-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QgDjHr3WeUIBYYUFbJ9fu9rBUCKEXq4MOmSDTP4AmgtPQb6JUPAlZGZjkQvIhYUo nE6mrnwTKgFPEZQ/rkhf2w== 0000912057-97-030096.txt : 19970912 0000912057-97-030096.hdr.sgml : 19970912 ACCESSION NUMBER: 0000912057-97-030096 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19970905 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19970908 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTAR HOTEL CO CENTRAL INDEX KEY: 0001014764 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521979383 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-12017 FILM NUMBER: 97676420 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 2029654455 MAIL ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 FORMER COMPANY: FORMER CONFORMED NAME: CAPSTAR HOTEL INVESTORS INC DATE OF NAME CHANGE: 19960517 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT FILED PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 5, 1997 CAPSTAR HOTEL COMPANY (Exact name of registrant as specified in its charter) DELAWARE 1-12017 52-1979383 (State or other jurisdiction (Commission File (IRS Employer of incorporation) Number) Identification Number)
1010 WISCONSIN AVENUE, N.W. SUITE 650 WASHINGTON, D.C. 20007 (Address of principal executive offices) Registrant's telephone number, including area code: (202) 965-4455 FORM 8-K ITEM 5. OTHER EVENTS For purposes of incorporating by reference into CapStar Hotel Company's (the "Company") Registration Statement on Form S-3 (File No. 333-34253) certain financial statements of hotels owned or under purchase contract by the Company required by Regulation S-X, attached hereto as Exhibits 99.1 through 99.15, are the following financial statements: Detroit Metro Airport Hilton Suites Hotel, Metrotown Hotel Limited Partnership (Holiday Inn Metrotown, Burnaby, British Columbia), Packwood Jekyll Limited Partnership (Jekyll Inn, Jekyll Island, GA), Embassy Suites Philadelphia, River Hotel, Ltd. I (Doubletree Hotel, Austin, TX), Chi-Town Partners, L.P. and St. Elmo's Partners, L.P. (Radisson Hotel & Suites, Chicago, IL; Georgetown Inn, Washington, D.C.), CapStar Tinton Falls, L.P. and CapStar Kansas City Partners, L.P. (Holiday Inn, Tinton Falls, NJ; Holiday Inn Sports Complex, Kansas City, MO), Highgate Portfolio, Westchase Holdings Ltd. (Westchase Hilton & Towers, Houston, TX), Ballston Hotel Limited Partnership (Arlington Hilton, Arlington, VA), Arlington Hilton (Arlington, TX), Georgetown Latham Hotel, Orange County Airport Hilton and Charlotte Sheraton Airport Plaza. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (c) Exhibits Exhibit Number 99.1 Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Statements of Operations, Owners' Equity and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for the Detroit Metro Airport Hilton Suites Hotel with accompanying notes and Independent Auditors' Report. 99.2 Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Statements of Operations, Partners' Capital and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for Metrotown Hotel Limited Partnership with accompanying notes and Independent Auditors' Report. 99.3 Comparative Balance Sheets as of December 31, 1996 and 1995, comparative Statements of Income (Loss), Cash Flows and Partners' Capital for the years ended December 31, 1996 and 1995 for Packwood Jekyll Limited Partnership with accompanying notes and Independent Auditors' Report. 99.4 Balance Sheet as of June 30, 1997 and Statements of Income (Loss), Cash Flows and Partners' Capital for the period ended June 30, 1997 for Packwood Jekyll Limited Partnership with accompanying notes and Accountants' Compilation Report. 99.5 Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Statements of Operations, Owners' Equity and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for the Embassy Suites Philadelphia with accompanying notes and Independent Auditors' Report. 99.6 Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Statements of Operations, Partners' Capital (Deficit) and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for River Hotel, Ltd. I with accompanying notes and Independent Auditors' Report.
1 99.7 Combined Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Combined Statements of Income, Partners' Capital and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for Chi-Town Partners, L.P. and St. Elmo's Partners, L.P. with accompanying notes and Report of Independent Accountants. 99.8 Combined Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996, Combined Statements of Operations, Partners' Capital and Cash Flows for the three months ended March 31, 1997 (unaudited) and the year ended December 31, 1996 for CapStar Tinton Falls, L.P. and CapStar Kansas City Partners, L.P. with accompanying notes and Independent Auditors' Report. 99.9 Combined Balance Sheet as of December 31, 1996, Combined Statements of Operations, Owners' Deficit and Cash Flows for the year ended December 31, 1996 for the Highgate Portfolio with accompanying notes and Independent Auditors' Report. 99.10 Combined Balance Sheet as of December 27, 1996, Combined Statements of Income, Owners' Deficit and Cash Flows for the year ended December 27, 1996 for Westchase Holdings Ltd. with accompanying notes and Independent Auditors' Report. 99.11 Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994, Statements of Operations, Partners' Deficit and Cash Flows for the six months ended June 30, 1996 and the year ended December 31, 1995, 1994 and 1993 for Ballston Hotel Limited Partnership with accompanying notes and Independent Auditors' Report. 99.12 Statements of Operations and Cash Flows for the period from January 1, 1996 to April 17, 1996 and the years ended December 31, 1995, 1994 and 1993 for the Arlington Hilton with accompanying notes and Independent Auditors' Report. 99.13 Statements of Operations and Cash Flows for the period from January 1, 1996 to March 8, 1996 and the years ended December 31, 1995, 1994 and 1993 for the Georgetown Latham with accompanying notes and Independent Auditors' Report. 99.14 Statements of Operations and Cash Flows for the period from January 1, 1996 to February 22, 1996 and the years ended December 31, 1995, 1994 and 1993 for the Orange County Airport Hilton with accompanying notes and Independent Auditors' Report. 99.15 Statements of Operations and Cash Flows for the period from January 1, 1996 to February 2, 1996 and the years ended December 31, 1995, 1994 and 1993 for the Charlotte Sheraton Airport Plaza with accompanying notes and Independent Auditors' Report.
2 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 hereto duly authorized. Date: September 5, 1997 CAPSTAR HOTEL COMPANY By: /s/ JOHN EMERY ----------------------------------------- John Emery Chief Financial Officer
3 EXHIBIT INDEX
EXHIBIT NUMBER - --------- 99.1 Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Statements of Operations, Owners' Equity and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for the Detroit Metro Airport Hilton Suites Hotel with accompanying notes and Independent Auditors' Report. 99.2 Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Statements of Operations, Partners' Capital and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for Metrotown Hotel Limited Partnership with accompanying notes and Independent Auditors' Report. 99.3 Comparative Balance Sheets as of December 31, 1996 and 1995, Comparative Statements of Income (Loss), Cash Flows and Partners' Capital for the years ended December 31, 1996 and 1995 for Packwood Jekyll Limited Partnership with accompanying notes and Independent Auditors' Report. 99.4 Balance Sheet as of June 30, 1997 and Statements of Income (Loss), Cash Flows and Partners' Capital for the period ended June 30, 1997 for Packwood Jekyll Limited Partnership with accompanying notes and Accountants' Compilation Report. 99.5 Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Statements of Operations, Owners' Equity and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for the Embassy Suites Philadelphia with accompanying notes and Independent Auditors' Report. 99.6 Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Statements of Operations, Partners' Capital (Deficit) and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for River Hotel, Ltd. I with accompanying notes and Independent Auditors' Report. 99.7 Combined Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996, Combined Statements of Income, Partners' Capital and Cash Flows for the six months ended June 30, 1997 (unaudited) and the year ended December 31, 1996 for Chi-Town Partners, L.P. and St. Elmo's Partners, L.P. with accompanying notes and Report of Independent Accountants. 99.8 Combined Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996, Combined Statements of Operations, Partners' Capital and Cash Flows for the three months ended March 31, 1997 (unaudited) and the year ended December 31, 1996 for CapStar Tinton Falls, L.P. and CapStar Kansas City Partners, L.P. with accompanying notes and Independent Auditors' Report. 99.9 Combined Balance Sheet as of December 31, 1996, Combined Statements of Operations, Owners' Deficit and Cash Flows for the year ended December 31, 1996 for the Highgate Portfolio with accompanying notes and Independent Auditors' Report. 99.10 Combined Balance Sheet as of December 27, 1996, Combined Statements of Income, Owners' Deficit and Cash Flows for the year ended December 27, 1996 for Westchase Holdings Ltd. with accompanying notes and Independent Auditors' Report. 99.11 Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994, Statements of Operations, Partners' Deficit and Cash Flows for the six months ended June 30, 1996 and the year ended December 31, 1995, 1994 and 1993 for Ballston Hotel Limited Partnership with accompanying notes and Independent Auditors' Report.
4 99.12 Statements of Operations and Cash Flows for the period from January 1, 1996 to April 17, 1996 and the years ended December 31, 1995, 1994 and 1993 for the Arlington Hilton with accompanying notes and Independent Auditors' Report. 99.13 Statements of Operations and Cash Flows for the period from January 1, 1996 to March 8, 1996 and the years ended December 31, 1995, 1994 and 1993 for the Georgetown Latham with accompanying notes and Independent Auditors' Report. 99.14 Statements of Operations and Cash Flows for the period from January 1, 1996 to February 22, 1996 and the years ended December 31, 1995, 1994 and 1993 for the Orange County Airport Hilton with accompanying notes and Independent Auditors' Report. 99.15 Statements of Operations and Cash Flows for the period from January 1, 1996 to February 2, 1996 and the years ended December 31, 1995, 1994 and 1993 for the Charlotte Sheraton Airport Plaza with accompanying notes and Independent Auditors' Report.
5 EX-99.1 2 EX-99.1 EXHIBIT 99.1 INDEPENDENT AUDITORS' REPORT The Board of Directors CapStar Hotel Company: We have audited the accompanying balance sheet of the Detroit Metro Airport Hilton Suites Hotel (the Hotel) as of December 31, 1996, and the related statements of operations, changes in owner's equity, and cash flows for the year then ended. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Detroit Metro Airport Hilton Suites Hotel as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Detroit, MI July 25, 1997 1 DETROIT METRO AIRPORT HILTON SUITES HOTEL BALANCE SHEETS JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
JUNE 30, DECEMBER 31, 1997 1996 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash............................................................................... $ 183,085 339,386 Guest and trade receivables, including allowances for uncollectible accounts of $50, 525 (unaudited) and $50,525, respectively................................... 337,244 240,033 Inventories........................................................................ 52,530 36,165 Prepaid expenses................................................................... 50,313 49,837 Property taxes and other deposits.................................................. 87,764 34,417 ------------ ------------ Total current assets............................................................. 710,936 699,838 ------------ ------------ Hotel property and equipment, at cost: Land and improvements.............................................................. 800,000 800,000 Building........................................................................... 3,200,000 3,200,000 Furniture and equipment............................................................ 896,368 896,368 ------------ ------------ 4,896,368 4,896,368 Less accumulated depreciation...................................................... 855,379 748,319 ------------ ------------ Net property and equipment....................................................... 4,040,989 4,148,049 ------------ ------------ Total assets..................................................................... $ 4,751,925 4,847,887 ------------ ------------ ------------ ------------ LIABILITIES AND OWNER'S EQUITY Current liabilities: Bank overdraft..................................................................... $ 0 14,819 Accounts payable................................................................... 700 19,106 Accrued expenses and other liabilities............................................. 202,738 177,998 Current portion of long-term debt.................................................. 90,000 90,000 ------------ ------------ Total current liabilities........................................................ 293,438 301,923 ------------ ------------ Long-term debt, excluding current installments....................................... 3,314,302 3,362,590 ------------ ------------ Owner's equity....................................................................... 1,144,185 1,183,374 ------------ ------------ Total liabilities and owner's equity............................................. $ 4,751,925 4,847,887 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. 2 DETROIT METRO AIRPORT HILTON SUITES HOTEL STATEMENTS OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1996
1997 1996 ------------ ---------- (UNAUDITED) Revenues: Rooms................................................................................ $ 1,937,887 3,752,097 Food and beverage.................................................................... 536,388 1,143,622 Other operating departments.......................................................... 67,736 146,907 ------------ ---------- 2,542,011 5,042,626 ------------ ---------- Operating costs and expenses: Rooms................................................................................ 503,763 906,181 Food and beverage.................................................................... 473,694 918,029 Other operating departments.......................................................... 59,699 127,669 Undistributed operating expenses: Administrative and general........................................................... 217,402 416,328 Sales and marketing.................................................................. 136,258 242,744 Franchise fees....................................................................... 114,042 221,502 Property operating costs............................................................. 267,938 470,854 Property taxes, insurance and other.................................................. 122,268 234,452 Depreciation......................................................................... 107,060 215,707 Interest............................................................................. 152,602 305,665 ------------ ---------- 2,154,726 4,059,131 ------------ ---------- Net income......................................................................... $ 387,285 983,495 ------------ ---------- ------------ ----------
See accompanying notes to financial statements. 3 DETROIT METRO AIRPORT HILTON SUITES HOTEL STATEMENTS OF CHANGES IN OWNER'S EQUITY FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1996 Balance, December 31, 1995...................................................... $1,000,062 Distributions................................................................... (800,183) Net income...................................................................... 983,495 --------- Balance, December 31, 1996...................................................... 1,183,374 Distributions (unaudited)....................................................... (426,474) Net income (unaudited).......................................................... 387,285 --------- Balance, June 30, 1997 (unaudited).............................................. $1,144,185 --------- ---------
See accompanying notes to financial statements. 4 DETROIT METRO AIRPORT HILTON SUITES HOTEL STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1996
1997 1996 ----------- ------------ (UNAUDITED) Cash flows from operating activities: Net income........................................................................... $ 387,285 983,495 ----------- ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation..................................................................... 107,060 215,707 Bad debt expense................................................................. 0 45,000 Changes in assets and liabilities: Guest and trade receivables.................................................... (97,211) (94,070) Inventories.................................................................... (16,365) (2,945) Prepaid expenses............................................................... (476) 8,276 Property taxes and other deposits.............................................. (53,347) 71,496 Accounts payable............................................................... (18,406) (6,475) Bank overdraft................................................................. (14,819) (83,884) Accrued expenses and other liabilities......................................... 24,740 83,874 ----------- ------------ Net cash provided by operating activities.................................... 318,461 1,220,474 ----------- ------------ Cash flows from investing activities: Capital expenditures................................................................. 0 (79,473) ----------- ------------ Net cash used in investing activities........................................ 0 (79,473) ----------- ------------ Cash flows from financing activities: Distribution to owner................................................................ (426,474) (800,183) Principal payments on long-term debt................................................. (48,288) (88,377) ----------- ------------ Net cash used in financing activities........................................ (474,762) (888,560) ----------- ------------ Increase (decrease) in cash............................................................ (156,301) 252,441 Cash at beginning of period............................................................ 339,386 86,945 ----------- ------------ Cash at end of period.................................................................. $ 183,085 339,386 ----------- ------------ ----------- ------------ Cash paid for interest................................................................. $ 152,602 305,665 ----------- ------------ ----------- ------------
