<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported) APRIL 6, 1998
American General Hospitality Corporation
(Exact Name of Registrant as Specified in its Charter)
Maryland 1-11903 75-2648842
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
5605 MacArthur Blvd., Suite 1200, Irving, Texas 75038
(Address of principal executive offices) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 550-6800
<PAGE>
ITEM 5. OTHER EVENTS
This Current Report on Form 8-K is being filed to update the interim
unaudited financial statements previously included in two separate Form 8-K's
dated January 8, 1998 and February 13, 1998. In addition, the financial
statements also include the December 31, 1997 audit of the Prime Portfolio
Acquisition hotels which is required for future Securities Exchange Act of 1933
filings.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
The following audited financial statements are included in this Form 8-K:
. Prime Portfolio Acquisition hotels as of December 31, 1996 and 1997 and
for each of the three years ended December 31, 1995, 1996 and 1997.
. Potomac Portfolio Acquisition hotels as of and for the year ended
December 31, 1996 and unaudited information for the year ended December
31, 1997
. FSA Portfolio Acquisition hotels as of December 31, 1996 and September
30, 1997, for each of the two years ended December 31, 1996 and the nine
month period ended September 30, 1997 and unaudited information for the
year ended December 31, 1997
. Holiday Inn O'Hare International Hotel as of and for the year ended
December 31, 1996 and unaudited information for the year ended December
31, 1997
<TABLE>
<CAPTION>
Index to Financial Statements Page
----------------------------- ----
<S> <C>
Prime Portfolio Acquisition
Report of Independent Accountants F-1
Combined Balance Sheets as of December 31, 1996 and 1997 F-2
Combined Statements of Operations for the Years Ended December 31, 1995, 1996 and
1997 F-3
Combined Statements of Equity for the Years Ended December 31, 1995, 1996 and 1997
F-4
Combined Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 F-5
Combining Balance Sheets as of December 31, 1996 F-6
Combining Balance Sheets as of December 31, 1997 F-7
Combining Statements of Operations for the Year Ended December 31, 1995
F-8
Combining Statements of Operations for the Year Ended December 31, 1996
F-9
Combining Statements of Operations for the Year Ended December 31, 1997
F-10
Combining Statements of Equity for the Years Ended December 31, 1995, 1996 and 1997
F-11
Combining Statements of Cash Flows for the Year Ended December 31, 1995
F-12
Combining Statements of Cash Flows for the Year Ended December 31, 1996
F-13
Combining Statements of Cash Flows for the Year Ended December 31, 1997
F-14
Notes to Financial Statements F-15
Schedule III Real Estate and Accumulated Depreciation
As of December 31, 1997 F-21
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Potomac Portfolio Acquisition
Report of Independent Accountants F-23
Balance Sheets as of December 31, 1996 and 1997 (unaudited) F-24
Statements of Operations for the Years Ended December 31, 1996 and 1997 (unaudited)
F-25
Statements of Equity for the Years Ended December 31, 1996
and 1997 (unaudited) F-26
Statements of Cash Flows for the Years Ended December 31, 1996 and
1997 (unaudited) F-27
Notes to Financial Statements F-28
Schedule III Real Estate and Accumulated Depreciation
As of December 31, 1996 F-32
FSA Portfolio Acquisition
Report of Independent Accountants F-32
Balance Sheets as of December 31, 1996, September 30, 1997 and December 31,1997 F-33
(unaudited)
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997
(unaudited) and the nine months ended September 30, 1996 (unaudited) and 1997 F-35
Statements of Equity for the Years Ended December 31, 1995, 1996 and 1997
(unaudited) and the nine months ended September 30, 1996 (unaudited) and 1997 F-36
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997
(unaudited) and the nine months ended September 30, 1996 (unaudited) and 1997 F-37
Notes to Financial Statements F-38
Schedule III Real Estate and Accumulated Depreciation
as of September 30, 1997 F-43
Holiday Inn O'Hare International Airport
Report of Independent Accountants F-45
Balance Sheets as of December 31, 1996 and
1997 (unaudited) F-46
Statements of Operations for the Years Ended December 31, 1996
and 1997 (unaudited) F-47
Statements of Equity for the Years Ended December 31, 1996
and 1997 (unaudited) F-48
Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 (unaudited) F-49
Notes to Financial Statements F-50
Schedule III Real Estate and Accumulated Depreciation
As of December 31, 1996 F-54
</TABLE>
(b) Unaudited Pro Forma Financial Information
<TABLE>
<CAPTION>
Index to Unaudited Pro Forma Financial Statements Page
------------------------------------------------- ----
<S> <C>
American General Hospitality Corporation
Pro Forma Balance Sheet as of December 31, 1997 F-55
Pro Forma Statements of Operations for the Years Ended
December 31, 1997 and 1996 F-58
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
AGH Leasing, L.P.
Pro Forma Statements of Operations for the Years Ended
December 31, 1996 and 1997 F-62
Clifton Holding Corp.
Pro Forma Statements of Operations for the Years Ended
December 31, 1996 and 1997 F-66
(c) The following are filed as Exhibits to this Report.
23.1 Consent of Independent Accountants
</TABLE>
4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused the Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 6, 1998 American General Hospitality Corporation
(Registrant)
By: /s/ KENNETH E. BARR
------------------------------------
Kenneth E. Barr
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited and reported separately herein on the combined financial
statements and financial statement schedule of the Prime Portfolio Acquisition
Hotels (described in Note 1) as of December 31, 1996 and 1997 and for the three
years then ended.
We have also audited the accompanying combining balance sheets and financial
statement schedule of the Prime Portfolio Acquisition Hotels as of December 31,
1996 and 1997 and the related combined statements of operations, equity and cash
flows for the three years then ended. These combining financial statements are
the responsibility of the Prime Portfolio Acquisition Hotels' management. Our
responsibility is to express an opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission ("SEC") as described in Note 1 to the financial statements and are
not intended to be a complete presentation of the Prime Portfolio Acquisition
Hotels.
In our opinion, the combining financial statements referred to above present
fairly, in all material respects, the financial positions of the Prime Portfolio
Acquisition Hotels as of December 31, 1996 and 1997, and the results of their
operations and cash flows for the three years then ended, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above which is presented for the
purpose of additional analysis and to comply with the rules and regulations of
the SEC, 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 2, 1998
F-1
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Investments in hotel properties, at cost:
Land and land improvements..................................... $ 18,703,642 $ 21,721,335
Building and improvements...................................... 125,658,540 152,153,002
Furniture, fixtures and equipment.............................. 39,173,323 35,056,523
------------- -------------
183,535,505 208,930,860
Less: accumulated depreciation...................................... 19,720,190 30,836,489
------------- -------------
Net investment in hotel properties.................................. 163,815,315 178,094,371
Cash and cash equivalents........................................... 1,802,509 1,522,567
Restricted cash..................................................... 700,114 0
Accounts receivable, net............................................ 5,545,669 5,073,783
Inventories......................................................... 2,387,036 2,543,554
Prepaid expenses.................................................... 951,887 1,221,673
Deferred expenses, net.............................................. 2,279,492 2,155,646
Other assets........................................................ 77,526 63,859
------------- -------------
Total assets................................................... $ 177,559,548 $ 190,675,453
============= =============
LIABILITIES AND EQUITY
Mortgage payable.................................................... $ 38,078,025 $ 35,737,784
Intercompany advance................................................ 92,828,197 88,707,942
Accounts payable, trade............................................. 2,718,169 3,211,686
Accrued expenses and other liabilities.............................. 4,941,806 5,324,205
------------- -------------
Total liabilities.............................................. 138,566,197 132,981,617
Commitments and contingencies (Note 5)
Capital............................................................. 23,952,105 23,952,105
Retained earnings................................................... 15,041,246 33,741,731
------------- -------------
Total equity................................................... 38,993,351 57,693,836
------------- -------------
Total liabilities and equity................................... $ 177,559,548 $ 190,675,453
============= =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-2
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Room revenue......................................... $ 61,374,689 $ 75,762,299 $ 88,079,205
Food and beverage revenue............................ 32,398,484 35,149,769 38,979,060
Other revenue........................................ 3,918,088 3,557,400 4,135,657
------------ ------------- -------------
Total revenue...................................... 97,691,261 114,469,468 131,193,922
------------ ------------- -------------
Expenses:
Property operating costs and expenses................ 17,779,877 20,530,841 22,732,183
Food and beverage costs and expenses................. 23,872,749 25,896,719 28,577,527
General and administrative........................... 6,550,258 7,752,288 8,371,052
Advertising and promotion............................ 5,577,807 6,620,451 6,883,567
Repairs and maintenance.............................. 4,588,975 4,937,985 5,291,173
Utilities............................................ 5,377,086 5,798,292 6,035,739
Management fees...................................... 3,268,342 3,693,651 4,142,881
Franchise costs...................................... 1,841,240 2,213,297 2,733,228
Depreciation and amortization........................ 5,410,831 8,551,401 11,346,920
Real estate and personal property taxes and
property insurance................................. 3,360,570 3,375,206 3,897,849
Interest expense..................................... 6,498,968 4,179,695 3,587,847
Lease expense........................................ 5,028,341 7,172,184 5,625,070
Other expense........................................ 66,095 47,855 206,637
------------ ------------- -------------
Total expenses..................................... 89,221,139 100,769,865 109,431,673
------------ ------------- -------------
Net income......................................... $ 8,470,122 $ 13,699,603 $ 21,762,249
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINED STATEMENTS OF EQUITY
BALANCE, DECEMBER 31, 1994..................................... $ 18,076,953
CONTRIBUTIONS.......................................... 107,015
DISTRIBUTIONS.......................................... (660,015)
NET INCOME............................................. 8,470,122
-------------
BALANCE, DECEMBER 31, 1995..................................... 25,994,075
CONTRIBUTIONS.......................................... 1,949,658
DISTRIBUTIONS.......................................... (2,649,985)
NET INCOME............................................. 13,699,603
-------------
BALANCE, DECEMBER 31, 1996..................................... 38,993,351
DISTRIBUTIONS.......................................... (3,061,764)
NET INCOME............................................. 21,762,249
-------------
BALANCE, DECEMBER 31, 1997..................................... $ 57,693,836
=============
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income.......................................... $ 8,470,122 $ 13,699,603 $ 21,762,249
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 5,410,831 8,551,401 11,346,920
Changes in assets and liabilities:
Restricted cash................................... (622,075) 529,838 700,114
Accounts receivable............................... (1,532,899) (1,149,537) 471,886
Inventories....................................... (748,303) (339,259) (156,518)
Prepaid expenses.................................. (98,817) 1,865,889 (269,786)
Other assets...................................... 50,577 (14,857) 13,667
Accounts payable.................................. 758,418 (349,125) 493,517
Accrued expenses and other liabilities............ 1,534,536 (208,958) 382,399
------------ ------------ ------------
Net cash provided by operating activities....... 13,222,390 22,584,995 34,744,448
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of hotel properties, net of cash acquired. (15,258,563) (4,310,617) (11,179,945)
Improvements and additions to properties.............. (20,162,146) (8,472,233) (14,215,410)
------------ ------------ ------------
Net cash used in investing activities........... (35,420,709) (12,782,850) (25,395,355)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on borrowings.................... (1,732,452) (41,379,392) (2,340,241)
Proceeds from borrowings............................ 13,550,000
Payment of deferred costs........................... (2,291,917) (176,080) (106,775)
Increase (decrease) in intercompany advance......... 12,695,407 33,466,818 (4,120,255)
Capital Contributions............................... 107,015 1,949,658
Distributions paid.................................. (660,015) (2,649,985) (3,061,764)
------------ ------------ ------------
Net cash used in financing activities.......... 21,668,038 (8,788,981) (9,629,035)
Net change in cash and cash equivalents................. (530,281) 1,013,164 (279,942)
Cash and cash equivalents at beginning of period........ 1,319,626 789,345 1,802,509
------------ ------------ ------------
Cash and cash equivalents at end of period.............. $ 789,345 $ 1,802,509 $ 1,522,567
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.............. $ 5,819,637 $ 5,799,881 $ 3,731,123
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
Group I Group II Combined
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Investments in hotel properties, at cost:
Land and land improvements..................... $ 13,165,434 $ 5,538,208 $ 18,703,642
Building and improvements...................... 54,290,951 71,367,589 125,658,540
Furniture, fixtures and equipment.............. 12,108,969 27,064,354 39,173,323
------------- ------------- -------------
79,565,354 103,970,151 183,535,505
Less: accumulated depreciation................... 9,763,951 9,956,239 19,720,190
------------- ------------- -------------
Net investment in hotel properties............... 69,801,403 94,013,912 163,815,315
Cash and cash equivalents........................ 970,142 832,367 1,802,509
Restricted cash.................................. 672,198 27,916 700,114
Accounts receivable, net......................... 1,980,458 3,565,211 5,545,669
Inventories...................................... 706,700 1,680,336 2,387,036
Prepaid expenses................................. 272,416 679,471 951,887
Deferred expenses, net........................... 1,499,624 779,868 2,279,492
Other assets..................................... 23,883 53,643 77,526
------------- ------------- -------------
Total assets................................... $ 75,926,824 $ 101,632,724 $ 177,559,548
============= ============= =============
LIABILITIES AND EQUITY
Mortgage payable................................. $ 24,645,318 $ 13,432,707 $ 38,078,025
Intercompany advance............................. 25,025,939 67,802,258 92,828,197
Accounts payable, trade.......................... 1,291,488 1,426,681 2,718,169
Accrued expenses and other liabilities........... 2,030,535 2,911,271 4,941,806
------------- ------------- -------------
Total liabilities.............................. 52,993,280 85,572,917 138,566,197
Commitments and contingencies (Note 5)
Capital.......................................... 4,541,315 19,410,790 23,952,105
Retained earnings................................ 18,392,229 (3,350,983) 15,041,246
------------- ------------- -------------
Total equity................................... 22,933,544 16,059,807 38,993,351
------------- ------------- -------------
Total liabilities and equity................... $ 75,926,824 $ 101,632,724 $ 177,559,548
============= ============= =============
</TABLE>
F-6
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Group I Group II Combined
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in hotel properties, at cost:
Land and land improvements.................. $ 13,165,739 $ 8,555,596 $ 21,721,335
Building and improvements................... 55,337,699 96,815,303 152,153,002
Furniture, fixtures and equipment........... 13,748,864 21,307,659 35,056,523
-------------- -------------- --------------
82,252,302 126,678,558 208,930,860
Less: accumulated depreciation................... 13,891,793 16,944,696 30,836,489
-------------- -------------- --------------
Net investment in hotel properties............... 68,360,509 109,733,862 178,094,371
Cash and cash equivalents........................ 582,336 940,231 1,522,567
Restricted cash
Accounts receivable, net......................... 2,042,171 3,031,612 5,073,783
Inventories...................................... 721,428 1,822,126 2,543,554
Prepaid expenses................................. 613,420 608,253 1,221,673
Deferred expenses, net........................... 1,270,552 885,094 2,155,646
Other assets..................................... 23,695 40,164 63,859
-------------- -------------- --------------
Total assets................................ $ 73,614,111 $ 117,061,342 $ 190,675,453
============== ============== ==============
LIABILITIES AND EQUITY
Mortgage payable................................. $ 23,727,054 $ 12,010,730 $ 35,737,784
Intercompany advance............................. 17,229,752 71,478,190 88,707,942
Accounts payable, trade.......................... 924,209 2,287,477 3,211,686
Accrued expenses and other liabilities........... 2,141,620 3,182,585 5,324,205
-------------- -------------- --------------
Total liabilities........................... 44,022,635 88,958,982 132,981,617
Commitments and contingencies (Note 5)
Capital.......................................... 17,551,314 6,400,791 23,952,105
Retained earnings................................ 12,040,162 21,701,569 33,741,731
-------------- -------------- --------------
Total equity................................ 29,591,476 28,102,360 57,693,836
-------------- -------------- --------------
Total liabilities and equity................ $ 73,614,111 $ 117,061,342 $ 190,675,453
============== ============== ==============
</TABLE>
F-7
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Group I Group II Combined
------------ ------------- ------------
<S> <C> <C> <C>
Revenues:
Room revenue......................................... $ 26,654,896 $ 34,719,793 $ 61,374,689
Food and beverage revenue............................ 15,368,085 17,030,399 32,398,484
Other revenue........................................ 1,640,127 2,277,961 3,918,088
------------ ------------- ------------
Total revenue...................................... 43,663,108 54,028,153 97,691,261
------------ ------------- ------------
Expenses:
Property operating costs and expenses................ 7,610,735 10,169,142 17,779,877
Food and beverage costs and expenses................. 10,892,061 12,980,688 23,872,749
General and administrative........................... 2,603,062 3,947,196 6,550,258
Advertising and promotion............................ 2,362,338 3,215,469 5,577,807
Repairs and maintenance.............................. 2,039,161 2,549,814 4,588,975
Utilities............................................ 2,173,838 3,203,248 5,377,086
Management fees...................................... 1,482,734 1,785,608 3,268,342
Franchise costs...................................... 799,647 1,041,593 1,841,240
Depreciation and amortization........................ 3,099,979 2,310,852 5,410,831
Real estate and personal property taxes and
property insurance.................................. 1,038,999 2,321,571 3,360,570
Interest expense..................................... 2,965,284 3,533,684 6,498,968
