<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
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/A is being filed to amend the Form 8-K
dated on April 6, 1998 which was 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.
The Potomac Portfolio Acquisition hotels and Holiday Inn O'Hare
International Hotel's financial statements are presented for informational
purposes only. The acquisitions are not significant for disclosure purposes as
required by the Securities Exchange Act of 1933 and 1934.
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.
. 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
. Potomac Portfolio Acquisition hotels as of and for the year ended
December 31, 1996 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
Prime Group II Acquisition Balance Sheet as of March 31, 1998 (unaudited) F-8
Combining Statements of Operations for the Year Ended December 31, 1995 F-9
Combining Statements of Operations for the Year Ended December 31, 1996 F-10
Combining Statements of Operations for the Year Ended December 31, 1997 F-11
Prime Group II Acquisition Statement of Operations for the Three Months F-12
Ended March 31, 1998 and 1997 (unaudited)
Combining Statements of Equity for the Years Ended December 31, 1995, 1996 and 1997 F-13
Prime Group II Acquisition Statement of Equity for the Three Months
Ended March 31, 1998 (unaudited) F-14
Combining Statements of Cash Flows for the Year Ended December 31, 1995 F-15
Combining Statements of Cash Flows for the Year Ended December 31, 1996 F-16
Combining Statements of Cash Flows for the Year Ended December 31, 1997 F-17
Prime Group II Acquisition Statement of Cash Flows
for the Three Months Ended March 31, 1998 and 1997 (unaudited) F-18
Notes to Financial Statements F-19
Schedule III Real Estate and Accumulated Depreciation
As of December 31, 1997 F-25
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
FSA Portfolio Acquisition
Report of Independent Accountants F-27
Balance Sheets as of December 31, 1996, September 30, 1997 and December 31,1997 F-28
(unaudited)
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 F-29
(unaudited) and the nine months ended September 30, 1996 (unaudited) and 1997
Statements of Equity for the Years Ended December 31, 1995, 1996 and 1997 F-30
(unaudited) and the nine months ended September 30, 1996 (unaudited) and 1997
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 F-31
(unaudited) and the nine months ended September 30, 1996 (unaudited) and 1997 F-32
Notes to Financial Statements
Schedule III Real Estate and Accumulated Depreciation F-37
as of September 30, 1997
Potomac Portfolio Acquisition F-39
Report of Independent Accountants F-40
Balance Sheets as of December 31, 1996 and 1997 (unaudited)
Statements of Operations for the Years Ended December 31, 1996 and 1997 (unaudited)
F-41
Statements of Equity for the Years Ended December 31, 1996
and 1997 (unaudited) F-42
Statements of Cash Flows for the Years Ended December 31, 1996 and
1997 (unaudited) F-43
Notes to Financial Statements F-44
Schedule III Real Estate and Accumulated Depreciation
As of December 31, 1996 F-48
Holiday Inn O'Hare International Airport
Report of Independent Accountants F-49
Balance Sheets as of December 31, 1996 and
1997 (unaudited) F-50
Statements of Operations for the Years Ended December 31, 1996
and 1997 (unaudited) F-51
Statements of Equity for the Years Ended December 31, 1996
and 1997 (unaudited) F-52
Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 (unaudited) F-53
Notes to Financial Statements F-54
Schedule III Real Estate and Accumulated Depreciation
As of December 31, 1996 F-58
</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 and March 31, 1998 F-59
Pro Forma Statements of Operations for the Year Ended
December 31, 1997 and the Three Months Ended March 31, 1998 F-67
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
AGH Leasing, L.P.
Pro Forma Statements of Operations for the Year Ended
December 31, 1997 and the Three Months Ended March F-80
31, 1998
Clifton Holding Corp.
Pro Forma Statements of Operations for the Year Ended
December 31, 1997 and the Three Months Ended March F-89
31, 1998
(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: June 19, 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>
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>
The accompanying notes are an integral part of these combined financial
statements.
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 2,287,478 3,211,686
Accrued expenses and other liabilities........... 2,141,620 3,182,585 5,324,205
-------------- -------------- --------------
Total liabilities........................... 44,022,635 88,958,983 132,981,617
Commitments and contingencies (Note 5)
Capital.......................................... 17,551,314 6,400,790 23,952,105
Retained earnings................................ 12,040,162 21,701,569 33,741,731
-------------- -------------- --------------
Total equity................................ 29,591,476 28,102,359 57,693,836
-------------- -------------- --------------
Total liabilities and equity................ $ 73,614,111 $ 117,061,342 $ 190,675,453
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-7
<PAGE>
PRIME PORTFOLIO GROUP II ACQUISITION HOTELS
BALANCE SHEET
AS OF MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in hotel properties, at cost:
Land and land improvements $ 8,728,233
Building and improvements 98,768,865
Furniture, fixtures and equipment 21,737,610
------------
129,234,708
Less: accumulated depreciation 18,764,757
------------
Net investment in hotel properties 110,469,951
Cash and cash equivalents 1,333,296
Restricted cash 0
Accounts receivable, net 2,823,754
Inventories 1,793,478
Prepaid expenses 641,524
Deferred expenses, net 930,297
Other assets 32,079
------------
Total assets $118,024,379
============
LIABILITIES AND EQUITY
Mortgage payable $ 11,968,151
Intercompany advance 71,764,736
Accounts payable, trade 1,188,127
Accrued expenses and other liabilities 3,666,974
------------
Total liabilities 88,587,988
Commitments and contingencies (Note 5) 0
Capital 6,400,790
Retained earnings 23,035,601
------------
Total equity 29,436,391
Total liabilities and equity $118,024,379
============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-8
<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>
The accompanying notes are an integral part of these combined financial
statements.
F-9
<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>
The accompanying notes are an integral part of these combined financial
statements.
F-10
<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>
The accompanying notes are an integral part of these combined financial
statements.
F-11
<PAGE>
PRIME PORTFOLIO GROUP II ACQUISITION HOTELS
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Room revenue $11,652,578 $ 9,980,957
Food and beverage revenue 5,585,099 3,944,278
Other revenue 484,554 1,106,172
------------ ------------
Total Revenue 17,722,231 15,031,407
Expenses:
Property operating costs and expenses 1,236,704 883,465
Food and beverage costs and expenses 4,423,318 3,739,678
General and administrative 3,956,863 3,183,271
Advertising and promotion 473,940 721,266
Repairs and maintenance 724,807 690,975
Utilities 947,326 935,504
Management fees 545,322 462,593
Franchise costs 354,445 456,130
Depreciation and amortization 1,863,826 1,756,047
Real estate and personal property taxes and property insurance 739,244 636,635
Interest expense 34,088 242,076
Lease expense 1,088,316 1,780,634
Other income (29,177)
----------- ------------
Total expenses 16,388,199 15,459,097
Net Income (Loss) $1,334,032 $ (427,690)
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-12
<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>
The accompanying notes are an integral part of these combined financial
statements.
F-13
<PAGE>
PRIME PORTFOLIO GROUP II ACQUISITION HOTELS
STATEMENT OF STOCKHOLDERS EQUITY
<TABLE>
<S> <C>
Balance, December 31 1997 $28,102,359
Net Income (Unaudited) 1,334,032
-----------
Balance, December 31 1997 (Unaudited) $29,436,391
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-14
<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>
The accompanying notes are an integral part of these combined financial
statements.
F-15
<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>
The accompanying notes are an integral part of these combined financial
statements.
F-16
<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>
The accompanying notes are an integral part of these combined financial
statements.
F-17
<PAGE>
PRIME PORTFOLIO GROUP II ACQUISITION HOTELS
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net Income (loss) $ 1,334,032 $ (427,690)
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,820,061 1, 756,047
Changes in assets and liabilities:
Restricted cash - 13,958
Accounts receivable 207,858 266,800
Inventories 28,648 (35,448)
Prepaid expenses (33,271) (39,077)
Other assets (37,118) 6,740
Accounts payable (1,099,351) 430,398
Accrued expenses and other liabilities 484,389 135,657
------------ -----------
Net cash provided by operating activities 2,705,248 2,107,385
Cash flows from investing activities:
Acquisitions of hotels properties, net of cash acquired
Improvements and additions to properties (2,556,150) (2,882,115)
------------ -----------
Net cash (used in) investing activities (2,556,150) (2,882,115)
Cash flows from financing activities:
Principal payments on borrowings (42,579) (355,494)
Increase (decrease) in intercompany advance 286,546 1,837,966
------------ -----------
Net cash provided by financing activities 243,967 1,482,472
------------ -----------
Net change in cash and equivalents 393,065 707,741
Cash and equivalents at beginning of period 940,231 455,058
------------ -----------
Cash and equivalents at end of period $ 1,333,296 1,162,799
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 34,088 $ 242,076
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<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 current and
future 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-19
<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. If impairment is indicated, an adjustment will be made to the carrying
value of the hotel based on discounted future cash flows. The owners do not
believe that there are any factors or circumstances indicating impairment of any
of the investments in hotels.
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-20
<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.
Interim Financial Information - The unaudited interim financial statements
as of March 31, 1998 and for the three month period ended March 31, 1998 have
been prepared pursuant to the rules and regulations of 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 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-21
<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-22
<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
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-23
<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. which acquisition is a condition to
closing the Proposed Merger. If the Proposed Merger is consummated, MeriStar
Resorts will become the lessee and manager of all of the Current Hotels
currently leased by AGH Leasing and will have a right of first refusal to become
the lessee of hotels acquired by the Company in the future except for the Prime
Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the Company 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-24
<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>
F-25
<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-26
<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-27
<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-28
<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-29
<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-30
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
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-31
<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
a group of affiliated entities controlled by Financial Securities Assurance (the
"Selling Entities") which are 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 which includes
ownership and rights of ownership transferred pending foreclosure. Each Selling
Entity will 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-32
<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. If impairment is indicated, an
adjustment will be made to the carrying value of the hotel based on discounted
future cash flows. Management of the Selling Entities does not believe that
these are any factors or circumstances indicating impairment of any of the
investments in hotels.
