<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 7, 1998
CAPSTAR HOTEL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 1-12017 52-1979383
- -------------------------------------------------------------------------------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
1010 Wisconsin Avenue, N.W.,
Suite 650
Washington, D.C. 20007
- -------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (202) 965-4455
Not applicable
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5. OTHER EVENTS
Attached hereto as Exhibits 99.1 and 99.2, respectively, are the financial
statements for MeriStar Hotels & Resorts, Inc. ("OpCo") as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, and the financial statements for American General Hospitality, Inc. as of
December 31, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
Exhibit
Number Description of Exhibit
- ------- ----------------------
99.1 Balance sheets as of December 31, 1997 and 1996, Statements of
Operations, Owners' Equity and Cash Flows for each of the years in
the three-year period ended December 31, 1997 for OpCo with
accompanying notes and Independent Auditors' Report.
99.2 Balance Sheets as of December 31, 1997 and 1996, Statements of
Operations, Stockholders' Equity and Cash Flows for each of the
years in the three-year period ended December 31, 1997 for
American General Hospitality, Inc. with accompanying notes and
Independent Auditors' Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: April 7, 1998
CAPSTAR HOTEL COMPANY
By: /s/ JOHN EMERY
------------------------
John Emery
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
99.1 Balance sheets as of December 31, 1997 and 1996, Statements of
Operations, Owners' Equity and Cash Flows for each of the years in
the three-year period ended December 31, 1997 for OpCo with
accompanying notes and Independent Auditors' Report.
99.2 Balance Sheets as of December 31, 1997 and 1996, Statements of
Operations, Stockholders' Equity and Cash Flows for each of the
years in the three-year period ended December 31, 1997 for
American General Hospitality, Inc. with accompanying notes and
Independent Auditors' Report.
<PAGE>
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapStar Hotel Company:
We have audited the accompanying combined balance sheets of the management
and leasing business of CapStar Hotel Company and subsidiaries ("OpCo") as of
December 31, 1997 and 1996 and the related combined statements of operations,
owners' equity and cash flows for each of the years in the three-year period
ended December 31, 1997. These combined financial statements are the
responsibility of OpCo's management. Our responsibility is to express an opinion
on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of OpCo as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
March 30, 1998
<PAGE>
OPCO
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,477 $ 305
Cash and cash equivalents held on behalf of affiliates 24,545 17,843
Accounts receivable, net of allowance for doubtful accounts
of $72 in 1997 and $33 in 1996 7,162 1,703
Prepaid expenses 1,097 777
Deposits, inventory and other 756 111
------- -------
Total current assets 36,037 20,739
Fixed assets:
Furniture, fixtures and equipment 2,701 726
Accumulated depreciation (418) (210)
------- -------
Total fixed assets, net 2,283 516
Investments in affiliates 8,058 1,926
Notes receivable 2,100 500
Intangible assets, net of accumulated amortization
of $719 in 1997 and $362 in 1996 35,941 685
------- -------
$84,419 $24,366
======= =======
LIABILITIES AND OWNERS' EQUITY
Current Liabilities:
Accounts payable $ 2,082 $ 543
Accrued expenses and other liabilities 8,532 1,282
Percentage lease payable 5,682 -
Due to affiliates, net 22,287 18,649
Advance deposits 146 -
Long-term debt, current portion 392 336
------- -------
Total current liabilities 39,121 20,810
Long-term debt 589 549
------- -------
Total liabilities 39,710 21,359
Commitments and contingencies
Minority interest 3,800 -
Owners' equity 40,909 3,007
------- -------
$84,419 $24,366
======= =======
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
OPCO
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- --------
<S> <C> <C> <C>
Revenue:
Leased hotels' operations:
Rooms $ 9,880 $ - $ -
Food and beverage 1,397 - -
Other operating departments 474 - -
Hotel management and other revenue 12,088 7,050 5,354
------- ------- -------
Total revenue 23,839 7,050 5,354
------- ------- -------
Leased hotels' operating expenses by department:
Rooms 2,533 - -
Food and beverage 909 - -
Other operating departments 261 - -
Undistributed operating expenses:
Administrative and general 10,473 6,140 4,745
Lease expense 4,135 - -
Property operating costs 1,917 - -
Depreciation and amortization 636 349 84
------- ------- -------
Total operating expenses 20,864 6,489 4,829
------- ------- -------
Net operating income 2,975 561 525
Equity in earnings of affiliates 46 - -
Interest expense 56 123 44
------- ------- -------
Income before minority interests 2,965 438 481
Minority interests 103 - -
------- ------- -------
Net income $ 2,862 $ 438 $ 481
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
OPCO
COMBINED STATEMENTS OF OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Capital contributions since
January 12, 1995 $ 398
Capital distributions (116)
Net income 481
--------
Balance, December 31, 1995
763
Capital contributions 1,806
Net income 438
--------
Balance, December 31, 1996 3,007
Capital contributions 35,040
Net income 2,862
--------
Balance, December 31, 1997 $ 40,909
========
</TABLE>
See accompanying notes to the combined financial statements.