Lease expense........................................ 920,432 4,107,909 5,028,341
Other expense (income)............................... (57,320) 124,046 66,095
------------ ------------- ------------
Total expenses..................................... 37,930,950 51,290,189 89,221,139
------------ ------------- ------------
Net income......................................... $ 5,732,158 $ 2,737,964 $ 8,470,122
============ ============= ============
</TABLE>
F-8
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Group I Group II Combined
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Room revenue......................................... $ 32,244,559 $ 43,517,740 $ 75,762,299
Food and beverage revenue............................ 16,445,947 18,703,822 35,149,769
Other revenue........................................ 1,527,920 2,029,480 3,557,400
------------ ------------- -------------
Total revenue...................................... 50,218,426 64,251,042 114,469,468
------------ ------------- -------------
Expenses:
Property operating costs and expenses................ 8,698,246 11,832,595 20,530,841
Food and beverage costs and expenses................. 11,231,070 14,665,649 25,896,719
General and administrative........................... 3,128,581 4,623,707 7,752,288
Advertising and promotion............................ 2,632,345 3,988,106 6,620,451
Repairs and maintenance.............................. 2,132,683 2,805,302 4,937,985
Utilities............................................ 2,358,573 3,439,719 5,798,292
Management fees...................................... 1,654,181 2,039,470 3,693,651
Franchise costs...................................... 959,329 1,253,968 2,213,297
Depreciation and amortization........................ 3,837,087 4,714,314 8,551,401
Real estate and personal property taxes and
property insurance................................. 1,102,457 2,272,749 3,375,206
Interest expense..................................... 2,534,284 1,645,411 4,179,695
Lease expense........................................ 920,376 6,251,808 7,172,184
Other expense (income)............................... (27,765) 75,620 47,855
------------ ------------- -------------
Total expenses..................................... 41,161,447 59,608,418 100,769,865
------------ ------------- -------------
Net income......................................... $ 9,056,979 $ 4,642,624 $ 13,699,603
============ ============= =============
</TABLE>
F-9
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Group I Group II Combined
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Room revenue......................................... $ 33,770,197 $ 54,309,008 $ 88,079,205
Food and beverage revenue............................ 15,452,912 23,526,148 38,979,060
Other revenue........................................ 1,581,999 2,553,658 4,135,657
------------ ------------- -------------
Total revenue...................................... 50,805,108 80,388,814 131,193,922
------------ ------------- -------------
Expenses:
Property operating costs and expenses................ 8,766,525 13,965,658 22,732,183
Food and beverage costs and expenses................. 10,695,183 17,882,344 28,577,527
General and administrative........................... 3,058,151 5,312,901 8,371,052
Advertising and promotion............................ 2,596,715 4,286,852 6,883,567
Repairs and maintenance.............................. 2,205,797 3,085,376 5,291,173
Utilities............................................ 2,389,469 3,646,270 6,035,739
Management fees...................................... 1,662,088 2,480,793 4,142,881
Franchise costs...................................... 1,100,602 1,632,626 2,733,228
Depreciation and amortization........................ 4,129,389 7,217,531 11,346,920
Real estate and personal property taxes and
property insurance................................. 1,186,524 2,711,325 3,897,849
Interest expense..................................... 2,655,881 931,966 3,587,847
Lease expense........................................ 871,279 4,753,791 5,625,070
Other expense (income)............................... (232,192) 438,829 206,637
------------ ------------- -------------
Total expenses..................................... 41,085,411 68,346,262 109,431,673
------------ ------------- -------------
Net income......................................... $ 9,719,697 $ 12,042,552 $ 21,762,249
============ ============= =============
</TABLE>
F-10
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Group I Group II Combined
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1994....................................... $ 11,454,407 $ 6,622,546 $ 18,076,953
Contributions................................................. 107,015 107,015
Distributions................................................. (660,015) (660,015)
Net income.................................................... 5,732,158 2,737,964 8,470,122
-------------- -------------- --------------
Balance, December 31, 1995....................................... 16,526,550 12,117,510 25,994,075
Contributions................................................. 1,949,658 1,949,658
Distributions................................................. (2,649,985) (2,649,985)
Net income.................................................... 9,056,979 4,642,624 13,699,603
-------------- -------------- --------------
Balance, December 31, 1996....................................... 22,933,544 16,059,807 38,993,351
Distributions................................................. (3,061,764) (3,061,764)
Net income.................................................... 9,719,697 12,042,552 21,762,249
-------------- -------------- --------------
Balance, December 31, 1997....................................... $ 29,591,477 $ 28,102,359 $ 57,693,836
============== ============== ==============
</TABLE>
F-11
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Group I Group II Combined
------------- ------------- ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income .......................................................... $ 5,732,158 $ 2,737,964 $ 8,470,122
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 3,099,979 2,310,852 5,410,831
Changes in assets and liabilities:
Restricted cash ................................................... (565,022) (57,053) (622,075)
Accounts receivable ............................................... (843,910) (688,989) (1,532,899)
Inventories ....................................................... (332,067) (416,236) (748,303)
Prepaid expenses .................................................. 52,151 (150,968) (98,817)
Other assets ...................................................... (12,082) 62,659 50,577
Accounts payable .................................................. 461,918 296,500 758,418
Accrued expenses and other liabilities ............................ 535,399 999,137 1,534,536
------------ ------------ ------------
Net cash provided by operating activities ...................... 8,128,524 5,093,866 13,222,390
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of hotel properties, net of cash
acquired .......................................................... (15,258,563) 0 (15,258,563)
Improvements and additions to properties ............................ (3,260,708) (16,901,438) (20,162,146)
------------ ------------ ------------
Net cash used in investing activities .......................... (18,519,271) (16,901,438) (35,420,709)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on borrowings .................................... (740,372) (992,080) (1,732,452)
Proceeds from borrowings ............................................ 12,000,000 1,550,000 13,550,000
Payment of deferred costs ........................................... (1,057,628) (1,234,289) (2,291,917)
Increase (decrease) in intercompany advance ......................... 901,884 11,793,523 12,695,407
Capital contributions................................................ 0 107,015 107,015
Distributions paid .................................................. (660,015) (660,015)
------------ ------------ ------------
Net cash provided by financing activities ...................... 10,443,869 11,224,169 21,668,038
------------ ------------ ------------
Net change in cash and cash equivalents ................................ 53,122 (583,403) (530,281)
Cash and cash equivalents at beginning of period ....................... 264,327 1,055,299 1,319,626
------------ ------------ ------------
Cash and cash equivalents at end of period ............................. $ 317,449 $ 471,896 $ 789,345
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .............................. $ 2,965,284 $ 2,854,353 $ 5,819,637
============ ============ ============
</TABLE>
F-12
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Group I Group II Combined
------------- ------------- ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income .......................................................... $ 9,056,979 $ 4,642,624 $ 13,699,603
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 3,837,087 4,714,314 8,551,401
Changes in assets and liabilities:
Restricted cash ................................................... 77,918 451,920 529,838
Accounts receivable ............................................... (223,938) (925,599) (1,149,537)
Inventories ....................................................... 44,671 (383,930) (339,259)
Prepaid expenses .................................................. (89,950) 1,955,839 1,865,889
Other assets ...................................................... 472 (15,329) (14,857)
Accounts payable .................................................. 7,015 (356,140) (349,125)
Accrued expenses and other liabilities ............................ 259,178 (468,136) (208,958)
------------ ------------ ------------
Net cash provided by operating activities ...................... 12,969,432 9,615,563 22,584,995
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of hotel properties, net of cash
acquired .......................................................... (4,310,617) (4,310,617)
Improvements and additions to properties ............................ (4,778,808) (3,693,425) (8,472,233)
------------ ------------ ------------
Net cash used in investing activities .......................... (4,778,808) (8,004,042) (12,782,850)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on borrowings .................................... (5,717,317) (35,662,075) (41,379,392)
Proceeds from borrowings ............................................ 0
Payment of deferred costs ........................................... (423) (175,657) (176,080)
Increase (decrease) in intercompany advance ......................... 829,794 32,637,024 33,466,818
Capital contributions ............................................... 1,949,658 1,949,658
Distributions paid .................................................. (2,649,985) 0 (2,649,985)
------------ ------------ ------------
Net cash used in financing activities .......................... (7,537,931) (1,251,050) (8,788,981)
------------ ------------ ------------
Net change in cash and cash equivalents ................................ 652,693 360,471 1,013,164
Cash and cash equivalents at beginning of period ....................... 317,449 471,896 789,345
------------ ------------ ------------
Cash and cash equivalents at end of period ............................. $ 970,142 $ 832,367 $ 1,802,509
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .............................. $ 2,534,284 $ 3,265,597 $ 5,799,881
============ ============ ============
</TABLE>
F-13
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
COMBINING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Group I Group II Combined
------------- ------------- ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income .......................................................... $ 9,719,697 $ 12,042,552 $ 21,762,249
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 4,129,389 7,217,531 11,346,920
Changes in assets and liabilities:
Restricted cash ................................................... 672,198 27,916 700,114
Accounts receivable ............................................... (61,713) 533,599 471,886
Inventories ....................................................... (14,728) (141,790) (156,518)
Prepaid expenses .................................................. (113,479) (156,307) (269,786)
Other assets ...................................................... 188 13,479 13,667
Accounts payable .................................................. (367,279) 860,796 493,517
Accrued expenses and other liabilities ............................ 111,085 271,314 382,399
------------ ------------ ------------
Net cash provided by operating activities ...................... 14,075,358 20,669,090 34,744,448
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of hotel properties, net of cash
acquired .......................................................... (11,179,945) (11,179,945)
Improvements and additions to properties ............................ (2,686,949) (11,528,461) (14,215,410)
------------ ------------ ------------
Net cash used in investing activities .......................... (2,686,949) (22,708,406) (25,395,355)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on borrowings .................................... (918,264) (1,421,977) (2,340,241)
Payment of deferred costs ........................................... (106,775) (106,775)
Increase (decrease) in intercompany advance ......................... (7,796,187) 3,675,932 (4,120,255)
Distributions paid .................................................. (3,061,764) 0 (3,061,764)
------------ ------------ ------------
Net cash (used in) provided by financing activities............. (11,776,215) 2,147,180 (9,629,035)
------------ ------------ ------------
Net change in cash and cash equivalents ................................ (387,806) 107,864 (279,942)
Cash and cash equivalents at beginning of period ....................... 970,141 832,368 1,802,509
------------ ------------ ------------
Cash and cash equivalents at end of period ............................. $ 582,337 $ 940,230 $ 1,522,567
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .............................. $ 2,786,860 $ 944,263 $ 3,731,123
============ ============ ============
</TABLE>
F-14
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - American General Hospitality Operating Partnership, L.P.
(the "Operating Partnership"), a subsidiary of American General Hospitality
Corporation (the "Company" or "Registrant"), together with two of its
subsidiaries, Mt. Arlington L.L.C and Portland/Shelton L.L.C acquired a 100%
ownership interest in nineteen hotels (the "Prime Portfolio Acquisition Hotels")
from entities unaffiliated with the Company, the Operating Partnership or its
subsidiaries (the "Selling Corporations"). The portfolio will be purchased in
two phases. Eight hotels ("Prime Group I Acquisition" or "Group I") were
acquired on January 8, 1998 and the remaining eleven hotels ("Prime Group II
Acquisition" or "Group II") will be acquired between September 30, 1998 and
March 31, 1999. The Company, established to acquire, own and lease hotel
properties, was formed as a Maryland corporation qualifying as a real estate
investment trust ("REIT"). The Company completed an Initial Public Offering of
its common stock on July 31, 1996.
Basis of Presentation - The accompanying combined financial statements of
the Prime Portfolio Acquisition Hotels have been prepared to comply with the
rules and regulations of the Securities and Exchange Commission ("SEC") and are
presented on a combined basis consistent with the Company due to anticipated
common ownership and management since the entities will be the subject of a
business combination with the Company. The Prime Portfolio Acquisition Hotels
consist of the following:
<TABLE>
<CAPTION>
PROPERTY NAME LOCATION NO. OF ROOMS
- ------------- -------- ------------
<S> <C> <C>
Prime Group I Acquisition:
St. Tropez Suites Las Vegas Las Vegas, Nevada 149
Crowne Plaza Suites Las Vegas Las Vegas, Nevada 201
Ramada Inn Mahwah Mahwah, New Jersey 128
Sheraton Crossroads Hotel Mahwah Mahwah, New Jersey 225
Ramada Plaza Meriden Meriden, Connecticut 150
Sheraton Four Points Hotel Mt. Arlington Mt. Arlington, New Jersey 124
Crowne Plaza Portland Portland, Oregon 161
Ramada Plaza Shelton Shelton, Connecticut 155
---------------------
1,293
---------------------
Prime Group II Acquisition:
Ramada Inn Armonk Armonk, New York 140
Ramada Inn Danbury Danbury, Connecticut 181
Ramada Inn Elmsford Elmsford, New York 101
Radisson Hotel and Suites Fairfield Fairfield, New Jersey 204
Ramada Inn Fairfield Fairfield, New Jersey 176
Crowne Plaza Hotel Hasbrouck Heights Hasbrouck Heights, New Jersey 355
Holiday Inn Jamesburg Jamesburg, New Jersey 150
Holiday Inn Princeton Princeton, New Jersey 240
Sheraton Hotel Saratoga Springs Saratoga Springs, New York 240
Radisson Suites Secaucus Secaucus, New Jersey 151
Radisson Hotel Trevose Trevose, Pennsylvania 272
---------------------
2,210
---------------------
Total Prime Portfolio Acquisition Hotels 3,503
=====================
</TABLE>
F-15
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
In February 1997, the Selling Corporations acquired the Holiday Inn
Jamesburg (Group II) for approximately $11.2 million in cash. The acquisition
was accounted for as a purchase and accordingly, the revenues and expenses have
been included in reported results from the date of acquisition.
In September 1996, the Selling Corporations acquired the Radisson Suites
Secaucus (Group II) for $16.5 million including $12.2 million in assumed debt.
The results of operations for periods prior to acquisition by the selling
corporation have been included in the accompanying financial statements.
In August 1995, the Selling Corporations acquired the St. Tropez Suites Las
Vegas (Group I) for $15.2 million. The results of operations for periods prior
to acquisition by the Selling Corporations have been included in the
accompanying financial statements.
The Selling Corporations conducted business as taxable corporations. These
financial statements have been prepared to show the operations and financial
position of the combined Prime Portfolio Acquisition Hotels, substantially all
of whose assets and operations will be acquired by the Company. The Company is a
REIT and accordingly, will not pay any federal income taxes, therefore, the
financial statements have been presented on a pretax basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties - The hotel properties are stated at cost
and are depreciated using the straight-line method over estimated useful lives
of 20-40 years for building and improvements and 3-10 years for furniture,
fixtures and equipment.
The owners of the Prime Portfolio Acquisition Hotels review the carrying
value of each property to determine if circumstances exist indicating an
impairment in the carrying value of the investment of the hotel property or that
depreciation periods should be modified. If facts or circumstances support the
possibility of impairment, the owners of the Prime Portfolio Acquisition Hotels
will prepare a projection of the undiscounted future cash flows, without
interest charges, of the specific hotel property and determine if the investment
in the hotel property is recoverable based on the undiscounted future cash
flows.
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 principally for capital and property tax reserves.
Inventories - Inventories consist primarily of supplies, 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 and license fees. Amortization of deferred loan costs is computed using
the effective yield method based upon the terms of the loan agreement.
Amortization of license fees is computed using the straight-line method over the
life of the agreement.
Income Taxes - The Prime Portfolio Acquisition Hotels results of operations
are included in the tax returns of the owners. The owner's 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 owners could be changed accordingly. The Company
is a REIT and will therefore not be subject to corporate income taxes.
Accordingly, the combined statements of operations contain no provision for
federal income taxes.
F-16
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
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. Such losses have been within the owners' estimates.
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, 1997, bank account balances
exceeded Federal Deposit Insurance Corporation limits by approximately $230,851
($111,485 Group I and $119,366 Group II).
Seasonality - The hotel industry is seasonal in nature. Generally, revenue
at these hotels is greater in the second and third quarters of a calendar year.