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-33
<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-34
<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-35
<PAGE>
FSA PORTFOLIO ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
8. SUBSEQUENT EVENTS
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. which acquisition is a condition to
closing the Proposed Merger. If the Proposed Merger is consummated, MeriStar
Resorts will become the lessee and manager of all of the Current Hotels
currently leased by by AGH Leasing and will have a right of first refusal to
become the lessee of hotels acquired by the Company in the future except for the
Prime Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the Company 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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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 due to current and future common ownership and
management and the entities will be 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. If impairment is indicated, an adjustment will be made to the
carrying value of the hotel based on discounted future cash flows. The owners do
not believe that there are any factors or circumstances indicating impairment of
any of the investments in hotels.
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-44
<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
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-45
<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
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-46
<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.
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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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. If impairment is indicated, an
adjustment will be made to the carrying value of the hotel based on discounted
future cash flows. The owners do not believe that there are any factors on
circumstances indicating impairment of the investment in the hotel.
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-54
<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-55
<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
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-56
<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. which acquisition is a condition to
closing the Proposed Merger. If the Proposed Merger is consummated, MeriStar
Resorts will become the lessee and manager of all of the Current Hotels
currently leased by AGH Leasing and will have a right of first refusal to become
the lessee of hotels acquired by the Company in the future except for the Prime
Group II Acquisition hotels.
The Merger Agreement defines the exchange ratios for both the Company 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-57
<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-58
<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 495,700 and 118,972 shares of
Common Stock on January 2, 1998 and January 15, 1998, respectively, to certain
investment funds and separate accounts advised by ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership (the "ABKB
Offering"), (ii) the sale of 1,052,650, 1,095,890 and 362,812 shares of Common
Stock on February 18, 1998, February 23, 1998 and February 28, 1998,
respectively, through three separate public offerings pursuant to the Shelf
Registration (the "UIT Offerings") and (iii) the acquisitions of the Prime Group
I Acquisition Hotels, the Potomac Portfolio Acquisition Hotels, the FSA
Portfolio Acquisition Hotels, and the Holiday Inn O'Hare International Hotel
acquired in the first quarter of 1998 (collectively the "Acquired Hotels") and
the acquisition of the Madison and Bloomington hotel acquisitions (collectively
the "Proposed Acquisition Hotels") as of January 1, 1997. The Acquired Hotels,
the Proposed Acquisition Hotels, and the hotels owned at December 31, 1997 are
collectively referred to herein as the Hotels. The Pro Forma Consolidated
Balance Sheet does not include the effects of the Proposed Merger with CapStar
or the acquisition of the Prime Group II Acquisition Hotels.
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-59
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PROPOSED ABKB
COMPANY ACQUIRED ACQUISITION OFFERING AND
HISTORICAL HOTELS HOTELS UIT OFFERINGS COMBINED
(A) (B) (B) (C) PRO FORMA
----------- ------------ ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in hotel properties, net........... $569,589,828 $492,880,681 (D) $15,741,000 (D) $1,078,211,509
Cash and cash equivalents..................... 800,255 800,255
Restricted cash............................... 765,048 765,048
Accounts receivable, net...................... 7,999,122 7,999,122
Investment in PSS I, Inc...................... 4,865,422 (L) 4,865,422
Mortgage note receivable - PSS I, Inc......... 43,509,048 (M) 43,509,048
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 $542,755,051 $15,741,000 $1,143,584,100
============ ============ =========== ============ ==============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Debt.......................................... $ 36,140,059 $ 31,991,130 (F) $ (8,218,755) (F) 59,912,434
Debt, Line of Credit.......................... 41,312,177 460,923,725 (G) $15,741,000 (G) (73,585,413) (G) 444,391,489
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 5,519,501 (H) 36,577,381 (K) 85,453,490
------------ ------------ ----------- ------------ --------------
Total liabilities........................ 141,838,502 498,434,356 15,741,000 (45,226,787) 610,787,071
------------ ------------ ----------- ------------ --------------
Common stock.................................. 211,823 31,260 (J) 243,083
Additional paid-in capital.................... 447,573,312 44,320,695 (I) 45,195,527 (K) 537,089,534
Unearned officers' compensation............... (724,792) (724,792)
Earnings in excess of distributions........... (3,810,796) (3,810,796)
------------ ------------ ----------- ------------ --------------
Total shareholders' equity............... 443,249,547 44,320,695 45,226,787 532,797,029
------------ ------------ ----------- ------------ --------------
Total liabilities and shareholders'
equity................................. $585,088,049 $542,755,051 $15,741,000 $1,143,584,100
============ ============ =========== ============ ==============
</TABLE>
F-60
<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) Acquired Hotels - represents the acquisition of the hotels acquired by the
Company through March 31, 1998, including estimated closing costs. The
acquisitions were 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 of
approximately $32.0 million and the issuance of 1,826,843 units of limited
partnership interests of Operating Partnership ("OP Units") valued at
approximately $49.8 million. Additionally, franchise transfer costs of
$1,499,900 related to the Acquired Hotels were estimated.
Proposed Acquisition Hotels represents the acquisition of the hotels,
including closing costs, to be acquired by the Company, which are currently
under contract. The acquisitions are to be financed through borrowings
under the Company's Credit Facilities. The Proposed Acquisition Hotels
include the Madison Hotel and the Select Inn Bloomington.
(C) Represents the net proceeds and related allocation to minority interest in
connection with (i) the sale of 495,700 and 118,972 shares of Common Stock
on January 2, 1998 and January 15, 1998, respectively, to certain
investment funds and separate accounts advised by ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership (the "ABKB
Offering") and (ii) the sale of 1,052,650, 1,095,890 and 362,812 shares of
Common Stock on February 18, 1998, February 23, 1998 and February 28,1998,
respectively, through three separate public offerings pursuant to the Shelf
Registration (the "UIT Offerings").
(D) Represents the increase resulting from the purchase of the following
Acquired Hotels and Proposed Acquisition Hotels, including estimated
closing costs (the purchase includes only the land, building and
improvements and furniture, fixtures and equipment):
<TABLE>
<S> <C>
Purchase of Acquired Hotels, including closing costs:
Potomac Portfolio Acquisition Hotels and the Holiday Inn O'Hare
International Airport Hotels $ 121,132,029
FSA Portfolio Acquisition Hotels (1) 225,369,286
Prime Group I Acquisition Hotels 146,379,366
---------------------
Total increase due to the purchase of the Acquired Hotels 492,880,681
---------------------
Purchase of the Proposed Acquisition Hotels, including closing costs:
Madison Hotel 12,161,000
Select Inn Bloomington 3,580,000
---------------------
Total increase due to the purchase of the Proposed Acquisition Hotels 15,741,000
---------------------
Total increase due to the purchase of the Acquired Hotels and the Proposed
Acquisition Hotels $ 508,621,681
=====================
</TABLE>
(1) Includes nine of the thirteen FSA Portfolio Acquisition Hotels. The
remaining four were acquired by a preferred stock subsidiary of the Company
as discussed on footnote (L).
The allocation of the Acquired Hotels' and Proposed Acquisition Hotels'
purchase price to the assets acquired consists of the following:
F-61
<PAGE>
<TABLE>
<CAPTION>
Proposed
Acquired Acquisition
Hotels Hotels Total
---------------- --------------- ---------------
<S> <C> <C> <C>
Land $ 44,913,163 $ 1,574,100 $ 46,487,263
Building and improvements 401,451,332 12,739,020 414,190,352
Furniture, fixtures and equipment 46,516,186 1,427,880 47,944,066
---------------- --------------- ---------------
$492,880,681 $15,741,000 $508,621,681
================ =============== ===============
</TABLE>
(E) The increase represents the estimated franchise transfer costs relating to
the Acquired Hotels. There are no estimated franchise transfer costs for
the Proposed Acquisition Hotels.
(F) Represents the following mortgage indebtedness assumed on three of the
Acquired Hotels.
<TABLE>
<S> <C>
First mortgage note payable in monthly installments at a fixed rate of
10.5%; maturing in December 2004, at which time a balloon payment of
approximately $4.1 million will be due and payable; collateralized by
the Crowne Plaza Portland............................................. $ 5,306,545
First mortgage note payable in monthly installments at a fixed rate of
10.5%; maturing in December 2004, at which time a balloon payment of
approximately $3.9 million will be due and payable; collateralized by
the Ramada Plaza Shelton.............................................. 4,928,286
First mortgage note payable in monthly installments at a fixed rate of
9.0%; maturing on January 1, 2012; collateralized by the Holiday Inn
O'Hare International Airport.......................................... 21,756,299
-------------------
Total mortgage indebtedness assumed with the purchase of the Acquired
Hotels $31,991,130
===================
</TABLE>
Also represents repayment of the mortgage indebtedness on the Radisson
Hotel Arlington Heights of $8,218,755, which matured on February 28, 1998
and was repaid with the net proceeds of the February 27, 1998 public
offering.
Aggregate annual principal payments for the Company's pro forma mortgage
indebtedness at December 31, 1997 are as follows.
<TABLE>
<CAPTION>
Year Amount
-------------------------------------------------- -----------------
<S> <C>
1998*............................................. $ 1,826,158
1999.............................................. 1,995,513
2000.............................................. 2,184,148
2001.............................................. 6,124,457
2002.............................................. 10,343,014
2003 and thereafter............................... 37,439,144
-----------------
Aggregate annual principal payments............... $59,912,434
=================
</TABLE>
* The aggregate annual principal payments for 1998 does not include the
repayment of the mortgage indebtedness on the Radisson Hotel Arlington
Heights of $8,218,755 which matured on February 28, 1998.