<PAGE>
OPCO
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Net income $ 2,862 $ 438 $ 481
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 636 349 84
Equity in earnings of affiliates (46) - -
Minority interests 103 - -
Changes in operating assets and liabilities:
Accounts receivable, net (5,459) (412) (1,290)
Prepaid expenses (320) (724) (11)
Deposits, Inventory and other (645) (111) -
Cash and cash equivalents held on behalf of affiliates (6,702) (17,843) -
Accounts payable 1,539 276 267
Due to affiliates, net 3,638 18,344 305
Accrued expenses and other liabilities 7,250 909 372
Percentage lease payable 1,463 - -
Advance deposits 146 - -
-------- -------- --------
Net cash provided by operating activities 4,465 1,226 208
-------- -------- --------
Investing activities:
Purchases of fixed assets (2,046) (382) (61)
Purchases of intangible assets (924) (824) -
Investments in affiliates (2,078) (150) -
Distributions from investments in affiliates 147 30 -
Additions to notes receivable (1,600) (500) -
-------- -------- --------
Net cash used in investing activities (6,501) (1,826) (61)
-------- -------- --------
Financing activities:
(Principal payments on) proceeds from long-term debt, net 96 662 (38)
Capital contributions 4,112 - 250
Capital distributions - - (116)
Loan from (repayments to) affiliate - (950) 950
Repayments from (loans to) management - 987 (987)
-------- -------- --------
Net cash provided by financing activities 4,208 699 59
-------- -------- --------
Net increase in cash and cash equivalents 2,172 99 206
Cash and cash equivalents, beginning of year 305 206 -
-------- -------- --------
Cash and cash equivalents, end of year $ 2,477 $ 305 $ 206
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
OPCO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1. ORGANIZATION
CapStar Hotel Company and its subsidiaries ("CapStar") was formed pursuant
to certain formation transactions prior to or on August 20, 1996. Prior to its
August 20, 1996 initial public offering (the "IPO"), CapStar's business was
conducted through its predecessor entities, EquiStar Hotel Investors, L.P. and
subsidiaries (collectively, "EquiStar") and CapStar Management Company, L.P.
("CMC").
The principal activity of CapStar is to acquire, renovate, reposition and
manage upscale, full-service hotels. CapStar also leases and manages certain
other hotels. CapStar owns, leases and manages hotels through its two operating
partnerships: CMC and CapStar Management Company II, L.P. ("CMC II"). Separate
wholly-owned limited liability companies or limited partnerships directly own
the hotels and leases. The owned, leased and managed hotels are located in 29
states, the District of Columbia, the U.S. Virgin Islands and Canada, and are
operated under various franchise agreements.