See accompanying notes to financial statements. 5 DETROIT METRO AIRPORT HILTON SUITES HOTEL NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 (1) ORGANIZATION The Detroit Metro Airport Hilton Suites Hotel (the Hotel) is located near the Detroit Metro Airport in Detroit, Michigan. The Hotel opened in 1989 and has been operated under a franchise agreement with Hilton Inns, Inc. The Hotel has 151 suites, an indoor pool and jacuzzi, an outdoor pool, a fitness center, a game room, and laundry facilities. Each suite has separate bedrooms and living areas; a microwave, refrigerator, and coffee maker; two remote control televisions; and a video cassette player. The dining facilities include the Hilton's Deli Cafe. The Hotel has approximately 4,400 square feet of meeting space. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel are included in the financial records of Mr. and Mrs. Soung Hong (the Hong's). The accompanying balance sheets and statements of operations, owner's equity and cash flows include the accounts of the Hotel only as if it were a separate legal entity, and have been prepared using the accrual method of accounting. The balance sheet as of June 30, 1997, and the statements of operations, changes in owner's equity, and cash flows for the six-month period then ended are unaudited. However, in the opinion of management, these financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for fair presentation of the Hotel's financial position. The results and operations for the unaudited six-month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the entire year. HOTEL PROPERTY AND EQUIPMENT Hotel property and equipment is recorded at cost. Depreciation is computed on the cost of hotel property and equipment using the straight-line method over 31.5 years for the building and 5 to 7 years for the furniture and equipment. Management periodically evaluates the potential permanent impairment of the net carrying value of the Hotel. If the net carrying value of the Hotel exceeds its fair value, the excess is charged to operations. No impairment losses were recorded in 1997 or 1996. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the Hotel and recognized when earned. 6 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY TAXES AND DEPOSITS In accordance with the loan agreement, the Hotel must make monthly payments to escrow accounts for a replacement reserve, real estate taxes, and insurance. The replacement reserve contributions are made as a percentage of room revenues on a monthly basis. INCOME TAXES The financial statements contain no provision for income taxes since the Hotel was owned by individuals and, therefore, all income tax liabilities were passed through to the individuals in accordance with the Internal Revenue Code. 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) TRANSACTIONS WITH RELATED PARTIES The Hotel is managed by the Rainier Group of Michigan (Rainier), an affiliate of the owners. No management agreement exists between the Hotel and Rainier. Rainier leases the Hotel from the Hong's and pays $40,000 per month in rent, which has been eliminated in the preparation of these financial statements. (4) LONG-TERM DEBT The Hotel is financed with a mortgage payable from a bank. The interest rate floats based on the lender's prime plus 2% and was 8.5% at December 31, 1996 and June 30, 1997, respectively. The term of the loan is seven years with principal and interest payments paid monthly based upon a 25-year amortization schedule. The unpaid principal balance plus accrued interest is due in full upon maturity in 1999. 7 EX-99.2 3 EX-99.2 EXHIBIT 99.2 INDEPENDENT AUDITORS' REPORT Board of Directors Capstar Hotel Company: We have audited the accompanying balance sheet of Metrotown Hotel Limited Partnership 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 Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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 Metrotown Hotel Limited Partnership as of December 31, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. KPMG Chartered Accountants Montreal, Canada August 27, 1997 1 METROTOWN HOTEL LIMITED PARTNERSHIP BALANCE SHEETS JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
1997 1996 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash................................................................................ $ 219,675 $ 171,000 Receivables......................................................................... 64,333 64,005 Inventories......................................................................... 43,075 43,152 Prepaid expenses.................................................................... 71,775 11,787 ------------ ------------ 398,858 289,944 ------------ ------------ Property and equipment (note 2)....................................................... 5,126,305 5,329,782 ------------ ------------ $ 5,525,163 $ 5,619,726 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable and accrued expenses............................................... $ 339,004 $ 351,816 Long-term debt (note 3)............................................................... -- 2,790,340 ------------ ------------ Total liabilities............................................................... 339,004 3,142,156 Partners' capital..................................................................... 5,186,159 2,477,570 ------------ ------------ $ 5,525,163 $ 5,619,726 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. 2 METROTOWN HOTEL LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1996
1997 1996 ------------ ------------ (UNAUDITED) Revenue: Rooms............................................................................... $ 1,135,473 $ 2,348,211 Food and beverage................................................................... 881,911 1,720,380 Other operating departments......................................................... 22,218 49,127 Other income........................................................................ 5,973 36,465 ------------ ------------ 2,045,575 4,154,183 Operating costs and expenses: Rooms............................................................................... $ 322,583 $ 724,395 Food and beverage................................................................... 643,711 1,436,832 Other operating departments......................................................... 12,550 28,517 Undistributed operating expenses: General and administrative.......................................................... 559,127 1,251,276 Management fees..................................................................... 61,342 125,061 Franchise fees...................................................................... 35,118 70,125 Depreciation........................................................................ 134,896 320,295 Interest on long-term debt.......................................................... 18,274 188,245 ------------ ------------ 1,787,601 4,144,746 ------------ ------------ Net income............................................................................ $ 257,974 $ 9,437 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. 3 METROTOWN HOTEL LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1996 Balance at January 1, 1996...................................................... $2,584,041 Distributions................................................................... (108,203) Net income...................................................................... 9,437 Translation adjustments......................................................... (7,705) --------- Balance at December 31, 1996.................................................... 2,477,570 Contributions (unaudited)....................................................... 2,769,060 Distributions (unaudited)....................................................... (255,045) Net income (unaudited).......................................................... 257,974 Translation adjustments (unaudited)............................................. (63,400) --------- Balance at June 30, 1997........................................................ $5,186,159 --------- ---------
See accompanying notes to financial statements. 4 METROTOWN HOTEL LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1996
1997 1996 ----------- ---------- (UNAUDITED) Cash provided by (used in): Operations: Income for the year................................................................... $ 257,974 $ 9,437 Add (deduct): Item not affecting working capital: Depreciation.................................................................... 134,896 320,295 Net changes in non-cash working capital balances relating to operations: Receivables..................................................................... (1,357) (1,281) Inventories..................................................................... (617) 6,606 Prepaid expenses................................................................ (60,178) (3,929) Accounts payable and accrued liabilities........................................ (7,158) (53,723) ----------- ---------- 323,560 277,405 Financing: Contributions from Limited Partner.................................................... 2,769,060 -- Remittances to Limited Partner........................................................ (255,045) (108,203) Principal repayment of loan payable................................................... (2,769,060) (46,693) ----------- ---------- (255,045) (154,896) Investment: Additions to property and equipment................................................... (16,056) (77,754) Effect of exchange rate changes......................................................... (3,784) 824 ----------- ---------- Increase (decrease) in cash during the year............................................. 48,675 45,579 Cash, beginning of year................................................................. 171,000 125,421 ----------- ---------- Cash, end of year....................................................................... $ 219,675 $ 171,000 ----------- ---------- ----------- ---------- Cash paid for interest.................................................................. $ 18,274 $ 188,245 ----------- ---------- ----------- ----------
See accompanying notes to financial statements. 5 METROTOWN HOTEL LIMITED PARTNERSHIP Notes to Financial Statements June 30, 1997 (Unaudited) and December 31, 1996 The Limited Partnership was formed on January 1, 1987, under the laws of the Province of British Columbia and owns and operates the Holiday Inn Metrotown, a Hotel located in Burnaby, British Columbia. (1) SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation: The financial statements have been prepared using the accrual basis of accounting. These financial statements have been translated from Canadian to US dollars. The assets and liabilities were translated at exchange rates prevailing at the balance sheet dates. Income and expenses were translated at average exchange rates prevailing during the corresponding periods. Gains or losses on translation are included in partners' capital. (b) Inventories: Inventories of food, beverage and supplies are valued at the lower of cost, as determined on a first in, first out basis, and replacement cost. (c) Property and equipment: Buildings are carried at cost. Depreciation is provided on a declining balance basis over the estimated useful life of 25 years. Furnishings and equipment are carried at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of 10 to 15 years. Furnishings and equipment include the value of linen, cutlery, glassware and similar supplies in use at the hotel. The hotel depreciates 50% of the cost of these items on a straight-line basis during the first sixty months of their use. The remaining 50% of the cost of these items is not depreciated and replacements are charged to expense. (d) Use of estimates: Management has made a number of estimates and assumptions related to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (e) Income taxes: The financial statements contain no provision for federal income taxes since the Limited Partnership's income, losses, deductions, and credits for tax purposes are reported on the income tax returns of the partners. 6 METROTOWN HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PROPERTY AND EQUIPMENT:
1997 1996 ------------ ------------ ACCUMULATED NET BOOK NET BOOK COST DEPRECIATION VALUE VALUE ------------ ------------ ------------ ------------ (UNAUDITED) Property................................................. $ 768,018 $ -- $ 768,018 $ 780,560 Buildings................................................ 4,929,652 1,377,932 3,551,720 3,682,665 Furnishings and equipment................................ 1,633,722 827,155 806,567 866,557 ------------ ------------ ------------ ------------ $ 7,331,392 $ 2,205,087 $ 5,126,305 $ 5,329,782 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Management periodically evaluates the potential permanent impairment of the net carrying value of the hotel. If the net carrying value of the hotel exceeds its fair value, the excess is charged to operations. No impairment losses were recorded in 1997 or 1996. 3. LONG-TERM DEBT:
1997 1996 ------------ ------------ (UNAUDITED) $2,790,340 (Cdn$3,800,000) mortgage on the hotel property, bearing interest at a fixed rate of 6.469%, entirely repayable upon maturity in February 1997 and guaranteed by the Limited Partnership, the general partner Metrotown Hotel Inc. and the Limited Partner............................................................................. $ -- $ 2,790,340 ------------ ------------
Subsequent to December 31, 1996, the Limited Partner, on behalf of the Limited Partnership, repaid the long-term debt. 4. RELATED PARTY TRANSACTIONS: The hotel incurred the following expenses with related parties:
1997 1996 --------- ---------- (UNAUDITED) Management fees to Limited Partner......................................................... $ 51,430 $ 165,518 Rental fees to Limited Partner............................................................. 20,470 35,198 Interest paid on loan payable to Limited Partner........................................... -- 2,825 --------- ----------
5. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES: The Limited Partnership has determined that the carrying value of its short-term financial assets and liabilities approximate fair values as at June 30, 1997 (unaudited) and December 31, 1996 because of the short-term maturity of those instruments. 7 EX-99.3 4 EX-99.3 EXHIBIT 99.3 INDEPENDENT AUDITORS' REPORT To The Partners Packwood Jekyll Limited Partnership We have audited the accompanying comparative balance sheets of Packwood Jekyll Limited Partnership as of December 31, 1996 and December 31, 1995 and the related statement of income (loss), partners' capital and cash flows for the years then ended. 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 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 Packwood Jekyll Limited Partnership as of December 31, 1996 and December 31, 1995 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Wertheim & Company New York, N.Y. February 14, 1997 1 PACKWOOD JEKYLL LIMITED PARTNERSHIP COMPARATIVE BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1996 1995 ------------- ------------- ASSETS Current Assets Cash.............................................................................. $ 26,146 $ 10,085 Accounts receivable............................................................... 65,323 41,011 Inventories--Note 2............................................................... 26,115 37,449 Prepaid taxes and expenses........................................................ 97,738 107,844 ------------- ------------- Total Current Assets.......................................................... 215,322 196,389 ------------- ------------- Property and Equipment--Note 3...................................................... Building.......................................................................... 2,085,254 2,085,254 Improvements...................................................................... 1,138,435 1,138,435 Furniture, fixtures and equipment................................................. 2,274,467 2,254,446 ------------- ------------- Less: Accumulated depreciation.................................................. 2,816,441 2,517,827 ------------- ------------- Total Property and Equipment.................................................. 2,681,715 2,960,308 ------------- ------------- Other Assets--Note 4................................................................ Unamortized mortgage loan expense................................................. 6,490 10,588 Unamortized franchise fees........................................................ -- 7,090 Security deposits................................................................. 8,183 7,246 ------------- ------------- Total Other Assets............................................................ 14,673 24,924 ------------- ------------- $ 2,911,710 $ 3,181,621 ------------- ------------- ------------- ------------- LIABILITIES AND CAPITAL Current Liabilities Mortgage payable--current portion--Note 5......................................... $ 114,301 $ 106,114 Accounts payable.................................................................. 248,697 326,313 Accrued liabilities............................................................... 217,880 138,320 Sales, payroll and other taxes payable............................................ 151,076 104,318 Loans payable--Merrill Lynch--Note 10............................................. 252,178 251,132 --other--current portion--Note 12..................................... 24,276 28,865 Note payable--Packwood Management, Inc.--Note 13.................................. 60,000 -- ------------- ------------- Total Current Liabilities..................................................... 1,068,408 955,062 Long-Term Liabilities Mortgage payable--net of current portion--Note 5.................................. 4,105,810 4,206,597 Loans payable--other--net of current portion--Note 12............................. 32,230 58,269 ------------- ------------- Total Liabilities............................................................. 5,206,448 5,219,928 Commitments and Contingent Liabilities Partners' Capital--Note 6........................................................... (2,294,738) (2,038,307) ------------- ------------- $ 2,911,710 $ 3,181,621 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of this report. 2 PACKWOOD JEKYLL LIMITED PARTNERSHIP COMPARATIVE STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED -------------------------- DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Income............................................................................... $3,502,333 $3,666,278 Cost of Sales........................................................................ 1,357,048 1,319,420 ------------ ------------ Gross Profit......................................................................... 2,145,285 2,346,858 ------------ ------------ Operating Expenses General and administrative......................................................... 278,523 261,496 Management fees.................................................................... 103,232 108,107 Other operating expenses........................................................... 1,060,567 1,112,964 ------------ ------------ Total Operating Expenses..................................................... 1,442,322 1,482,567 ------------ ------------ Operating Profit..................................................................... 702,963 864,291 ------------ ------------ Other (Income) Expenses Mortgage interest.................................................................. 365,846 370,407 Other interest..................................................................... 38,119 23,254 Rent............................................................................... 155,589 160,527 Interest income.................................................................... -- (124) General partners' assets management fee--Note 7.................................... 35,030 38,891 Real estate and personal property taxes............................................ 55,007 57,667 ------------ ------------ 649,591 650,622 ------------ ------------ Income before Depreciation........................................................... 53,372 213,669 ------------ ------------ Depreciation....................................................................... 298,615 342,000 Amortization--loan fees............................................................ 4,098 4,099 --franchise fees........................................................ 7,090 7,090 ------------ ------------ 309,803 353,189 ------------ ------------ Net Income (Loss) for Year........................................................... $ (256,431) $ (139,520) ------------ ------------ ------------ ------------