Recently Issued Statement of Financial Accounting Standards - The Prime
Portfolio Acquisition Hotels adopted the 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 Prime Portfolio
Acquisition Hotels financial statements.
3. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
Prime Group I Acquisition: 1996 1997
------------ ------------
<S> <C> <C>
First mortgage notes payable in monthly installments including interest at
fixed rates of 11.18% maturing in November 2014.......................................... $ 10,443,781 $ 10,234,832
First mortgage notes payable in monthly installments including interest at floating
rates ranging from 78% of prime (8.50% at December 31, 1997) to prime plus 4.75%
maturing at various dates through July 2007.............................................. 14,201,537 13,492,222
------------ ------------
24,645,318 23,727,054
------------ ------------
Prime Group II Acquisition:
First mortgage notes payable in monthly installments including interest at floating
rates ranging from LIBOR (5.72% at December 31, 1997) plus 1.25% to prime
(8.50% at December 31, 1997) plus 3% maturing at various dates through September 1999... 13,432,707 12,010,730
------------ ------------
13,432,707 12,010,730
------------ ------------
Total Prime Portfolio Acquisition Hotels Debt....................................... $ 38,078,025 $ 35,737,784
============ ============
</TABLE>
Mortgage debt is collateralized by the investment in hotel properties.
The Selling Corporations incurred debt of $1,550,000 in connection with the
purchase of the Holiday Inn Princeton (Group II) in January 1995. The Selling
Corporations also incurred debt of $12,000,000 in connection with the purchase
of the Sheraton Crossroads Hotel Mahwah (Group I) in February 1995.
F-17
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
Aggregate annual principal payments for the Prime Portfolio Acquisition
Hotels' debt at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Group I Group II Total
- ---- ------------------------------------------------
<S> <C> <C> <C>
1998.................................................. $ 3,956,965 $ 4,826,945 $ 8,783,910
1999.................................................. 4,376,934 3,956,824 8,333,758
2000.................................................. 148,486 1,203,195 1,351,681
2001.................................................. 560,112 0 560,112
2002.................................................. 612,698 0 612,698
Thereafter............................................ 14,071,859 2,023,766 16,095,625
--------------- --------------- --------------
$ 23,727,054 $ 12,010,730 $ 35,737,784
=============== =============== ==============
</TABLE>
4. LEASES
Eight of the Prime Portfolio Acquisition hotels are subject to leases with
third parties with respect to the building and/or land underlying each such
hotel. The leases require the tenant to pay all expenses of owning and operating
the hotels, including real estate taxes and structural maintenance and repairs.
The building and underlying land related to the Sheraton Four Points Hotel
Mt. Arlington (Group I) is encumbered by a lease expiring in August 1998 with 99
one year renewal options. Renewals will be automatic unless the lessor is
notified in writing, at least 60 days before the end of the initial term or any
renewal term, of the lessee's election not to renew. In the event the lessee
notifies the lessor of its election not to renew the lease, the lessor shall
have the option to convert the lease to a management agreement between the
lessor, as owner, and lessee, as managing agent. Management fee payments would
equal 5% of gross receipts from the operation of the hotel and would expire five
years after its commencement. Minimum annual lease payments are based on i) an
amount equal to the required monthly bond payments due from the lessor to the
New Jersey Economic Development Authority, ii) monthly installments due to the
lessor of $5,833, and iii) a percentage rent due to the lessor, payable
annually, in the amount of 5% of gross room receipts in excess of $20,000,
multiplied by the number of guest rooms, less applicable use and occupancy
taxes.
The Radisson Suites Secaucus (Group II) is encumbered by a ground lease
expiring in June 2062. The lease requires minimum rent payments equal to the sum
of the number of guest rooms times $1,000 and percentage rent payments equal to
10% of the gross room revenue in excess of the number of guest rooms times
$23,500.
The Ramada Inn Fairfield (Group II) is encumbered by a ground lease
expiring in November 2000 with two extension options of 10 years each and one
extension option of 20 years. The lease requires minimum annual lease payments
of $364,440 payable in equal monthly installments.
The Ramada Inn Armonk (Group II) is encumbered by a ground lease expiring
in June 2000 with five additional five year renewal options. The lease requires
minimum annual lease payments of $261,468 plus a percentage rent equal to 10% of
gross room receipts in excess of $7,000, multiplied by the number of guest rooms
at the hotel, less applicable use and occupancy taxes.
The building and underlying land related to the Radisson Hotel and Suites
Fairfield (Group II) is encumbered by a lease expiring in December 1999 with
three renewal options of 10 years each. Minimum annual lease payments are based
upon the amount due under existing mortgages held by the lessor plus an amount
equal to 10% of net operating income.
The building and underlying land related to the Holiday Inn Princeton
(Group II) is encumbered by a lease expiring in December 2004 with three renewal
options of 10 years each. Minimum annual lease payments are based upon the
amount due under existing mortgages held by the lessor plus a percent of net
operating income, as defined, ranging from 5% to 22.5%.
The building and underlying land related to the Ramada Inn Elmsford (Group
II) is encumbered by a lease expiring in December 2003 with five renewal options
of five years each. The lease requires minimum annual lease payments of $273,552
plus a percentage rent of 10% of gross room receipts in excess of $7,500,
multiplied by the number of guest rooms at the hotel, less all applicable use
and occupancy taxes.
F-18
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
The building, underlying land, and certain equipment related to the
Sheraton Hotel Saratoga Springs (Group II) is encumbered by a lease expiring in
December 2007. Minimum annual lease payments are based on an amount equal to
one-sixth of the amount payable by the lessor as interest on the next interest
payment date and one-twelfth of the amount payable by the lessor as principal on
the next bond payment date.
5. COMMITMENTS
The intercompany advance is due to the Selling Corporations and their
affiliates for advances used to pay for operating expenses incurred, management
fees, and mortgage financings. The intercompany advance is non-interest bearing.
Management fees of 3% to 5% of gross revenues of each hotel are paid to an
affiliate of the hotels.
Franchise fees represent the annual expense for franchise royalties and
reservation services under the terms of the hotel franchise agreement. The Prime
Portfolio Acquisition Hotels' franchise fees range from 1.5% to 5% of gross room
revenue.
The Prime Portfolio Acquisition Hotels are required to remit 1% to 4.5% of
gross room revenue to franchisers for sales and advertising expenses incurred to
promote the hotels at the national level. Additional sales and advertising costs
are incurred at the local property level.
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 Prime Portfolio Acquisition Hotels report the
carrying amount of cash and cash equivalents, restricted cash, accounts payable,
accrued expenses and other liabilities at cost which approximates fair value due
to the short maturity of these instruments. The carrying amount of the Prime
Portfolio Acquisition Hotels' debt approximates fair value due to the Prime
Portfolio Acquisition Hotels' ability to obtain such borrowings at comparable
interest rates.
7. SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, on January 8, 1998, the Company, the Operating
Partnership and two of its subsidiaries purchased the first phase of the
portfolio, the Prime Group I Acquisition. The acquisition was 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. The purchase price was paid in cash, from borrowings under the
Company's credit facility, the issuance of OP Units and the assumption of
mortgage indebtedness. The hotels are leased to an independent lessee (the
"Prime Lessee") that is affiliated with Prime Hospitality Corporation ("Prime")
under separate Participating Leases. The Participating Leases entered into with
the Prime Lessee are for a term of 10 years and prohibit the Operating
Partnership from selling the hotels for a period of three years but otherwise
have terms and conditions substantially similar to the Operating Partnership's
other Participating Leases.
The Company intends to purchase the Prime Group II Acquisition between
September 30, 1998 and March 31, 1999, at its option. The combined financial
statements do not reflect any of the transactions in connection with the
acquisition of the Prime Group I Acquisition or the proposed Prime Group II
Acquisition by the Company.
F-19
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
On March 15, 1998 the Company and an affiliate and CapStar Hotel Company
("CapStar") entered into a definitive agreement (the "Merger Agreement")
pursuant to which the parties agreed, subject to stockholder approval and other
conditions and covenants, to merge as equals (the "Proposed Merger").
Accordingly, no assurance can be given that the Proposed Merger will be
consummated. Pursuant to the Merger Agreement, CapStar will spin off (the "Spin-
Off") in a taxable transaction, its hotel operations and management business to
its current stockholders as a new C-Corporation to be called MeriStar Hotels &
Resorts, Inc. ("MeriStar Resorts"). CapStar will subsequently merge with and
into the Company, which will qualify as a reorganization under Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"). The Company will be
renamed MeriStar Hospitality Corporation after the Proposed Merger. In a
separate transaction, which will close immediately after the closing of the
Proposed Merger, MeriStar Resorts will acquire AGH Leasing, L.P. (an affiliate)
and American General Hospitality, Inc. for $95 million, which is payable through
the issuance of $10 million of units of limited partnership interests of a
subsidiary owned by MeriStar Resorts and $85 million in cash. This acquisition
is a condition to closing the Proposed Merger.
The Merger Agreement defines the exchange ratios for both the Company and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998. The Proposed
Merger will be submitted for approval at separate meetings of the stockholders
of the Company and CapStar. Prior to such stockholder meetings, the Company will
file a registration statement with the SEC registering under the Securities Act
of 1933, as amended, the shares of MeriStar Hospitality Corporation to be issued
in the Proposed Merger.
F-20
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1997
Real estate as of December 31, 1997:
------------------------------------
<TABLE>
<CAPTION>
Accumulated
Depreciation
Land and Building and Building and
Description Encumbrances Improvements Improvements Total Improvements
----------- ------------ ------------ ------------ ----- ------------
<S> <C> <C> <C> <C> <C>
Prime Group I Acquisition:
St. Tropez Suites Las Vegas $ 4,930,683 $ 11,030,669 $ 15,961,352 $ 982,531
Crowne Plaza Suites Las Vegas 1,027,500 7,243,332 8,270,833 1,311,243
Ramada Inn Mahwah $ 2,630,043 216,460 1,887,425 2,103,885 528,338
Sheraton Crossroads Hotel Mahwah 10,862,179 3,603,948 13,473,959 17,077,907 1,436,574
Ramada Plaza Meriden 530,397 2,972,938 3,503,335 706,389
Sheraton Four Points Hotel Mt.
Arlington 954,819 954,819 373,602
Crowne Plaza Portland 5,306,545 1,508,189 10,001,335 11,509,524 1,779,965
Crowne Plaza Shelton 4,928,286 1,348,562 8,093,522 9,442,084 1,222,916
-------------- ------------- -------------- ------------- -------------
23,727,053 13,165,739 55,657,999 68,823,738 8,341,558
-------------- ------------- -------------- ------------- -------------
Prime Group II Acquisition:
Ramada Inn Armonk 1,038,049 1,038,049 314,014
Ramada Inn Danbury 642,882 3,857,510 4,500,392 934,253
Ramada Inn Elmsford 1,634,805 1,634,805 679,444
Radisson Hotel and Suites Fairfield 21,192,803 21,192,803 1,300,602
Ramada Inn Fairfield 2,115,631 2,115,631 481,222
Crowne Plaza Hotel Hasbrouck Heights 3,759,476 19,354,836 23,114,312 2,242,635
Holiday Inn Princeton 4,970,409 4,970,409 868,898
Sheraton Hotel Saratoga Springs 9,291,086 9,291,086 2,362,430
Radisson Suites Secaucus 12,010,730 14,426,684 14,426,684 630,255
Radisson Hotel Trevose 1,135,850 9,072,033 10,207,883 1,662,884
Holiday Inn Jamesburg 3,017,387 9,541,157 12,558,544 245,776
-------------- ------------- -------------- ------------- -------------
12,010,730 8,555,595 96,432,003 105,050,598 11,723,003
-------------- ------------- -------------- ------------- -------------
$ 35,737,783 $ 21,721,334 $ 152,153,002 $ 173,874,336 $ 20,064,561
============== ============= ============== ============= =============
<CAPTION>
Net Which
Book Value Depreciation
Building and Date of Date of in Statement
Description Improvements Construction Acquisition Is Computed
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Prime Group I Acquisition:
St. Tropez Suites Las Vegas $ 10,048,138 1986 1994 20 - 40 Yrs.
Crowne Plaza Suites Las Vegas 5,932,089 1989 1993 20 - 40 Yrs.
Ramada Inn Mahwah 1,359,087 1982 1992 20 - 40 Yrs.
Sheraton Crossroads Hotel Mahwah 12,037,385 1986 1994 20 - 40 Yrs.
Ramada Plaza Meriden 2,206,549 1985 1993 20 - 40 Yrs.
Sheraton Four Points Hotel Mt.
Arlington 581,217 1984 1984 20 - 40 Yrs.
Crowne Plaza Portland 8,221,370 1988 1993 20 - 40 Yrs.
Crowne Plaza Shelton 6,870,606 1989 1990 20 - 40 Yrs.
-------------
47,316,441
-------------
Prime Group II Acquisition:
Ramada Inn Armonk 724,035 1974 1975 20 - 40 Yrs.
Ramada Inn Danbury 2,923,257 1972 1993 20 - 40 Yrs.
Ramada Inn Elmsford 955,361 1973 1974 20 - 40 Yrs.
Radisson Hotel and Suites Fairfield 19,892,201 1983 1996 20 - 40 Yrs.
Ramada Inn Fairfield 1,633,809 1972 1974 20 - 40 Yrs.
Crowne Plaza Hotel Hasbrouck Heights 17,112,200 1975 1994 20 - 40 Yrs.
Holiday Inn Princeton 4,101,511 1982 1995 20 - 40 Yrs.
Sheraton Hotel Saratoga Springs 6,763,853 1983 1983 20 - 40 Yrs.
Radisson Suites Secaucus 13,796,429 1988 1996 20 - 40 Yrs.
Radisson Hotel Trevose 7,409,149 1973 1994 20 - 40 Yrs.
Holiday Inn Jamesburg 9,295,391 1997 20 - 40 Yrs.
-------------
84,807,196
-------------
$ 132,723,637
=============
</TABLE>
<PAGE>
PRIME PORTFOLIO ACQUISITION HOTELS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1997 - (CONTINUED)
<TABLE>
<CAPTION>
Reconciliation of Real Estate: Group I Group II Total
- ------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Balance at December 31, 1995 .................................... $ 61,850,189 $ 83,931,955 $ 145,782,144
Additions and revaluation due to hotel ownership transfer,
net.......................................................... 1,325,672 (2,745,634) (1,419,962)
------------ ------------ ---------------
Balance at December 31, 1996 .................................... 63,175,861 81,186,321 144,362,182
Additions and revaluation due to hotel ownership transfer,
net.......................................................... 5,647,777 23,864,277 (29,512,154)
------------ ------------ ---------------
Balance at December 31, 1997 .................................... $ 68,823,738 $105,050,598 $ 173,874,336
============ ============ ===============
Reconciliation of Accumulated Depreciation:
- -------------------------------------------
Balance at December 31, 1995 .................................... $ 2,896,992 $ 8,018,072 $ 10,915,064
Depreciation and revaluation due to hotel ownership transfer,
net.......................................................... 1,534,143 (2,979,542) (1,445,399)
------------ ------------ ---------------
Balance at December 31, 1996 .................................... 4,431,135 5,038,530 9,469,665
Depreciation and revaluation due to hotel ownership transfer,
net.......................................................... 3,910,423 6,684,473 10,594,896
------------ ------------ ---------------
Balance at December 31, 1997 .................................... $ 8,341,558 $ 11,723,003 $ 20,064,561
============ ============ ===============
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying combined balance sheet and financial
statement schedule of the Potomac Portfolio Acquisition Hotels (described in
Note 1) as of December 31, 1996 and the related combined statements of
operations, partners' capital and cash flows for the year then ended. These
combined financial statements are the responsibility of the Potomac Portfolio
Acquisition Hotels' management. Our responsibility is to express an opinion on
these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Potomac
Portfolio Acquisition Hotels as of December 31, 1996, and the results of its
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above which is presented for the purpose of
additional analysis and to comply with the rules and regulations of the
Securites and Exchange Commission, 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 3, 1997
F-23
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---------------- ---------------
ASSETS (unaudited)
<S> <C> <C>
Investments in hotel properties, at cost:
Land and land improvements.......................... $ 3,959,897 $ 3,959,897
Building and improvements........................... 41,881,752 42,882,663
Furniture, fixtures and equipment................... 11,532,784 11,545,834
---------------- ---------------
57,374,433 58,388,394
Less: accumulated depreciation.......................... 21,303,016 21,822,335
---------------- ---------------
Net investment in hotel properties...................... 36,071,417 36,566,059
Cash and cash equivalents............................... 0 714,798
Restricted cash......................................... 1,980,071 708,070
Accounts receivable, net................................ 722,379 601,345
Inventories............................................. 372,996 371,062
Prepaid expenses........................................ 466,013 303,040
Deferred expenses....................................... 647,448 546,486
Other assets............................................ 8,900 8,900
---------------- ---------------
Total assets........................................ $ 40,269,224 $ 39,819,760
================ ===============
LIABILITIES AND PARTNERS' CAPITAL
Mortgage payable........................................ $ 27,061,468 $ 26,446,705
Bank overdraft.......................................... 43,952
Payable to affiliate.................................... 852,384
Accounts payable, trade................................. 464,538 392,867
Accrued expenses and other liabilities.................. 1,016,222 1,028,199
---------------- ---------------
Total liabilities................................... 28,586,180 28,720,155
Commitments and contingencies (Note 4)
Partners' capital....................................... 11,683,044 11,099,605
---------------- ---------------
Total liabilities and partners' capital............. $ 40,269,224 $ 39,819,760
================ ===============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31, December 31,
---------------
1996 1997
--------------- ---------------
Revenues: (unaudited)
<S> <C> <C>
Room revenue.............................................. $ 16,343,788 $ 17,408,174
Food and beverage revenue................................. 6,336,526 6,589,758
Other revenue............................................. 797,053 780,317
--------------- ---------------
Total revenue............................................. 23,477,367 24,778,249
Expenses:
Property operating costs and expenses..................... 4,628,571 4,797,329
Food and beverage costs and expenses...................... 5,078,578 5,175,341
General and administrative................................ 1,633,099 1,782,851
Advertising and promotion................................. 1,295,176 1,261,074
Repairs and maintenance................................... 1,199,385 1,228,946
Utilities................................................. 1,090,440 1,094,617
Management fees........................................... 693,552 735,439
Franchise costs........................................... 669,654 758,423
Depreciation.............................................. 1,939,327 1,943,838
Amortization.............................................. 70,804 100,962
Real estate and personal property taxes, and
property insurance....................................... 659,449 486,064
Interest expense.......................................... 1,963,850 1,894,641
Other expense............................................. 658,299 277,332
--------------- ---------------
Total expenses............................................ 21,580,184 21,690,920
--------------- ---------------
Net income................................................ $ 1,897,183 $ 3,087,329
=============== ===============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
Balance, December 31, 1995 ....................... $ 9,785,861
Net income .................................... 1,897,183
------------
Balance, December 31, 1996 ....................... 11,683,044
Distributions (unaudited) ..................... (3,670,768)
Net income (unaudited) ........................ 3,087,329
------------
Balance, December 31, 1997 (unaudited) ........... $ 11,099,605
============
The accompanying notes are an integral part of these
combined financial statements.