(G) Represents the borrowings made under the Company's Credit Facilities for
the acquisitions of the Acquired Hotels and the net proceeds from the ABKB
Offering and the UIT Offerings. The Company intends to finance the Proposed
Acquisition Hotels with its current Credit Facilities.
F-62
<PAGE>
<TABLE>
<S> <C>
Borrowings to purchase the Acquired Hotels
Potomac Portfolio Acquisition Hotels and the Holiday Inn O'Hare International
Airport Hotel $ 63,089,786
FSA Portfolio Acquisition Hotels (see Footnote D) 225,765,986
Investment in PSS I, Inc. (see Footnote L) 48,964,118
Prime Group I Acquisition Hotels 123,103,835
---------------------
Total borrowings to purchase the Acquired Hotels 460,923,725
---------------------
Borrowings to purchase the Proposed Acquisition Hotels
Madison Hotel 12,161,000
Select Inn Bloomington 3,580,000
---------------------
Total borrowings to purchase the Proposed Acquisition Hotels 15,741,000
---------------------
Net proceeds from the ABKB Offering, and the UIT Offerings
ABKB Offering (15,499,569)
UIT Offerings (66,304,599)
Repayment of Radisson Hotel Arlington Heights debt (see Footnote F) 8,218,755
---------------------
Total net proceeds from equity offerings (73,585,413)
---------------------
Net change $403,079,312
=====================
</TABLE>
(H) Represents the recognition of minority interest of 12.1% and 13.8% in the
Operating Partnership for the historical and pro forma period,
respectively.
(I) Represents the value associated with the issuance of 518,437 OP Units on
January 8, 1998 for the acquisition of the Prime Group I Acquisition Hotels
and 1,308,406 OP Units on February 3, 1998 for the acquisition of the
Holiday Inn O'Hare International Airport hotel.
(J) Represents the $0.01 par value of (i) the 495,700 and the 118,972 shares of
Common Stock issued in connection with the ABKB Offering, and (ii) the
1,052,650, 1,095,890 and 362,812 shares of Common Stock issued through the
UIT.
(K) Represents the following net proceeds from the ABKB Offering, the UIT
Offerings and the Pro Forma 1998 Offering after allocation to minority
interest.
<TABLE>
Net proceeds from the ABKB Offering, and the UIT Offerings
<S> <C>
ABKB Offering $ 15,499,569
UIT Offerings 66,304,599
Allocation to minority interest (36,577,381)
$0.01 par value of Common Stock issued (31,260)
------------------
Net change $ 45,195,527
==================
</TABLE>
(L) Represents the Company's investment in PSS I, Inc., a preferred stock
subsidiary, that owns four of the FSA Portfolio Acquisition Hotels which
are slated for sale. PSS I, Inc. purchased the four hotels on February 22,
1998.
(M) Represents the mortgage notes receivable the Company has from PSS I, Inc.
The notes bear interest at a rate of 12% per annum, payable in monthly
installments of interest only.
F-63
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
The following unaudited Pro Forma Consolidated Balance Sheet is presented
as if the Company had completed the acquisition of the 2 pending hotel
acquisitions (the "Proposed Acquisition Hotels", together with the hotels owned
at March 31, 1998, the "Hotels") including the Madison Hotel Acquisition and
the Select Inn Bloomington as of March 31, 1998. The Pro Forma Consolidated
Balance Sheet does not include the effects of the Proposed Merger with CapStar
or the acquisition of the Prime Group II Acquisition Hotels.
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 March 31, 1998 and should be
read in conjunction with the financial statements filed with the American
General Hospitality Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
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 March 31, 1998, nor does it purport to
represent the future financial position of American General Hospitality
Corporation.
F-64
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PROPOSED
COMPANY ACQUISITION
HISTORICAL HOTELS PRO FORMA
(A) (B) BALANCE SHEET
----------------- ------------------ -------------------
<S> <C> <C> <C>
ASSETS
Investment in hotel properties, net....... $1,071,107,687 $15,741,000 (C) $1,086,848,687
Cash and cash equivalents................. 972,619 972,619
Restricted cash........................... 3,357,229 3,357,229
Participating Lease receivable - Lessee... 17,102,846 17,102,846
Investment in PSS I, Inc.................. 4,865,422 4,865,422
Mortgage note receivable - PSS I, Inc..... 43,509,048 43,509,048
Deferred expenses, net.................... 5,154,896 5,154,896
Other assets.............................. 1,788,037 1,788,037
Notes receivable AGH Leasing L.P......... 220,136 220,136
----------------- ------------------ -------------------
Total assets......................... $1,148,077,920 $15,741,000 $1,163,818,920
================= ================== ===================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Debt...................................... $ 59,457,735 $ 59,457,735 (D)
Debt, Credit Facilities................... 442,112,177 $15,741,000(E) 457,853,177
Distributions payable..................... 11,877,198 11,877,198
Accounts payable, trade, accrued
expenses and other liabilities.......... 18,912,038 18,912,038
Minority interest in Operating Partnership 85,104,033 85,104,033
----------------- ------------------ -------------------
Total liabilities.................... 617,463,181 15,741,000 633,204,181
----------------- ------------------ -------------------
Shareholders' Equity
Common stock.............................. 243,158 243,158
Additional paid-in capital................ 537,361,152 537,361,152
Unearned officers' compensation........... (878,527) (878,527)
Distributions in excess of earnings....... (6,111,044) (6,111,044)
----------------- ------------------ -------------------
Total shareholders' equity........... 530,614,739 530,614,739
----------------- ------------------ -------------------
Total liabilities and shareholders'
equity............................. $1,148,077,920 $15,741,000 $1,163,818,920
================= ================== ===================
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-65
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the historical balance sheet of the Company as of March 31,
1998.
(B) Proposed Acquisition Hotels represent the acquisition of the hotels,
including closing costs, to be acquired by the Company, which are currently
under contract. The acquisitions are to be financed through borrowings
under the Company's Credit Facilities. The Proposed Acquisition Hotels
include the Madison Hotel and the Select Inn Bloomington.
(C) Represents the increase resulting from the purchase of the following
Proposed Acquisition Hotels, including estimated closing costs (the
purchase includes only the land, building and improvements and furniture,
fixtures and equipment):
<TABLE>
<S> <C>
Purchase of the Proposed Acquisition Hotels, including closing costs:
Madison Hotel $ 12,161,000
Select Inn Bloomington 3,580,000
----------------
Total increase $ 15,741,000
================
</TABLE>
The allocation of the Proposed Acquisition Hotels' purchase price to the
assets acquired consists of the following:
<TABLE>
<CAPTION>
Proposed Acquisition
Hotels
--------------------------
<S> <C>
Land $ 1,574,100
Building and improvements 12,739,020
Furniture, fixtures and equipment 1,427,880
--------------------------
$ 15,741,000
==========================
</TABLE>
(D) Aggregate annual principal payments for the Company's pro forma mortgage
indebtedness at March 31, 1998 are as follows.
<TABLE>
<CAPTION>
Year Amount
------------------------------------------------- ---------------------
<S> <C>
Remainder of 1998................................ $ 1,371,459
1999............................................. 1,995,513
2000............................................. 2,184,148
2001............................................. 6,124,457
2002............................................. 10,343,014
2003 and thereafter.............................. 37,439,144
---------------------
Aggregate annual principal payments.............. $ 59,457,735
=====================
</TABLE>
(E) The Company intends to finance the acquisition of the Proposed Acquisition
Hotels with borrowings under its current Credit Facilities.
<TABLE>
<S> <C>
Borrowings to purchase the Proposed Acquisition Hotels
Madison Hotel $ 12,161,000
Select Inn Bloomington 3,580,000
---------------
Total borrowings to purchase the Proposed Acquisition Hotels $ 15,741,000
===============
</TABLE>
F-66
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the Company had completed (i) the follow-on primary public
offering of 6,368,300 shares of Common Stock (the "1997 Public Offering") on
February 7, 1997, (ii) 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") between November 1, 1997 and February 15, 1998, (iii) the follow-on
primary offering of 4,250,000 shares of Common Stock (the "Second 1997
Offering") on November 13, 1997, (iv) the sale of 1,052,650, 1,095,890 and
362,812 shares of Common Stock on February 18, 1998, February 23, 1998 and
February 27, 1998, respectively, issued through three separate public offerings
pursuant to the Shelf Registration (the "UIT Offerings") and (v) the
acquisitions of the 12 hotels and office building acquired in 1997 and the 15
hotels acquired in 1996 all owned as of December 31, 1997 (collectively the
"December 31 Hotels") (vi) and the acquisition of the interests in the Prime
Group I Acquisition Hotels, the Potomac Portfolio Acquisition Hotels, the FSA
Portfolio Acquisition Hotels, the Holiday Inn O'Hare International Hotel
acquired in the first quarter of 1998 (the "Acquired Hotels") and the
acquisition of the pending Madison and Bloomington hotel acquisitions (the
"Proposed Acquisition Hotels", as of January 1, 1997. The Acquired Hotels, the
Proposed Acquistion Hotels and the December 31 Hotels are collectively referred
to herein as the "Hotels". The Pro Forma Consolidated Statement of Operations
does not include the effects of the Proposed Merger with CapStar of the
acquisition of the Prime Group II Acquisition Hotels.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Statement of Operations is
derived from the Company's Consolidated Statements of Operations for the year
ended 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 year ended December 31, 1997.
The following Pro Forma Consolidated Statement of Operations is not
necessarily indicative of what the actual results of operations would have been
assuming such transactions had been completed as of January 1, 1997.