OpCo is comprised of the assets, liabilities, and related operations
(collectively "OpCo") associated with the hotel management and leasing business
of CapStar, and certain hotel ownership investments of CapStar which are
directly owned by certain CapStar subsidiaries, as follows:
-the hotel management business and certain investments in affiliates owned
by CMC;
-the hotel management business and 38 hotel leases owned by CapStar Winston
Company, LLC "CapStar Winston" which was purchased by CapStar in 1997;
-the hotel lease and investment in BoyStar Ventures, L.P. owned by CapStar
BK Company, LLC "CapStar BK" which was purchased by CapStar in 1997; and
-the investment in CapStar Wyandotte Company, LLC owned by CapStar KC
Company, LLC "CapStar KC" which was purchased by CapStar in 1997.
-the investment in Ballston Parking Associates owned by CapStar Virginia
Company, LLC "CapStar Virginia" which was purchased by CapStar in 1996.
The following table outlines OpCo's portfolio of managed and leased hotels:
<TABLE>
<CAPTION>
CapStar Hotels Third Party Managed Leased Hotels Total
Managed Hotels
--------------------- --------------------- -------------------- ---------------------
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 47 12,019 27 4,631 40 5,687 114 22,337
December 31, 1996 19 5,166 28 4,619 - - 47 9,785
December 31, 1995 6 2,101 41 6,089 - - 47 8,190
</TABLE>
These financial statements present the financial position and operations of OpCo
as of December 31, 1997 and 1996, and for each of the years in the three-year
period ended December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination- The combined financial statements include the
operations of CMC, CapStar Winston, CapStar BK, CapStar KC, and CapStar
Virginia, as described above. All significant intercompany transactions and
balances have been eliminated in the combination.
Investments in affiliates in which OpCo holds a voting interest of 50% or
less and exercises significant influence are accounted for using the equity
method. OpCo uses the cost method to account for its investment in an entity in
which it does not have the ability to exercise significant influence.
<PAGE>
Cash and Cash Equivalents-- OpCo considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
OpCo invests excess cash balances on behalf of the CapStar-owned hotels it
manages. This cash is recorded as cash and cash equivalents held on behalf of
affiliates with the offsetting liability recorded in due to affiliates, net.
Fixed Assets- Fixed assets are recorded at cost and are depreciated using
the straight-line method over lives ranging from five to seven years.
Intangible Assets- Intangible assets consist of the value of goodwill and
lease contracts purchased, organization and franchise costs, and costs incurred
to obtain management contracts. Goodwill represents the excess of cost over the
fair value of the net assets of the acquired businesses. Intangible assets are
amortized on a straight-line basis over the estimated useful lives of the
underlying assets ranging from five to 40 years.
The carrying values of long-lived intangible assets, which include fixed
assets and all intangible assets, are evaluated periodically in relation to the
operating performance and expected future undiscounted cash flows of the
underlying assets. Adjustments are made if the sum of expected future
undiscounted net cash flows is less than book value. No impairment losses were
recorded during 1997, 1996 or 1995.
Income Taxes- No provision is made for income taxes as the operations of
OpCo are directly owned by a partnership and four limited liability companies,
and therefore, any such liability is the liability of the partners and members.
Revenue Recognition- Revenue is earned through the operation and management
of the hotel properties and is recognized when earned.
Minority Interests- Minority interests represent OpCo's proportionate share
of the value of operating partnership units ("OP Units") of CMC and CMC II
issued to third parties in conjunction with CapStar's purchases of certain
hotels and CapStar Winston.
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.