F-26
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
December 31, December 31,
1996 1997
----------- -----------
Cash flow from operating activities: (unaudited)
Net income ................................... $ 1,897,183 $ 3,087,329
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation ................................. 1,939,327 1,943,838
Amortization ................................. 70,804 100,962
Loss on fixed asset disposal ................. 25,410
Changes in assets and liabilities:
Restricted cash ........................... (911,663) 1,272,001
Accounts receivable ....................... 440,208 121,034
Inventories ............................... (8,365) 1,934
Prepaid expenses .......................... (193,074) 162,973
Other assets .............................. 200
Accounts payable .......................... (53,839) (71,671)
Payable to affiliate ...................... 852,384
Accrued expenses and other liabilities .... 162,287 11,977
----------- -----------
Net cash provided by operating activities 3,368,478 7,482,761
----------- -----------
Cash flows used in investing activities:
Improvements and additions to properties ..... (2,591,997) (2,438,480)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in bank overdraft ........ (155,385) (43,952)
Principal payments on borrowings ............. (522,916) (614,763)
Payment of deferred financing costs .......... (98,180)
Distributions ................................ (3,670,768)
----------- -----------
Net cash used in financing activities ... (776,481) (4,329,483)
----------- -----------
Net change in cash and cash equivalents ......... 0 714,798
Cash and cash equivalents at beginning of period 0 0
----------- -----------
Cash and cash equivalents at end of period ...... $ 0 $ 714,798
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest ....... $ 1,963,850 $ 1,894,641
=========== ===========
The accompanying notes are an integral
part of these combined financial statements.
F-27
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - American General Hospitality Operating Partnership, L.P.
(the "Operating Partnership"), a subsidiary of American General Hospitality
Corporation (the "Company" or "Registrant"), acquired a 100% ownership interest
in four hotels (the "Potomac Portfolio Acquisition Hotels") from entities
unaffiliated with the Company and the Operating Partnership. The Company,
established to acquire, own and lease hotel properties, was formed as a Maryland
corporation qualifying as a real estate investment trust ("REIT"). The Company
completed an Initial Public Offering of its common stock on July 31, 1996.
Basis of Presentation - The accompanying combined financial statements of
the Potomac Portfolio Acquisition Hotels have been prepared to comply with the
rules and regulations of the Securities and Exchange Commission ("SEC") and are
presented on a combined basis consistent with the Company due to common
ownership and management since the entities were the subject of a business
combination with the Company. The Potomac Portfolio Acquisition Hotels consist
of the following:
PROPERTY NAME LOCATION NO. OF ROOMS
- ------------- -------- ------------
Ramada Old Town Alexandria Alexandria, Virginia 258
Holiday Inn Historic District Alexandria Alexandria, Virginia 178
Holiday Inn Annapolis Annapolis, Maryland 220
Holiday Inn Express BWI Airport Hanover, Maryland 159
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties - The hotel properties are stated at cost
and are depreciated using the straight-line method over estimated useful lives
of 31-40 years for building and improvements and 5-10 years for furniture,
fixtures and equipment.
The owners of the Potomac Portfolio Acquisition Hotels review the carrying
value of each property to determine if circumstances exist indicating an
impairment in the carrying value of the investment of the hotel property or that
depreciation periods should be modified. If facts or circumstances support the
possibility of impairment, the owners of the Potomac Portfolio Acquisition
Hotels will prepare a projection of the undiscounted future cash flows, without
interest charges, of the specific hotel property and determine if the
investment in the hotel property is recoverable based on the undiscounted future
cash flows.
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 principally for capital and property tax reserves.
Inventories - Inventories consist primarily of supplies, 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 and license fees. Amortization of deferred loan costs is computed using
the effective yield method based upon the terms of the loan agreement.
Amortization of license fees is computed using the straight-line method over the
life of the agreement. Accumulated amortization at December 31, 1996 is
$126,166.
F-28
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
Income Taxes - The Potomac Portfolio Acquisition Hotels are included in
limited partnerships which are not taxable entities. The results of operations
are included in the tax returns of the partners, accordingly, the statements of
operations contain no provision for federal income taxes. The partnership's 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. Such losses have been within the owners' estimates.
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, 1996, bank account balances
exceeded Federal Deposit Insurance Corporation limits by approximately
$1,980,071.
Seasonality - The hotel industry is seasonal in nature. Generally, revenue
at the Potomac Portfolio Acquisition Hotels is greater in the second and third
quarters of a calendar year.
Interim Financial Information - The unaudited interim financial statements
as of December 31, 1997 and for the twelve month periods ended December 31, 1997
have been prepared pursuant to the rules and regulations of the SEC. The notes
to the interim financial statements included herein are intended to highlight
significant changes to the notes to the December 31, 1996 combined financial
statements and present interim disclosures required by the SEC. The
accompanying interim combined financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the combined
interim financial statements. All such adjustments are of a normal and
recurring nature.
3. DEBT
Debt as of December 31, 1996 consists of the following:
<TABLE>
<S> <C>
First mortgage notes payable in monthly installments including interest at the fixed rate of 9.02%
maturing August 31, 2000........................................................................................ $ 13,685,719
First mortgage note payable in monthly installments including interest at the floating rate of prime
(8.25% at December 31, 1996) plus 2% maturing January 31, 2015.................................................. 5,004,302
First mortgage note payable in monthly installments including interest at the fixed rate of 8.375%
maturing January 3, 2001........................................................................................ 5,287,217
First mortgage note payable in monthly installments including interest at the floating rate of LIBOR
(5.44% at December 31, 1996) plus 4.25% maturing December 31, 2001.............................................. 3,084,230
------------
$ 27,061,468
============
</TABLE>
Mortgage debt is collateralized by the investment in hotel properties.
F-29
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
Aggregate annual principal payments for the Potomac Portfolio Acquisition
Hotels' debt at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------------
<S> <C>
1997......................... $ 581,650
1998......................... 639,229
1999......................... 702,559
2000......................... 13,135,989
2001......................... 7,573,246
Thereafter................... 4,428,795
------------
$ 27,061,468
============
</TABLE>
4. COMMITMENTS
Management fees of 3% of gross revenues of each hotel are paid to an
affiliate of the hotels, except for the Holiday Inn Historic District Alexandria
for which the base management fee is 4% of gross revenues. Additionally, the
Holiday Inn Historic District Alexandria pays incentive management fees of 1% of
gross revenues in excess of $2,670,000. Management fees of $693,552 were paid
in 1996 which includes $39,768 of incentive fees.
Franchise fees represent the annual expense for franchise royalties and
reservation services under the terms of the hotel franchise agreement. The
Potomac Portfolio Acquisition Hotels' franchise fees range from 3% to 5% of
gross room revenue.
The Potomac Portfolio Acquisition Hotels are required to remit 1% to 3% of
gross room revenue to franchisers for sales and advertising expenses incurred to
promote the hotels at the national level. Additional sales and advertising
costs are incurred at the local property level.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Potomac Portfolio Acquisition Hotels report the
carrying amount of cash and cash equivalents, restricted cash, accounts payable,
accrued expenses and other liabilities at cost which approximates fair value due
to the short maturity of these instruments. The carrying amount of the Potomac
Portfolio Acquisition Hotels' debt approximates fair value due to the Potomac
Portfolio Acquisition Hotels' ability to obtain such borrowings at comparable
interest rates.
6. SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, the Company purchased the Potomac Portfolio
Acquisition Hotels on January 22, 1998. The acquisition was accounted for by
the Company using the purchase method of accounting. These financial statements
do not reflect any transaction in connection with the acquisition of the Potomac
Portfolio Acquisition Hotels by the Company. The purchase price was paid in
cash from borrowings under the Company's credit facility. The Potomac Portfolio
Acquisition Hotels are leased to AGH Leasing L.P. and managed by American
General Hospitality, Inc.
On March 15, 1998 the Company and an affiliate and CapStar Hotel Company
("CapStar") entered into a definitive agreement (the "Merger Agreement")
pursuant to which the parties agreed, subject to stockholder approval and other
conditions and covenants, to merge as equals (the "Proposed Merger").
Accordingly, no assurance can be given that the Proposed Merger will be
consummated. Pursuant to the Merger Agreement, CapStar will spin off (the "Spin-
Off") in a taxable transaction, its hotel operations and management business to
its current stockholders as a new C-Corporation to be called MeriStar Hotels &
Resorts, Inc. ("MeriStar Resorts"). CapStar will subsequently merge with and
into the Company, which will qualify as a
F-30
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
NOTES TO FINANCIAL STATEMENTS
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company will be renamed MeriStar Hospitality
Corporation after the Proposed Merger. In a separate transaction, which will
close immediately after the closing of the Proposed Merger, MeriStar Resorts
will acquire AGH Leasing, L.P. (an affiliate) and American General Hospitality,
Inc. for $95 million, which is payable through the issuance of $10 million of
units of limited partnership interests of a subsidiary owned by MeriStar Resorts
and $85 million in cash. This acquisition is a condition to closing the Proposed
Merger.
The Merger Agreement defines the exchange ratios for both the Company and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998. The
Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the Company and CapStar. Prior to such stockholder meetings,
the Company will file a registration statement with the SEC registering under
the Securities Act of 1933, as amended, the shares of MeriStar Hospitality
Corporation to be issued in the Proposed Merger.
F-31
<PAGE>
POTOMAC PORTFOLIO ACQUISITION HOTELS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996
Real estate as of December Life Upon 31, 1996:
- ----------------------------------------------
<TABLE>
<CAPTION>
Accumulated Net
Depreciation Book Value
Land and Building and Building and Building and
Description Encumbrances Improvements Improvements Total Improvements Improvements
----------- ------------ ------------ ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ramada Old Town Alexandria $ 5,287,217 $ 686,824 $ 7,950,709 $ 8,637,533 $ 4,492,709 $ 3,458,000
Holiday Inn Historic District
Alexandria 13,685,719 67,826 16,171,189 16,239,015 4,357,605 11,813,584
Holiday Inn Annapolis 5,004,302 1,754,178 11,616,616 13,370,794 3,292,421 8,324,195
Holiday Inn Express BWI
Airport 3,084,230 1,451,069 6,143,238 7,594,307 1,210,641 4,932,597
---------------- ------------- ------------- ------------- -------------- -------------
$ 27,061,468 $ 3,959,897 $ 41,881,752 $ 45,841,649 $ 13,353,376 $ 28,528,376
================ ============= ============= ============= ============== =============
<CAPTION>
Life Upon
Which
Expected Depreciation
Date of Date of in Statement
Description Construction Acquisition Is Computed
----------- ------------ ----------- -----------
<S> <C> <C> <C>
Ramada Old Town Alexandria 1977 1998 31 - 40 Yrs.
Holiday Inn Historic District
Alexandria 1983 1998 31 - 40 Yrs.
Holiday Inn Annapolis 1988 1998 31 - 40 Yrs.
Holiday Inn Express BWI
Airport 1988 1998 31 - 40 Yrs.
</TABLE>
Reconciliation of Real Estate:
- ------------------------------
Balance at December 31, 1995 ............ $45,745,853
Additions ............................ 95,796
-----------
Balance at December 31, 1996 ............ $45,841,649
===========
Reconciliation of Accumulated Depreciation:
- -------------------------------------------
Balance at December 31, 1995 ............ $12,144,022
Depreciation ......................... 1,209,354
-----------
Balance at December 31, 1996 ............ $13,353,376
===========
F-32
<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 FSA Portfolio Acquisition Hotels (described in Note 1)
as of December 31, 1996 and September 30, 1997 and the related combined
statements of operations, equity and cash flows for the years ended December 31,
1995 and 1996, and for the nine month period ended September 30, 1997. These
combined financial statements are the responsibility of the FSA Portfolio
Acquisition Hotels' 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 ("SEC") as described in Note 1 to the financial statements and are
not intended to be a complete presentation of the FSA Portfolio Acquisition
Hotels.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the FSA Portfolio
Acquisition Hotels as of December 31, 1996 and September 30, 1997 and the
combined results of their operations and their cash flows for the years ended
December 31, 1995 and 1996, and for the nine month period ended September 30,
1997, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule referred to above which is
presented for the purpose of additional analysis and to comply with the rules
and regulations of the SEC, 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
January 15, 1998
F-33
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30, December 31,
ASSETS 1996 1997 1997
-------------- --------------- --------------
(unaudited)
<S> <C> <C> <C>
Investments in hotel properties, at cost:
Land and land improvement............................ $ 17,410,300 $ 17,410,300 $ 17,682,312
Buildings and improvements........................... 153,600,775 156,963,663 156,646,326
Furniture, fixtures and equipment.................... 13,817,423 23,559,780 24,065,760
------------- -------------- --------------
184,828,498 197,933,743 198,394,398
Less accumulated depreciation............................ (11,870,537) (17,834,042) (19,821,877)
------------- -------------- --------------
Net investment in hotel properties....................... 172,957,961 180,099,701 178,572,521
Cash and cash equivalents................................ 6,115,749 5,848,141 5,474,076
Accounts receivable, net................................. 3,650,813 4,115,546 7,046,408
Intercompany receivable.................................. 1,314,695 1,635,944
Inventories.............................................. 450,067 479,897 506,555
Prepaid expenses......................................... 775,341 1,209,378 478,352
Other assets, net........................................ 443,216 498,040 1,001,055
------------- -------------- --------------
Total assets............................. $ 185,707,842 $ 193,886,647 $ 193,078,967
============= ============== ==============
LIABILITIES AND EQUITY
Accounts payable, trade.................................. $ 1,156,129 $ 1,080,662 $ 1,769,978
Intercompany payable..................................... 1,009,227
Accrued expenses and other liabilities................... 3,475,479 5,459,184 3,767,411
------------- -------------- --------------
Total liabilities........................ 4,631,608 6,539,846 6,546,616
------------- -------------- --------------
Commitments and contingencies (Notes 4 and 5)
Capital.................................................. 198,664,240 190,258,581 171,883,321
Accumulated deficit...................................... (17,588,006) (2,911,780) 14,649,030
------------- -------------- --------------
Total equity............................. 181,076,234 187,346,801 186,532,351
------------- -------------- --------------
Total liabilities and equity............. $ 185,707,842 $ 193,886,647 $ 193,078,967
============= ============== ==============
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
F-34
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Month Period
Ended
For the Years Ended December 31, September 30,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
Revenues:
<S> <C> <C> <C> <C> <C>
Room revenue ............................ $49,889,032 $53,420,099 $67,302,646 $41,249,204 $52,212,194
Food and beverage revenue ............... 12,559,730 13,093,606 16,205,928 9,484,045 11,920,407
Lease revenue ........................... 415,799 433,136 296,952 353,972
Other revenue ........................... 3,754,443 4,064,616 5,030,623 3,062,649 3,483,513
----------- ----------- ----------- ----------- -----------
Total revenues .................. 66,619,004 71,011,457 88,539,197 54,092,850 67,970,086
----------- ----------- ----------- ----------- -----------
Expenses:
Property operating costs and expenses ... 14,513,577 15,385,916 17,676,156 11,729,413 13,553,302
Food and beverage costs and expenses .... 10,257,783 10,696,785 12,520,145 7,814,850 9,340,014
General and administrative .............. 7,058,768 7,412,892 7,719,371 5,472,295 5,704,824
Advertising and promotion ............... 4,476,519 5,243,745 6,040,610 3,907,476 4,535,476
Repairs and maintenance ................. 3,847,221 4,029,018 4,151,652 2,970,054 3,166,285
Utilities ............................... 4,194,643 4,308,091 4,272,112 3,273,599 3,295,026
Management fees ......................... 1,465,413 1,453,691 1,913,790 1,113,672 1,423,762
Franchise costs ......................... 2,114,220 1,863,307 2,453,290 1,426,694 1,915,319
Depreciation ............................ 5,629,152 6,241,385 7,951,340 4,681,039 5,963,505
Real estate and personal property taxes,
and property insurance ............... 3,282,075 3,584,526 3,521,192 2,747,393 2,624,371
Other expenses .......................... 2,269,517 1,961,239 2,758,729 1,340,197 1,771,976
----------- ----------- ----------- ----------- -----------
Total expenses .................. 59,108,888 62,180,595 70,978,387 46,476,682 53,293,860
----------- ----------- ----------- ----------- -----------
Net income ...................... $ 7,510,116 $ 8,830,862 $17,560,810 $ 7,616,168 $14,676,226
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-35
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
COMBINED STATEMENTS OF EQUITY
Equity
-------------
Balance, December 31, 1994 ....................... $ 175,645,663
Net income ................................... 7,510,116
Capital contributions ........................ 3,235,946
Distributions ................................ (6,833,286)
-------------
Balance, December 31, 1995 ....................... 179,558,439
Net income ................................... 8,830,862
Capital contributions ........................ 4,461,757
Distributions ................................ (11,774,824)
-------------
Balance, December 31, 1996 ....................... 181,076,234
Net income ................................... 14,676,226
Capital contributions ........................ 14,820,420
Distributions ................................ (23,226,079)
-------------
Balance, September 30, 1997 ...................... 187,346,801
Net income (unaudited) ....................... 2,884,584
Capital contributions (unaudited) ............ 4,940,140
Distributions (unaudited) .................... (8,639,174)
-------------
Balance, December 31, 1997 (unaudited) ........... $ 186,532,351
=============
The accompanying notes are an integral part of these combined
financial statements.