F-67
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
YEAR ENDED ADJUSTMENTS ABKB PROPOSED
DECEMBER 31, DECEMBER 31 OFFERING AND ACQUIRED ACQUISITION
1997 HOTELS UIT OFFERINGS HOTELS HOTELS
(A) (B) (C) (D) (D)
---------------- --------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues
Participating Lease revenue (E)............... $ 59,934,337 $ 14,258,118 $ 58,656,030 $ 1,026,615
Office building rental income (F)............. 1,205,465 1,134,582
Interest income (G)........................... 771,955 3,672,309
---------------- --------------- ----------------- ------------ ---------------
Total revenue.......................... 61,911,757 15,392,700 62,328,339 1,026,615
---------------- --------------- ----------------- ------------ ---------------
Expenses
Depreciation (H).............................. 13,970,289 4,461,303 19,329,399 612,218
Amortization (I).............................. 1,105,898 276,719 86,870
Real estate and personal property
Taxes and property insurance (J).......... 7,073,323 1,830,313 6,022,195 86,416
Office building operating expense (F)......... 596,939 658,611
General and administrative (K)................ 1,999,923 1,066,648
Ground lease expense (L)...................... 1,271,639 2,012,052
Amortization on unearned
officers' compensation.................... 125,729
Interest expense (M).......................... 9,048,898 6,786,345 (18,285,489) 37,841,111 1,180,575
---------------- --------------- ----------------- ------------ ---------------
Total expenses......................... 35,192,638 14,013,291 (18,285,489) 66,358,275 1,879,209
---------------- --------------- ----------------- ------------ ---------------
Income before minority interest............... $ 26,719,119 $ 1,379,409 $ 18,285,489 $ (4,029,936) $ (852,594)
Minority interest............................. 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>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1997
----------------
<S> <C>
Revenues
Participating Lease revenue (E)................ $ 133,875,100
Office building rental income (F).............. 2,340,047
Interest income (G)............................ 4,444,264
----------------
Total revenue........................... 140,659,410
----------------
Expenses
Depreciation (H)............................... 38,373,209
Amortization (I)............................... 1,469,487
Real estate and personal property
Taxes and property insurance (J)........... 15,012,247
Office building operating expense (F).......... 1,255,550
General and administrative (K)................. 3,066,571
Ground lease expense (L)....................... 3,283,691
Amortization on unearned
officers' compensation...................... 125,729
Interest expense (M)........................... 36,571,440
----------------
Total expenses.......................... 99,157,924
----------------
Income before minority interest.............. $ 41,501,486
Minority interest (O)........................ 5,736,262
----------------
Net income applicable to common
stockholders................................ $ 35,765,224
================
Net income per basic common share............ $ 1.47
================
Weighted average number of basic shares
of common stock outstanding.................. 24,275,051
================
Net income per diluted common share............ $ 1.46
================
Weighted average number of diluted shares
of common stock outstanding.................. 24,438,234
================
</TABLE>
F-68
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(A) Represents the Company's historical statement of operations for the year
ended December 31, 1997.
(B) Represents the adjustment necessary to present a statement of operations of
the 12 hotels and the office building purchased during 1997 prior to
ownership by the Company based on historical balances of the previous
owners. The combination of the historical statement of operations presented
in (A) and the pro forma statements of operations presented in (B) would be
the results of the 27 hotels and the office building owned by the Company
as if the Company owned the hotels and the office building as of January 1,
1997.
(C) Represents the adjustment 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 UIT Offerings. The
adjustment made assumes that the equity transactions were completed as of
January 1, 1997.
<TABLE>
<CAPTION>
Reduction in
Net proceeds Interest Rate interest expense
-------------------- ------------------- --------------------
<S> <C> <C> <C>
ABKB Offering $ 67,576,019 7.5000 % $ 5,068,201
Second 1997 Offering 110,155,000 7.4844 % 8,244,443
UIT Offerings 66,304,598 7.5000 % 4,972,845
-------------------- --------------------
Total reduction $244,035,617 $18,285,489
==================== ====================
</TABLE>
(D) Acquired Hotels represent the acquisition of the interests in the hotels
acquired by the Company through March 31, 1998, including estimated closing
costs. The acquisitions were 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 of approximately $32.0 million and the issuance of 1,826,843
units of limited partnership interests of Operating Partnership ("OP
Units")valued at approximately $49.8 million. Additionally, franchise
transfer costs of $1,499,900 related to the Acquired Hotels were estimated.
Proposed Acquisition Hotels represent the acquisition of the hotels,
including closing costs, to be acquired by the Company, which are currently
under contract. The acquisitions are to be financed through borrowings
under the Company's Credit Facilities. The Proposed Acquisition Hotels
include the Madison Hotel and the Select Inn Bloomington.
(E) 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 for the Participating Leases to the revenues
of the Hotels. The departmental revenue thresholds in the Participating
Leases are seasonally adjusted for interim periods. The Participating Lease
payments for the Acquired Hotels and the Proposed Acquisition Hotels are
calculated by applying the rent provisions applicable in the first year of
the respective leases executed to the historical operating revenues of the
hotels prior to the acquisition by the Company.
<TABLE>
<CAPTION>
Excess of
Participating Total
Rent over Base Participating
Base Rent Rent Rent
------------------ ------------------- -------------------
<S> <C> <C> <C>
December 31 Hotels $46,110,810 $28,081,645 $ 74,192,455
------------------ ------------------- -------------------
Base and Participating Lease payments for the Acquired
Hotels
Potomac Portfolio Acquisition Hotels and the Holiday
Inn O'Hare International Airport Hotel
9,737,500 4,984,550 14,722,050
FSA Portfolio Acquisition Hotels 17,752,496 7,637,738 25,390,234
Prime Group I Acquisition Hotels 14,165,875 4,377,871 18,543,746
------------------ ------------------- -------------------
Total for the Acquired Hotels 41,655,871 17,000,159 58,656,030
------------------ ------------------- -------------------
</TABLE>
F-69
<PAGE>
<TABLE>
<CAPTION>
Excess of
Participating Total
Rent over Base Participating
Base Rent Rent Rent
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Base and Participating Lease payments for the Proposed
Acquisition Hotels
Madison Hotel 637,336 0 637,336
Select Inn Bloomington 389,279 0 389,279
-------------------- -------------------- -------------------
Total for the Proposed Acquisition Hotels 1,026,615 0 1,026,615
-------------------- -------------------- -------------------
$88,793,296 $45,081,804 $133,875,100
==================== ==================== ===================
</TABLE>
(F) Represents the rental income and operating expenses associated with the
Houston Office Building, which was acquired by the Company in a portfolio
transaction on June 25, 1997.
(G) The adjustment represents the interest income earned on the mortgage notes
receivable the Company has from its preferred stock subsidiary, PSS I, Inc.
which owns four properties slated for sale. The notes bear interest at a
rate of 12% per annum, payable in monthly installments of interest
only.
(H) 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. The allocation of the cost of the
Hotels is as follows:
<TABLE>
<CAPTION>
Proposed
December 31 Acquired Acquisition
Hotels Hotels Hotels Total
------------------- ------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Land $ 46,352,820 $ 44,913,163 $ 1,574,100 $ 92,840,083
Building and improvements 449,575,286 401,451,332 12,739,020 863,765,638
Furniture, fixtures and
equipment 38,218,668 46,516,186 1,427,880 86,162,734
------------------- ------------------- -------------------- ----------------------
$534,146,774 $492,880,681 $15,741,000 $1,042,768,455
=================== =================== ====================
Construction in progress 53,605,534
Accumulated depreciation
December 31, 1997 (18,162,480)
----------------------
$1,078,211,509
======================
</TABLE>
(I) 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.
(J) 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.
F-70
<PAGE>
<TABLE>
<CAPTION>
Real estate and personal
property taxes and
property insurance
------------------------
<S> <C>
Real estate and personal property taxes and property insurance for the Acquired
Hotels
Potomac Portfolio Acquisition Hotels and the Holiday Inn O'Hare International
Airport Hotel $1,925,086
FSA Portfolio Acquisition Hotels 2,919,385
Prime Group I Acquisition Hotels 1,177,724
------------------------
Total real estate and personal property taxes and property insurance for the
Acquired Hotels 6,022,195
------------------------
Real estate and personal property taxes and property insurance for the Proposed
Acquisition Hotels 86,416
------------------------
Total Acquired Hotels and Proposed Acquisition Hotels $6,108,611
========================
</TABLE>
(K) Represents estimated general and administrative expenses to be paid or
reimbursed to the Company by the Operating Partnership. The following
annual general and administrative expenses are based on historical general
and administrative expenses as well as estimated expenses associated with
the increased size of the Company based on current and planned employee
additions, approved bonus programs and increased professional fees.
<TABLE>
<S> <C>
Salaries and wages (including directors fees) $1,664,000
Professional fees 474,000
Taxes, fees and related 200,000
Directors' and officers' insurance 120,000
Allocated rent supplies and other 103,000
Other operating expenses 505,571
---------------------
$3,066,571
=====================
</TABLE>
(L) Represents the amounts to be paid by the Operating Partnership for ground
leases underlying the properties. Seven of the Hotels are subject to ground
leases with third parties with respect to the land underlying each such
hotel. The ground leases are triple net leases which required the tenant to
pay all expenses of owning and operating the hotel, including real estate
taxes and structural maintenance and repair. One other hotel is subject to
a ground lease with the state of Florida for certain offshore real property
accessible by the guests of the hotel.