The accompanying notes are an integral part of this report. 3 PACKWOOD JEKYLL LIMITED PARTNERSHIP COMPARATIVE STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED -------------------------- DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Cash Flows from Operating Activities: Net (Loss)........................................................................... $ (256,431) $ (139,520) ------------ ------------ Adjustments to Reconcile Net Income to Cash Provided by Operations: Depreciation....................................................................... 298,615 342,000 Amortization....................................................................... 11,188 11,189 Accounts receivable................................................................ (24,312) (7,119) Inventories........................................................................ 11,334 (4,749) Prepaid expenses................................................................... 10,106 (52,293) Accounts payable................................................................... (77,616) 124,786 Accrued liabilities and taxes...................................................... 126,318 (14,808) Security deposits.................................................................. (937) (2,702) ------------ ------------ Total Adjustments.............................................................. 354,696 396,304 ------------ ------------ Net Cash Provided by Operating Activities............................................ 98,265 256,784 ------------ ------------ Cash (Used) in Investing Activities: Capital expenditures............................................................... (20,021) (160,568) ------------ ------------ Cash Flows From Financing Activities: Proceeds from bank loan (net)...................................................... 1,046 53,183 Partners' drawings................................................................. -- (100,000) Principal payments under mortgage.................................................. (92,600) (79,531) Principal payments under lease payable (net)....................................... (30,629) (808) Note payable--Packwood Management, Inc............................................. 60,000 -- ------------ ------------ Net Cash (Used) in Financing Activities.............................................. (62,183) (127,156) ------------ ------------ Net Increase (Decrease) in Cash...................................................... 16,061 (30,940) Cash at Beginning of Year............................................................ 10,085 41,025 ------------ ------------ Cash at End of Year.................................................................. $ 26,146 $ 10,085 ------------ ------------ ------------ ------------ Supplemental Schedule of Financing Activities Interest paid...................................................................... $ 375,293 $ 389,377 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of this report. 4 PACKWOOD JEKYLL LIMITED PARTNERSHIP PARTNERS' CAPITAL
BALANCE JANUARY 1, DECEMBER 31, 1996 NET LOSS DRAWINGS 1996 ------------- ----------- ----------- ------------- Limited Partners......................................... $ (844,153) $ (128,216) $ -- $ (972,369) General Partners......................................... (1,194,154) (128,215) -- (1,322,369) ------------- ----------- ----------- ------------- $ (2,038,307) $ (256,431) -- $(2,294,738) ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
The accompanying notes are an integral part of this report. 5 PACKWOOD JEKYLL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION The Partnership acquired the Jekyll Island Inn of Jekyll Island Georgia on February 15, 1989. The Hotel is a 265-room resort Hotel. BASIS OF FINANCIAL STATEMENTS The Partnership maintains its books and records and files its tax returns on the accrual basis. In preparing statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from the estimates. (2) INVENTORIES Inventories are stated at the lower of cost or market. They consist of:
DECEMBER 31, -------------------- 1996 1995 --------- --------- Linen................................................................... $ 10,331 $ 11,632 Food.................................................................... 8,616 13,799 Beverages............................................................... 5,449 4,943 Tickets and miscellaneous............................................... 1,719 7,075 --------- --------- $ 26,115 $ 37,449 --------- --------- --------- ---------
(3) PROPERTY AND EQUIPMENT Property and equipment are capitalized at cost. Significant improvements are capitalized; maintenance and repairs are charged to income. When equipment is retired or otherwise disposed of, the cost of the assets and related accumulated depreciation are eliminated from the accounts and any gain or loss on disposition is credited or charged to income. Depreciation and amortization of fixed assets is computed on accelerated methods using lives from five to 31 1/2 years. (4) OTHER ASSETS Mortgage loan costs and franchise fees are all to be amortized over a 60-month period. (5) MORTGAGE PAYABLE The Partnership has a first mortgage with GE Capital Asset Management Corp. for $4,500,000. Payments are at $39,052.05 per month with the balance due on July 31, 1998. Interest is at 8.5%. The balance due at December 31, 1996 was $4,220,111. 6 (6) PARTNERS' CAPITAL Pursuant to the partnership agreement all operating profits and losses of the Partnership are allocated as follows: 50% -- Limited Partners 50% -- General Partners (7) GENERAL PARTNERS' ASSET MANAGEMENT FEE: The general partners receive in accordance with their respective interest an asset management fee in the amount of one percent of the Partnership's gross revenues. This fee is cumulative but subordinate to the cumulative return (10% per annum) payable to the limited partners. (8) MANAGEMENT AGREEMENT On January 1, 1991 the hotel engaged "Packwood Management Inc.," a Georgia corporation, with a fee of 3% of gross revenue plus a $900 monthly accounting fee. Certain stockholders of Packwood Management Inc. are also stockholders of two of the corporate general partners. This agreement was terminated on December 9, 1996 and a new management agreement was signed with an independent company with a fee of 3% of gross revenue plus a $2,000 monthly accounting fee. The term of this agreement ends December 31, 2001. (9) LAND LEASE The Partnership has a land lease with the Jekyll Island State Park Authority which expires April 26, 2018. The current annual base rent is $52,308 plus a percentage of revenue. The Partnership has a renewal option for an additional 16 years. (10) BANK LOAN The Partnership has obtained a working capital loan for $250,000 from Merrill Lynch Business Financial Services, Inc. with an interest rate of prime plus 1 1/2%. It is collateralized by inventory, equipment, furniture, fixtures and accessories. The maturity date of this credit line is August 31, 1997. (11) MEMBERSHIP AGREEMENT On December 23, 1991, the hotel became a "Best Western." This agreement was terminated in May 1996. (12) LONG-TERM DEBT Long-term debt maturing in the next five years consists of the following: 1997 -- $ 114,301 1998 -- 4,105,810 1999 -- -- 2000 -- -- 2001 -- --
The Partnership leases equipment for the hotels. Payments over the next five years are as follows: 1997 -- 24,276 1998 -- 19,060 1999 -- 11,883 2000 -- 1,287 2001 -- --
(13) NOTE PAYABLE--PACKWOOD MANAGEMENT, INC. The Partnership borrowed a total of $60,000 from Packwood Management, Inc. in December 1996. The note is due on demand with an interest rate of 10% per annum. Certain stockholders of Packwood Management, Inc. are also stockholders of two of the corporate general partners. 7 EX-99.4 5 EX-99.4 EXHIBIT 99.4 ACCOUNTANTS' COMPILATION REPORT August 14, 1997 To the Partners Packwood Jekyll Limited Partnership Gentlemen: We have compiled the accompanying balance sheet of Packwood Jekyll Limited Partnership as of June 30, 1997 and the related statements of income (loss), partners' capital and cash flows for the six months then ended, in accordance with statements on standards for accounting and review services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. Wertheim & Company 1 PACKWOOD JEKYLL LIMITED PARTNERSHIP BALANCE SHEET JUNE 30, 1997 ASSETS Current Assets Cash............................................................. $ 96,427 Accounts receivable.............................................. 95,459 Inventories--Note 2.............................................. 27,850 Prepaid taxes and expenses....................................... 126,238 ---------- ---------- Total Current Assets......................................... $ 345,974 Property and Equipment--Note 3 Building......................................................... 2,085,254 Improvements..................................................... 1,138,435 Furniture, fixtures and equipment................................ 2,357,219 Less: Accumulated depreciation................................. (2,918,087) ---------- Total Property and Equipment................................. 2,662,821 Other Assets--Note 4 Unamortized mortgage loan expense................................ 4,639 Security deposits................................................ 8,533 ---------- Total Other Assets........................................... 13,172 ---------- $3,021,967 ----------
LIABILITIES AND CAPITAL Current Liabilities Mortgage payable--current portion--Note 5........................ $ 118,300 Accounts payable................................................. 152,084 Accrued liabilities.............................................. 554,213 Sales, payroll and other taxes payable........................... 212,739 Loans payable--Merrill Lynch--Note 10............................ 250,000 --other--current portion--Note 11.................... 23,088 ---------- Total Current Liabilities.................................... $1,310,424 Long-Term Liabilities Mortgage payable--net of current portion--Note 5................. 4,027,155 Loans payable--other--net of current portion--Note 11............ 18,874 ---------- Total Liabilities............................................ 4,046,029 Commitments and Contingent Liabilities Partners' Capital--Note 6.......................................... (2,334,486) ---------- $3,021,967 ---------- ----------
See Accountants' Compilation Report and Accompanying Notes to Financial Statements. 2 PACKWOOD JEKYLL LIMITED PARTNERSHIP STATEMENT OF INCOME (LOSS) JUNE 30, 1997 Income.................................................................................. $ 2,101,673 Cost of Sales........................................................................... 838,676 ----------- Gross Profit............................................................................ $ 1,262,997 Operating Expenses General and Administrative............................................................ 153,949 Management fees....................................................................... 63,034 Other operating expenses.............................................................. 600,406 ----------- Total Operating Expenses............................................................ 817,389 ----------- Operating Profit........................................................................ 445,608 Other Expenses Mortgage interest..................................................................... 207,469 Other interest........................................................................ 17,660 Rent.................................................................................. 94,372 General partners' asset management fee--Note 7........................................ 33,244 Real estate and personal property taxes............................................... 28,916 ----------- Total Other Expenses................................................................ 381,661 ----------- Income (Loss) before Depreciation....................................................... 63,947 Depreciation.......................................................................... 101,646 Amortization--loan fees............................................................... 2,049 103,695 ----------- ----------- Net Income (Loss) for the Period........................................................ $ (39,748) ----------- -----------
See Accountants' Compilation Report and Accompanying Notes to Financial Statements. 3 PACKWOOD JEKYLL LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS JUNE 30, 1997 Cash Flows from Operating Activities: Net (Loss)........................................................ $ (39,748) Adjustments to Reconcile Net Income to Cash Provided by Operations: Depreciation.................................................... $ 101,646 Amortization.................................................... 2,049 Accounts receivable............................................. (30,136) Inventories..................................................... (1,735) Prepaid expenses................................................ (28,500) Accounts payable................................................ (96,613) Accrued liabilities and taxes................................... 397,798 Security deposits............................................... (350) --------- Total Adjustments........................................... 344,159 --------- Net Cash Provided by Operating Activities......................... 304,411 Cash (Used) in Investing Activities: Capital expenditures............................................ (82,752) Cash Flows from Financing Activities: Proceeds from bank loan (net)................................... (2,178) Payments--note payable--Packwood Management..................... (60,000) Principal payments under mortgage............................... (74,656) Principal payments under lease payable (net).................... (14,544) --------- Net Cash (Used) in Financing Activities........................... (151,378) --------- Net Increase in Cash.............................................. 70,281 Cash--Beginning of Period......................................... 26,146 --------- Cash--End of Period............................................... $ 96,427 --------- ---------
See Accountants' Compilation Report and Accompanying Notes to Financial Statements. 4 PACKWOOD JEKYLL LIMITED PARTNERSHIP PARTNERS' CAPITAL
BALANCE JANUARY 1, NET JUNE 30, 1997 LOSS DRAWINGS 1997 ------------- ---------- ----------- ------------- Limited Partners............................................. $ (972,369) $ (19,874) $ -- $ (992,243) General Partners............................................. (1,322,369) (19,874) -- (1,342,243) ------------- ---------- ----------- ------------- $ (2,294,738) $ (39,748) -- $ (2,334,486) ------------- ---------- ----------- ------------- ------------- ---------- ----------- -------------
See Accountants' Compilation Report and Accompanying Notes to Financial Statements. 5 PACKWOOD JEKYLL LIMITED PARTNERSHIP Notes to Financial Statements June 30, 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The Partnership acquired the Jekyll Island Inn of Jekyll Island, Georgia on February 15, 1989. The Hotel is a 265-room resort Hotel. BASIS OF FINANCIAL STATEMENTS The Partnership maintains its books and records and files its tax returns on the accrual basis. In preparing statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from the estimates. (2) INVENTORIES Inventories are stated at the lower of cost or market. As of June 30, 1997 they consist of: Linen.............................................................................. $ 10,331 Food............................................................................... 8,067 Beverages.......................................................................... 7,452 Tickets and miscellaneous.......................................................... 2,000 --------- $ 27,850 --------- ---------
(3) PROPERTY AND EQUIPMENT Property and equipment are capitalized at cost. Significant improvements are capitalized; maintenance and repairs are charged to income. When equipment is retired or otherwise disposed of, the cost of the assets and related accumulated depreciation are eliminated from the accounts and any gain or loss on disposition is credited or charged to income. Depreciation and amortization of fixed assets is computed on accelerated methods using lives from five to 31 1/2 years. (4) OTHER ASSETS Mortgage loan costs and franchise fees are all to be amortized over a 60-month period. (5) MORTGAGE PAYABLE The Partnership has a first mortgage with GE Capital Asset Management Corp. for $4,500,000. Payments are at $39,052.05 per month with the balance due on July 31, 1998. Interest is at 8.5%. The balance due at June 30, 1997 was $4,145,455. 6 PACKWOOD JEKYLL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (6) PARTNERS' CAPITAL Pursuant to the partnership agreement all operating profits and losses of the Partnership are allocated as follows: 50%--Limited Partners 50%--General Partners (7) GENERAL PARTNERS' ASSET MANAGEMENT FEE The general partners receive in accordance with their respective interest an asset management fee in the amount of one percent of the Partnership's gross revenues. This fee is cumulative but subordinate to the cumulative return (10% per annum) payable to the limited partners. (8) MANAGEMENT AGREEMENT A management agreement was signed with an independent company with a fee of 3% of gross revenue plus a $2,000 monthly accounting fee. The term of this agreement ends December 31, 2001. Packwood Management Company receives $2,000 per month as a management fee. (9) LAND LEASE The Partnership has a land lease with the Jekyll Island State Park Authority which expires April 26, 2018. The current annual base rent is $52,308 plus a percentage of revenue. The Partnership has a renewal option for an additional 16 years. (10) BANK LOAN The Partnership has obtained a working capital loan for $250,000 from Merrill Lynch Business Financial Services, Inc. with an interest rate of prime plus 1 1/2%. It is collateralized by inventory, equipment, furniture, fixtures and accessories. The maturity date of this credit line is August 31, 1997. (11) LONG-TERM DEBT Long-term debt maturing in the next five years consists of the following: June 30, 1998................................................................... $ 118,300 1999..................................................................... 4,027,155 2000..................................................................... -- 2001..................................................................... -- 2002..................................................................... --
The Partnership leases equipment for the hotels. Payments over the next five years are as follows: June 30, 1998................................................................... $ 23,088 1999..................................................................... 14,370 2000..................................................................... 4,504 2001..................................................................... -- 2002..................................................................... --
(12) SUBSEQUENT EVENTS In August 1997, the Partnership sold the hotel to the company that is presently managing the hotel. 7 EX-99.5 6 EX-99.5 EXHIBIT 99.5 INDEPENDENT AUDITORS' REPORT The Board of Directors Capstar Hotel Company: We have audited the accompanying balance sheet of the Embassy Suites Philadelphia (the Hotel) as of December 31, 1996 and the related statements of operations, owners' equity and cash flows for the year then ended. These financial statements are the responsibility of the Hotel's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Embassy Suites Philadelphia as of December 31, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington D.C. July 18, 1997 1 EMBASSY SUITES PHILADELPHIA BALANCE SHEETS JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
JUNE 30, DECEMBER 1997 31, Assets (UNAUDITED) 1996 ---------- ----------- Property and equipment: Land............................................................. $4,500,000 4,500,000 Building......................................................... 26,245,588 28,827,175 Furniture, fixtures and equipment................................ 2,045,498 3,020,315 Construction in process.......................................... 238,863 144,734 ---------- ----------- 33,029,949 36,492,224 Less accumulated depreciation.................................... (197,000) (3,928,199) ---------- ----------- Property and equipment, net........................................ 32,832,949 32,564,025 Cash and cash equivalents.......................................... 862,186 26,351 Accounts receivable, net........................................... 504,712 322,308 Due from affiliate................................................. -- 192,922 Inventory.......................................................... -- 87,438 Prepaid expenses and other assets.................................. 550,617 91,923 ---------- ----------- $34,750,464 33,284,967 ---------- ----------- ---------- ----------- Liabilities and Owners' Equity Accounts payable and accrued expenses.............................. $ 829,146 1,504,958 Advances from affiliate (note 3)................................... 559,288 24,939,117 Note payable to third party (note 4)............................... 23,000,00 -- ---------- ----------- Total liabilities.................................................. 24,388,434 26,444,075 Owners' equity..................................................... 10,362,030 6,840,892 ---------- ----------- Total liabilities and owners' equity............................... $34,750,464 33,284,967 ---------- ----------- ---------- -----------