F-36
<PAGE>
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Month Period
Ended
For the Years Ended December 31, September 30,
-------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ............................... $ 7,510,116 $ 8,830,862 $ 17,560,810 $ 7,616,168 $ 14,676,226
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation .......................... 5,629,152 6,241,385 7,951,340 4,681,039 5,963,505
Changes in assets and liabilities:
Accounts receivable ................... (1,641,507) (717,628) (3,395,595) (1,148,983) (464,733)
Intercompany receivable/payable ....... (57,130) (28,256) 2,323,922 (13,561) (321,249)
Inventories ........................... (111,670) (15,978) (56,488) (4,247) (29,830)
Prepaid expenses ...................... (620,467) (9,300) 296,989 (56,231) (434,037)
Other assets .......................... (233,774) (21,772) (557,839) (356,833) (54,824)
Accounts payable, trade ............... 511,021 (426,348) 613,849 (227,061) (75,467)
Accrued expenses and other liabilities (662,190) 1,021,258 291,932 2,079,041 1,983,705
------------ ------------ ------------ ------------ ------------
Net cash provided by operating ...... 10,323,551 14,874,223 25,028,920 12,569,332 21,243,296
activities
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Improvements and additions to hotel ...... (5,248,803) (5,476,695) (13,565,900) (2,367,533) (13,105,245)
properties
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (5,248,803) (5,476,695) (13,565,900) (2,367,533) (13,105,245)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Capital contributions .................... 3,235,946 4,461,757 19,760,560 1,441,332 14,820,420
Distributions paid ....................... (6,833,286) (11,774,824) (31,865,253) (10,384,556) (23,226,079)
------------ ------------ ------------ ------------ ------------
Net cash used in financing activities (3,597,340) (7,313,067) (12,104,693) (8,943,224) (8,405,659)
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents ...... 1,477,408 2,084,461 (641,673) 1,258,575 (267,608)
Cash and cash equivalents at beginning of .... $ 2,553,880 $ 4,031,288 $ 6,115,749 $ 4,031,288 $ 6,115,749
periods
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of periods .. $ 4,031,288 $ 6,115,749 $ 5,474,076 $ 5,289,863 $ 5,848,141
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-37
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - American General Hospitality Operating Partnership, L.P.
(the "Operating Partnership"), a subsidiary of American General Hospitality
Corporation (the "Company" or "Registrant"), acquired a 100% equity interest in
13 hotels in a 14 hotel portfolio (the "FSA Portfolio Acquisition Hotels") from
entities (the "Selling Entities") unaffiliated with the Operating Partnership.
American General Hospitality Corporation (the "Company"), established to
acquire, own and lease hotel properties, was formed as a Maryland corporation
qualifying as a real estate investment trust ("REIT"). The Company completed an
Initial Public Offering of its common stock on July 31, 1996.
Basis of Presentation - The FSA Portfolio Acquisition Hotels are under
common control by virtue of various contractual agreements, and it is intended
that every Selling Entity be the subject of a business combination with the
Company. Therefore, the accompanying financial statements of the FSA Portfolio
Acquisition Hotels have been presented on a combined basis and have been
prepared to comply with the rules and regulations of the Securities and Exchange
Commission ("SEC"). The FSA Portfolio Acquisition Hotels consist of the
following:
<TABLE>
<CAPTION>
No. of
Property Name Location Rooms
------------- -------- ------
<S> <C> <C>
Select Inn Bloomington Bloomington, Minnesota 148
Courtyard by Marriott Century City Century City, California 134
DoubleTree Resort Surfside Clearwater Beach Clearwater Beach, California 426
Ramada Inn Gulfview Clearwater Beach Clearwater Beach, California 289
Holiday Inn Fort Lauderdale Beach Fort Lauderdale Beach, Florida 240
Howard Johnson Resort Key Largo Key Largo, Florida 100
Courtyard by Marriott Disney Village Lake Buena Vista, Florida 323
Holiday Inn Madeira Beach Madeira Beach, California 149
Courtyard by Marriott Marina del Rey Marina del Rey, California 276
Mystic Hotel Mystic, Connecticut 77
Holiday Inn Richmond West Richmond, Virginia 280
Radisson Inn Rochester Rochester, New York 171
Holiday Inn Forest Park St. Louis St. Louis, Missouri 120
DoubleTree Hotel Tampa Airport Tampa, Florida 496
</TABLE>
The Selling Entities conducted business so that income taxes were the
responsibility of the owners. Substantially all of the assets and operations of
the Selling Entities will be acquired by the Company, which is a REIT and
accordingly, not subject to federal income taxes. Therefore, the financial
statements have been presented with no provision for federal income taxes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Hotel Properties - The individual hotel properties were
acquired by the respective Selling Entities during the period from 1992 to 1994,
either through foreclosure or deed-in-lieu of foreclosure of the collateral of
the loan receivables. Hotel properties are stated at the lower of cost or fair
value less selling costs and are depreciated using the straight-line method over
estimated useful lives of 39 years for buildings and improvements and 5 to 10
years for furniture, fixtures and equipment.
F-38
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
The individual Selling Entities 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 affected Selling Entity will prepare a projection of the
undiscounted future cash flows, without interest charges, of the specific hotel
property and determine if the investment in the hotel property is recoverable
based on the undiscounted future cash flows.
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 consist primarily of supplies, 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.
Income Taxes - The Selling Entities conducted business so that income taxes
were the responsibility of their respective owners. The owners' 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 said owners could be changed accordingly. The Company
is a REIT under the Code and accordingly not subject to corporate income taxes.
Accordingly, the financial statements 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.
Recently Issued Statement of Financial Accounting Standards - The FSA
Portfolio Acquisition Hotels adopted the 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 FSA Portfolio
Acquisition Hotels financial statements.
Interim Financial Information - The interim financial statements for the
period ended September 30, 1996 and December 31, 1997 have been prepared
pursuant to the rules and regulations of 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.
F-39
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
3. LEASE REVENUE
The Select Inn Bloomington hotel is operated by a third party entity under
a Fee Lease which expires in December 2000 with one extension option of 10
years. Minimum future rental income under the Fee Lease at September 30, 1997 is
as follows:
Year Amount
---- ------------
1997................................... $ 80,000
1998................................... 320,000
1999................................... 320,000
2000................................... 320,000
------------
$ 1,040,000
===========
In addition to the $320,000 annual base rent, a percentage rent shall be
paid equal to 23% of the amount, if any, by which the annual gross sales, as
defined, shall exceed $1,391,304. The lease requires the tenant to pay all
expenses of owning and operating the hotel, including real estate taxes and
structural maintenance and repairs.
The Mystic Hotel was operated by a third party entity under a Fee Lease
that terminated in December 1995. Upon the termination of the lease, the lessor
retained all rights and obligations related to owning and operating the hotel.
4. GROUND LEASES
Three of the FSA Portfolio Acquisition Hotels are subject to ground leases
with third parties with respect to the land underlying each such hotel. The
ground leases require the tenant to pay all expenses of owning and operating the
hotels, including real estate taxes and structural maintenance and repairs.
The Radisson Inn Rochester hotel is encumbered by a ground lease expiring
on December 31, 2021 with two 25 year renewal options. The lease requires
minimum annual rent payments of $60,000 through 1999 and thereafter an annual
rent of $60,000 plus a percentage rent payment equal to 1% of gross receipts in
excess of the minimum annual rent.
The DoubleTree Resort Surfside Clearwater Beach hotel is encumbered by a
ground lease expiring in February 2079. Annual lease payments are based upon the
greater of a $283,970 base rent or a percentage rent equal to 3% of gross room
revenues and 1% of gross receipts from the sale of food and beverage. The annual
base rent shall be adjusted every 10 years to equal the average rental payments
for the preceding 10 year period.
The Courtyard by Marriott Disney Village hotel is encumbered by a ground
lease expiring on September 30, 2046. Annual lease payments are based upon the
greater of a $500,000 base rent or a percentage rent equal to 8.5% of gross room
revenues, 4% of gross receipts from the sale of food, 6% of gross receipts from
the sale of beverages, 25% of gross receipts from subleases, concessionaires and
rent of exhibition, and meeting and conference facilities, and 7% of gross
receipts from all other sources, including sale of merchandise, service charges,
and vending machines. The annual base rent shall be adjusted every five years to
the greater of the minimum annual rent during the prior five years or 75% of the
average total rent paid during such five year period.
F-40
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Minimum future rental payments required under the ground leases at
September 30, 1997 are as follows:
Year Amount
---- -------------
1997.................................... $ 210,992
1998.................................... 843,970
1999.................................... 843,970
2000.................................... 843,970
2001.................................... 843,970
Thereafter.............................. 45,849,660
-------------
$ 49,436,532
=============
Ground lease expense included in Other expenses was $1,005,460 and
$1,531,659, for the years ended December 31, 1995 and 1996, respectively, and
$1,168,050 for the nine month period ended September 30, 1997.
5. COMMITMENTS
Management fees represent amounts paid to third party entities for various
operational services. The base management fee is based upon a percentage of
gross revenues ranging from 1% to 2%. An incentive fee is paid based upon a
percentage of gross operating profits ranging from 2.25% to 4.5%. Management and
incentive fees of $1,465,413 and $1,453,691 were paid as of December 31, 1995
and 1996, respectively, and $1,423,762 was paid for the nine month period ended
September 30, 1997.
Franchise fees represent the annual expense for franchise royalties, sales
and advertising expenses and reservation services under the terms of hotel
franchise agreements. Franchise fees are based upon a percentage of gross room
revenue ranging from 3.25% to 7.5%.
In addition, accounting fees are paid for various record keeping services
ranging from $500 to $3,000 per month.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the FSA Portfolio Acquisition Hotels report 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.
7. RELATED PARTY TRANSACTIONS
Intercompany receivables related to hotel operations are due from
affiliates of the owners in the amount of $1,314,695 and $1,635,944 as of
December 31, 1996 and September 30, 1997, respectively, and are non-interest
bearing.
F-41
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
8. SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, the Company acquired thirteen hotels in the
fourteen-hotel portfolio on February 13, 1998. The Company expects to acquire
the fourteenth hotel by mid-April 1998. The closing is subject to various
closing conditions and no assurance can be given that the acquisition will be
completed. The acquisition was accounted for by the Company using the purchase
method of accounting. These financial statements do not reflect any transaction
in connection with the acquisition of the FSA Portfolio Acquisition Hotels by
the Company. The purchase price was paid entirely in cash and was funded by
borrowings under the Company's credit facilities. The thirteen hotels are leased
to AGH Leasing L.P. and managed by American General Hospitality, Inc. The
Company expects that the fourteenth hotel to be acquired by the Company will
continue to be leased to and managed by its current operator. The Company
intends to sell five of the FSA Portfolio Acquisition Hotels either as a group
or individually although it has no binding purchase agreements with respect to
such sale.
On March 15, 1998 the Company and an affiliate and CapStar Hotel Company
("CapStar") entered into a definitive agreement (the "Merger Agreement")
pursuant to which the parties agreed, subject to stockholder approval and other
conditions and covenants, to merge as equals (the "Proposed Merger").
Accordingly, no assurance can be given that the Proposed Merger will be
consummated. Pursuant to the Merger Agreement, CapStar will spin off (the "Spin-
Off") in a taxable transaction, its hotel operations and management business to
its current stockholders as a new C-Corporation to be called MeriStar Hotels &
Resorts, Inc. ("MeriStar Resorts"). CapStar will subsequently merge with and
into the Company, which will qualify as a reorganization under Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"). The Company will be
renamed MeriStar Hospitality Corporation after the Proposed Merger. In a
separate transaction, which will close immediately after the closing of the
Proposed Merger, MeriStar Resorts will acquire AGH Leasing, L.P. (an affiliate)
and American General Hospitality, Inc. for $95 million, which is payable through
the issuance of $10 million of units of limited partnership interests of a
subsidiary owned by MeriStar Resorts and $85 million in cash. This acquisition
is a condition to closing the Proposed Merger.
The Merger Agreement defines the exchange ratios for both the Company and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998. The Proposed
Merger will be submitted for approval at separate meetings of the stockholders
of the Company and CapStar. Prior to such stockholder meetings, the Company will
file a registration statement with the SEC registering under the Securities Act
of 1933, as amended, the shares of MeriStar Hospitality Corporation to be issued
in the Proposed Merger.
F-42
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997
Real estate as of September 30, 1997:
- ------------------------------------
<TABLE>
<CAPTION>
Accumulated
Depreciation
Land and Building and Building and
Description Improvements Improvements Total Improvements
----------- ------------ ------------ ----- ------------
<S> <C> <C> <C> <C>
Select Inn Bloomington $ 200,000 $ 1,740,000 $ 1,940,000 $ 122,694
Courtyard by Marriott Century City 1,400,000 12,290,980 13,690,980 861,256
DoubleTree Resort Surfside Clearwater Beach 3,771,500 32,812,050 36,583,550 2,313,670
Ramada Inn Gulfview Clearwater Beach 2,062,400 19,002,683 21,065,083 1,288,219
Holiday Inn Fort Lauderdale Beach 1,616,700 15,692,628 17,309,328 1,027,125
Howard Johnson Resort Key Largo 900,000 7,854,174 8,754,174 552,640
Courtyard by Marriott Disney Village 1,210,000 10,670,395 11,880,395 745,403
Holiday Inn Madeira Beach 1,311,900 12,198,630 13,510,530 821,850
Courtyard by Marriott Marina del Rey 1,436,200 13,693,742 15,129,942 907,088
Mystic Hotel 370,000 3,303,608 3,673,608 228,818
Holiday Inn Richmond West 1,078,700 9,732,464 10,811,164 669,294
Radisson Inn Rochester 400,000 3,516,810 3,916,810 246,184
Holiday Inn Forest Park St. Louis 430,000 3,783,854 4,213,854 264,719
DoubleTree Hotel Tampa Airport 1,222,900 10,671,645 11,894,545 750,906
------------ ------------ ------------ ------------
$ 17,410,300 $156,963,663 $174,373,963 $ 10,799,866
============ ============ ============ ============
<CAPTION>
Net Which
Book Value Expected Depreciation
Building and Date of Date of in Statement
Description Improvements Construction Acquisition Is Computed
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Select Inn Bloomington $ 1,617,307 1962 1998 39 Yrs.