Minimum future rental payments for all the ground leases to be paid by
Company at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Amount
---------------------------------------------------- ---------------------
<S> <C>
1998................................................ $ 1,187,191
1999................................................ 1,187,191
2000................................................ 1,187,191
2001................................................ 1,187,191
2002................................................ 1,224,691
2003 and thereafter................................. 75,815,042
---------------------
Minimum future rental payments $81,788,497
=====================
</TABLE>
F-71
<PAGE>
(M) Represents pro forma interest expense on the following debt for the year
ended December 31, 1997:
<TABLE>
<S> <C>
December 31 Hotels
Holiday Inn Select DFW Airport South (1) $ 1,213,683
Courtyard by Marriott Meadowlands (2) 381,333
DoubleTree Guest Suites Atlanta (3) 927,289
Radisson Hotel Arlington Heights (4) 616,407
Credit Facilities 12,696,531
------------------------
15,835,243
------------------------
Acquired Hotels
Crowne Plaza Portland (5) 557,187
Ramada Plaza Shelton (6) 517,470
Holiday Inn O'Hare International Airport (7) 2,066,848
Credit Facilities - Potomac Portfolio Acquisition Hotels and the Holiday Inn
O'Hare International Airport 4,794,561
Credit Facilities - FSA Portfolio Acquisition Hotels 20,672,257
Credit Facilities - Prime Group I Acquisition Hotels 9,232,788
------------------------
37,841,111
------------------------
Proposed Acquisition Hotels
Credit Facilities - Madison Hotel 912,073
Credit Facilities - Select Inn Bloomington 268,500
1,180,575
------------------------
Equity offerings
ABKB Offering (5,068,201)
Second 1997 Offering (8,244,443)
UIT Offerings (4,972,845)
(18,285,489)
------------------------
Total pro forma interest expense $ 36,571,440
========================
</TABLE>
(1) First mortgage note payable in monthly installments including interest at
the fixed rate of 8.75%; maturing on February 1, 2011 at which time a
balloon payment of approximately $6,120,000 will be due and payable;
collateralized by the Holiday Inn Select Dallas DFW Airport South
(2) First mortgage note payable in monthly installments including interest at
the fixed rate of 7.5%; maturing on December 1, 2001 at which time a
balloon payment of approximately $3,985,000 will be due and payable;
collateralized by the Courtyard by Marriott Meadowlands
(2) Construction loan payable in monthly installments including interest at the
fixed rate of 7.89%; maturing on January 1, 2001; collateralized by the
Courtyard by Marriott Meadowlands
(3) First mortgage note payable in monthly installments at a fixed rate of
9.75%; maturing on July 1, 2002, at which time a balloon payment of
approximately $8,200,000 will be due and payable; collateralized by the
DoubleTree Guest Suites Atlanta
(4) One year first mortgage note payable in monthly installments of interest
only at a fixed rate of 7.5%; collateralized by the Radisson Hotel
Arlington Heights; matured on February 28, 1998, at which time the balance
of $8,218,755 was paid
(5) First mortgage note payable in monthly installments at a fixed rate of
10.5%; maturing in December 2004, at which time a balloon payment of
approximately $4.1 million will be due and payable; collateralized by the
Crowne Plaza Portland
(6) First mortgage note payable in monthly installments at a fixed rate of
10.5%; maturing in December 2004, at which time a balloon payment of
approximately $3.9 million will be due and payable; collateralized by the
Ramada Plaza Shelton
(7) First mortgage note payable in monthly installments at a fixed rate of 9.0%;
maturing on January 1, 2012; collateralized by the Holiday Inn O'Hare
International Airport
F-72
<PAGE>
On February 13, 1998 the Company replaced its $300 million secured
line of credit with two new unsecured credit facilities in the aggregate
principal amount of $600 million (collectively, the "Credit Facilities").
The Credit Facilities have a three-year term and bear interest based upon
the 30-day, 60-day or 90-day LIBOR (5.6875%, 5.6875% and 5.7109% as of
March 31, 1998) at the option of the Company, plus an applicable margin for
all or part of the Facilities (the "Margins"). The Margins, which are
adjusted on a quarterly basis, range from 1.40% per annum to 2.0% per
annum, based upon certain leverage ratios. As of March 31, 1998 the Margins
were 1.875% per annum.
(N) Calculated at 12.1% for the historical period ended December 31, 1997 and
as 13.8% for the pro forma periods presented.
F-73
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the Company had completed (i) the follow-on primary public
offering of 6,368,300 shares of Common Stock (the "1997 Public Offering") on
February 7, 1997, (ii) 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") between November 1, 1997 and February 15, 1998, (iii) the follow-on
primary offering of 4,250,000 shares of Common Stock (the "Second 1997
Offering") on November 13, 1997, (iv) the sale of 1,052,650, 1,095,890 and
362,812 shares of Common Stock on February 18, 1998, February 23, 1998 and
February 27, 1998, respectively, issued through three separate public offerings
pursuant to the Shelf Registration (the "UIT Offerings") and (v) the
acquisitions of the interests in 26 hotels acquired in the first quarter of
1998, 12 hotels and office building acquired during 1997 and 15 hotels acquired
during 1996 all owned as of March 31, 1998 (the "March 31 Hotels") and the
acquisition of the 2 pending hotel acquisitions (the "Proposed Acquisition
Hotels", together with the March 31 Hotels, the "Hotels") including the Madison
Hotel Acquisition and the Select Inn Bloomington as of January 1, 1997. The Pro
Forma Consolidated Statement of Operations does not include the effects of the
Proposed Merger with CapStar or the acquisition of the Prime Group II
Acquisition Hotels.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Statement of Operations is
derived from the Company's Consolidated Statements of Operations for the quarter
ended March 31, 1998 and should be read in conjunction with the financial
statements filed with American General Hospitality Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
The following Pro Forma Consolidated Statement of Operations is not
necessarily indicative of what the actual results of operations would have been
assuming such transactions had been completed as of January 1, 1997.
F-74
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ACQUIRED
THREE MONTHS HOTELS PROPOSED ABKB OFFERING
ENDED PRO FORMA ACQUISITION AND UIT
MARCH 31, 1998 ADJUSTMENTS HOTELS OFFERINGS COMBINED PRO
(A) (B) (C) (D) FORMA
--------------- -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues
Participating Lease revenue (E)....... $ 31,248,960 $ 4,903,130 $ 338,258 $ 36,490,348
Office building rental income (F)..... 817,693 817,693
Interest income (G)................... 710,874 560,593 1,271,467
-------------- -------------- ------------ --------------- --------------
Total revenue.................. 32,777,527 5,463,723 338,258 38,579,508
-------------- -------------- ------------ --------------- --------------
Expenses
Depreciation (H)...................... 8,603,977 1,122,304 153,054 9,879,335
Amortization (I)...................... 442,253 16,347 458,600
Real estate and personal property
taxes and property insurance (J)..... 3,187,435 672,212 86,416 3,946,063
Office building operating expense (F). 370,090 370,090
General and administrative............ 757,246 757,246
Ground lease expense (K).............. 626,745 672,577 1,299,322
Amortization of unearned
officers' compensation............. 52,988 52,988
Merger expenses (L)................... 2,100,000 2,100,000
Interest expense (M).................. 7,344,834 2,665,844 295,144 (722,659) 9,583,163
-------------- -------------- ------------ --------------- --------------
Total expenses.................... 23,485,568 5,149,284 534,614 (722,659) 28,446,807
-------------- -------------- ------------ --------------- --------------
Income before minority interest....... 9,291,959 314,439 (196,356) 722,659 10,132,701
Minority interest (N)................. 1,197,190 1,400,524
-------------- --------------
Net income applicable to common
stockholders...................... $ 8,094,769 $ 8,732,177
============== ==============
Net income per basic common share..... $ 0.35 $ 0.36
============== ==============
Weighted average number of
basic shares of Common Stock
outstanding....................... 22,807,034 24,270,320
============== ==============
Net income per diluted common share... $ 0.35 $ 0.36
============== ==============
Weighted average number of diluted
shares of Common Stock
outstanding....................... 23,032,863 24,496,149
============== ==============
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-75
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(A) Represents the Company's historical statement of operations for the year
ended March 31, 1998.
(B) Represents the adjustment necessary to present a statement of operations of
the 26 hotels purchased during the first quarter of 1998 prior to the
ownership by the Company based on historical balances of the previous
owners. The combination of the historical statement of operations presented
in (A) and the pro forma statements of operations presented in (B) would be
the results of the 53 hotels owned by the Company as if the Company owned
the hotels as of January 1, 1997.
(C) Proposed Acquisition Hotels represent the acquisition of the hotels,
including closing costs, to be acquired by the Company, which are currently
under contract. The acquisitions are to be financed through borrowings
under the Company's Credit Facilities. The Proposed Acquisition Hotels
include the Madison Hotel and the Select Inn Bloomington.
(D) Represents the adjustment to interest expense for the quarter as a result
of the repayment of borrowings under the Company's Credit Facilities with
the net proceeds from the ABKB Offering and the UIT Offerings. The
adjustment made are for the time prior to the consummation of the equity
transaction only.
<TABLE>
<CAPTION>
Reduction in
interest expense
for time prior to
Net proceeds Interest Rate consummation
---------------- ----------------- -----------------
<S> <C> <C> <C>
ABKB Offering $ 67,576,019 7.5 % $ 25,833
UIT Offerings 66,304,598 7.5 % 696,826
---------------- -----------------
Total 133,880,617 $ 722,659
============== =================
</TABLE>
(E) 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 for the Participating Leases to the revenues
of the Hotels. The departmental revenue thresholds in the Participating
Leases are seasonally adjusted for interim periods. The Participating Lease
payments for the Proposed Acquisition Hotels are calculated by applying the
rent provisions applicable in the first year of the respective leases to
the historical operating revenues of the hotels prior to the acquisition by
the Company.
<TABLE>
<CAPTION>
Excess of
Participating Total
Rent over Base Participating
Base Rent Rent Rent
------------------ ------------------ -----------------
<S> <C> <C> <C>
March 31 Hotels $ 22,755,423 $ 13,396,667 $ 36,152,090
------------------ ------------------ -----------------
Base and Participating Lease payments for the Proposed
Acquisition Hotels
Madison Hotel 238,997 0 238,997
Select Inn Bloomington 99,261 0 99,261
------------------ ------------------ -----------------
Total for the Proposed Acquisition Hotels 338,258 0 338,258
------------------ ------------------ -----------------
$ 23,093,681 $ 13,396,667 $ 36,490,348
================== ================== =================
</TABLE>
(F) Represents the rental income and operating expenses associated with the
Houston Office Building, which was acquired by the Company in a portfolio
transaction on June 25, 1997.