See accompanying notes to financial statements. 2 EMBASSY SUITES PHILADELPHIA STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1996
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, (UNAUDITED) 1996 ------------- ------------ Revenue: Rooms.............................................................................. $ 4,953,275 9,634,531 Other operating departments........................................................ 822,808 1,467,755 ------------- ------------ Total revenue........................................................................ 5,776,083 11,102,286 ------------- ------------ Operating costs and expenses: Rooms.............................................................................. 1,401,079 2,416,043 Other operating departments........................................................ 384,655 1,021,408 Undistributed expenses: Administrative and general......................................................... 663,744 1,388,861 Sales and marketing................................................................ 230,487 622,431 Management and franchise fees...................................................... 308,570 593,580 Property operating costs........................................................... 819,698 1,646,788 Property taxes, insurance and other................................................ 246,455 489,742 Depreciation and amortization...................................................... 580,559 1,130,157 Interest expense (note 3).......................................................... 1,177,588 2,605,637 ------------- ------------ Total expenses....................................................................... 5,812,835 11,914,647 ------------- ------------ Net loss............................................................................. $ (36,752) (812,361) ------------- ------------ ------------- ------------
See accompanying notes to financial statements. 3 EMBASSY SUITES PHILADELPHIA STATEMENTS OF OWNERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1996 Balance at January 1, 1996..................................................... $7,606,554 Contributions................................................................ 46,699 Net loss..................................................................... (812,361) ---------- Balance at December 31, 1996................................................... 6,840,892 Contributions (unaudited).................................................... 2,801,259 Cost basis adjustment due to change in ownership (unaudited)................. 756,631 Net loss (unaudited)......................................................... (36,752) ---------- Balance at June 30, 1997 (unaudited)........................................... $10,362,030 ---------- ----------
See accompanying notes to financial statements. 4 EMBASSY SUITES PHILADELPHIA STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1996
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, (UNAUDITED) 1996 -------------- ------------ Cash Flows from operating activities: Net loss........................................................................ $ (36,752) (812,361) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................................................. 580,559 1,130,157 Decrease (increase) in accounts receivable.................................... (182,404) 96,794 Decrease (increase) in due from affiliate..................................... 192,922 (192,922) Increase in prepaid expenses and other assets................................. (458,694) (38,711) Decrease (increase) in inventory.............................................. 87,438 (5,624) Increase (decrease) in accounts payable and accrued expenses.................. (116,524) 678,395 -------------- ------------ Total adjustments............................................................... 103,297 1,668,089 -------------- ------------ Net cash provided by operating activities......................................... 66,545 855,728 -------------- ------------ Cash flows from investing activities--additions to property and equipment......... (92,852) (895,718) -------------- ------------ Cash flows from financing activities Cash contributed by owner....................................................... 2,801,259 46,699 Advances (repayments on advances) from affiliate, net........................... (24,939,117) 19,642 Proceeds from note payable to affiliate......................................... 23,000,000 -- -------------- ------------ Net cash provided by financing activities......................................... 862,142 66,341 -------------- ------------ Net increase in cash and cash equivalents......................................... 835,835 26,351 Cash and cash equivalents at the beginning of the period.......................... 26,351 -- -------------- ------------ Cash and cash equivalents at the end of the period................................ $ 862,186 26,351 -------------- ------------ -------------- ------------ Supplemental disclosure of cash flow information: Cash paid during the period for interest........................................ $ 1,177,588 2,605,637 -------------- ------------ -------------- ------------
See accompanying notes to financial statements. 5 EMBASSY SUITES PHILADELPHIA NOTES TO FINANCIAL STATEMENTS JUNE 30,1997 (UNAUDITED) AND DECEMBER 31, 1996 (1) ORGANIZATION The Embassy Suites Philadelphia ("the Hotel") is located in downtown Philadelphia, Pennsylvania. The Hotel commenced operations in May of 1993 and has 288 suites. The Hotel offers dining, meeting and banquet and recreational facilities. The Hotel's business is generated from both business travelers and tourists due to its proximity to the Pennsylvania convention center and numerous tourist attractions. The Hotel is owned by BA Parkway Associates II, a general partnership. BA Parkway Associates II was ultimately owned by Bell Atlantic Investments, Inc. until April 30, 1997, when AAP Hotel Co. and LFREI Sub One, Inc., affiliates of Atlantic American Properties, purchased the partnership interests. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel are included in the financial records of BA Parkway Associates II. The accompanying financial statements include the accounts of the Hotel only, as if it was a separate legal entity, and have been prepared using the accrual basis of accounting. CASH AND CASH EQUIVALENTS The Hotel considers all highly liquid instruments with an original maturity date of three months or less to be cash equivalents. INVENTORY Inventory, consisting primarily of linens and various other items, is stated at cost, using the first-in, first-out ("FIFO") method. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. The carrying value of the Hotel was adjusted upon the purchase of the partnership interests by Atlantic American Properties (see Note 1) to the purchase price of $33,000,000. Depreciation is computed on the building using the straight-line method over its useful life of 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method over 10 years. Management periodically evaluates potential permanent impairment of the net carrying value of the Hotel. If the net carrying value of the Hotel exceeds its fair value, the excess is charged to operations. No impairment losses were recorded in 1997 or 1996. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write offs occur when management deems a receivable uncollectible. 6 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE Revenue is earned through the operations of the Hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes as the Hotel is owned by a partnership and, therefore, all of the partnership's income, losses, deductions, and credits for tax purposes are reported on the income tax returns of the partners. USE OF ESTIMATES Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) RELATED-PARTY TRANSACTIONS Certain subsidiaries of Bell Atlantic Investments, Inc. advanced amounts to the Hotel. The Hotel was charged interest at an effective rate of 10.4 percent on the advances. The advances had no stated maturity date. The outstanding balance of these advances was $24,939,117 at December 31, 1996. These advances were repaid upon the purchase of the partnership interests on April 30, 1997. Interest charged to the Hotel on these advances was $863,485 (unaudited) for the six months ended June 30, 1997 and $2,605,637 in 1996. Subsequent to April 30, 1997, an affiliate of Atlantic American Properties advanced amounts to the Hotel. These advances did not bear interest. These advances amounted to $559,288 (unaudited) at June 30, 1997. Room revenue earned through related parties was approximately $313,000 (unaudited) for the six months ended June 30, 1997 and approximately $762,000 in 1996. (4) NOTE PAYABLE TO THIRD PARTY BA Parkway Associates II entered into a $23,000,000 promissory note with Goldman Sachs Mortgage Company on April 30, 1997. The note bears interest at the one-month London Interbank Offered Rate plus 175 basis points and has a maturity date of April 30, 1998. Interest incurred on this note was $314,103 (unaudited) for the six months ended June 30, 1997. The note is secured by the Hotel and related assets. (5) COMMITMENTS For the six months ended June 30, 1997 and the year ended December 31, 1996, the Hotel earned rental income of $225,000 (unaudited) and $450,000 respectively, under a non-cancelable operating lease with a tenant that maintains a restaurant on the premises. The lease, which expires in May 2000, provides for minimum rent and requires the tenant to pay its pro rata share of certain building operating expenses, as defined in the lease. 7 (5) COMMITMENTS (CONTINUED) Future minimum lease payments under the non-cancelable operating lease as of December 31, 1996 is as follows: 1997............................................................ $ 450,000 1998............................................................ 450,000 1999............................................................ 450,000 2000............................................................ 187,500 --------- Total future minimum lease payments............................. $1,537,500 --------- ---------
(6) SUBSEQUENT EVENT On August 12, 1997, the partnership interests in BA Parkway Associates II were purchased by certain affiliates of CapStar Hotel Company for $33,600,000. Concurrent with the purchase, the note payable to third party was repaid. 8 EX-99.6 7 EX-99.6 EXHIBIT 99.6 INDEPENDENT AUDITORS' REPORT The Partners River Hotel, Ltd. I: We have audited the accompanying balance sheet of River Hotel, Ltd. I dba Doubletree Hotel of Austin as of December 31, 1996, and the related statements of operations, changes in partners' capital (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the financial position of River Hotel, Ltd. I dba Doubletree Hotel of Austin as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in note 5 to the financial statements, the Partnership has $39,596,000 of debt and accrued interest which matured in January 1995 and is currently in default because of the Partnership's failure to make required debt service payments in prior years. If the Partnership is unable to restructure or refinance this debt, it may be forced to sell at unfavorable prices, or may lose by foreclosure, the property securing the debt. Alternatively, the Partnership may be forced to seek protection under Federal bankruptcy laws. This situation raises substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to these matters are also described in note 5. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP Phoenix, AZ January 29, 1997 1 RIVER HOTEL, LTD. I (A TEXAS LIMITED PARTNERSHIP) DBA DOUBLETREE HOTEL OF AUSTIN BALANCE SHEETS June 30, 1997 (Unaudited) and December 31, 1996
1997 Assets (UNAUDITED) 1996 ----------- ---------- Current assets: Cash............................................................ $ 412,250 258,120 Accounts receivable, net (note 2)............................... 816,823 644,393 Inventory....................................................... 106,765 111,375 Prepaid expenses................................................ 82,764 39,387 ----------- ---------- Total current assets.......................................... 1,418,602 1,053,275 Land, building and equipment (note 2): Land and improvements........................................... 2,706,547 2,705,000 Building and improvements....................................... 25,375,980 24,888,700 Furniture and equipment......................................... 9,089,158 8,884,954 ----------- ---------- 37,171,685 36,478,654 Less accumulated depreciation and amortization.................. 19,127,747 18,573,713 ----------- ---------- Land, building and equipment, net............................. 18,043,938 17,904,941 ----------- ---------- Operating stock, net.............................................. 55,693 29,421 Other assets (note 2)............................................. 62,584 222,491 ----------- ---------- $19,580,817 19,210,128 ----------- ---------- ----------- ---------- Liabilities and Partners' Deficit Current liabilities: Accrued interest (note 2)....................................... $12,890,591 12,696,000 Current portion of long-term debt (notes 2, 3 and 5)............ 26,900,000 26,900,000 Accounts payable (note 3)....................................... 277,588 220,641 Due to affiliate (note 3)....................................... 469,919 476,179 Accrued taxes payable........................................... 248,637 212,948 Accrued liabilities (note 3).................................... 586,372 546,676 ----------- ---------- Total current liabilities..................................... 41,373,107 41,052,444 Partners' deficit (notes 4 and 5)................................. (21,792,290) (21,842,316) Commitments and contingencies (notes 3 and 5) ----------- ---------- $19,580,817 19,210,128 ----------- ---------- ----------- ----------
See accompanying notes to the financial statements. 2 RIVER HOTEL, LTD. I (A TEXAS LIMITED PARTNERSHIP) DBA DOUBLETREE HOTEL OF AUSTIN STATEMENTS OF OPERATIONS Six months ended June 30, 1997 (Unaudited) and the year ended December 31, 1996
1997 (UNAUDITED) 1996 ------------ ------------ Revenues: Room................................................................................ $ 4,232,853 7,660,157 Food and beverage................................................................... 1,842,139 3,485,573 Telephone........................................................................... 190,355 322,208 Other............................................................................... 284,192 531,062 ------------ ------------ 6,549,539 11,999,000 ------------ ------------ Departmental expenses (note 3): Room................................................................................ 940,259 1,809,657 Food and beverage................................................................... 1,323,344 2,458,998 Telephone........................................................................... 94,418 239,725 Other............................................................................... 194,311 372,815 ------------ ------------ 2,552,332 4,881,195 ------------ ------------ Departmental income................................................................... 3,997,207 7,117,805 ------------ ------------ Undistributed expenses (note 3): Administrative and general.......................................................... 630,447 1,179,056 Marketing........................................................................... 564,422 1,060,720 Property operation, maintenance and energy costs.................................... 573,187 1,169,154 Management fees..................................................................... 261,982 479,960 ------------ ------------ 2,030,038 3,888,890 ------------ ------------ Income before fixed charges........................................................... 1,967,169 3,228,915 ------------ ------------ Fixed charges: Rent, taxes and insurance........................................................... 339,376 640,304 Interest............................................................................ 1,023,733 2,052,357 Depreciation and amortization....................................................... 554,034 1,123,732 ------------ ------------ 1,917,143 3,816,393 ------------ ------------ Net income (loss)..................................................................... $ 50,026 (587,478) ------------ ------------ ------------ ------------
See accompanying notes to the financial statements. 3 RIVER HOTEL, LTD. I (A TEXAS LIMITED PARTNERSHIP) DBA DOUBLETREE HOTEL OF AUSTIN STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) Six months ended June 30, 1997 (Unaudited) and the year ended December 31, 1996
BROWN- AUSTIN II, CLASS INC. A & B GENERAL LIMITED PARTNER PARTNERS TOTAL ------------- ------------- ------------- Balances, January 1, 1996............................................ $ 1,921,022 (23,175,860) (21,254,838) Net loss............................................................. (11,750) (575,728) (587,478) ------------- ------------- ------------- Balances, December 31, 1996.......................................... 1,909,272 (23,751,588) (21,842,316) Net income........................................................... 1,001 49,025 50,026 ------------- ------------- ------------- Balances, June 30, 1997.............................................. $ 1,910,273 (23,702,563) (21,792,290) ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to the financial statements. 4 RIVER HOTEL, LTD. I (A TEXAS LIMITED PARTNERSHIP) DBA DOUBLETREE HOTEL OF AUSTIN STATEMENTS OF CASH FLOWS Six months ended June 30, 1997 (Unaudited) and the year ended December 31, 1996
1997 (UNAUDITED) 1996 ----------- ---------- Cash flows from operating activities: Net income (loss)..................................................................... $ 50,026 (587,478) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization....................................................... 554,034 1,123,732 Changes in assets and liabilities: Increase in accounts receivable................................................... (172,430) (112,970) Decrease (increase) in inventories................................................ 4,610 (9,489) Increase in prepaid expenses...................................................... (43,377) (3,441) Decrease (increase) in other assets............................................... 159,907 (191,889) Increase in inventory............................................................. (26,272) -- Increase (decrease) in accrued interest........................................... 194,591 (517,100) Increase (decrease) in accounts payable........................................... 56,947 (47,168) Decrease in due to affiliate...................................................... (6,260) -- Increase in accrued taxes payable................................................. 35,689 7,743 Increase in accrued liabilities................................................... 39,696 97,350 ----------- ---------- Net cash provided by (used in) operating activities............................. 847,161 (240,710) ----------- ---------- Cash flows from investing activities -- purchases of building improvements, furniture and equipment......................................................................... (693,031) (109,614) ----------- ---------- Net increase (decrease) in cash......................................................... 154,130 (350,324) Cash at beginning of period............................................................. 258,120 608,444 ----------- ---------- Cash at end of period................................................................... $ 412,250 258,120 ----------- ---------- ----------- ---------- Supplemental disclosure of cash flow information: Cash paid during the period for interest.............................................. $ 829,142 2,569,457 ----------- ---------- ----------- ----------