Courtyard by Marriott Century City 11,429,724 1986 1998 39 Yrs.
DoubleTree Resort Surfside Clearwater Beach 30,498,380 1980 1998 39 Yrs.
Ramada Inn Gulfview Clearwater Beach 17,714,464 1969 1998 39 Yrs.
Holiday Inn Fort Lauderdale Beach 14,665,504 1969 1998 39 Yrs.
Howard Johnson Resort Key Largo 7,301,533 1971 1998 39 Yrs.
Courtyard by Marriott Disney Village 9,924,992 1972 1998 39 Yrs.
Holiday Inn Madeira Beach 11,376,780 1972 1998 39 Yrs.
Courtyard by Marriott Marina del Rey 12,786,654 1976 1998 39 Yrs.
Mystic Hotel 3,074,790 1967 1998 39 Yrs.
Holiday Inn Richmond West 9,063,170 1975 1998 39 Yrs.
Radisson Inn Rochester 3,270,626 1971 1998 39 Yrs.
Holiday Inn Forest Park St. Louis 3,519,134 1978 1998 39 Yrs.
DoubleTree Hotel Tampa Airport 9,920,739 1972 1998 39 Yrs.
------------
$146,163,797
============
</TABLE>
F-43
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 - (CONTINUED)
Reconciliation of Real Estate:
-----------------------------
Balance at December 31, 1995 ............. $179,351,803
Additions .............................. 5,476,695
------------
Balance at December 31, 1996 ............. 184,828,498
Additions .............................. 13,105,245
------------
Balance at September 30, 1997 ............ $197,933,743
============
Reconciliation of Accumulated Depreciation:
------------------------------------------
Balance at December 31, 1995 ............. $ 5,629,152
Depreciation ........................... 6,241,385
------------
Balance at December 31, 1996 ............. 11,870,537
Depreciation ........................... 5,963,505
------------
Balance at September 30, 1997 ............ $ 17,834,042
============
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American General Hospitality Corporation
We have audited the accompanying balance sheet and financial statement
schedule of the Holiday Inn O'Hare International Hotel (the "O'Hare Hotel")
(described in Note 1) as of December 31, 1996 and the related statements of
operations, partners' capital and cash flows for the year then ended. These
financial statements are the responsibility of the O'Hare Hotel'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 financial position of the O'Hare Hotel as of December
31, 1996, and the results of its operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above
which is presented for the purpose of additional analysis and to comply with the
rules and regulations of the Securities and Exchange Commission, 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
October 22, 1997
F-45
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
--------------- ---------------
ASSETS (unaudited)
<S> <C> <C>
Investments in hotel property, at cost:
Land and land improvements........................... $ 2,360,000 $ 2,360,000
Building and improvements............................ 15,563,628 16,017,716
Furniture, fixtures and equipment.................... 3,060,035 3,483,826
--------------- ---------------
20,983,663 21,861,542
Less: accumulated depreciation........................... 9,743,257 10,503,277
--------------- ---------------
Net investment in hotel property......................... 11,240,406 11,358,265
Cash and cash equivalents................................ 45,732 76,042
Restricted cash.......................................... 1,095,887 1,618,701
Accounts receivable, net................................. 669,103 340,394
Inventories.............................................. 140,092 211,370
Prepaid expenses......................................... 81,984 132,948
Deferred expenses........................................ 251,505 238,725
Other assets............................................. 55,818 53,609
--------------- ---------------
Total assets......................................... $ 13,580,527 $ 14,030,054
=============== ===============
LIABILITIES AND PARTNERS' DEFICIT
Mortgage payable......................................... $ 22,500,000 $ 21,741,048
Notes payable to partners................................ 3,000,000 2,477,475
Capital lease obligation................................. 17,435 5,115
Accounts payable, trade.................................. 969,575 527,657
Accrued expenses and other liabilities................... 1,618,376 1,781,315
--------------- ---------------
Total liabilities.................................... 28,105,386 26,532,610
Commitments and contingencies (Notes 4 and 5)
Partners' deficit........................................ (14,524,859) (12,502,556)
--------------- ---------------
Total liabilities and partners' deficit.............. $ 13,580,527 $ 14,030,054
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
--------------- ---------------
Revenues: (unaudited)
<S> <C> <C>
Room revenue................................................ $ 12,899,993 $ 14,651,075
Food and beverage revenue................................... 7,793,598 8,796,556
Other revenue............................................... 963,547 1,030,523
--------------- ---------------
Total revenue............................................. 21,657,138 24,478,154
Expenses:
Property operating costs and expenses....................... 3,763,987 4,184,538
Food and beverage costs and expenses........................ 5,720,079 7,035,840
General and administrative.................................. 2,012,815 2,289,786
Advertising and promotion................................... 1,235,590 1,336,611
Repairs and maintenance..................................... 992,935 1,018,774
Utilities................................................... 821,724 832,051
Management fees............................................. 536,466 607,071
Franchise costs............................................. 644,310 733,447
Depreciation................................................ 758,587 760,020
Amortization................................................ 21,084 20,280
Real estate and personal property taxes, and property
insurance.................................................. 1,164,686 1,328,126
Interest expense............................................ 2,205,495 2,243,452
Refinancing costs........................................... 2,827,000
Other expense............................................... 41,757 65,855
--------------- ---------------
Total expenses............................................ 22,746,515 22,455,851
--------------- ---------------
Net income (loss)......................................... $ (1,089,377) $ 2,022,303
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
Balance, December 31, 1995....................................... $(13,435,482)
Net loss....................................................... (1,089,377)
------------
Balance, December 31, 1996....................................... (14,524,859)
Net income (unaudited)......................................... 2,022,303
------------
Balance, December 31, 1997 (unaudited)........................... $(12,502,556)
============
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
----------- -----------
<S> <C> <C>
Cash flow from operating activities: (unaudited)
Net income (loss) ................................................... $(1,089,377) $ 2,022,303
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ........................................................ 758,587 760,020
Amortization ........................................................ 21,084 20,280
Changes in assets and liabilities:
Restricted cash .................................................. 266,435 (522,814)
Accounts receivable .............................................. 93,110 328,709
Inventories ...................................................... 21,135 (71,278)
Prepaid expenses ................................................. 19,856 (50,964)
Other assets ..................................................... 38,867 2,209
Accounts payable ................................................. 409,823 (441,918)
Accrued expenses and other liabilities ........................... (196,836) 162,939
----------- -----------
Net cash provided by operating activities ...................... 342,684 2,209,486
----------- -----------
Cash flows from investing activities:
Improvements and additions to properties ............................ (814,162) (877,879)
----------- -----------
Cash flows from financing activities:
Principal payments on borrowings .................................... (2,695,244) (1,281,477)
Payments on capital lease obligation ................................ (11,374) (12,320)
Payment of deferred financing costs ................................. (96,510) (7,500)
Proceeds from notes payable to partners ............................. 3,000,000
----------- -----------
Net cash provided by financing activities ...................... 196,872 (1,301,297)
----------- -----------
Net change in cash and cash equivalents ................................ (274,606) 30,310
Cash and cash equivalents at beginning of period ....................... 320,338 45,732
----------- -----------
Cash and cash equivalents at end of period ............................. $ 45,732 $ 76,042
=========== ===========
Supplemental disclosures of information:
Cash paid during the year for interest .............................. $ 5,217,529 $ 2,240,160
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - American General Hospitality Operating Partnership, L.P.
(the "Operating Partnership"), a subsidiary of American General Hospitality
Corporation (the "Company" or "Registrant"), acquired through a subsidiary a
100% ownership interest in the 507 room Holiday Inn O'Hare International Hotel
(the "O'Hare Hotel") located in Rosemont, Illinois from entities unaffiliated
with the Company and the Operating Partnership. The Company, established to
acquire, own and lease hotel properties, was formed as a Maryland corporation
qualifying as a real estate investment trust ("REIT"). The Company completed an
Initial Public Offering ("IPO") of its common stock on July 31, 1996.
Basis of Presentation - The accompanying financial statements of the O'Hare
Hotel have been prepared to comply with the rules and regulations of the
Securities and Exchange Commission ("SEC") and are presented on a basis
consistent with the Company due to common ownership and management since the
entity was 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 cost and is
depreciated using the straight-line method over estimated useful lives of 15-45
years for building and improvements and 7-10 years for furniture, fixtures and
equipment.
The owners of the O'Hare Hotel 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 owners of the O'Hare 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 the hotel property is recoverable
based on the undiscounted future cash flows.
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 principally for capital and property tax reserves.
Inventories - Inventories consist primarily of supplies, 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 and license fees. Amortization of deferred loan costs is computed using
the effective yield method based upon the terms of the loan agreement.
Amortization of license fees is computed using the straight-line method over the
life of the agreement. Accumulated amortization at December 31, 1996 is $75,205.
Income Taxes - The O'Hare 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, accordingly, the statements of operations contain no
provision for federal income taxes. The partnership's 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.
F-50
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
NOTES TO FINANCIAL STATEMENTS
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. Such losses have been within the owners' estimates.
Seasonality - The hotel industry is seasonal in nature. Generally, revenue
at this hotel is greater in the second and third quarters of a calendar year.
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, 1996, bank account balances
exceeded Federal Deposit Insurance Corporation limits by approximately $492,084.
Interim Financial Information - The unaudited interim financial statements
as of December 31, 1997 and for the twelve months ended December 31, 1997 have
been prepared pursuant to the rules and regulations of the SEC. The notes to the
interim financial statements included herein are intended to highlight
significant changes to the notes to the December 31, 1996 financial statements
and present interim disclosures required by the SEC. The accompanying interim
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature.
3. DEBT
On December 31, 1996, the O'Hare Hotel refinanced the existing mortgage
note of $23,919,537 using proceeds from (i) a new note in the amount of
$22,500,000 and (ii) notes payable to partners totaling $3,000,000. Additional
interest of $2,827,000 was paid by the O'Hare Hotel upon refinancing. Debt as of
December 31, 1996 consists of the following:
<TABLE>
<S> <C>
First mortgage note payable in monthly installments of $228,267 including interest at the
fixed rate of 9% maturing January 1, 2012.......................................................... $ 22,500,000
Note payable to partner payable in monthly installments of $31,138 including interest at
the fixed rate of 9.0% maturing December 31, 2001.................................................. 1,500,000
Note payable to partner payable in monthly principal installments of $25,000 plus interest at the
floating rate of prime (8.25% at December 31, 1996) plus .5% maturing December 1, 2001............. 1,500,000
------------
$ 25,500,000
============
</TABLE>
Mortgage debt is collateralized by the investment in hotel property.
Aggregate annual principal payments for the O'Hare Hotel's debt at December
31, 1996 are as follows:
Year Amount
---- ------------
1997............................................. $ 1,220,703
1998............................................. 1,378,129
1999............................................. 1,479,632
2000............................................. 1,590,514
2001............................................. 1,717,755
Thereafter....................................... 18,113,267
------------
$ 25,500,000
============
F-51
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
NOTES TO FINANCIAL STATEMENTS
4. LEASES
Capital lease obligations represent the present value of future rental
payments under various equipment leases. Minimum future rental payments
required under these capital leases (together with the present value of net
minimum lease payments) at December 31, 1996 are as follows:
Year Amount
---- -------
1997............................................. $12,923
1998............................................. 5,385
-------
Total minimum lease payment...................... 18,308
Less imputed interest............................ 873
-------
Present value of net minimum lease payments...... $17,435
=======
Leased capital assets are included in equipment and at December 31, 1996
had a net book value of $18,551 ($55,000 less $36,449 in accumulated
depreciation).
5. COMMITMENTS
Management fees of 2.5% of gross revenues are paid to an affiliate of the
hotel. The payment of management fees is prohibited in the event that there are
not sufficient operating revenues to first pay current operating expenses, debt
service and escrow requirements under the mortgage. Management fees of $536,466
were paid in 1996.
Franchise fees represent the annual expense for franchise royalties and
reservation services under the terms of the hotel franchise agreement. The
O'Hare Hotel franchise fees are 5% of gross room revenue. The agreement expires
in 2001.
The O'Hare Hotel is required to remit 1.5% of gross room revenue to the
franchiser 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.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the O'Hare 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 O'Hare Hotel's debt
approximates fair value due to the O'Hare Hotel's ability to obtain such
borrowings at comparable interest rates.
7. SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, the Company purchased the O'Hare Hotel on February
3, 1998. The acquisition was accounted for by the Company using the purchase
method of accounting. These financial statements do not reflect any transaction
in connection with the acquisition of the O'Hare Hotel by the Company. The
purchase price was paid in cash, the issuance of Class C units of limited
partnership interest of the Operating Partnership (the "Class C OP Units") and
mortgage debt assumption. The Class C OP Units bear a preferred annual
distribution rate of $1.89 per Class C OP Unit until such time as the dividend
distribution rate for the Company's Common Stock exceeds $1.89 at which time the
distribution rate on the Class C OP Units shall equal the distribution rate on
the Company's Common Stock. In addition, the holders of the Class C OP Units
are entitled to receive additional OP Units if the Company's Common Stock (as
reported on the NYSE) is not trading at or above $30 per share on the
anniversary date of the closing of the acquisition. The hotel is leased to AGH
Leasing L.P. and managed by American General Hospitality Company, Inc.
F-52
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
NOTES TO FINANCIAL STATEMENTS
On March 15, 1998 the Company and an affiliate and CapStar Hotel Company
("CapStar") entered into a definitive agreement (the "Merger Agreement")
pursuant to which the parties agreed, subject to stockholder approval and other
conditions and covenants, to merge as equals (the "Proposed Merger").
Accordingly, no assurance can be given that the Proposed Merger will be
consummated. Pursuant to the Merger Agreement, CapStar will spin off (the "Spin-
Off") in a taxable transaction, its hotel operations and management business to
its current stockholders as a new C-Corporation to be called MeriStar Hotels &
Resorts, Inc. ("MeriStar Resorts"). CapStar will subsequently merge with and
into the Company, which will qualify as a reorganization under Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"). The Company will be
renamed MeriStar Hospitality Corporation after the Proposed Merger. In a
separate transaction, which will close immediately after the closing of the
Proposed Merger, MeriStar Resorts will acquire AGH Leasing, L.P. (an affiliate)
and American General Hospitality, Inc. for $95 million, which is payable through
the issuance of $10 million of units of limited partnership interests of a
subsidiary owned by MeriStar Resorts and $85 million in cash. This acquisition
is a condition to closing the Proposed Merger.
The Merger Agreement defines the exchange ratios for both the Company and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.
The Company expects the Proposed Merger to close in June 1998. The
Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the Company and CapStar. Prior to such stockholder meetings,
the Company will file a registration statement with the SEC registering under
the Securities Act of 1933, as amended, the shares of MeriStar Hospitality
Corporation to be issued in the Proposed Merger.
F-53
<PAGE>
HOLIDAY INN O'HARE INTERNATIONAL HOTEL
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Real estate as of December 31, 1996:
- -----------------------------------
Accumulated
Depreciation
Land and Building and Building and
Description Encumbrances Improvements Improvements Total Improvements
----------- ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Holiday Inn O'Hare International $ 22,500,000 $ 2,360,000 $ 15,563,628 $ 17,923,628 $ 7,845,899
------------ ------------ ------------- ------------- ------------
$ 22,500,000 $ 2,360,000 $ 15,563,628 $ 17,923,628 $ 7,845,899
============ ============ ============= ============= ============
<CAPTION>
Real estate as of December 31, 1996:
- ----------------------------------- Life Upon
Net Which
Book Value Expected Depreciation
Building and Date of Date of in Statement
Description Improvements Construction Acquisition Is Computed
----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Holiday Inn O'Hare International $ 7,717,729 1975 1998 15-45 Yrs.