(G) The adjustment represents the interest income earned on the mortgage notes
receivable the Company has from PSS I, Inc. The notes bear interest at a
rate of 12% per annum, payable in monthly installments of interest only.
PSS I, Inc. is a preferred stock subsidiary which owns four properties
which are slated for sale.
F-76
<PAGE>
(H) 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. The allocation of the cost of the Hotels
is as follows.
<TABLE>
<CAPTION>
Proposed
March 31 Hotels Acquisition Hotels Total
------------------- ---------------------- -----------------
<S> <C> <C> <C>
Land $ 91,294,896 $ 1,574,100 $ 92,868,996
Building and improvements 865,894,477 12,739,020 878,633,497
Furniture, fixtures and equipment
91,557,219 1,427,880 92,985,099
------------------- ---------------------- -----------------
$1,048,746,592 $ 15,741,000 $ 1,064,487,592
=================== ======================
Construction in progress 49,176,932
Accumulated depreciation as of
March 31, 1998 (26,815,837)
----------------
$ 1,086,848,687
================
</TABLE>
(I) 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.
(J) 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.
<TABLE>
<CAPTION>
Real estate and personal
property taxes and
property insurance
----------------------------
<S> <C>
Real estate and personal property taxes and property insurance for the Proposed
Acquisition Hotels $ 86,416
============================
</TABLE>
(K) Represents the amounts to be paid by the Operating Partnership for ground
leases underlying the properties. Eight of the Hotels are subject to ground
leases with third parties with respect to the land underlying each such
hotel. The ground leases are triple net leases which required the tenant to
pay all expenses of owning and operating the hotel, including real estate
taxes and structural maintenance and repair. The Westin Ley Largo is
subject to a ground lease related to the bay bottom area fronting the
property.
Minimum future rental payments for all the ground leases to be paid by
Company at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Amount
--------------------------------------------------------------------- --------------------------
<S> <C>
1998................................................................. $ 890,394
1999................................................................. 1,187,191
2000................................................................. 1,187,191
2001................................................................. 1,187,191
2002................................................................. 1,224,691
2003 and thereafter.................................................. 75,815,042
--------------------------
Minimum future rental payments $ 81,491,700
==========================
</TABLE>
(L) Represents the merger expenses recorded in the first quarter of 1998
relating to the Proposed Merger with CapStar Hotel Company. The merger
expenses include costs for: Underwriters, legal expenses, accounting and
auditing expenses and other miscellaneous costs.
F-77
<PAGE>
(M) Represents pro forma interest expense on the following debt for the quarter
ended March 31, 1998:
<TABLE>
<CAPTION>
Pro Forma Combined Pro
Historical Adjustment Forma
------------- -------------- ---------------
<S> <C> <C> <C>
March 31 Hotels
Holiday Inn Select DFW Airport South (1) $ 298,573 $ 298,573
Courtyard by Marriott Meadowlands (2) 90,616 90,616
DoubleTree Guest Suites Atlanta (3) 227,820 227,820
Radisson Hotel Arlington Heights (4) 203,757 203,757
Crowne Plaza Portland (5) 128,211 $ 12,382 140,593
Ramada Plaza Shelton (6) 119,072 11,499 130,571
Holiday Inn O'Hare International Airport (7) 324,877 183,720 508,597
Credit Facilities 5,951,908 2,458,243 8,410,151
------------- -------------- ---------------
7,344,834 2,665,844 10,010,678
------------- -------------- ---------------
Proposed Acquisition Hotels
Credit Facilities - Madison Hotel 228,019 228,019
Credit Facilities - Select Inn Bloomington 67,125 67,125
-------------- ---------------
295,144 295,144
-------------- ---------------
Equity offerings
ABKB Offering (25,832) (25,832)
UIT Offerings (696,827) (696,827)
-------------- ---------------
(722,659) (722,659)
-------------- ---------------
Total interest expense $ 7,344,834 $2,238,329 $ 9,583,163
============= ============== ===============
</TABLE>
(1) First mortgage note payable in monthly installments including interest at
the fixed rate of 8.75%; maturing on February 1, 2011 at which time a
balloon payment of approximately $6,120,000 will be due and payable;
collateralized by the Holiday Inn Select Dallas DFW Airport South
(2) First mortgage note payable in monthly installments including interest at
the fixed rate of 7.5%; maturing on December 1, 2001 at which time a
balloon payment of approximately $3,985,000 will be due and payable;
collateralized by the Courtyard by Marriott Meadowlands
(2) Construction loan payable in monthly installments including interest at the
fixed rate of 7.89%; maturing on January 1, 2001; collateralized by the
Courtyard by Marriott Meadowlands
(3) First mortgage note payable in monthly installments at a fixed rate of
9.75%; maturing on July 1, 2002, at which time a balloon payment of
approximately $8,200,000 will be due and payable; collateralized by the
DoubleTree Guest Suites Atlanta
(4) One year first mortgage note payable in monthly installments of interest
only at a fixed rate of 7.5%; collateralized by the Radisson Hotel
Arlington Heights; matured on February 28, 1998, at which time the balance
of $8,218,755 was paid
(5) First mortgage note payable in monthly installments at a fixed rate of
10.5%; maturing in December 2004, at which time a balloon payment of
approximately $4.1 million will be due and payable; collateralized by the
Crowne Plaza Portland
(6) First mortgage note payable in monthly installments at a fixed rate of
10.5%; maturing in December 2004, at which time a balloon payment of
approximately $3.9 million will be due and payable; collateralized by the
Ramada Plaza Shelton
(7) First mortgage note payable in monthly installments at a fixed rate of
9.0%; maturing on January 1, 2012; collateralized by the Holiday Inn
O'Hare International Airport
F-78
<PAGE>
On February 13, 1998 the Company replaced its $300 million secured
line of credit with two new unsecured credit facilities in the aggregate
principle amount of $600 million (collectively, the "Credit Facilities").
The Credit Facilities have a three-year term and bear interest based upon
the 30-day, 60-day or 90-day LIBOR (5.6875%, 5.6875% and 5.7109% as of
March 31, 1998) at the option of the Company, plus an applicable margin for
all or part of the Facilities (the "Margins"). The Margins, which are
adjusted on a quarterly basis, range from 1.40% per annum to 2.0% per
annum, based upon certain leverage ratios. As of March 31, 1998 the Margins
were 1.875% per annum.
(N) Calculated at 12.9% for the historical period ended March 31, 1998 and as
13.8% for the pro forma periods presented.
F-79
<PAGE>
AGH LEASING, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
The following unaudited Pro Forma Consolidated Statement of Operations are
presented as if the Company had completed the acquisition of the 12 hotels
acquired during 1997 and 15 hotels acquired during 1996 all owned as of December
31, 1997 (the "December 31 Hotels") and the 18 hotels acquired in the first
quarter of 1998 (the "Acquired Hotels") and the one hotel to be acquired by the
Company and leased to AGH Leasing (the "Proposed Acquisition Hotel")
(collectively the "AGH Hotels") as of January 1, 1997. The Acquired Hotels
include the Potomac Portfolio Acquisition Hotels, the FSA Portfolio Acquisition
Hotels, the Holiday Inn O'Hare International Hotel and the Proposed Acquisition
Hotel is the Madison Hotel Acquisition. The Pro Forma Consolidated Statement of
Operations does not include the effects of the Proposed Merger with
CapStar.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Statement of Operation are
derived from AGH Leasing's Consolidated Statements of Operations 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 year ended December 31, 1997.
The following Pro Forma Consolidated Statement 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, 1997.
F-80
<PAGE>
AGH LEASING, L.P.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL DECEMBER 31
YEAR ENDED HOTELS PROPOSED MANAGEMENT
DECEMBER 31, PRO FORMA ACQUIRED ACQUISITION FEES
1997 ADJUSTMENTS HOTELS HOTEL ADJUSTMENT COMBINED
(A) (B) (C) (C) (G) PRO FORMA
-------------- ------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Room revenue (D)........................... $ 123,965,649 $ 27,806,341 $ 99,361,895 $ 1,379,556 $ 252,513,441
Food and beverage revenue (D).............. 28,626,625 7,674,974 25,145,757 207,374 61,654,730
Other revenue (D).......................... 10,121,833 2,256,516 8,380,871 82,507 20,841,727
Minority interest income (E)............... 1,802,558 (139,150) 1,663,408
-------------- ------------- ------------- ------------ ------------ -------------
Total revenue....................... $ 164,516,665 $ 37,598,681 $ 132,888,523 $ 1,669,437 $ 336,673,306
-------------- ------------- ------------- ------------ ------------ -------------
Expenses
Property operating costs and expenses (F).. 33,894,184 6,754,081 26,658,014 456,500 67,762,779
Food and beverage costs and expenses (F)... 22,768,224 5,297,676 20,218,787 121,170 48,405,857
General and administrative (F)............. 15,871,676 2,978,176 11,792,008 241,768 30,883,628
Advertising and promotion (F).............. 12,792,700 2,489,673 8,638,295 68,533 23,989,201
Repairs and maintenance (F)................ 6,712,883 1,756,796 6,399,372 95,048 14,964,099
Utilities (F).............................. 7,258,674 1,532,149 6,198,780 95,716 15,085,319
Management fees (G)........................ 1,691,639 1,158,265 2,694,902 42,106 1,767,977 7,354,889
Franchise costs (H)........................ 4,754,285 1,041,672 3,945,161 50,095 9,791,213
Depreciation............................... 63,000 63,000
Amortization (I)........................... 40,997 40,997
Interest expense........................... 26,808 237,256 264,064
Other expense.............................. 158,113 173,116 79,997 411,226
Participating Lease expenses (J)........... 59,934,337 14,258,118 45,298,537 637,336 120,128,328
-------------- ------------- ------------- ------------ ------------ -------------
Total expenses...................... 165,967,520 37,676,978 131,923,853 1,808,272 1,767,977 339,144,600
-------------- ------------- ------------- ------------ ------------ -------------
Net income (loss)................... $ (1,450,855) $ (78,297) $ 964,670 $ (138,835) $ (1,767,977) $ (2,471,294)
============== ============= ============= ============ ============ =============
</TABLE>
F-81
<PAGE>
AGH LEASING, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The pro forma consolidated statement of operations of AGH Leasing, L.P.