See accompanying notes to the financial statements. 5 RIVER HOTEL, LTD. I (A TEXAS LIMITED PARTNERSHIP) DBA DOUBLETREE HOTEL OF AUSTIN NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 (1) SUMMARY OF ACCOUNTING POLICIES DESCRIPTION OF BUSINESS River Hotel, Ltd. I (the "Partnership") is a Texas limited partnership that owns and operates a hotel in Austin, Texas, which provides guest rooms, food and beverage services, group meeting facilities, a parking garage and space for tenant commercial shops. The Partnership began operation of the hotel on April 27, 1984, under a trade name license agreement, as "La Mansion Hotel, Austin." On January 20, 1988, a management agreement was signed with DT Management, Inc. (a wholly-owned subsidiary of Doubletree, Inc.) and the name of the hotel was changed to Doubletree Hotel of Austin. BEVERAGE SERVICE OPERATION The liquor license related to the beverage service is owned by a separate corporation; however, the operations of the beverage service are substantially those of the Partnership. Accordingly, the revenues and expenses related to the beverage service have been included with those of the Partnership. INVENTORY Inventory is valued at cost on a first-in first-out (FIFO) basis. LAND, BUILDING AND EQUIPMENT Land, building and equipment are stated at cost. Management periodically evaluates potential permanent impairment of the net carrying value of the hotel. If the net carrying value of the hotel exceeds its fair value, the excess is charged to operations. No impairment losses were recorded during 1997 or 1996. DEPRECIATION AND AMORTIZATION Depreciation and amortization is provided over the estimated useful lives of the related assets using the straight-line method. The hotel is being depreciated over 30 years and furniture and equipment are being depreciated over 3-18 years. Land improvements are being amortized over 30 years. PARTNERS' DEFICIT Profits and losses are shared by the partners in accordance with percentage interests as provided by the Partnership Agreement. Such percentage interests aggregated 2% to Brown-Austin II, Inc., the General Partner, 98% to the Class A limited partners, and none to the Class B limited partners. Brown-Austin II, Inc. may request capital contributions from the Class A limited partners. To the extent that a Class A limited partner fails to provide his proportionate share of the contribution requested, his share of the allocations of profits and losses will be reduced to the same extent his Class A limited partnership interest is reduced in relation to the interests of the other Class A limited partners who made the contribution. No contributions were made during the six-month period ended June 30, 1997 (unaudited) or in 1996. 6 (1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Partnership is not subject to federal and state income taxes. Income or loss and tax credits are allocated to the individual partners. Accordingly, no provision for income taxes has been made in the accompanying financial statements. Differences may exist between the Partnership's results of operations for tax reporting purposes and that reported on the accompanying statements of operations, primarily because accelerated depreciation is used for tax reporting purposes. MANAGEMENT ESTIMATES Management of the Partnership has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ significantly from these estimates. (2) LONG-TERM DEBT Long-term debt and related accrued interest consist of the following at June 30, 1997 (unaudited):
ACCRUED PRINCIPAL INTEREST TOTAL ------------- ------------ ------------ Mortgage note payable to AB Austin Limited Partnership (a related party of the General Partner), 5.4%, matured January 1, 1995, secured by a first deed of trust lien on all hotel property and equipment and a security instrument covering accounts receivable.... $ 24,000,000 12,168,711 36,168,711 Note payable to AB Austin Limited Partnership (a related party of the General Partner), 5.4%, matured January 1, 1995, payable on a pro rata basis with the mortgage note payable as outlined in the fifth modification agreement to the mortgage note payable................. 1,400,000 406,880 1,806,880 Note payable to bank, 3%, matured January 4, 1995, secured by all of the Partnership's contract rights and accounts receivable arising out of the sale of hotel property, subordinate to the notes payable to AB Austin Limited Partnership.................................... 1,500,000 315,000 1,815,000 ------------- ------------ ------------ $ 26,900,000 12,890,591 39,790,591 ------------- ------------ ------------ ------------- ------------ ------------
7 (2) LONG-TERM DEBT (CONTINUED) Long-term debt and related accrued interest consist of the following at December 31, 1996:
ACCRUED PRINCIPAL INTEREST TOTAL ------------- ------------ ------------ Mortgage note payable to AB Austin Limited Partnership (a related party of the General Partner), 5.4%, matured January 1, 1995, secured by a first deed of trust lien on all hotel property and equipment and a security instrument covering accounts receivable.... $ 24,000,000 11,983,367 35,983,367 Note payable to AB Austin Limited Partnership (a related party of the General Partner), 5.4%, matured January 1, 1995, payable on a pro rata basis with the mortgage note payable as outlined in the fifth modification agreement to the mortgage note payable................. 1,400,000 397,633 1,797,633 Note payable to bank, 3%, matured January 4, 1995, secured by all of the Partnership's contract rights and accounts receivable arising out of the sale of hotel property, subordinate to the notes payable to AB Austin Limited Partnership.................................... 1,500,000 315,000 1,815,000 ------------- ------------ ------------ $ 26,900,000 12,696,000 39,596,000 ------------- ------------ ------------ ------------- ------------ ------------
DT Management, Inc. provided a loan to the Partnership in the amount of $1,400,000. In 1995, the note was purchased by AB Austin Limited Partnership, a related party of the General Partner. The terms of the note were not modified. The Partnership made interest payments on the note of $39,467 (unaudited) during the six-month period ended June 30, 1997 and of $122,306 in 1996. During 1995, the mortgage note payable was also purchased by AB Austin Limited Partnership, a related party of the General Partner. The terms of the mortgage note were not modified. As such, all of the above notes are current obligations of the Partnership. The Partnership is in violation of certain loan covenants for failing to make required debt service payments prior to 1995. However, the Partnership made interest payments of $789,675 (unaudited) during the six-month period ended June 30, 1997 and of $2,447,151 in 1996. A loan modification agreement has established a "replacement reserve" of 3% of gross revenue to be funded monthly to an account maintained by AB Austin Limited Partnership as defined in the agreement. The funds are restricted for making capital expenditures or for other purposes as approved by the lender. As of June 30, 1997 and December 31, 1996, there was $31,639 (unaudited) and $191,546, respectively in the reserve which is included in other assets in the accompanying balance sheets. (3) OTHER RELATED PARTY TRANSACTIONS The General Partner has advanced funds to the Partnership for operating purposes and has paid certain expenses on behalf of the Partnership. In addition, the General Partner earns $25,000 annually for its management of the Partnership. The total amount due to the General Partner was $469,919 (unaudited) at June 30, 1997 and $476,179 at December 31, 1996. The Partnership pays management fees of 4% of gross revenues and an incentive fee (as defined in the management agreement) to DT Management, Inc. The management fee expense due under this agreement was $261,982 (unaudited) for the six-month period ended June 30, 1997 and $479,960 in 1996. At June 30, 1997 and December 31, 1996, $38,926 (unaudited) and $36,248, respectively, of these amounts 8 (3) OTHER RELATED PARTY TRANSACTIONS (CONTINUED) is included in accrued liabilities in the accompanying balance sheets. The management agreement expires on December 31, 2002, unless terminated earlier as set forth in the agreement. In addition, the Partnership has paid funds to Doubletree, Inc., and affiliated companies for training, accounting, advertising and data processing services, which are reimbursed at cost, and for the purchase of supplies and equipment from Innco, a subsidiary of Doubletree, Inc. A summary of these transactions for the six-month period ended June 30, 1997 and for 1996 is as follows:
(UNAUDITED) 1997 1996 ----------- --------- Accounting/data processing/training fees.............................. $ 27,488 50,136 Supplies and equipment purchased (Innco).............................. 98,837 44,603 Advertising........................................................... 126,314 230,880 Central reservations.................................................. 50,367 88,596 ----------- --------- ----------- ---------
At June 30, 1997 and December 31, 1996, $26,304 (unaudited) and $15,811, respectively, of the aforementioned expenses are included in accounts payable and accrued liabilities in the accompanying balance sheets. The Partnership participates with other affiliated hotels in a self-insured group health plan through a Voluntary Employee Benefit Association (VEBA) administered by United Health Care. This plan is funded to the limits provided in the tax code. Aggregate and stop-loss insurance exists at amounts which limit exposure to the plan. (4) SALE OF PARTNERSHIP INTEREST On June 24, 1991, Brown-Austin, Inc., a Texas corporation (Seller), sold its sole general partnership interest in the Partnership to Brown-Austin II, Inc., a Maryland corporation (Purchaser). Under the sales agreement, the Purchaser assumed the right, title and interest related to the sole general partnership interest of the Seller. Additionally, the balances of the Class A and B limited partners have been combined for financial statement purposes in the accompanying statements of changes in partners' capital (deficit). The deficit balances of the Class A limited partners as of June 30, 1997 and December 31, 1996 are $23,702,663 (unaudited) and $23,751,688, respectively. The Capital balance of the Class B limited partner is $100 as of June 30, 1997 (unaudited) and December 31, 1996. (5) GOING CONCERN As shown in the accompanying financial statements, the Partnership incurred net income of $50,026 (unaudited) for the six-month period ended June 30, 1997 and a net loss of $587,478 for the year ended December 31, 1996 and at June 30, 1997 and December 31, 1996 had a cumulative partners' deficit of $21,792,290 (unaudited) and $21,842,316, respectively. In addition, the Partnership has failed to make required debt service payments on its notes payable and the notes securing the Partnership's assets have matured, and the balance of $39,790,591 (unaudited) is currently in default. Although the mortgage lenders have not initiated foreclosure proceedings, it is uncertain whether an extension of the due date or a modification of terms will be granted. The Partnership has no commitments from funding sources, including the partners, to meet its future debt requirements. If the Partnership is unable to restructure or refinance this debt, it may be forced to sell at unfavorable prices, or may lose by foreclosure, the property securing the debt. The Partnership's management intends to continue discussions with its lenders for continued forbearance and is considering offers to purchase the Hotel. These factors raise substantial doubt about the Partnership's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. 9 EX-99.7 8 EX-99.7 EXHIBIT 99.7 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Chi-Town Partners, L.P. and St. Elmo's Partners, L.P.: We have audited the accompanying combined balance sheet of Chi-Town Partners, L.P. and St. Elmo's Partners, L.P. as of December 31, 1996 and the related combined statements of income, changes in partners' capital and cash flows for the year then ended. These financial statements are the responsibility of the management of Chi-Town Partners, L.P. and St. Elmo's Partners, L.P. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Chi-Town Partners, L.P. and St. Elmo's Partnership, L.P. as of December 31, 1996 and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania January 31, 1997, except for Note 8 as to which the date is July 16, 1997 1 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) COMBINED BALANCE SHEETS JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
JUNE 30, DECEMBER 31, 1997 1996 ------------- ------------- (UNAUDITED) ASSETS Investments in real estate, at cost: Land............................................................................. $ 4,227,379 $ 4,227,379 Buildings........................................................................ 24,689,163 24,704,079 Furniture, fixtures and equipment................................................ 6,132,878 6,115,468 Tenant improvements.............................................................. 904,091 744,172 Construction-in-progress......................................................... 967,703 71,674 ------------- ------------- 36,921,214 35,862,772 Less accumulated depreciation.................................................... (5,089,379) (4,094,571) ------------- ------------- Total real estate, net......................................................... 31,831,835 31,768,201 Cash and cash equivalents.......................................................... 2,189,555 3,438,483 Accounts and notes receivable, net of allowance of $15,994 and $17,500 as of June 30, 1997 and December 31, 1996, respectively..................................... 989,526 588,099 Due from affiliate................................................................. 205 -- Prepaid expenses and other assets.................................................. 191,473 87,343 Goodwill, net of accumulated amortization of $301,222 and $248,772 as of June 30, 1997 and December 31, 1996, respectively 1,248,778 1,300,278 Deferred costs, net of accumulated amortization of $420,040 and $314,852 as of June 30, 1997 and December 31, 1996, respectively..................................... 692,844 769,464 ------------- ------------- Total assets................................................................... $ 37,144,216 $ 37,951,868 ------------- ------------- ------------- ------------- LIABILITIES AND PARTNERS' CAPITAL Liabilities: Mortgage note payable............................................................ $ 15,284,994 $ 15,499,994 Accounts payable and accrued expenses............................................ 2,644,380 2,785,546 Due to affiliates................................................................ 3,905 277,822 Other liabilities................................................................ 77,299 83,153 ------------- ------------- Total liabilities.............................................................. 18,010,578 18,646,515 Commitments and contingencies Partners' capital.................................................................. 19,133,638 19,305,353 ------------- ------------- Total liabilities and partners' capital........................................ $ 37,144,216 $ 37,951,868 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these combined financial statements. 2 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) COMBINED STATEMENTS OF INCOME FOR THE SIX-MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1996
JUNE 30, DECEMBER 31, 1997 1996 ------------ ------------- (UNAUDITED) Revenues: Hotel operations................................................................... $ 8,639,121 $ 16,366,213 Office rental income............................................................... 541,178 1,216,726 Parking operations................................................................. 409,459 873,685 Other.............................................................................. 388,350 812,642 ------------ ------------- Total revenues................................................................. 9,978,108 19,269,266 ------------ ------------- Expenses: Hotel operating.................................................................... 5,753,770 11,149,622 Office operating................................................................... 257,834 548,328 Parking operating.................................................................. 276,469 515,878 Real estate taxes.................................................................. 634,982 1,188,984 Interest........................................................................... 775,438 1,460,069 Depreciation....................................................................... 994,808 1,993,885 Amortization....................................................................... 156,522 272,048 ------------ ------------- Total expenses................................................................. 8,849,823 17,128,814 ------------ ------------- Net income........................................................................... $ 1,128,285 $ 2,140,452 ------------ ------------- ------------ -------------
The accompanying notes are an integral part of these combined financial statements. 3 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE SIX-MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1996 Balance, December 31, 1995..................................................... $20,339,901 Distributions.................................................................. (3,175,000) Net income..................................................................... 2,140,452 ---------- Balance, December 31, 1996..................................................... 19,305,353 Distributions (unaudited)...................................................... (1,300,000) Net income (unaudited)......................................................... 1,128,285 ---------- Balance, June 30, 1997 (unaudited)............................................. $19,133,638 ---------- ----------
The accompanying notes are an integral part of these combined financial statements. 4 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) COMBINED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1996
JUNE 30, DECEMBER 31, 1997 1996 ------------- ------------- (UNAUDITED) Cash flows from operating activities: Net income....................................................................... $ 1,128,285 $ 2,140,452 Adjustments to reconcile net income to cash provided by operating activities: Loss on disposition of fixed asset............................................. -- 2,399 Depreciation and amortization.................................................. 1,151,330 2,265,933 Provision for bad debts........................................................ 4,631 10,000 Changes in assets and liabilities: Increase in accounts receivable................................................ (406,058) (74,444) Increase due from affiliate.................................................... (205) -- Decrease (increase) in prepaid and other assets................................ (104,130) 117,915 Increase (decrease) in accounts payable and accrued expenses................... (141,166) 741,375 Increase (decrease) in amounts due to affiliates............................... (273,917) 86,631 Increase (decrease) in other liabilities....................................... (5,854) 4,715 ------------- ------------- Net cash provided by operating activities.................................. 1,352,916 5,294,976 ------------- ------------- Cash flows from investing activities: Additions to property and equipment.............................................. (1,058,442) (1,712,080) Increase in deferred costs and other............................................. (28,402) (133,894) ------------- ------------- Net cash used in investing activities...................................... (1,086,844) (1,845,974) ------------- ------------- Cash flows from financing activities: Proceeds from mortgage note payable.............................................. -- 128,706 Repayment of mortgage note payable............................................... (215,000) (380,000) Distributions to partners........................................................ (1,300,000) (3,175,000) ------------- ------------- Net cash used in financing activities...................................... (1,515,000) (3,426,294) ------------- ------------- Increase (decrease) in cash........................................................ (1,248,928) 22,708 Cash and cash equivalents, beginning of year....................................... 3,438,483 3,415,775 ------------- ------------- Cash and cash equivalents, end of year............................................. $ 2,189,555 $ 3,438,483 ------------- ------------- ------------- ------------- Supplemental cash flow information: Cash paid for interest........................................................... $ 725,658 $ 1,466,292 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these combined financial statements. 5 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (Delaware Limited Partnerships) Notes to Combined Financial Statements 1. PARTNERSHIPS ORGANIZATION AND OPERATIONS: Chi-Town Partners, L.P. and St. Elmo's Partners, L.P. (together, "the Partnerships") were formed to acquire, own and operate real estate operations. The financial statements are presented on a combined basis due to common ownership and control. The percentage interest of the general and limited partners of Chi-Town Partners, L.P. at December 31, 1996 are as follows:
PERCENTAGE INTEREST ----------- General Partners: AG Chi-Town Acquisition Corp.................................................... .50% AE-Huron, Inc................................................................... .50% Limited Partners: AG Chi-Town Partners, L.P....................................................... 97.00% AE-Huron Associates, L.P........................................................ 2.00% ----------- 100.00% ----------- -----------
Net losses of Chi-Town Partners, L.P. are allocated as follows: (a) First, to those partners who were previously allocated income in accordance with their percentage interests to the extent of and in proportion to such allocations which have not been previously eliminated by prior loss allocations. (b) Second, to all partners in accordance with their percentage interests, except that no losses are allocated to the limited partners if such allocation causes or increases a deficit capital account balance of the limited partners ("Excess Losses"). Such losses which cannot be allocated to the limited partners are allocated to the general partners. Net profits of the Chi-Town Partners, L.P. are allocated as follows: (a) First, to the general partners to the extent of prior Excess Losses not previously eliminated through allocations of income. (b) Second, to all partners in proportion to and to the extent of prior losses allocated to them not previously eliminated through prior allocations of income. (c) Third, to all partners in accordance with their percentage interests. Cash distributions are distributable among the partners according to their percentage interests. 6 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 1. PARTNERSHIPS ORGANIZATION AND OPERATIONS: (CONTINUED) The percentage interests of the general and limited partners of St. Elmo's Partners, L.P. at December 31, 1996 are as follows:
PERCENTAGE INTEREST ----------- General partners: St. Elmo's Acquisition Corp..................................................... .50% AE--Georgetown, Inc............................................................. .50% Limited partners: AG St. Elmo's Partners, L.P..................................................... 94.43% AE--Georgetown Associates, L.P.................................................. 4.57% ----------- 100.00% ----------- -----------
Net losses of the St. Elmo's Partners, L.P. are allocated as follows: (a) First, to those partners who were previously allocated income in accordance with their percentage interest to the extent of and in proportion to such allocations which have not been previously eliminated by prior loss allocations. (b) Second, to all partners in accordance with their percentage interests, except that no losses are allocated to the limited partners if such allocation causes or increases a deficit capital account balance of the limited partners ("Excess Losses"). Such losses which cannot be allocated to the limited partners are allocated to the general partners. Net profits of the St.Elmo's Partners, L.P. are allocated as follows: (a) First, to the general partners to the extent of prior Excess losses not previously eliminated through allocations of income. (b) Second, to all partners in proportion to and to the extent of prior losses allocated to them not previously eliminated through prior allocations of income. (c) Third, to all partners in accordance with their percentage interests. Pursuant to the partnership agreement, distributions of cash flow are generally allocated in accordance with the partners' percentage interests. However, pursuant to the terms of a separate agreement between St. Elmo's Partners, L.P. and the operating general partner, St. Elmo's Partners, L.P. is obligated to make an additional distribution to the operating general partner during any period in which the minimum required internal rate of return, as defined in the agreement, is achieved and a cash flow distribution is made to the partners. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all cash balances and highly liquid investments having initial maturities of three months or less. 7 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost for both Chi-Town Partners, L.P. and St. Elmo's Partners, L.P. Chi-Town Partners, L.P. property and equipment includes interest on funds borrowed to finance the renovation. Cost of major additions and betterments are capitalized; maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to operations as incurred. When property is retired or otherwise disposed of, the cost of the property and the related accumulated depreciation are removed from the accounts and any resultant gains or losses are reflected in income for the period. Depreciation is computed using the estimated useful lives of the assets. For buildings and improvements, depreciation is computed on the straight-line basis over 39 years. Depreciation of furniture, fixtures and equipment is computed using the 200% declining balance method, over a 3 to 7 year period. During 1996, the Partnerships adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The adoption of this pronouncement had no material effect on the financial position or results of operations of the Partnerships. DEFERRED COSTS: Deferred costs are recorded at cost and consist of Partnership organization costs, deferred leasing costs, franchise fees and deferred loan costs. Amortization of deferred costs is on a straight-line basis over the following periods: Organization costs................... 60 months Deferred leasing costs............... Underlying lease terms Franchise Fee........................ 245 months Deferred loan costs.................. Life of the loan
REVENUE RECOGNITION: Revenue is recognized from rooms, restaurant, parking, offices and other ancillary services as earned. INCOME TAXES: The taxable income or loss of the Partnerships are included in the income tax returns of the partners; accordingly, no provision for income tax expense or benefit is reflected in the accompanying combined financial statements. The Partnerships' tax returns and the amount of allocable profits or losses are subject to examination by Federal and state taxing authorities. The tax liability of the partners could be modified if such an examination resulted in changes to the Partnerships profits or losses. 8 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) CREDIT RISK: In the normal course of business, the Partnerships grant credit to office tenants and hotel customers who are primarily either tourists or corporate travelers. The Partnerships primarily invest their excess cash at federally insured commercial banks or brokerage houses in interest-bearing instruments. Cash available in these accounts may, at times, exceed FDIC and SIPC insurance limits. FAIR VALUE OF FINANCIAL INSTRUMENTS: For instruments including cash, accounts receivable and payable and accruals, it was assumed that the carrying amount approximated fair value because of their short maturity. The carrying amount of the mortgage notes payable are assumed to approximate fair value because they bear interest at a floating rate. ACQUISITION OF THE GEORGETOWN INN HOTEL: Upon St. Elmo's Partners, L.P. acquiring The Georgetown Inn Hotel in Washington, D.C. the purchase price was allocated to assets and liabilities acquired based on their estimated fair values. This resulted in approximately $1,550,000 of cost in excess of net tangible assets acquired, which is being amortized on a straight-line basis over 15 years. USE OF ESTIMATES: The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. UNAUDITED COMBINED FINANCIAL STATEMENTS: The unaudited combined balance sheet as of June 30, 1997 and the unaudited combined statements of income, changes in partners' capital and cash flows for the six months ended June 30, 1997, in the opinion of management, have been prepared on the same basis as the audited combined financial statements and include all significant adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of these interim periods. Operating results for the six month period ended June 30, 1997 is not necessarily indicative of the results for the entire year. 3. RELATED PARTIES: Chi-Town Partners L.P. has engaged an affiliate of the operating general partner to perform property management and other services for Chi-Town Partners, L.P. Pursuant to the management agreement between the parties, the affiliate receives the following fees: - A Base Annual Management Fee of 3% of the Gross Operating Revenues received by the Partnership, as defined in the agreement. For the six-months ended June 30, 1997 and the year ended December 31, 1996, $211,630 and $388,217 has been charged to expense of which $194,111 and $354,240 is included in hotel operating expenses and $17,519 and $33,977 is included in office operating expenses, respectively. 9 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 3. RELATED PARTIES: (CONTINUED) In addition, for each Fiscal Year beginning with July 1, 1994, Chi-Town Partners, L.P. shall pay the affiliate an Incentive Fee equal to 10% of the amount by which Operating Profit, as defined in the agreement, for such Fiscal Year exceeds the Operating Profit Hurdle with respect to such Fiscal Year, but in no event shall the sum of the Base Annual Management Fee plus the Incentive Fee exceed 4% of the Gross Operating Revenues for such Fiscal Year. If the Operating Profit for a Fiscal Year is less than the Operating Profit Hurdle with respect to such Fiscal Year, the Base Annual Management Fee shall be reduced by an amount equal to 10% of such difference, but in no event shall the Base Annual Management Fee be less than 2% of Gross Operating Revenues for such Fiscal Year. Operating Profit Hurdles are as follows:
FISCAL YEAR OPERATING PROFIT ENDING JUNE 30, HURDLE ---------------- ---------------------- 1996........................................................... $ 4,574,759 1997........................................................... 5,211,617 1998........................................................... 5,712,092
For the fiscal year ended June 30, 1996, the Operating Profit Hurdle was achieved;. accordingly, the Chi-Town Partners, L.P. recognized an incentive fee of $38,919. - Construction management fees of 5% of the cost of building and tenant improvements. For the six-months ended June 30, 1997 and the year ended December 31, 1996, construction management fees totaled $42,203 and $25,900, respectively, and are included in the cost of the property on the accompanying balance sheet and depreciated in accordance with the method described in Note 2. - The affiliate receives leasing commissions in amounts which vary depending upon the economic terms of the underlying leases and whether or not outside brokerage commissions are paid. There were no leasing commissions paid for the six-months ended June 30, 1997 and the year ended December 31, 1996. At June 30, 1997 and December 31, 1996, $55,172 and $22,446, respectively, in unpaid fees were due to the affiliate. St. Elmo's Partners, L.P. has engaged an affiliate of the operating general partner to perform property management and other services for St. Elmo's Partners, L.P. Pursuant to the management agreement between the parties, the affiliate receives the following fees: - A base annual management fee of 3% of the gross operating revenues received by St. Elmo's Partners, L.P, as defined in the agreement. For the six-months ended June 30, 1997 and the year ended December 31, 1996, $48,376 and $107,341, respectively, has been charged to expenses and is included in operating expenses. In addition, for each fiscal year beginning with August 1, 1994, St. Elmo's Partners, L.P. shall pay the affiliate an incentive fee equal to 10% of the amount by which operating profit, as defined in the agreement, for such fiscal year exceeds the operating profit hurdle with respect to such fiscal year, 10 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 3. RELATED PARTIES: (CONTINUED) but in no event shall the sum of the base annual management fee plus the incentive fee exceed 4% of the gross operating revenues for such fiscal year. If the operating profit for a fiscal year is less than the operating profit hurdle with respect to such fiscal year, the base annual management fee shall be reduced by an amount equal to 10% of such difference, but in no event shall the base annual management fee be less than 2% of gross operating revenues for such fiscal year. Operating profit hurdles are as follows:
FISCAL YEAR OPERATING PROFIT ENDING JULY 31, HURDLE ---------------- ---------------------- 1996........................................................... $ 1,458,779 1997........................................................... 1,514,181 1998........................................................... 1,571,850
- Construction management fees of 5% of the cost of building and tenant improvements. For the six-months ended June 30, 1997 and the year ended December 31, 1996, $21,103 and $16,169, respectively, of construction management fees were earned by the affiliate. At June 30, 1997 and December 31, 1996, $0 and $16,169, respectively, in unpaid fees were due to the affiliate. 4. MORTGAGE NOTE PAYABLE: Chi-Town Partners, L.P. has a note payable to a credit company. The loan is non-recourse to the partners and is collateralized by a first mortgage on Chi-Town Partners, L.P. real property and substantially all of the Chi-Town Partners, L.P. other assets. The loan was structured to include a $3,500,000 capital loan component as well as a $8,500,000 construction loan component. The maximum amount outstanding under this loan facility during 1996 was $11,794,994. The mortgage note payable is due on February 28, 2000, with two options to Chi-Town Partners, L.P. to extend the maturity date by one year upon payment of $24,000 per option. The options are conditional upon Chi-Town Partners, L.P. full performance of all loan conditions and requirements and a debt service coverage ratio of not less than 1.5 to 1 based on the then current capped interest rates. In addition, the mortgage note payable contains prepayment penalties during the first three years. Interest on the note is payable monthly in arrears. The interest rate is 3.75% above either the one, three or six month LIBOR rate which is periodically chosen by the Chi-Town Partners, L.P. The interest rate on the note is 9.53% at December 31, 1996 pursuant to a six-month LIBOR contract entered into by Chi-Town Partners, L.P. on August 29, 1996. Under the terms of the note monthly principal payments of $25,000 are required commencing the month following the earlier of (1) the funding of the maximum amount of the loan, (2) the substantial completion of the property's renovation or (3) the second anniversary of the loan. The renovation was 11 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 4. MORTGAGE NOTE PAYABLE: (CONTINUED) deemed to be substantially complete prior to December 31, 1995; monthly principal payments commenced in January 1996. Accordingly, mandatory principal payments under the note are as follows:
YEAR AMOUNT - ------------------------------------------------------------------------------- ------------- 1997........................................................................... $ 300,000 1998........................................................................... 300,000 1999........................................................................... 300,000 2000........................................................................... 10,719,994 ------------- Total.......................................................................... $ 11,619,994 ------------- -------------
St. Elmo's Partners, L.P. has a non-recourse note payable to a bank which is collateralized by a first mortgage on St. Elmo's Partners, L.P. real property as well as a collateral interest in substantially all of St. Elmo's Partners, L.P. other assets. Quarterly principal reductions of $20,000 are required and the loan has a final maturity date of April 15, 2000. Mandatory principal payments under this note are as follows:
YEAR AMOUNT - -------------------------------------------------------------------------------- ------------ 1997............................................................................ $ 80,000 1998............................................................................ 80,000 1999............................................................................ 80,000 2000............................................................................ 3,640,000 ------------ $ 3,880,000 ------------ ------------
Interest on the note is payable monthly in arrears. Under the terms of the note, St. Elmo's Partners, L.P. has two interest rate options. St. Elmo's Partners, L.P. can elect that the entire principal balance or any portion thereof in excess of $1,000,000 bear interest at LIBOR plus three percent for specified periods up to one year ("LIBOR Advance"). Any outstanding balance of the loan which is not a LIBOR Advance bears interest at the greater of the Bank's prime rate plus one and one-quarter percent or the Federal Funds rate plus one-half of one percent. The LIBOR Advance in effect at December 31, 1996 was for a period of 30 days and expired on January 2, 1997. The interest rate on the note was 8.5625% at December 31, 1996. 5. OPERATING LEASES: The Partnerships lease space to tenants under noncancelable operating leases with terms of up to 10 years. The Partnerships perform credit evaluations of their lessees and generally do not require collateral 12 CHI-TOWN PARTNERS, L.P. AND ST. ELMO'S PARTNERS, L.P. (DELAWARE LIMITED PARTNERSHIPS) NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 5. OPERATING LEASES: (CONTINUED) other than security deposits for most tenants. Minimum future rentals expected to be received under noncancelable leases over the next five years are as follows:
YEAR ENDING DECEMBER 31, AMOUNT ------------- ------------ 1997............................................................................. $ 1,101,044 1998............................................................................. 1,111,516 1999............................................................................. 975,262 2000............................................................................. 694,562 2001............................................................................. 463,447
The above amounts do not include any percentage rents or additional rent from leases which provide for pass-through of operating expenses or escalations based upon increases in the consumer price index. 6. EMPLOYEE BENEFIT PLANS: Certain employees of Chi-Town Partners, L.P. are covered by union-sponsored, collectively bargained, multi-employer pension and healthcare benefit plans. Contributions and cost are determined in accordance with the provisions of negotiated labor contracts or terms of the plans. Pension expense for these plans was $56,401 and $106,964 and healthcare expense was $141,690 and $365,520, respectively, for the six-months ended June 30, 1997 and the year ended December 31, 1996. 7. CONTINGENCIES: The Partnerships are party to certain legal actions arising in the ordinary course of business. The Partnerships believe that the ultimate disposition of these matters will not have a material effect on their combined financial position or combined results of operations. 8. SUBSEQUENT EVENT: During July 1997, the Partnerships sold their hotels to CapStar Hotel Company. 13 EX-99.8 9 EX-99.8 EXHIBIT 99.8 INDEPENDENT AUDITORS' REPORT The Board of Directors CapStar Hotel Company: We have audited the accompanying combined balance sheet of CapStar Tinton Falls, L.P. and CapStar Kansas City Partners, L.P. (the "Partnerships") as of December 31, 1996 and related combined statements of operations, partners' capital and cash flows for the year then ended. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of CapStar Tinton Falls, L.P. and CapStar Kansas City Partners, L.P. as of December 31, 1996, and the results of their combined operations and their combined cash flows for the year then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington D.C. July 24, 1997 1 CAPSTAR TINTON FALLS, L.P. AND CAPSTAR KANSAS CITY PARTNERS, L.P. COMBINED BALANCE SHEETS MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996