3. INVESTMENTS IN AFFILIATES
OpCo has ownership interests in certain corporate joint ventures and affiliated
companies. OpCo's investments in affiliates are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
OWNERSHIP INTEREST 1997 1996
------------ -----------
<S> <C> <C> <C>
CapStar Wyandotte Company LLC 50% $ 3,023 $ -
HGI Holdings, LLC 1,895 -
BoyStar Ventures, L.P. 9% 1,175 -
Ballston Parking Associates 36% 1,629 1,776
Other 336 150
----------- -----------
$ 8,058 $ 1,926
=========== ===========
</TABLE>
<PAGE>
3. INVESTMENTS IN AFFILIATES (CONTINUED)
Combined summarized financial information of OpCo's investments in
affiliates accounted for using the equity method as of and for the years ended
December 31, 1997 and 1996 is as follows:
1997 1996
-------- -----
Balance Sheet data:
Current assets $ 1,773 34
Non-current assets 32,766 5,469
Current liabilities 1,094 --
Non-current liabilities 7,000 --
Operating data:
Revenue $ 1,742 589
Net income (loss) (110) 141
4. NOTES RECEIVABLE
Notes receivable consists of the following:
DECEMBER 31,
1997 1996
---------- ----------
Loans to managed hotels $ 2,000 $ 500
Other 100 -
---------- ----------
$ 2,100 $ 500
========== ==========
In the normal course of business, OpCo makes interest bearing loans to
certain managed hotels and other affiliates. These loans generally require
monthly payments of interest. Of the outstanding notes receivable at December
31, 1997 and 1996, $900 and $0, respectively, of the balances are secured by a
second mortgage on a certain hotel; $250 and $500 of the balances, respectively,
are guaranteed by third parties; and $950 and $0, respectively, is unsecured.
The loans bear interest at market rates between 8% and 9%. The loans to managed
hotels mature between 2001 and 2007 while loans to other affiliates are payable
on 30 days notice. OpCo earned interest income on these loans of $82 and $11
during 1997 and 1996, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
1997 1996
------------ -----------
Goodwill $27,605 $ -
Lease contracts 6,576 -
Organization costs 897 897
Management contracts 867 150
Other 715 -
------------ -----------
36,660 1,047
Less accumulated amortization (719) (362)
------------ -----------
$35,941 $ 685
============ ===========
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
1997 1996
-------------------------
Note payable........................................ $ 855 $ 665
Capital leases...................................... 126 220
----- -----
981 885
Less current portion................................ (392) (336)
----- -----
$ 589 $ 549
===== =====
Note Payable- In June 1996, OpCo entered into a note payable to finance
liability insurance premiums. This note was amended in December 1997 to increase
the principal balance. The principal balance was changed to $887 and the
maturity date was extended to May 2000. The note accrues interest at an annual
rate of 6.4% and requires monthly payments of principal and interest. OpCo
incurred interest expense of $33 and $19 during 1997 and 1996, respectively.
Capital Leases- OpCo has entered into various capital leases for office
equipment which expire between 1998 and 2000. The leases require monthly
payments of principal and interest. Interest rates on the leases range from 6.4%
to 13.3%. The Company incurred interest expense on the leases of $23 in 1997,
$28 in 1996, and $18 in 1995.
Future Maturities- Aggregate future maturities of the above obligations are as
follows:
1998............................................. $392
1999............................................. 417
2000............................................. 172
-----
$981
=====
During 1996 and 1995, OpCo incurred interest expense of $76 and $26,
respectively, on the note payable to an affiliate of OpCo.
7. RELATED-PARTY TRANSACTIONS
OpCo manages hotels owned by CapStar. Hotel management revenue associated
with these hotels was $7,238, $2,625 and $917 during 1997, 1996 and 1995,
respectively. Management believes these contracts are at prevailing market
rates. In the normal course of business, OpCo manages cash on behalf of CapStar
and its owned hotels and advances and receives amounts on behalf of CapStar and
its owned hotels. At December 31, 1997 and 1996, the net amount due to CapStar
and its owned hotels was $24,545 and $17,843, respectively.
OpCo also manages hotels that are owned in part by affiliates or officers
of CapStar. Hotel management revenue associated with these hotels was $943, $824
and $1,104 during 1997, 1996 and 1995, respectively. At December 31, 1997, 1996
and 1995, the amount due from these properties related to hotel management fees
was $798, $304 and $237, respectively. Management believes these contracts are
at prevailing market rates.