("AGH Leasing") include the results of operations of the 46 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 Company's historical statement of operations for the year
ended December 31, 1997.
(B) Represents the adjustments to present a statement of operations for the 12
hotels acquired by the Company and leased to AGH Leasing during 1997 prior
to their acquisition by the Company based on historical balances of the
previous owners. The combination of the historical statement of operations
presented in column (A) and the pro forma statement of operation presented
in column (B) represent the results of operations of the 27 December 31
Hotels as if all of the AGH Hotels were acquired on January 1, 1997 and
leased to AGH Leasing pursuant to a Participating Lease since that
date.
(C) Acquired Hotels represent the acquisition of the interests in the hotels
acquired by the Company and leased to AGH Leasing through March 31, 1998.
The Acquired Hotels are leased pursuant to operating leases ("Participating
Leases") which provide for rent based on the revenues of the Acquired
Hotels. The Acquired Hotels include the FSA Portfolio Acquisition Hotels,
the Potomac Portfolio Acquisition Hotels and the Holiday Inn O'Hare
International Airport Hotel.
Proposed Acquisition Hotel represents the acquisition of one hotel, the
Madison Hotel, to be acquired by the Company and leased to AGH Leasing
pursuant to a Participating Lease.
The following table reflects summarized information regarding the Acquired
Hotels:
<TABLE>
<CAPTION>
Potomac Portfolio
Acquisition Hotels
and the Holiday Inn
FSA Portfolio O'Hare International
Acquisition Hotels Airport Hotel Total
-------------------- ------------------------ -------------------
<S> <C> <C> <C>
Total Hotel revenues $ 88,539,197 $ 49,256,403 $ 137,795,600
Total expenses 70,978,387 44,146,771 115,125,158
----------------- ------------------------ -------------------
Net income 17,560,810 5,109,632 22,670,442
Elimination of historical expenses
Net income of Select Inn Bloomington (392,417) (392,417)
Management fees 570,568 (11,292) 559,276
Depreciation 7,951,340 2,703,858 10,655,198
Amortization 121,242 121,242
Real estate and personal property taxes and
property insurance 3,521,192 1,968,253 5,489,445
Interest expense 4,138,093 4,138,093
Other expense 2,678,741 343,187 3,021,928
----------------- ------------------------ -------------------
Adjusted net income before Participating
Lease payment 31,890,234 14,372,973 46,263,207
Participating Lease payment 30,576,487 14,722,050 45,298,537
----------------- ------------------------ -------------------
Acquired Hotels adjusted net income $ 1,313,757 $ (349,077) $ 964,670
================= ======================== ===================
</TABLE>
F-82
<PAGE>
(D) Represents historical room, food and beverage and other revenues of the AGH
Hotels.
(E) 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.
(F) Represents the historical expenses of the AGH Hotels.
(G) 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 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,
management fees are forfeited by AGHI to increase AGH Leasing's taxable net
operating income to $50,000.
<TABLE>
<CAPTION>
Base Incentive Total
management fee management fee management fee
--------------------- -------------------- -------------------------
<S> <C> <C> <C>
December 31 Hotels $ 2,849,904 $ 2,849,904
Acquired Hotels
Potomac Portfolio Acquisition Hotels and the
Holiday Inn O'Hare International Airport Hotel 738,846 $ 614,955 1,353,801
FSA Portfolio Acquisition Hotels 1,341,101 1,341,101
Proposed Acquisition Hotel
Madison Hotel 25,263 16,843 42,106
Management fee adjustment 1,767,977 1,767,977
--------------------- -------------------- -------------------------
Total management fees $ 4,955,114 $ 2,399,775 $ 7,354,889
===================== ==================== =========================
</TABLE>
(H) 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 impacts including possible revenue
enhancements and operating expense reductions are also not included.
(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) 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. The Participating Lease payments
for the Acquired Hotels and the Proposed Acquisition Hotel are calculated
by applying the rent provisions applicable in the first year of the
respective leases executed to the historical operating revenues of the
hotels prior to the acquisition by the Company.
F-83
<PAGE>
<TABLE>
<CAPTION>
Excess of
Participating Total
Rent over Base Participating
Base Rent Rent Rent
----------------- -------------------- -------------------
<S> <C> <C> <C>
December 31 Hotels $46,110,810 $28,081,645 $ 74,192,455
----------------- -------------------- -------------------
Base and Participating Lease payments for the
Acquired Hotels
Potomac Portfolio Acquisition Hotels and the Holiday
Inn O'Hare International Airport Hotel
9,737,500 4,984,550 14,722,050
FSA Portfolio Acquisition Hotels 9 hotels owned by
the Company 17,752,496 7,637,735 25,390,231
FSA Portfolio Acquisition Hotels 4 hotels owned by
PSS I, Inc. 3,924,955 1,261,301 5,186,266
----------------- -------------------- -------------------
Total Base and Participating Lease payments for the
Acquired Hotels 31,414,951 13,883,586 45,298,537
----------------- -------------------- -------------------
Base and Participating Lease payments for the
Proposed Acquisition Hotel
Madison Hotel 637,336 0 637,336
----------------- -------------------- -------------------
Total Base and Participating Lease payments for the
Proposed Acquisition Hotel $78,163,097 $41,965,231 $120,128,328
================= ==================== ===================
</TABLE>
F-84
<PAGE>
AGH LEASING, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the 45 hotels which the Company and its affiliates lease to AGH
Leasing (the "AGH Leasing March 31 Hotels") and one of the additional hotels to
be acquired by the Company and leased to AGH Leasing (the "Proposed Acquisition
Hotel", together with AGH Leasing March 31 Hotels, the "AGH Leasing Hotels")
were leased pursuant to Participating Leases as of January 1, 1997. The Proposed
Acquisition Hotel is the Madison Hotel Acquisition. The Pro Forma Consolidated
Statement of Operations does not include the effects of the Proposed Merger with
CapStar.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Consolidated Statement of Operation are
derived from AGH Leasing's Consolidated Statements of Operations as of March 31,
1998 and should be read in conjunction with the financial statements filed with
American General Hospitality Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
The following Pro Forma Consolidated Statement 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, 1997.
F-85
<PAGE>
AGH LEASING, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AGH LEASING
HISTORICAL MARCH 31 HOTELS PROPOSED
THREE MONTHS ENDED PRO FORMA ACQUISITION
MARCH 31, 1998 ADJUSTMENTS HOTEL COMBINED
(A) (B) (C) PRO FORMA
-------------------- ------------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues
Room revenue (D).............................. $ 58,224,156 $ 10,591,753 $ 68,815,909
Food and beverage revenue (D)................. 14,147,363 2,493,306 16,640,669
Other revenue (D)............................. 4,415,258 1,028,980 3,373 5,447,611
-------------------- ------------------- ------------ -------------
Total revenue.......................... 76,786,777 14,114,039 3,373 90,904,189
-------------------- ------------------- ------------ -------------
Expenses
Property operating cost and expenses (E).... 13,956,762 3,068,333 7,492 17,032,587
Food and beverage costs and expenses (E).... 9,983,727 2,251,201 (411) 12,234,517
General and administrative (E).............. 6,315,376 1,486,918 46,447 7,848,741
Advertising and promotion (E)............... 5,316,895 1,030,001 7,289 6,354,185
Repairs and maintenance (E)................. 2,906,546 735,838 1,135 3,643,519
Utilities (E)............................... 2,872,937 694,370 9,151 3,576,458
Management fees (F)......................... 1,759,353 311,020 2,070,373
Franchise costs (G)......................... 2,300,237 409,716 2,709,953
Depreciation................................ 15,750 15,750
Amortization (H)............................ 10,348 10,348
Interest expense............................ 5,858 5,858
Other expense............................... 91,628 19,500 111,128
Participating Lease expense (I)............. 28,165,224 5,358,517 238,997 33,762,738
-------------------- ------------------- ------------ -------------
Total expenses......................... 73,700,641 15,365,414 310,100 89,376,155
-------------------- ------------------- ------------ -------------
Net income (loss)................................ $ 3,086,136 $(1,251,375) $(306,727) $ 1,528,034
==================== =================== ============ =============
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-86
<PAGE>
AGH LEASING, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The Pro Forma Consolidated Statement of Operations of AGH Leasing, L.P.
("AGH Leasing") include the results of operations of the 45 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 Company's historical statement of operations for the year
ended March 31, 1998.
(B) Represents the adjustments to present a statement of operations for the 18
hotels acquired by the Company and leased to AGH Leasing during the first
quarter of 1998 prior to their acquisition by the Company based on
historical balances of the previous owners. The combination of the
historical statement of operations presented in column (A) and the pro
forma statement of operation presented in column (B) represent the results
of operations of the 45 AGH Leasing March 31 Hotels as if all of the AGH
Hotels were acquired on January 1, 1997 and leased to AGH Leasing pursuant
to a Participating Lease since that date.
(C) Proposed Acquisition Hotel represents the acquisition of one hotel, the
Madison Hotel, to be acquired by the Company and leased to AGH Leasing
pursuant to a Participating Lease. The Madison Hotel was closed for a
complete renovation in September 1997 and is expected to reopen in July
1998.
(D) Represents historical room, food and beverage and other revenues of AGH
Hotels.
(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.