------------
$ 7,717,729
============
</TABLE>
Reconciliation of Real Estate:
- -----------------------------
Balance at December 31, 1995.................. $ 17,380,579
Additions................................... 543,049
------------
Balance at December 31, 1996.................. $ 17,923,628
============
Reconciliation of Accumulated Depreciation:
- ------------------------------------------
Balance at December 31, 1995.................. $ 7,361,564
Depreciation................................ 484,335
------------
Balance at December 31, 1996.................. $ 7,845,899
============
F-54
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
The following unaudited Pro Forma Consolidated Balance Sheet is presented
as if the Company had completed (i) the sale of 614,672 shares of Common Stock
to certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership (the
"ABKB Offering"), the sale of 2,511,352 shares of Common Stock through three
separate public offerings pursuant to the Shelf Registration and (ii) the
acquisition of the 26 hotels acquired in the first quarter of 1998 and the
acquisition of the 13 pending hotel acquisitions (the "Acquired and Proposed
Acquisition Hotels", together with the hotels owned at December 31, 1997, the
"Hotels") including the Prime Portfolio Acquisition Hotels, the Potomac
Portfolio Acquisition Hotels, the FSA Portfolio Acquisition Hotels, the Holiday
Inn O'Hare International Hotel and the Madison Hotel Acquisition as of December
31, 1997.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Balance Sheet is derived
from the Company's Consolidated Balance Sheet as of December 31, 1997 and should
be read in conjunction with the financial statements filed with American General
Hospitality Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
The following Pro Forma Consolidated Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of December 31, 1997, nor does it purport to
represent the future financial position of American General Hospitality
Corporation.
F-55
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUIRED AND ABKB PRIVATE
PROPOSED PLACEMENT AND
COMPANY ACQUISITION PRO FORMA
HISTORICAL HOTELS OFFERINGS COMBINED
(A) (B) (C) PRO FORMA
-------------- --------------- --------------- ---------------
ASSETS
<S> <C> <C> <C> <C>
Investment in hotel properties, net........... 569,589,828 778,079,175 (D) $ 1,347,669,003
Cash and cash equivalents..................... 800,255 800,255
Restricted cash............................... 765,048 765,048
Accounts receivable, net...................... 7,999,122 7,999,122
Deferred expenses, net........................ 4,037,825 1,499,900 (E) 5,537,725
Other assets.................................. 1,661,650 1,661,650
Notes receivable - Lessee..................... 234,321 234,321
-------------- --------------- --------------- ---------------
Total assets............................. $ 585,088,049 $ 779,579,075 $ 1,364,667,124
============== =============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt.......................................... $ 36,140,059 $ 31,991,130 (F) 68,131,189
Debt, Line of Credit.......................... 41,312,177 697,747,245 (G) $ (261,790,919)(G) 477,268,503
Distributions payable......................... 9,352,973 9,352,973
Accounts payable, trade, accrued
expenses and other liabilities.............. 11,676,685 11,676,685
Minority interest in Operating Partnership.... 43,356,608 5,519,556 (H) 39,523,842 (H) 88,400,006
-------------- --------------- --------------- ---------------
Total liabilities........................ 141,838,502 735,257,931 (222,267,077) 654,829,356
-------------- --------------- --------------- ---------------
Common stock.................................. 211,823 101,335 (J) 313,158
Additional paid-in capital.................... 447,573,312 44,321,144 (I) 222,165,742 (K) 714,060,198
Unearned officers' compensation............... (724,792) (724,792)
Earnings in excess of distributions........... (3,810,796) (3,810,796)
-------------- --------------- --------------- ---------------
Total shareholders' equity.............. 443,249,547 44,321,144 $ 222,267,077 709,837,768
-------------- --------------- --------------- ---------------
Total liabilities and shareholders'
equity................................. $ 585,088,049 $ 779,579,075 $ 1,364,667,124
============== =============== =============== ===============
</TABLE>
F-56
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the historical balance sheet of the Company as of December 31,
1997.
(B) Represents the acquisition of the assets relating to the Acquired and
Proposed Acquisition Hotels, including estimated closing costs. The
acquisitions are financed through borrowings under the Company's two
unsecured credit facilities with an aggregate principal amount of $600
million (the "Credit Facilities"), the assumption of indebtedness and the
issuance of 1,826,843 units of limited partnership interests of Operating
Partnership ("OP Units"). Additionally, franchise transfer costs of
$1,499,900 related to the Acquired and Proposed Acquisition Hotels were
estimated.
(C) Represents the net proceeds and related allocation to minority interest in
connection with (i) the sale of 614,672 shares of Common Stock to certain
investment funds and separate accounts advised by ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership (the "ABKB
Offering") after December 31, 1997 and (ii) a pro forma follow-on primary
offering of approximately 7,000,000 shares of Common Stock (the "Pro Forma
1998 Offering") at $26.6875 per share (the last reported sale price of the
Common Stock on the New York Stock Exchange) to decrease its borrowings
under the Company's Credit Facilities. The Prime Group II Acquisition may
be closed at any time from September 30, 1998 through March 31, 1999, at
the option of the Company. Because the Company is able to control the
timing of the acquisition, it will endeavor to consummate the Pro Forma
1998 Offering at such time that it is able to secure favorable pricing and
maximize the proceeds from that offering.
(D) Represents the increase resulting from the purchase of Acquired and
Proposed Acquisition Hotels, including estimated closing costs (the
purchase includes only the land, building and improvements and furniture,
fixtures and equipment).
(E) The increase represents the estimated franchise transfer costs relating to
the Acquired and Proposed Acquisition Hotels.
(F) Represents the mortgage indebtedness assumed on three of the Acquired and
Proposed Acquisition Hotels.
(G) Represents the borrowings made under the Company's Credit Facilities for
the acquisitions of the Acquired and Proposed Acquisition Hotels and the
net proceeds from the ABKB Offering and the Pro Forma 1998 Offering.
(H) Represents the recognition of minority interest in the Operating
Partnership that will not be owned by the Company (11.1%).
(I) Represents the issuance of 1,826,843 of OP Units for the acquisition of the
Acquired and Proposed Acquisition Hotels.
(J) Represents the $0.01 par value of (i) the 614,672 shares of Common Stock
issued in connection with the ABKB Offering, (ii) the 2,511,352 shares of
Common Stock issued through three separate public offerings pursuant to the
Shelf Registration and (iii) approximately 7,000,000 shares of Common Stock
issued in Pro Forma 1998 Offering.
(K) Represents the net proceeds from the ABKB Offering, the three separate
public offerings and the Pro Forma 1998 Offering after allocation to
minority interest.
F-57
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
The following unaudited Pro Forma Consolidated Statements of Operations are
presented as if the Company had completed (i) the initial public offering of
8,075,000 shares of Common Stock (the "IPO"), the follow-on primary public
offering of 6,368,300 shares of Common Stock (the "1997 Public Offering"), the
sale of 2,671,705 shares of Common Stock to certain investment funds and
separate accounts advised by ABKB/LaSalle Securities Limited Partnership and
LaSalle Advisors Limited Partnership (the "ABKB Offering"), the follow-on
primary offering of 4,250,000 shares of Common Stock (the "Second 1997
Offering"), the sale of 2,511,352 shares of Common Stock issued through three
separate public offerings pursuant to the Shelf Registration (the "Shelf
Offerings") and (ii) the acquisition of the 27 hotels and office building owned
as of December 31, 1997 (the "December 31 Hotels") and the acquisition of the 26
hotels acquired in the first quarter of 1998 and the acquisition of the 13
pending hotel acquisitions (the "Acquired and Proposed Acquisition Hotels",
together with the December 31 Hotels, the "Hotels") including the Prime
Portfolio Acquisition Hotels, the Potomac Portfolio Acquisition Hotels, the FSA
Portfolio Acquisition Hotels, the Holiday Inn O'Hare International Hotel and the
Madison Hotel Acquisition as of January 1, 1996.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Statements of Operations are
derived from the Company's Consolidated Statements of Operations for the years
ended December 31, 1996 and 1997 and should be read in conjunction with the
financial statements filed with American General Hospitality Corporation's
Annual Report on Form 10-K for the years ended December 31, 1997 and 1996.
The following Pro Forma Consolidated Statements of Operations are not
necessarily indicative of what the actual results of operations would have been
assuming such transactions had been completed as of January 1, 1996.
F-58
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SECOND AND
HISTORICAL FOURTH
JULY 31, 1996 QUARTER 1997 ABKB HOTEL
THROUGH ACQUISITIONS OFFERING ACQUISITIONS PRO FORMA
DECEMBER 31, PRO FORMA PRO FORMA AND SECOND AND PRO FORMA YEAR ENDED
1996 ADJUSTMENTS ADJUSTMENTS 1997 OFFERING OFFERINGS DECEMBER 31,
(A) (B) (B) (C) (B) (C) 1996
------------ ----------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Participating Lease revenue (D)........ $ 13,387,719 $32,064,815 $ 20,324,107 $ 80,622,571 $146,399,212
Office building rental income (E)...... 2,143,833 2,143,833
Interest income (F).................... 108,075 (8,602) 99,473
------------ ----------- ------------ ------------- ------------- ------------
Total revenue........................ $ 13,495,794 $32,056,213 $ 22,467,940 $ 80,622,571 $148,642,518
------------ ----------- ------------ ------------- ------------- ------------
Expenses
Depreciation (G)....................... 2,635,380 6,983,615 6,838,237 29,718,150 46,175,382
Amortization (H)....................... 273,425 636,028 473,163 149,990 1,532,606
Real estate and personal property
taxes and property insurance (I)...... 1,444,592 3,611,733 2,111,542 9,102,827 16,270,694
Office building operating expense (E).. 1,344,552 1,344,552
General and administrative (J)......... 822,113 877,887 233,488 1,066,648 3,000,136
Ground lease expense (K)............... 545,279 504,245 5,616,798 6,666,322
Amortization of unearned
officers' compensation (L)............ 36,979 51,771 88,750
Interest expense (M)................... 1,412,117 1,707,104 11,723,877 (12,174,607) 34,192,772 36,861,263
------------ ----------- ------------ ------------- ------------- ------------
Total expenses....................... 7,169,885 14,372,382 22,724,859 (12,174,607) 79,847,184 111,939,705
------------ ----------- ------------ ------------- ------------- ------------
Income before minority interest........ 6,325,909 17,683,831 (256,919) 12,174,607 775,387 36,702,813
Minority interest (N).................. 1,196,728 4,064,615
------------ ------------
Net income applicable to common
stockholders.......................... $ 5,129,181 $ 32,638,198
============ ============
Net income per basic common share...... $ 0.63 $ 1.04
============ ============
Weighted average number of basic shares
of common stock outstanding........... 8,122,139 31,267,768
============ ============
Net income per diluted common share.... $ 0.63 $ 1.04
============ ============
Weighted average number of diluted
shares of common stock outstanding.... 8,164,774 31,310,404
============ ============
</TABLE>
F-59
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED ABKB
DECEMBER 31, PRO FORMA OFFERING
1997 ADJUSTMENTS AND SECOND 1997
(O) (P) OFFERING
(C)
---------------- --------------- ------------------
<S> <C> <C> <C>
Revenues
Participating Lease revenue (D)........ $ 59,934,337 $ 14,258,118
Office building rental income (E)...... 1,205,465 1,134,582
Interest income (F).................... 771,955
---------------- --------------- ------------------
Total revenue................... 61,911,757 15,392,700
---------------- --------------- ------------------
Expenses
Depreciation (G)....................... 13,970,289 4,461,303
Amortization (H)....................... 1,105,898 276,719
Real estate and personal property
Taxes and property insurance (I)... 7,073,323 1,830,313
Office building operating expense (E).. 596,939 658,611
General and administrative (J)......... 1,999,923
Ground lease expense (K)............... 1,271,639
Amortization on unearned
officers' compensation (L).......... 125,729
Interest expense (M)................... 9,048,898 6,786,345 (12,174,607)
---------------- --------------- ------------------
Total expenses.................. 35,192,638 14,013,291 (12,174,607)
---------------- --------------- ------------------
Income before minority interest........ $ 26,719,119 $ 1,379,409 $ 12,174,607
Minority interest (N).................. 3,234,189
----------------
Net income applicable to
common stockholders $ 23,484,930
================
Net income per basic common share...... $ 1.60
================
Weighted average number of basic shares
of common stock outstanding.......... 14,678,160
================
Net income per diluted common share.... $ 1.58
================
Weighted average number of diluted
shares of common stock outstanding... 14,841,343
================
<CAPTION>
HOTEL
ACQUISITIONS PRO FORMA YEAR
AND PRO FORMA ENDED
OFFERINGS DECEMBER 31,
(B) (C) 1997
----------------- ------------------
<S> <C> <C>
Revenues
Participating Lease revenue (D)........ $ 94,811,692 $ 169,004,147
Office building rental income (E)...... 2,340,047
Interest income (F).................... 771,955
----------------- ------------------
Total revenue................... 94,811,692 172,116,149
----------------- ------------------
Expenses
Depreciation (G)....................... 30,530,472 48,962,064
Amortization (H)....................... 149,990 1,532,606
Real estate and personal property
Taxes and property insurance (I)... 9,574,165 18,477,801
Office building operating expense (E).. 1,255,550
General and administrative (J)......... 1,066,648 3,066,571
Ground lease expense (K)............... 5,875,716 7,147,355
Amortization on unearned
officers' compensation (L).......... 125,729
Interest expense (M)................... 35,838,230 39,498,866
----------------- ------------------
Total expenses.................. 83,035,221 120,066,542
----------------- ------------------
Income before minority interest........ $ 11,776,471 $ 52,049,607
Minority interest (N).................. 5,764,179
==================
Net income applicable to
common stockholders $ 46,285,428
==================
Net income per basic common share...... $ 1.48
==================
Weighted average number of basic
shares of common stock outstanding... 31,275,051
==================
Net income per diluted common share.... $ 1.47
==================
Weighted average number of diluted
shares of common stock outstanding... 31,438,234
==================
</TABLE>
F-60
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents the historical consolidated statements of operations of the
Company for the period July 31, 1996 (inception of operations) through
December 31, 1996.
(B) Represents the adjustments necessary to reflect the pro forma statement of
operations of the 20 hotels acquired prior to April 1, 1997 that were owned
by the Company as of December 31, 1997, the 7 hotels acquired during the
second and fourth quarters of 1997 ("Second and Fourth Quarter 1997
Acquisitions") that were owned by the Company as of December 31, 1997 and
the 39 Acquired and Proposed Acquisition Hotels (together, the "Hotels") as
if all of the Hotels were acquired on January 1, 1996 and leased to a
Lessee pursuant to a Participating Lease since that date.
(C) Represents the adjustments to interest expense as a result of the repayment
of borrowings under the Company's Credit Facilities with the net proceeds
from the ABKB Offering, the Second 1997 Offering and the Pro Forma 1998
Offering.
(D) 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
Leases are seasonally adjusted for interim periods.
(E) Represents the rental income and operating expenses associated with the
Houston Office Building.
(F) Represents interest income on the advance to AGH Leasing for the purchase
of certain furniture, fixtures and equipment from the Company. The
receivable balance as of December 31, 1997 is $234,321.
(G) Represents pro forma depreciation on the Operating Partnership's investment
in 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.
(H) Represents amortization of deferred loan costs related to the Company's
Credit Facilities, amortization of franchise transfer costs and
amortization of organizational costs and other deferred expenses. Deferred
loan costs are amortized utilizing a method which approximates the interest
method over the remaining term of the Credit Facilities. Franchise transfer
costs are amortized over the term of the related franchise agreements which
approximates 10 years. Organizational costs and other deferred expenses are
amortized over terms ranging from 5 to 12 years.
(I) Represents amounts to be paid by the Operating Partnership for real estate
and personal property taxes and property insurance. The amounts included
were derived from the historical amounts paid with respect to the Hotels
adjusted for estimated probable real estate and personal property tax
increases.
(J) Represents estimated general and administrative expenses. The expenses
include salaries and wages, professional fees, directors' and officers'
insurance, Board of Directors' fees and other operating expenses.
(K) Represents the amounts to be paid by the Operating Partnership for ground
leases underlying the properties. In addition to the four current hotels
with ground leases, eight additional Acquired and Proposed Acquisition
Hotels are subject to ground leases.
(L) 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, 20% on the
first and second anniversary dates of the IPO and 25% on the third and
fourth anniversary dates of the IPO. The shares were issued at $17.75.
(M) Represents interest expense on the: borrowings under the Company's Credit
Facilities, mortgage indebtedness related to the Holiday Inn DFW South, the
Courtyard by Marriott Secaucus, the DoubleTree Guest Suites Atlanta, the
Radisson Hotel Arlington Heights, the Crowne Plaza Portland, the Ramada
Plaza Shelton and the Holiday Inn O'Hare International Airport.
(N) Calculated at 11.1% of income before minority interest.
(O) Represents the Company's historical statement of operations for the year
ended December 31, 1997.
(P) Represents the pro forma statements of operations of the 27 hotels that
were owned by the Company as of December 31, 1997.