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
OpCo leases certain hotels under non-cancelable operating leases with
initial terms ranging from 5 to 15 years, expiring through 2012. OpCo also
leases corporate office space. Future minimum lease payments required under
these operating leases as of December 31, 1997 were as follows:
1998 $ 20,533
1999 20,728
2000 20,653
2001 20,674
2002 20,701
Thereafter 189,757
------------
$ 293,046
============
In connection with the CapStar Winston hotel leases, CapStar has guaranteed
certain lease obligations of OpCo. CapStar was contingently liable for lease
guarantees on 38 of the hotel leases aggregating up to a maximum of
approximately $20 million at December 31, 1997. In addition, two other hotel
leases are secured by CapStar BK's and CapStar KC's pledges of their interests
in the affiliate companies that own those leased hotels. OpCo knows of no event
of default that would require either CapStar, CapStar Winston, CapStar BK, or
CapStar KC to satisfy these guarantees or pledges of security interests.
OpCo operates and manages 27 hotels owned by third parties containing 4,631
rooms. OpCo's management agreements (the "Management Agreements") have remaining
terms ranging from one month to nine years. Substantially all of the Management
Agreements permit the hotel owners to terminate such agreements prior to the
stated expiration dates if the applicable hotel is sold, and several of the
Management Agreements permit the hotel owners to terminate such agreements prior
to the stated expiration date without cause or by reason of the failure of the
applicable hotel to obtain specified levels of performance.
In the course of OpCo's normal business activities, various lawsuits,
claims and proceedings have been or may be instituted or asserted against OpCo.
Based on currently available facts, management believes that the disposition of
matters that are pending or asserted will not have a material adverse effect on
the combined financial position, results of operations or liquidity of OpCo.
<PAGE>
9. ACQUISITIONS
In November 1997, CapStar acquired substantially all of the assets of
Winston Hospitality, Inc. ("Winston") for a purchase price of $34,000 and
contributed the assets to OpCo. Winston leased 38 and managed 28 of the
operating hotels of Winston Hotels, Inc., a real estate investment trust. The
acquisition of Winston has been accounted for as a purchase and, accordingly,
the operating results of Winston have been included in OpCo's combined financial
statements since the date of acquisition. The excess of the aggregate purchase
price over the fair market value of net identifiable assets acquired was
approximately $27,605 and is being amortized over 40 years.
The following unaudited pro forma summary presents information as if
Winston had been acquired at the beginning of the periods presented. The pro
forma information is provided for informational purposes only. It is based on
historical information and does not necessarily reflect the actual results that
would have occurred nor is it necessarily indicative of future results of
operations of OpCo.
PRO FORMA INFORMATION (UNAUDITED)
1997 1996
------------- --------------
Total revenue $ 94,911 $ 68,895
Net income before minority interest 3,991 253
Net income 3,698 235
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the OpCo's quarterly results of operations:
<TABLE>
<CAPTION>
1997
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue................... $1,838 $2,816 $4,794 $14,391
Total operating expenses........ 1,390 2,129 3,911 13,434
Net operating income............ 448 687 883 957
Net income...................... 424 650 861 927
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue................... $1,158 $1,812 $1,982 $2,098
Total operating expenses........ 1,066 1,668 1,824 1,931
Net operating income............ 92 144 158 167
Net income...................... 72 113 123 130
</TABLE>
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid for interest $ 56 $ 138 $ 18
Assets contributed (liabilities assigned) to OpCo:
Percentage lease payable $ (4,219) $ - $ -
Investments in affiliates 4,155 1,806 -
Intangible assets 34,689 - -
Non-cash investing and financing activities:
Capital contributions by owners $ 30,928 $ 1,806 $ 148
Minority interests 3,697 - -
Additions to equipment through capital leases - - 261
</TABLE>
<PAGE>
12. SUBSEQUENT EVENTS
On March 15, 1998, CapStar and American General Hospitality Corporation
signed a definitive agreement to merge. As part of the merger, CapStar will
spin-off OpCo to its current shareholders as a C corporation to be called
MeriStar Hotels & Resorts, Inc. Subsequently, CapStar will merge into American
General Hospitality Corporation. The combined entity will be renamed MeriStar
Hospitality Corporation and will own 110 hotels with 27,739 rooms in 30 states
and Canada.