<TABLE>
<CAPTION>
Base Incentive Total
management fee management fee management fee
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
AGH Leasing March 31 Hotels $ 1,403,965 $ 666,408 $ 2,070,373
Proposed Acquisition Hotel
Madison Hotel 0 0 0
--------------------- --------------------- ----------------------
Total management fees $ 1,403,965 $ 666,408 $ 2,070,373
===================== ===================== ======================
</TABLE>
(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 impacts including possible revenue
enhancements and operating expense reductions are also not included.
(H) 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.
F-87
<PAGE>
(I) 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. The Participating Lease payments
for the Acquired Hotels and the Proposed Acquisition Hotel are calculated
by applying the rent provisions applicable in the first year of the
respective leases to the historical operating revenues of the hotels prior
to the acquisition by the Company.
<TABLE>
<CAPTION>
Excess of
Participating
Rent over Base Total Participating
Base Rent Rent Rent
--------------------- -------------------- -----------------------
<S> <C> <C> <C>
AGH Leasing March 31 Hotels $ 20,195,193 $ 13,328,548 $ 33,523,741
Base and Participating Lease payments for
the Proposed Acquisition Hotel
Madison Hotel 238,997 0 238,997
--------------------- -------------------- -----------------------
Total $ 20,434,190 $ 13,328,548 $ 33,762,738
===================== ==================== =======================
</TABLE>
F-88
<PAGE>
CLIFTON HOLDING CORP.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
The following unaudited Pro Forma Consolidated Statement of Operations are
presented as if the Company had completed the acquisition of the eight Prime
Group I Acquisition Hotels and leased to Clifton Holding Corp (the "Prime
Lessee") as of January 1, 1997. The Pro Forma Combined Statement of Operations
does not include the effect of the acquisition of the Prime Group II Acquisition
Hotels.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Combined Statement of Operation are
derived from the Prime Portfolio Acquisition Hotels' Combined Statements of
Operations as of December 31, 1997 and should be read in conjunction with the
financial statements filed with American General Hospitality Corporation's
Report on Form 8-K dated April 6, 1998 and filed April 7, 1998.
The following Pro Forma Consolidated Statement 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, 1997.
F-89
<PAGE>
CLIFTON HOLDING CORP.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
DECEMBER 31, PRO FORMA
1997 ADJUSTMENTS
(A) (B) PRO FORMA
------------------- ------------------ ------------------
<S> <C> <C> <C>
Revenues
Room revenue (C).......................... $ 33,770,197 $ 33,770,197
Food and beverage revenue (C)............. 15,452,912 15,452,912
Other revenue (C)......................... 1,581,999 1,581,999
------------------- ------------------ ------------------
Total revenue.......................... 50,805,108 50,805,108
------------------- ------------------ ------------------
Expenses
Property operating costs and expenses (D). 8,766,525 8,766,525
Food and beverage costs and expenses (D).. 10,695,183 10,695,183
General and administrative (D)............ 3,058,151 3,058,151
Advertising and promotion (D)............. 2,596,715 2,596,715
Repairs and maintenance (D)............... 2,205,797 2,205,797
Utilities (D)............................. 2,389,469 2,389,469
Management fees (E)....................... 1,662,088 (1,662,088)
Franchise costs (F)....................... 1,100,602 1,100,602
Depreciation and amortization (B)......... 4,129,389 (4,129,389)
Real estate and personal property
taxes and property insurance (B)........ 1,186,524 (1,186,524)
Interest expense (B)...................... 2,655,881 (2,655,881)
Operating lease expense (B)............... 871,279 (635,206) 236,073
Other income (D).......................... (232,192) (232,192)
Participating Lease expense (G)........... 18,543,741 18,543,741
------------------- ------------------ ------------------
Total expenses......................... 41,085,411 8,274,653 49,360,064
------------------- ------------------ ------------------
Net income (loss)...................... $ 9,719,697 $ (8,274,653) $ 1,445,044
=================== ================== ==================
</TABLE>
F-90
<PAGE>
CLIFTON HOLDING CORP.
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
The pro forma combined statement of operations of the Clifton Holding Corp.
(the "Prime Lessee") include the results of operations of the eight hotels
leased from the American General Hospitality Operating Partnership, L.P. (the
"Operating Partnership") due to 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. 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
(A) Represents the Prime Group I Acquisition Hotels' historical statement of
operations for the year ended December 31, 1997.
(B) Represents the adjustments to present a statement of operations for the
eight hotels acquired by the Company and leased to the Prime Lessee during
1998 prior to their acquisition by the Company based on historical balances
of the previous owners. The combination of the historical statement of
operations presented in column (A) and the pro forma adjustments in column
(B) represent the results of operations of the eight Prime Group I
Acquisition Hotels as if all of the Prime Group I Acquisition Hotels were
acquired on January 1, 1997 and leased to the Prime Lessee pursuant to a
Participating Lease since that date.
(C) Represents historical room, food and beverage and other revenues of the
Prime Group I Acquisition Hotels.
(D) Represents the historical expenses of the Prime Group I Acquisition Hotels.
(E) Historical management fees have been eliminated based on the inclusion of
the hotel management function within the Participating Lease terms.
(F) Represents the historical franchise fees of the Prime Group I Acquisition
Hotels. Franchise fees associated with the hotel conversions are not
included in the pro forma statements of operations since other impacts
including possible revenue enhancements and operating expense reductions
are also not included.
(G) 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 Group I Acquisition Hotels. The departmental thresholds in the
Participating Leases are seasonally adjusted for interim periods. The
Participating Lease payments for the Prime Group I Acquisition Hotels are
calculated by applying the rent provisions applicable in the first year of
the respective leases executed to the historical operating revenues of the
hotels prior to the acquisition by the Company.
<TABLE>
<CAPTION>
Excess of
Participating Total
Rent over Base Participating
Base Rent Rent Rent
----------------- -------------------- -------------------
<S> <C> <C> <C>
Prime Group I Acquisition Hotels $14,165,875 $4,377,871 $18,543,746
================= ==================== ===================
</TABLE>
F-91
<PAGE>
CLIFTON HOLDING CORP.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the Company had completed the acquisition of the eight Prime
Group I Acquisition Hotels and leased them to Clifton Holding Corp (the "Prime
Lessee") pursuant to Participating Leases as of January 1, 1997. The Pro Forma
Combined Statement of Operations does not include the effect of the Prime Group
II Acquisition Hotels.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Combined Statement of Operation are
derived from the Prime Portfolio Acquisition Hotels' Combined Statements of
Operations as of December 31, 1997 and should be read in conjunction with the
financial statements filed with American General Hospitality Corporation's
Report on Form 8-K dated April 6, 1998 and filed April 7, 1998.
The following Pro Forma Consolidated Statement 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, 1997.
F-92
<PAGE>
CLIFTON HOLDING CORP.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
MARCH 31, PRO FORMA
1998 ADJUSTMENTS
(A) (B) PRO FORMA
----------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues
Room revenue (C).................................. $ 7,604,805 $ 419,617 $ 8,024,422
Food and beverage revenue (C)..................... 2,971,362 151,697 3,123,059
Other revenue (C)................................. 353,323 53,323 406,646
Interest income (C)............................... 23,111 23,111
----------------------- ------------------- -------------------
Total revenue................................... 10,952,601 624,637 11,577,238
----------------------- ------------------- -------------------
Expenses
Property operating costs and expenses (D)......... 1,953,015 109,141 2,062,156
Food and beverage costs and expenses (D).......... 2,240,277 105,867 2,346,144
General and administrative (D).................... 629,551 66,853 696,404
Advertising and promotion (D)..................... 941,879 20,549 962,428
Repairs and maintenance (D)....................... 480,625 41,126 521,751
Utilities (D)..................................... 568,653 1,720 570,373
Other expense (D)................................. 394 394
Participating Lease expense (E)................... 4,115,013 228,015 4,343,028
----------------------- ------------------- -------------------
Total expenses.................................. 10,929,407 573,271 11,502,678
----------------------- ------------------- -------------------
Net income (loss)............................... $ 23,194 $ 51,366 $ 74,560
======================= =================== ===================
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-93
<PAGE>
CLIFTON HOLDING CORP.
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
The pro forma combined statement of operations of the Clifton Holding Corp.
(the "Prime Lessee") include the results of operations of the eight hotels
leased from the American General Hospitality Operating Partnership, L.P. (the
"Operating Partnership") due to 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. 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
(A) Represents the Prime Group I Acquisition Hotels' historical statement of
operations for the three months ended March 31, 1998.
(B) Represents the adjustments to present a statement of operations for the
eight hotels acquired by the Company and leased to the Prime Lessee during
1998 prior to their acquisition by the Company based on historical balances
of the previous owners. The combination of the historical statement of
operations presented in column (A) and the pro forma adjustments in column
(B) represent the results of operations of the eight Prime Group I
Acquisition Hotels as if all of the Prime Group I Acquisition Hotels were
acquired on January 1, 1997 and leased to the Prime Lessee pursuant to a
Participating Lease since that date.
(C) Represents historical room, food and beverage and other revenues of the
Prime Group I Acquisition Hotels.
(D) Represents the historical expenses of the Prime Group I Acquisition Hotels.
(E) 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 Group I Acquisition Hotels. The departmental thresholds in the
Participating Leases are seasonally adjusted for interim periods. The
Participating Lease payments for the Prime Group I Acquisition Hotels are
calculated by applying the rent provisions applicable in the first year of
the respective leases to the historical operating revenues of the hotels
prior to the acquisition by the Company.
<TABLE>
<CAPTION>
Excess of
Participating Total
Rent over Base Participating Rent
Base Rent Rent
------------------ -------------------- ---------------------
<S> <C> <C> <C>
Prime Group I Acquisition Hotels $ 3,382,139 $ 960,889 $ 4,343,028
================== ==================== =====================
</TABLE>
F-94
<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.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
June 19, 1998