F-61
<PAGE>
AGH LEASING, L.P.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
The following unaudited Pro Forma Consolidated Statements of Operations are
presented as if the Company had completed the acquisition of the 27 hotels owned
as of December 31, 1997 and the acquisition of 20 of the Acquired and Proposed
Acquisition Hotels leased to AGH Leasing, L.P. (collectively the "AGH Hotels")
including the Potomac Portfolio Acquisition Hotels, the FSA Portfolio
Acquisition Hotels, the Holiday Inn O'Hare International Hotel and the Madison
Hotel Acquisition as of January 1, 1996.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Statements of Operations are
derived from AGH Leasing's Consolidated Statements of Operations as of December
31, 1996 and 1997 and should be read in conjunction with the financial
statements filed with American General Hospitality Corporation's Annual Report
on Form 10-K for the years ended December 31, 1996 and 1997.
The following Pro Forma Consolidated Statements of Operations are not
necessarily indicative of what the actual results of operations would have been
assuming such transactions had been completed as of January 1, 1996.
F-62
<PAGE>
AGH LEASING, L.P.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
JULY 31, 1996 DECEMBER 31 ACQUIRED
THROUGH HOTELS AND
DECEMBER 31, PRO FORMA PROPOSED
1996 ADJUSTMENTS ACQUISITIONS
(A) (B) (B)
---------------- --------------- ----------------
<S> <C> <C> <C>
Revenues
Room revenue (C)............................ $ 26,725,200 $ 110,086,642 $ 84,639,642
Food and beverage revenue (C)............... 8,374,459 35,801,976 27,587,810
Other revenue (C)........................... 1,691,472 7,845,837 6,369,467
Minority interest income D)................. 1,284,177
---------------- --------------- ----------------
Total revenue........................ $ 36,791,131 $ 155,018,632 $ 118,596,919
---------------- --------------- ----------------
Expenses
Property operating costs and expenses (E)... 7,235,297 30,349,334 24,467,818
Food and beverage costs and expenses (E).... 6,262,071 26,331,855 21,719,066
General and administrative (E).............. 3,270,481 13,129,314 11,376,346
Advertising and promotion (E)............... 2,305,776 10,413,836 7,925,128
Repairs and maintenance (E)................. 1,450,987 7,503,668 6,364,962
Utilities (E)............................... 1,628,490 6,835,787 6,356,010
Management fees (F)......................... 947,632 4,123,386 2,363,095
Franchise costs (G)......................... 950,307 3,776,900 3,221,776
Depreciation (H)............................ 26,250 36,750
Amortization (I)............................ 6,753
Interest expense (J)........................ 13,314 18,375
Other expense............................... 27,093 331,916 37,730,212
Participating Lease expenses (K)............ 13,387,719 52,388,922
---------------- --------------- ----------------
Total expenses....................... 37,512,170 155,240,043 121,524,413
---------------- --------------- ----------------
Net income (loss).................... $ (721,039) $ (221,411) $ (2,927,494)
================ =============== ================
<CAPTION>
MANAGEMENT FEES
ADJUSTMENT COMBINED
(F) PRO FORMA
----------------- ----------------
<S> <C> <C>
Revenues
Room revenue (C)............................ $ 221,451,484
Food and beverage revenue (C)............... 71,764,245
Other revenue (C)........................... 15,906,776
Minority interest income D)................. 1,284,177
----------------- ----------------
Total revenue........................ $ 310,406,682
----------------- ----------------
Expenses
Property operating costs and expenses (E)... 62,052,449
Food and beverage costs and expenses (E).... 54,312,992
General and administrative (E).............. 27,776,141
Advertising and promotion (E)............... 20,644,740
Repairs and maintenance (E)................. 15,319,617
Utilities (E)............................... 14,820,287
Management fees (F)......................... (1,273,350) 6,160,763
Franchise costs (G)......................... 7,948,983
Depreciation (H)............................ 63,000
Amortization (I)............................ 6,753
Interest expense (J)........................ 31,689
Other expense............................... 359,009
Participating Lease expenses (K)............ 103,506,853
----------------- ----------------
Total expenses....................... (1,273,350) 313,003,276
----------------- ----------------
Net income (loss).................... $ 1,273,350 $ (2,596,594)
================= ================
</TABLE>
F-63
<PAGE>
AGH LEASING, L.P.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL DECEMBER 31, ACQUIRED
YEAR ENDED 1997 HOTELS AND
DECEMBER 31, PRO FORMA PROPOSED MANAGEMENT FEES
1997 ADJUSTMENTS ACQUISITIONS ADJUSTMENT COMBINED
(L) (B) (B) (F) PRO FORMA
----------- ----------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Room revenue (C).......................... $123,965,649 $27,806,341 $100,741,451 $252,513,441
Food and beverage revenue (C)............. 35,595,835 9,286,459 31,820,756 76,703,050
Other revenue (C)......................... 8,031,070 1,773,070 6,523,091 16,327,231
Minority interest income (D).............. 1,802,558 (139,150) 1,663,408
------------ ----------- ------------ ------------- ------------
Total Revenue..................... $169,395,112 $38,726,720 $139,085,298 $347,207,130
------------ ----------- ------------ ------------- ------------
Expenses
Property operating costs and expenses(E).. 33,894,184 6,754,081 27,114,514 67,762,779
Food and beverage costs and expenses (E).. 27,646,671 6,425,715 24,867,295 58,939,681
General and administrative (E)............ 15,871,676 2,978,176 12,033,776 30,883,628
Advertising and promotion (E)............. 12,792,700 2,489,673 8,706,828 23,989,201
Repairs and maintenance (E)............... 6,712,883 1,756,796 6,494,420 14,964,099
Utilities (E)............................. 7,258,674 1,532,149 6,294,496 15,085,319
Management fees (F)....................... 1,691,639 1,158,265 2,737,008 1,767,977 7,354,889
Franchise costs (G)....................... 4,754,285 1,041,672 3,995,256 9,791,213
Depreciation (H).......................... 63,000 63,000
Amortization (I).......................... 40,997 40,997
Interest expense (J)...................... 26,808 237,256 264,064
Other expense............................. 158,113 173,116 79,997 411,226
Participating Lease expenses (K).......... 59,934,337 14,258,126 45,935,873 120,128,336
------------ ----------- ------------ ------------- ------------
Total expenses.................... 170,845,967 38,805,025 138,259,463 1,767,977 349,678,432
------------ ----------- ------------ ------------- ------------
Net income (loss)................. $ (1,450,855) $ (78,305) $ 825,835 $ (1,767,977) $ (2,471,302)
============ =========== ============ ============= ============
</TABLE>
F-64
<PAGE>
AGH LEASING, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The pro forma consolidated statements of operations of AGH Leasing, L.P.
("AGH Leasing") include the results of operations of the 47 hotels leased from
the American General Hospitality Operating Partnership, L.P. (the "Operating
Partnership") due to AGH Leasing's control over the operations of the hotels
during the twelve-year term of the Participating Leases. AGH Leasing has
complete discretion in establishing room rates and all rates for hotel goods and
services. Likewise, all operating expenses of the hotels are under the control
of AGH Leasing. AGH Leasing has the right to manage or to enter into management
contracts with other parties to manage the hotels. If AGH Leasing elects to
enter into management contracts with parties other than American General
Hospitality, Inc. ("AGHI"), AGH Leasing must obtain the prior written consent of
the Company, which consent may not be unreasonably withheld.
AGH Leasing's results of operations are seasonal. Generally, hotel revenue
is greater in the second and third quarters of a calendar year, although this
may not be true for hotels in major tourist destinations. With the Company's
acquisition and subsequent leasing of the FSA Portfolio Acquisition Hotels,
which include several hotels in tourist destinations, the AGH Hotels may now
produce greater revenues in the first and second quarters.
(A) Represents the historical consolidated statement of operations of the
Company for the period July 31, 1996 (inception of operations) through
December 31, 1996.
(B) Represents the adjustments to reflect the pro forma statements of
operations of the 27 hotels owned by the Company as of December 31, 1997
and leased to AGH Leasing and the 20 Acquired and Proposed Acquisition
Hotels leased to AGH Leasing as if all of the AGH Hotels were acquired on
January 1, 1996 and leased to AGH Leasing pursuant to a Participating Lease
since that date.
(C) Represents historical room, food and beverage and other revenues of AGH
Hotels.
(D) Represents the amount of AGH Leasing's minority interest investment in Twin
Towers Leasing, L.P. (the "Twin Towers Lessee", together with AGH Leasing,
L.P., "AGH Leasing") which leases the Radisson Orlando Twin Towers hotel
from the Operating Partnership. The Twin Towers Lessee is owned 51% by AGH
Leasing, which is the sole general partner, and 49% by Regent Carolina
Corporation, which is the sole limited partner. Regent Carolina Corporation
is not affiliated with the Company, the Operating Partnership or AGH
Leasing.
(E) Represents the historical expenses of the AGH Hotels.
(F) 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
0.01% increase in annual total revenues over the total revenues for the
preceding twelve month period up to the maximum incentive fee. The payment
of the management fees to AGHI by AGH Leasing is subordinate to AGH
Leasing's obligations to the Company under the Participating Leases. The
full management fee payable during 1996 and 1997 will be earned only to the
extent that AGH Leasing has taxable income equal to or greater than
$50,000. If AGH Leasing's taxable net operating income is below $50,000 in
1997 and 1996, management fees are forfeited by AGHI to increase AGH
Leasing's taxable net operating income to $50,000.
(G) Represents the historical franchise fees of the AGH Hotels. Franchise fees
associated with the hotel conversions are not included in the pro forma
statements of operations since other impact including possible revenue
enhancements and operating expense reductions are also not included.
(H) Historical depreciation at the AGH 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 AGH Leasing from the Operating Partnership. The FF&E
is depreciated over an estimated useful life of 5 years.
(I) Historical deferred loan costs and the related amortization has been
eliminated since AGH Leasing is not expected to incur similar costs.
Amortization expense relates to the amortization of organization costs
which are being amortized over a 60 month period.
(J) Any future interest expense related to debt for the AGH Hotels will be
incurred and paid by the Operating Partnership. Interest expense related to
an advance made by the Operating Partnership to AGH Leasing for the FF&E
purchase. The advance of $315,000 bears interest at 10%. The December 31,
1997 balance of the note is $234,231.
(K) Represents lease payments to the Operating Partnership from AGH Leasing
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 AGH Hotels. The departmental thresholds in the Participating Leases are
seasonally adjusted for interim periods.
(L) Represents the Company's historical statement of operations for the year
ended December 31, 1997.
F-65
<PAGE>
CLIFTON HOLDING CORP.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
The following unaudited Pro Forma Combined Statements of Operations are
presented as if the Company had completed the acquisitions of the 19 Prime
Portfolio Acquisition Hotels as of January 1, 1996.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Combined Statements of Operations are
derived from the Prime Portfolio Acquisition Hotels' Combined Statement of
Operations as of December 31, 1996 and 1997 and should be read in conjunction
with the financial statements filed with American General Hospitality
Corporation's Report on Form 8-K.
The following Pro Forma Combined Statement of Operations are not
necessarily indicative of what the actual results of operations would have been
assuming such transactions had been completed on January 1, 1996.
F-66
<PAGE>
CLIFTON HOLDING CORP.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
DECEMBER 31,
1996 PRO FORMA
(A) ADJUSTMENTS PRO FORMA
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Room revenue (B)................. $ 75,762,299 $ $ 75,762,299
Food and beverage revenue (B).... 35,149,769 35,149,769
Other revenue (B)................ 3,557,400 3,557,400
-------------- -------------- --------------
Total revenue.................... 114,469,468 114,469,468
Expenses:
Property operating costs and
expenses (C).................... 20,530,841 20,530,841
Food and beverage costs and
expenses (C).................... 25,896,719 25,896,719
General and administrative (C)... 7,752,288 7,752,288
Advertising and promotion (C).... 6,620,451 6,620,451
Repairs and maintenance (C)...... 4,937,985 4,937,985
Utilities (C).................... 5,798,292 5,798,292
Management fees (D).............. 3,693,651 (3,693,651)
Franchise costs (E).............. 2,213,297 2,213,297
Depreciation and
amortization (F)................ 8,551,401 (8,551,401)
Real estate and personal
property taxes, and
property insurance (G).......... 3,375,206 (3,375,206)
Interest expense (H)............. 4,179,695 (4,179,695)
Lease expense (I)................ 7,172,184 (5,581,514) 1,590,670
Other expense (C)................ 47,855 47,855
Participating Lease expense (J).. 42,544,359 42,544,359
-------------- -------------- --------------
Total expenses................... 100,769,865 17,162,892 117,932,757
-------------- -------------- --------------
Net income....................... $ 13,699,603 $ (17,162,892) $ (3,463,289)
============== ============== ==============
</TABLE>
F-67
<PAGE>
CLIFTON HOLDING CORP.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
DECEMBER 31,
1997 PRO FORMA
(K) ADJUSTMENTS PRO FORMA
--------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Room revenue (B)................... $ 88,079,205 $ $ 88,079,205
Food and beverage revenue (B)...... 38,979,060 38,979,060
Other revenue (B).................. 4,135,657 4,135,657
--------------- ------------- -------------
Total revenue...................... 131,193,922 131,193,922
Expenses:
Property operating costs and....... 22,732,183 22,732,183
expenses (C)
Food and beverage costs and........ 28,577,527 28,577,527
expenses (C)
General and administrative (C)..... 8,371,052 8,371,052
Advertising and promotion (C)...... 6,883,567 6,883,567
Repairs and maintenance (C)........ 5,291,173 5,291,173
Utilities (C)...................... 6,035,739 6,035,739
Management fees (D)................ 4,142,881 (4,142,881)
Franchise costs (E)................ 2,733,228 2,733,228
Depreciation and amortization (F).. 11,346,920 (11,346,920)
Real estate and personal
property taxes, and
property insurance (G)............ 3,897,849 (3,897,849)
Interest expense (H)............... 3,587,847 (3,587,847)
Lease expense (I).................. 5,625,070 (4,265,101) 1,359,969
Other expense (C).................. 206,637 206,637
Participating Lease expense (J).... 44,486,543 44,486,543
--------------- ------------- -------------
Total expenses..................... 109,431,673 17,245,945 126,677,618
--------------- ------------- -------------
Net income......................... $ 21,762,249 $ (17,245,945) $ 4,516,304
=============== ============= =============
</TABLE>
F-68
<PAGE>
CLIFTON HOLDING CORP.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The pro forma combined statements of operations of the Clifton Holding
Corp. (the "Prime Lessee") include the results of operations of the 19 hotels
leased from American General Hospitality Operating Partnership, L.P. due to the
Prime Lessee's control over the operations of the hotels during the ten-year
term of the Participating Leases. The Prime 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 Prime Lessee.
The Prime Lessee has the right to manage or to enter into management contracts
with other parties to manage the hotels. If the Prime Lessee elects to enter
into management contracts with other parties, the Prime Lessee must obtain the
prior written consent of the Company, which consent may not be unreasonably
withheld.
The Prime 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.
(A) Represents the historical combined statement of operations of the Prime
Portfolio Acquisition Hotels for the year ended December 31, 1996.
(B) Represents historical room, food and beverage and other revenues of the
Prime Lessee Hotels.
(C) Represents the historical expenses of the Prime Lessee Hotels.
(D) Historical management fees have been eliminated based on the inclusion of
the hotel management in the Participating Lease.
(E) Represents the historical franchise costs of the Hotels. Franchise fees
associated with the hotel conversions are not included in the pro forma
statements of operations since other impact including possible revenue
enhancements and operating expense reductions are also not included.
(F) Historical depreciation and amortization at the Prime Lessee Hotels has
been eliminated due to depreciation and amortization of deferred loan costs
being recorded by the Operating Partnership.
(G) Historical real estate and personal property taxes, and property insurance
expense has been eliminated due to these costs being recorded by the
Operating Partnership
(H) Any future interest expense related to debt for the Prime Lessee Hotels
will be incurred and paid by the Operating Partnership.
(I) Represents the elimination of ground lease expense to be paid by the
Operating Partnership.
(J) Represents lease payments to the Operating Partnership from the Prime
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 Prime Lessee Hotels. The departmental revenue thresholds in the
Participating Leases are seasonally adjusted for interim periods.
(K) Represents the Company's historical statement of operations for the year
ended December 31, 1997.
F-69
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
American General Hospitality Corporation on Form S-3 (File Nos. 333-33007, 333-
36127, and 333-45329) and on Form S-8 (File Nos.333-08845 and 333-08841), as
amended, of our report dated April 2, 1998 of our audit of the combined and
combining financial statements of Prime Portfolio Acquisition Hotels included in
this Report on 8-K.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 6, 1998