As a condition of the proposed merger, MeriStar Hotels & Resorts is to
acquire privately-held American General Hospitality, Inc. and AGH Leasing, L.P.,
which together currently operate and/or lease 46 of American General Hospitality
Corporation's 54 owned hotels and manage 15 additional properties for third
party owners. The aggregate purchase price for American General Hospitality,
Inc. and AGH Leasing, L.P. is $95 million, payable in a mixture of cash and
units of limited partnership interest. Upon completion of OpCo's spin-off and
acquisitions, MeriStar Hotels & Resorts will lease and manage 202 hotel in 31
states, 110 of which will be owned by MeriStar Hospitality Corporation.
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of American General Hospitality, Inc.
We have audited the accompanying balance sheets of American General Hospitality,
Inc. (the "Company") as of December 31, 1997 and 1996 and the related statements
of operations, stockholders' equity and cash flows for the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American General Hospitality,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Dallas, Texas
April 1, 1998
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------------ ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,900,176 $ 455,058
Accounts and management fees receivable 1,756,317 1,731,204
Accounts receivable, affiliates 167,621 103,574
Prepaid expenses 36,010 13,229
---------------- -----------------
Total current assets 3,860,124 2,303,065
Investments in property and equipment, at cost:
Furniture and equipment 1,155,220 522,696
Leasehold improvements 88,049 6,960
---------------- -----------------
1,243,269 529,656
Less accumulated depreciation 300,362 334,933
---------------- -----------------
Net investments in property and equipment 942,907 194,723
---------------- -----------------
Deposits 78,860 50
Goodwill, net of accululated amortization of $2,250 and
$2,000 as of December 31, 1997 and 1996, respectively 7,750 8,000
Other assets - 1,477
---------------- -----------------
Total assets $ 4,889,641 $ 2,507,315
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 77,499 $ 474,253
Accounts payable, affiliates 1,275,000 42,770
Accrued liabilities 2,795,477 1,268,895
Deferred revenue 48,699 148,586
---------------- -----------------
Total current liabilities 4,196,675 1,934,504
---------------- -----------------
Commitments and contingencies (Notes 3 and 5)
Stockholders' equity:
Common stock, $.01 par value, 100,00 shares
authorized, 600 shares issued
and outstanding 6 6
Additional paid-in capital 584,143 584,143
Retained earnings 108,817 (11,338)
---------------- -----------------
Total stockholders' equity 692,966 572,811
---------------- -----------------
Total liabilities and
stockholders' equity $ 4,889,641 $ 2,507,315
================ =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Management and consulting fee revenue $ 7,350,851 $ 9,818,069 $ 10,070,090
----------- ----------- -----------
Operating expenses:
Salaries and employee benefits 3,705,366 4,253,358 4,498,855
Professional fees 520,067 412,994 562,152
Rent and related expense 378,699 292,103 320,515
Travel and entertainment 69,328 114,110 397,740
General and administrative expenses 130,863 82,429 227,081
Office expenses 113,513 139,013 190,190
Advertising and promotion 29,127 36,813 50,135
----------- ----------- -----------
4,946,963 5,330,810 6,246,668
----------- ----------- -----------
Income before depreciation, amortization,
consulting fees and other income (expense) 2,403,888 4,487,259 3,823,422
----------- ----------- -----------
Consulting fees 2,227,077 3,979,446 4,056,477
Depreciation expense 123,927 101,891 93,974
Amortization expense 250 250 250
----------- ----------- -----------
2,351,254 4,081,587 4,150,701
----------- ----------- -----------
Income (loss) from operations 52,634 405,672 (327,279)
----------- ----------- -----------
Other income (expense):
Interest income 134,931 187,750 135,600
Other expense (67,410) -- (189,204)
----------- ----------- -----------
67,521 187,750 (53,604)
----------- ----------- -----------
Net income (loss) $ 120,155 $ 593,422 $ (380,883)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Additional Retained Total
Common Stock Paid-In Earnings Stockholders'
------------
Shares Amount Capital (Deficit) Equity
------ ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 600 $ 6 $ 584,143 $(223,877) $ 360,272
Net loss (380,883) (380,883)
------ ------ --------- --------- ---------
Balance, December 31, 1995 600 6 584,143 (604,760) (20,611)