1997 1996 ------------- ------------ (UNAUDITED) ASSETS Property and equipment: Land............................................................................... $ 885,500 885,500 Buildings.......................................................................... 5,710,773 5,705,501 Furniture, fixtures and equipment.................................................. 1,824,851 1,678,904 ------------- ------------ 8,421,124 8,269,905 Less--accumulated depreciation..................................................... (1,034,363) (908,501) Total property and equipment, net.................................................... 7,386,761 7,361,404 Cash and cash equivalents.......................................................... 172,394 487,781 Accounts receivable................................................................ 182,612 167,736 Inventory and other assets......................................................... 159,555 104,513 Deposits and retainers............................................................. 56,415 56,415 Organization costs and financing cost, net of accumulated amortization of $161,113 in 1997 and $147,977 in 1996..................................................... 331,098 344,233 ------------- ------------ Total assets......................................................................... $ 8,288,835 8,522,082 ------------- ------------ ------------- ------------ LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses................................................ $ 726,223 662,327 Notes payable (note 3)............................................................... 5,489,204 5,524,439 ------------- ------------ Total liabilities.................................................................... 6,215,427 6,186,766 Partners' capital.................................................................... 2,073,408 2,335,316 ------------- ------------ Total liabilities and partners' capital.............................................. $ 8,288,835 8,522,082 ------------- ------------ ------------- ------------
See accompanying notes to combined financial statements. 2 CAPSTAR TINTON FALLS, L.P. AND CAPSTAR KANSAS CITY PARTNERS, L.P. COMBINED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1996
1997 1996 ------------ ---------- (UNAUDITED) Revenue: Rooms................................................................................ $ 1,207,085 6,013,577 Food and beverage.................................................................... 581,048 2,668,119 Other operating departments.......................................................... 62,449 317,454 ------------ ---------- 1,850,582 8,999,150 ------------ ---------- Operating costs and expenses: Rooms................................................................................ 370,017 1,551,816 Food and beverage.................................................................... 505,280 2,192,080 Other operating departments.......................................................... 29,135 158,689 Undistributed operating expenses: Administrative and general........................................................... 185,259 810,930 Sales and marketing.................................................................. 133,353 580,692 Management fees (note 4)............................................................. 55,161 310,953 Property operating costs............................................................. 378,318 1,568,451 Property taxes, insurance and other.................................................. 117,657 463,422 Interest (note 3).................................................................... 131,812 503,334 Depreciation and amortization........................................................ 138,998 451,336 ------------ ---------- 2,044,990 8,591,703 ------------ ---------- Net income (loss)...................................................................... $ (194,408) 407,447 ------------ ---------- ------------ ----------
See accompanying notes to combined financial statements. 3 CAPSTAR TINTON FALLS, L.P. AND CAPSTAR KANSAS CITY PARTNERS, L.P. COMBINED STATEMENTS OF PARTNERS' CAPITAL FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)AND THE YEAR ENDED DECEMBER 31, 1996 Balance at January 1, 1996...................................................... $2,197,869 Distributions................................................................. (270,000) Net income.................................................................... 407,447 --------- Balance at December 31, 1996.................................................... 2,335,316 Distributions (unaudited)..................................................... (67,500) Net loss (unaudited).......................................................... (194,408) --------- Balance at March 31, 1997 (unaudited)........................................... $2,073,408 --------- ---------
See accompanying notes to combined financial statements. 4 CAPSTAR TINTON FALLS, L.P. AND CAPSTAR KANSAS CITY PARTNERS, L.P. COMBINED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)AND THE YEAR ENDED DECEMBER 31, 1996
1997 1996 ----------- ---------- (UNAUDITED) Cash flows from operating activities: Net income (loss)...................................................................... $(194,408) 407,447 Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: Depreciation and amortization........................................................ 138,998 451,336 Decrease (increase) in accounts receivable........................................... (14,876) 57,670 Decrease (increase) in inventory and other assets.................................... (55,042) 32,649 Increase in accounts payable and accrued expenses.................................... 63,896 26,612 ----------- ---------- Total adjustments...................................................................... 132,976 568,267 ----------- ---------- Net cash provided (used) by operating activities......................................... (61,432) 975,714 ----------- ---------- Cash flows from investing activities--purchases of property and equipment................ (151,220) (367,029) ----------- ---------- Cash flows from financing activities: Repayments on notes payable............................................................ (35,235) (139,590) Capital distributions.................................................................. (67,500) (270,000) ----------- ---------- Net cash used by financing activities.................................................... (102,735) (409,590) ----------- ---------- Net increase (decrease) in cash and cash equivalents..................................... (315,387) 199,095 Cash and cash equivalents at beginning of period......................................... 487,781 288,686 ----------- ---------- Cash and cash equivalents at end of period............................................... $ 172,394 487,781 ----------- ---------- ----------- ---------- Supplemental disclosure of cash flow information: Interest paid.......................................................................... $ 131,812 503,334 ----------- ---------- ----------- ----------
See accompanying notes to combined financial statements. 5 CAPSTAR TINTON FALLS, L.P. AND CAPSTAR KANSAS CITY PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996 (1) ORGANIZATION CapStar Tinton Falls, L.P. is a limited partnership which owns one hotel located in Tinton Falls, New Jersey known as the Holiday Inn Tinton Falls. CapStar Kansas City Partners, L.P. is a limited partnership which owns one hotel located in Kansas City, Missouri known as the Kansas City Holiday Inn Sports Complex. The general partner of CapStar Tinton Falls, L.P. and CapStar Kansas City Partners, L.P. (the "Partnerships") is CapStar Hotel Partners, L.P. CapStar Hotel Company purchased the Holiday Inn Tinton Falls and the Kansas City Holiday Inn Sport Complex from the Partnerships for approximately $10,100,000 on April 30, 1997. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The combined financial statements include the accounts of the Partnerships and have been prepared using the accrual basis of accounting. CASH AND CASH EQUIVALENTS The Partnerships consider all highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORY Inventories, consisting primarily of china, tableware, linens, and food and beverage items are stated at cost, using the first-in, first-out method of inventory valuation. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is computed on the buildings using the straight-line method over its useful life of 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method over 5 to 7 years. Management periodically evaluates potential permanent impairment of the net carrying value of the hotels. If the net carrying value of the hotels exceed their fair values, the excess is charged to operations. No impairment losses were recorded during 1997 or 1996. ORGANIZATION COSTS AND FINANCING COSTS Organization costs incurred in the formation of the Partnerships are amortized over useful lives of five to 40 years. Costs associated with the acquisition of debt are amortized over the terms of the loans using a method that approximates the interest method. 6 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned by the Partnerships through the operations of the hotels and is recognized when earned. INCOME TAXES The combined financial statements contain no provision for federal income taxes since the Partnerships' income, losses, deductions, and credits for tax purposes are reported on the income tax returns of the partners. USE OF ESTIMATES Management has made a number of estimates and assumptions related to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) NOTES PAYABLE CapStar Tinton Falls, L.P. had a note payable to Sovereign Bank. The note had a fixed interest rate at 8 percent and required monthly payments of principal and interest. The note was secured by the hotel property and had a maturity date of February 1, 1998. The outstanding balance of the note was $2,700,454 (unaudited) at March 31, 1997 and $2,711,314 at December 31, 1996. Interest expense incurred on the note was $57,241 (unaudited) for the three months ended March 31, 1997 and $219,417 in 1996. CapStar Kansas City Partners, L.P. had a note payable to ORIX USA Corporation. The note had an interest rate equal to the London Interbank Offered Rate plus 4.25 percent (9.69 percent at December 31, 1996) and required monthly payments of principal and interest. The note was secured by the hotel property and had a maturity date of January 22, 2002. The outstanding balance of the note was $2,788,750 (unaudited) at March 31, 1997 and $2,813,125 at December 31, 1996. Interest expense incurred on the note was $74,571 (unaudited) for the three months ended March 31, 1997 and $283,917 in 1996. Both of the above notes were repaid in full upon the sale of the hotels by the Partnerships. (4) RELATED-PARTY TRANSACTIONS The two hotels are managed by CapStar Management Company, L.P. (CMC), a subsidiary of CapStar Hotel Company. The hotels paid base management fees to CMC based on gross revenue plus incentive management fees if the hotels' operating results exceeded levels specified in the management contract. Management fees incurred by the Partnerships were $55,161 (unaudited) for the three months ended March 31, 1997 and $310,953 in 1996. 7 EX-99.9 10 EX-99.9 EXHIBIT 99.9 INDEPENDENT AUDITORS' REPORT The Board of Directors Capstar Hotel Company: We have audited the accompanying combined balance sheet of the Highgate Portfolio (the "Hotels") as of December 31, 1996 and the related combined statements of operations, owners' deficit and cash flows for the year then ended. These combined financial statements are the responsibility of the Hotels' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Highgate Portfolio as of December 31, 1996 and the results of their combined operations and their combined cash flows for the year ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. February 7, 1997 1 HIGHGATE PORTFOLIO COMBINED BALANCE SHEET DECEMBER 31, 1996
1996 -------------- ASSETS Cash and cash equivalents......................................................................... $ 3,093,582 Escrow accounts................................................................................... 265,695 Accounts receivable............................................................................... 1,911,939 Inventory and other assets........................................................................ 547,449 -------------- Total current assets.............................................................................. 5,818,665 -------------- Property and equipment: Land............................................................................................ 4,852,052 Building........................................................................................ 32,550,978 Furniture, fixtures and equipment............................................................... 16,817,888 -------------- 54,220,918 Less--accumulated depreciation.................................................................. (16,638,646) -------------- Total property and equipment, net................................................................. 37,582,272 Deferred assets, net of accumulated amortization of $983,486...................................... 1,042,224 Advances to related parties....................................................................... 7,297,283 -------------- Total assets...................................................................................... $ 51,740,444 -------------- -------------- LIABILITIES AND OWNERS' DEFICIT Accounts payable and accrued expenses............................................................. $ 5,231,355 Capital lease obligations, current portion........................................................ 202,980 Notes payable, current portion.................................................................... 1,122,000 -------------- Total current liabilities......................................................................... 6,556,335 -------------- Capital lease obligations, long-term.............................................................. 226,977 Advances from related parties..................................................................... 11,902,144 Notes payable, long-term.......................................................................... 45,074,801 -------------- Total liabilities................................................................................. 63,760,257 Owners' deficit................................................................................... (12,019,813) -------------- Total liabilities and owners' deficit............................................................. $ 51,740,444 -------------- --------------
See accompanying notes to combined financial statements. 2 HIGHGATE PORTFOLIO COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
1996 ------------- Revenue: Rooms............................................................................................ $ 22,285,306 Food and beverage................................................................................ 8,194,218 Other operating departments...................................................................... 3,940,775 ------------- 34,420,299 ------------- Operating expenses: Rooms............................................................................................ 5,498,855 Food and beverage................................................................................ 6,672,434 Other operating departments...................................................................... 2,189,072 Undistributed operating expenses: Administrative and general....................................................................... 2,678,993 Sales and marketing.............................................................................. 2,857,750 Management fees.................................................................................. 1,157,682 Property operating costs......................................................................... 2,870,437 Property taxes, insurance and other.............................................................. 1,973,571 Depreciation and amortization.................................................................... 2,719,401 Interest expense................................................................................. 5,951,317 Foreign currency exchange adjustment............................................................. 1,297 ------------- 34,570,809 ------------- Net loss before income taxes..................................................................... (150,510) Income tax expense............................................................................... 215,700 ------------- Net loss......................................................................................... $ (366,210) ------------- -------------
See accompanying notes to combined financial statements. 3 HIGHGATE PORTFOLIO COMBINED STATEMENT OF OWNERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1996 Balance, December 31, 1995..................................................... $(11,660,873) Foreign currency translation adjustment........................................ 7,270 Net loss....................................................................... (366,210) ----------- Balance, December 31, 1996..................................................... $(12,019,813) ----------- -----------
See accompanying notes to combined financial statements. 4 HIGHGATE PORTFOLIO COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996
1996 ------------- Cash flows from operating activities: Net loss......................................................................................... $ (366,210) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................................................................. 2,719,401 Foreign currency translation adjustment........................................................ (7,270) Increase in escrow accounts.................................................................... (78,953) Increase in accounts receivable................................................................ (338,313) Decrease in inventory and other assets......................................................... 79,815 Increase in accounts payable and accrued expenses.............................................. 1,444,744 ------------- Net cash provided by operating activities.......................................................... 3,453,214 ------------- Cash flows from investing activities: Deferred asset additions......................................................................... (50,000) Purchases of building improvements............................................................... (998,350) Net repayments of advances to related parties.................................................... 1,193,230 Purchases of furniture and equipment............................................................. (1,408,204) ------------- Net cash used by investing activities.............................................................. (1,263,324) ------------- Cash flows from financing activities: Repayments of notes payable...................................................................... (409,360) Advances from related parties.................................................................... 15,352 Repayments of capital lease obligations.......................................................... (137,729) ------------- Net cash used by financing activities.............................................................. (531,737) ------------- Net increase in cash and cash equivalents.......................................................... 1,658,153 Cash and cash equivalents at beginning of period................................................... 1,435,429 ------------- Cash and cash equivalents at end of period......................................................... $ 3,093,582 ------------- ------------- Supplemental disclosure of cash flow information: Interest paid...................................................................................... $ 5,011,517 Additions to capital lease obligations............................................................. 377,081 ------------- -------------