Net income 593,422 593,422
------ ------ --------- --------- ---------
Balance, December 31, 1996 600 6 584,143 (11,338) 572,811
Net income 120,155 120,155
------ ------ --------- --------- ---------
Balance, December 31, 1997 600 $ 6 $ 584,143 $ 108,817 $ 692,966
====== ====== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $120,155 $593,422 $(380,883)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Amortization 250 250 250
Depreciation 123,927 101,891 93,974
Loss from disposition of assets 33,269 -- 36,425
Changes in assets and liabilities:
Accounts and management fees receivable (25,113) (980,292) (151,928)
Accounts receivable - affiliates (64,047) (35,071) 231,687
Prepaid expenses (22,781) 4,906 11,073
Deposits (78,810) (20) 54,750
Accounts payable (396,754) 152,191 (185,613)
Accounts payable - affiliates 1,232,230 -- (245,691)
Accrued liabilities 1,526,582 272,663 449,100
Deferred revenue (99,887) 89,169 59,417
--------- -------- --------
Net cash provided by (used in) operating 2,349,021 199,109 (27,439)
activities --------- -------- --------
Cash flows from investing activities:
Proceeds from sale of investment 1477 -- --
Loan to affiliates -- -- (25,000)
Proceeds from loans to affiliates - - 282,218
Purchase of property and equipment (916,746) (87,076) (167,160)
Proceeds from sale of furniture
and equipment 11,366 - -
----------- ---------- --------
Net cash provided by (used in)
investing activities (903,903) (87,076) 90,058
----------- ---------- --------
Net increase in cash and equivalents 1,445,118 112,033 62,619
Cash and equivalents at beginning
of year 455,058 343,025 280,406
----------- ---------- --------
Cash and equivalents at end of year $ 1,900,176 $ 455,058 $ 343,025
=========== ========== ========
</TABLE>
The accompanying notes are an integral part of theses financial statements.
<PAGE>
AMERICAN GENERAL HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
American General Hospitality, Inc. (the "Company"), a Texas
corporation, was incorporated in November 1988 and provides hotel
management and consulting services to hotels throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company
considers all certificates of deposit and debt instruments with
original maturities of three months or less to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it is
not exposed to any significant credit risk on cash and cash
equivalents.
Investments in Property and Equipment
Property and equipment consist of furniture, equipment, computer
equipment and leasehold improvements and are stated at cost.
Depreciation is provided by using the straight-line method over
estimated useful lives of five to seven years for furniture and
equipment and three years for leasehold improvements. This is
considered reasonable for financial reporting purposes and is not
materially different from estimated useful lives.
Maintenance and repairs are charged to operations as incurred; major
renewals and improvements are capitalized. Upon the sale or
disposition of a fixed asset, the asset and related accumulated
depreciation accounts are removed from the accounts and the related
gain or loss is included in operations.
Goodwill
Goodwill in the amount of $10,000 was recorded when the S
Corporation was originally formed in 1988. The goodwill is
being amortized using the straight line method over a 40 year period.
<PAGE>
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are
performed and an allowance for potential credit losses is provided
against the portion of accounts receivable which is estimated to be
uncollectible.
Advertising Cost
The Company participates in various advertising and marketing
programs. All advertising costs are expensed in the period incurred.
Concentrations of Risk
The Company places cash deposits at a major bank. At December 31,
1997, bank account balances exceed Federal Deposit Insurance
Corporation limits by approximately $2,330,000. Management believes
credit risk related to these deposits is minimal.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Income Taxes
The Company, with the consent of its shareholders, elected to be
treated as a small business corporation under Subchapter S of the
Internal Revenue Code. In this status, the Company is not a taxable
entity, and elements of income and expense flow through and are
taxed to the shareholders on an individual basis; therefore, no
provision or liability for income taxes is reflected in these
financial statements. The Company's tax returns and the
<PAGE>
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 shareholder could
be changed accordingly.
3. OPERATING LEASES:
During 1997, the Company entered into a sublease agreement with
Federal Home Loan Bank of Dallas to lease 18,668 square feet of
office space. The agreement requires monthly rental
payments of $28,780 and expires in September 2000. Federal Home
Loan Bank of Dallas lease from Crescent Real Estate Funding II, L.P.
The Company also has various equipment leases on office equipment
expiring in future years.
<PAGE>
Future minimum lease payments under these noncancelable lease agreements
are as follows:
Year Ended December 31,
Amount
-------------------
1998 $ 360,072
1999 360,072
2000 260,806
-------------------
$ 980,950
-------------------
4. EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) retirement plan and provides
discretionary matching contributions of 50% of eligible employees'
contributions, up to 6% of employee compensation. During 1997, 1996
and 1995, the Company contributed $26,033, $63,933 and $53,365 to
this plan, respectively.
The Company has an employee stock ownership plan which covers all
eligible employees meeting age and length of service requirements.
Under the terms of this plan, contributions are at the discretion of
the Board of Directors up to the maximum allowable for tax purposes.
During 1997, 1996 and 1995, the Company contributed $71,625, $98,255
and $94,814 in cash to this plan, respectively. This approximated 3%
of eligible employee compensation. No contributions of stock have
been made to the plan to date.
5. CONTINGENCIES:
The Company is a defendant in various litigation arising in the
ordinary course of its business. No provision for liability related
to this litigation has been recorded in the financial statements as
the Company believes that no material uninsured loss will result.
6. CONCENTRATIONS OF CREDIT RISK:
<PAGE>
Most of the Company's business activity is with or on behalf of the
hotels it manages across the United States, and substantially all of
the Company's trade and management fee receivables are from these
hotels. The Company employs all hotel employees for the properties
and is reimbursed by the property owners. At December 31, 1997,
there were approximately 7,500 employees.
7. RELATED PARTY TRANSACTIONS:
Accounts receivable-affiliates represents amounts due from
affiliates for property renovations, purchases, potential
investments, shared expenses and other advances.
Accounts payable-affiliates represents amounts due to affiliates for
advances.
During 1997, 1996 and 1995, the Company received fee revenue for
management, consulting and accounting services provided in the
amount of $866,969, $121,087 and $249,088, respectively, from
entities affiliated with the Company through common ownership.
In addition, the Company paid consulting fees of $2,227,077,
$3,979,446 and $4,056,477 during 1997, 1996 and 1995, respectively,
to an affiliated entity.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statements of Financial Accounting Standards No.107 requires all
entities to disclose the fair value of certain financial instruments
in their financial statements. Accordingly, the Company reports the
carrying amounts 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.
9. SUBSEQUENT EVENTS (UNAUDITED):
On March 15, 1998 American General Hospitality Corporation (the
"REIT") 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 and
form a "paper-clipped" REIT (the "Proposed Merger"). Accordingly, no
assurance can be given that the
<PAGE>
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 REIT, which will qualify as a
reorganization under Section 368 of the Internal Revenue Code of 1986,
as amended (the "Code"). The REIT 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 (an affiliate) and the
Company for $95 million, payable through the issuance of $11.2 million of
units of limited partnership interests of a subsidiary owned by
MeriStar Resorts and $83.8 million in cash, which is a condition to
closing the Proposed Merger.
The Merger Agreement defines the exchange ratios for both the REIT's
and CapStar's stockholders. CapStar stockholders will receive one
share each of MeriStar Hospitality Corporation and MeriStar Resorts
for each CapStar share owned. The REIT'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 REIT 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 REIT and Capstar. Prior to such
stockholder meetings, the REIT will file a registration statement
with the SEC registering under the Securities Act of 1933, as
amended, the shares of MeriStar Hospitality Corporation.