See accompanying notes to combined financial statements. 5 HIGHGATE PORTFOLIO NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996 (1) ORGANIZATION The Highgate Portfolio (the "Hotels") consists of six hotels which are owned by partnerships or corporations affiliated with Highgate Hotels, Inc. ("Highgate Hotels"). Two of the Hotels are located in Dallas (Radisson and Holiday Inn Select), one hotel is located in Indianapolis (Doubletree), one hotel is located in Calgary (Holiday Inn), and two hotels are located in Vancouver (Ramada and Sheraton). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotels are included in the financial records of the respective partnership or corporation that owns each hotel. The accompanying combined financial statements include the accounts of the Hotels only, as if they were a separate legal entity, and have been prepared using the accrual basis of accounting. CASH AND CASH EQUIVALENTS The Hotels consider all highly liquid instruments with an original maturity date of three months or less to be cash equivalents. ESCROW ACCOUNTS Escrow Accounts represent amounts paid into a property tax escrow account. INVENTORIES Inventories, consisting primarily of china, tableware, linens, and food and beverage items are stated at cost, using the first-in, first-out ("FIFO") method of inventory valuation. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed on the buildings and building improvements using the straight-line method over their useful lives of 15 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method over five years. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debts to establish an allowance for doubtful accounts. Write offs occur when management deems a receivable uncollectible. DEFERRED EXPENSES Deferred expenses consist, primarily, of deferred financing costs which are amortized on a basis which approximates the interest method, over the term of the respective loan. REVENUE Revenue is earned primarily through the operations of the Hotels and is recognized when earned. INCOME TAXES Four of the Hotels are owned by partnerships, and therefore, any income taxes are reported by the individual partners. The two remaining hotels are owned by entities incorporated in Canada (the Canadian Corporations). For the purposes of these financial statements, the Hotels have calculated the tax provision for the Canadian Corporations using an effective tax rate of 44%. The Canadian Corporations' deferred tax assets and liabilities are insignificant to these financial statements and are therefore not presented. 6 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of three hotels, located in Canada, are translated at the rate of exchange at the balance sheet date; revenue and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments to assets and liabilities are recorded in the Combined Statement of Owners' Deficit. Foreign currency translation gains and losses are recorded in the Combined Statements of Operations. USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) RELATED-PARTY TRANSACTIONS Five of the Hotels are managed by Hospitality Group, Inc. a related party of Highgate Hotels. The property management agreements provide for management fees of 3% of Gross Revenues, as defined in the management agreement. In addition, the management agreements provide for an incentive fee of 2% of Gross Revenues, as defined in the management agreement, provided that certain net operating income thresholds are met. The five hotels incurred management fees of $1,047,730 in 1996. The Hotels have made advances to various related parties. The total amounts outstanding on the advances to related parties were $7,297,283 at December 31, 1996. The advances are unsecured, bear no interest and have no terms of repayment. The Hotels have received advances from various related parties. The total amounts outstanding on the advances from related parties were $11,902,144 at December 31, 1996. The advances are unsecured, bear no interest and have no terms of repayment. Management does not expect to be required to repay advances during 1997. (4) NOTES PAYABLE Notes Payable consisted of the following on December 31, 1996: RADISSON--DALLAS Note payable to the Equitable Life Assurance of the United States (Equitable), collateralized by a deed of trust on the Hotel. Interest payable monthly at 10% with the balance due November 30, 2000................................... $7,407,205 Note payable to Equitable, with no interest due, collateralized by a deed of trust on the hotel. Balance due November 30, 2000............................ 1,140,020 HOLIDAY INN SELECT--DALLAS Note payable to Allied Capital Commercial Corporation and Business Mortgage Investors, Inc., collateralized by a deed of trust on substantially all assets of the current owner. Principal payments of $25,000 are due monthly with interest at prime plus 5.25% (13.5% at December 31, 1996). Balance is due September 30, 1999....................................................... 7,500,000 Note payable to BancOne Capital Partners III Limited Partnership, collateralized by a pledge and assignment of partnership interests and a stock pledge in affiliates of Highgate Hotels. Interest is payable monthly at 13%, with Participation Payments, as defined, due 30 days after the end of each calendar year. Balance is due September 30, 1999........................ 2,500,000 HOLIDAY INN--CALGARY Note Payable to Hongkong Bank of Canada with interest payable monthly at 5.36%........................................................................ 3,064,575
7 (4) NOTES PAYABLE (CONTINUED) DOUBLETREE--INDIANAPOLIS Note payable to Lincoln National Life Insurance, collateralized by a deed of trust on the hotel. Principal payments of $39,935 are due monthly with interest at 10.50%. Balance is due on January 1, 2005........................ 3,874,866 Note payable to BancOne Capital Partners III Limited Partnership, collateralized by a pledge and assignment of partnership interests and a stock pledge in affiliates of Highgate Hotels. Interest is payable monthly at 12%. The balance is due November 30, 2004.................................... 2,430,000 SHERATON HOTEL--VANCOUVER (SURREY) Note payable to Lehman Brothers Holdings, Inc., collateralized by a deed of trust on the hotel. Interest is payable monthly at LIBOR plus 13%. The balance is due September 1, 2000............................................. 11,500,000 RAMADA HOTEL--VANCOUVER Note payable to Canadian Imperial Bank of Commerce (CIBC), secured by a first fixed charge against the hotel. Interest is payable monthly at the CIBC prime rate plus 1.5%. Principal is due monthly, in accordance with the note, with the balance due February 28, 2000............................................ 6,780,135 ---------- Total...................................................................... $46,196,801 ---------- ----------
Aggregate maturities of the above notes payable are as follows:
For the year ended - --------------------------------------------------------------- 1997........................................................... $1,122,000 1998........................................................... 1,144,047 1999........................................................... 10,267,515 2000........................................................... 26,210,678 2001........................................................... 479,220 Thereafter..................................................... 6,973,341 ---------- Total...................................................... $46,196,801 ---------- ----------
(5) CAPITAL LEASE OBLIGATIONS The Hotels lease certain equipment under various capital leases. The leases require monthly payments totaling $16,915 including interest ranging between 10.5% to 15.5% per annum, with the final lease maturing in February 2000. Furniture and equipment includes approximately $430,000 for leases that have been capitalized. (6) MANAGEMENT AGREEMENT Property management for the Doubletree Hotel is provided by Double Tree Partners. The management agreement provides for payment of a management fee of 3% of Total Sales, as defined in the management agreement. In addition, the management agreement provides for an incentive management fee equal to 15% of the amount, if any, by which the Net Operating Income, as defined in the management agreement, for any fiscal year exceeds $420,000. Total management fees under this agreement were $109,952 for 1996. See note 3 for management agreements related to the other five hotels. 8 EX-99.10 11 EX-99.10 EXHIBIT 99.10 INDEPENDENT AUDITORS' REPORT Partners and Board of Directors Westchase Holdings, Ltd. dba Westchase Hilton Hotel and Towers GAR Holdings, Inc. Houston, Texas We have audited the accompanying combined balance sheet of Westchase Holdings, Ltd. (a Texas limited partnership) dba Westchase Hilton Hotel and Towers and GAR Holdings, Inc. as of December 27, 1996, and the related combined statements of income, owners' deficit and cash flows for the year then ended. These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of Westchase Holdings, Ltd. dba Westchase Hilton Hotel and Towers and GAR Holdings, Inc. at December 27, 1996 and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Mann Frankfort Stein & Lipp, P.C. Houston, Texas February 11, 1997 1 WESTCHASE HOLDINGS, LTD. DBA WESTCHASE HILTON HOTEL AND TOWERS GAR HOLDINGS, INC. COMBINED BALANCE SHEET DECEMBER 27, 1996 ASSETS Current assets Cash and cash equivalents.................................................... $1,116,006 Accounts receivable, less allowance for doubtful accounts of $4,213.......... 456,339 Inventories.................................................................. 57,172 Federal income tax receivable................................................ 12,164 Prepaid expenses............................................................. 13,575 ---------- Total current assets........................................................... 1,655,256 Property and equipment Land......................................................................... 2,046,000 Building..................................................................... 12,451,161 Furnishings, fixtures and equipment.......................................... 4,594,999 Automobiles.................................................................. 19,928 ---------- 19,112,088 Less: accumulated depreciation............................................... (6,167,818) ---------- Net property and equipment..................................................... 12,944,270 Other assets Restricted cash.............................................................. 281,389 License fee, less accumulated amortization of $15,750........................ 6,757 Loan origination fees, less accumulated amortization of $95,975.............. 543,861 Service warranties, less accumulated amortization of $3,600.................. 4,400 Deposits..................................................................... 112,171 ---------- Total other assets............................................................. 948,578 ---------- Total assets................................................................... $15,548,104 ---------- ---------- LIABILITIES AND OWNERS' DEFICIT Current liabilities Accounts payable............................................................. $ 286,069 Accrued expenses............................................................. 600,154 Current portion of long-term debt............................................ 567,125 ---------- Total current liabilities...................................................... 1,453,348 Long-term debt, less current portion........................................... 15,061,302 ---------- Total liabilities.............................................................. 16,514,650 Commitments and contingencies.................................................. -- Owners' deficit................................................................ (966,546) ---------- Total liabilities and owners' deficit.......................................... $15,548,104 ---------- ----------
See notes to combined financial statements. 2 WESTCHASE HOLDINGS, LTD. DBA WESTCHASE HILTON HOTEL AND TOWERS GAR HOLDINGS, INC. COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 27, 1996 Revenues Rooms........................................................................ $7,558,419 Food and beverage............................................................ 2,360,609 Other........................................................................ 676,291 ---------- Total Revenues................................................................. 10,595,319 Departmental Expenses Rooms........................................................................ 1,645,524 Food and beverage............................................................ 1,493,485 Other........................................................................ 188,445 ---------- Total Departmental Expenses.................................................... 3,327,454 ---------- Gross Operating Income......................................................... 7,267,865 Undistributed Expenses Administrative and general................................................... 1,240,749 Marketing.................................................................... 1,204,528 Energy costs................................................................. 540,489 Repairs and maintenance...................................................... 562,017 Management fees.............................................................. 249,996 ---------- Total Undistributed Expenses................................................... 3,797,779 ---------- Income Before Fixed Charges.................................................... 3,470,086 Fixed Charges Interest..................................................................... 1,294,344 Depreciation and amortization................................................ 1,174,261 Property taxes............................................................... 344,135 Insurance.................................................................... 84,553 ---------- Total Fixed Charges............................................................ 2,897,293 ---------- Income Before Federal Income Taxes............................................. 572,793 Federal Income Taxes........................................................... 845 ---------- Net Income..................................................................... $ 571,948 ---------- ----------
See notes to combined financial statements. 3 WESTCHASE HOLDINGS, LTD. DBA WESTCHASE HILTON HOTEL AND TOWERS GAR HOLDINGS, INC. COMBINED STATEMENT OF OWNER'S DEFICIT YEAR ENDED DECEMBER 27, 1996
ADDITIONAL COMMON PAID-IN RETAINED PARTNERS' STOCK CAPITAL EARNINGS CAPITAL TOTAL ------------- ------------- --------- ------------- ------------- Balance, December 30, 1995........................ $ 10 $ 990 $ 52,580 $ 3,524,114 $ 3,577,694 Distributions..................................... -- -- -- (5,116,188) (5,116,188) Net income........................................ -- -- 23,853 548,095 571,948 --- ----- --------- ------------- ------------- Balance, December 27, 1996........................ $ 10 $ 990 $ 76,433 $ (1,043,979) $ (966,546) ------------- ------------- --------- ------------- ------------- ------------- ------------- --------- ------------- -------------
See notes to combined financial statements. 4 WESTCHASE HOLDINGS, LTD. DBA WESTCHASE HILTON HOTEL AND TOWERS GAR HOLDINGS, INC. COMBINED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 27, 1996 Cash flows from operating activities Net income...................................................................... $ 571,948 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................. 1,174,261 Provision for bad debts....................................................... 21,537 Gain from disposal of property and equipment.................................. (1,695) Changes in assets and liabilities: Accounts receivable........................................................... (82,492) Inventories................................................................... (4,442) Federal income taxes receivable............................................... (11,384) Prepaid expenses.............................................................. 76,414 Other assets.................................................................. 33,730 Accounts payable.............................................................. (144,494) Accrued expenses.............................................................. (721,385) --------- 340,050 --------- Net cash provided by operating activities....................................... 911,998 Cash flows from investing activities Cash paid for property and equipment.......................................... (134,589) Proceeds from the sale of property and equipment.............................. 7,542 Decrease in advances to affiliates, net....................................... 5,160 Other intangible assets....................................................... (639,837) --------- Net cash used in investing activities........................................... (761,724) Cash flows from financing activities Principal payments on debt.................................................... (12,434,464) Proceeds from debt............................................................ 16,000,000 Distributions................................................................. (5,116,188) --------- Net cash used in financing activities........................................... (1,550,652) --------- Net decrease in cash and cash equivalents....................................... (1,400,378) Cash and cash equivalents at beginning of period................................ 2,797,773 --------- Cash and cash equivalents at end of period...................................... $1,397,395 --------- --------- Supplemental cash flow information Interest paid................................................................. $1,590,129 --------- --------- Taxes paid.................................................................... $ 12,229 --------- --------- Cash equivalents reconciliation Cash and cash equivalents..................................................... $1,116,006 Restricted cash............................................................... 281,389 --------- $1,397,395 --------- ---------
See notes to combined financial statements. 5 WESTCHASE HOLDINGS, LTD. dba WESTCHASE HILTON HOTEL AND TOWERS GAR HOLDINGS, INC. Notes to Combined Financial Statements December 27, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING: The accompanying combined financial statements include the accounts of the following entities (collectively, the "Companies"):
FORM OF ENTITY ---------------------- Westchase Holdings, Ltd. ("Partnership") dba Westchase Hilton Hotel and Towers................................ Limited Partnership GAR Holdings, Inc. ("GAR")............................................ Corporation
Significant intercompany transactions and balances have been eliminated in combination. Beverage operations are managed by GAR. The Partnership acts as agent for GAR with respect to sales and beverage taxes and has paid all deposits required by the Texas Alcoholic Beverage Commission on behalf of GAR. NATURE OF OPERATIONS: The Companies provide hotel, restaurant and banquet facilities to the general public in Houston, Texas. The Companies' revenues are derived primarily from room rentals. Secondary sources of revenues are generated from restaurant services, banquet facilities and customer support services provided to guests within the Hotel. The Companies extend credit to businesses in Houston area and throughout the United States. ACCOUNTING PERIOD: The Companies' fiscal year is based on a 52-53 week year. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Earnings are charged with a provision for doubtful accounts based on a current review of the collectibility of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. INVENTORIES: Food and beverage inventories are valued at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets (five to thirty-nine years). Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized. OTHER ASSETS: Other assets include the following: (1) license fees paid to Hilton Inns, Inc., which are being amortized on a straight-line basis over a thirteen year period through November, 2000; (2) loan origination fees paid to a finance company which are being amortized on a straight-line basis over a five year period through March, 2001; and (3) extended warranties paid to a vendor which are being amortized on a straight-line basis over a five year period through September, 1999. FEDERAL INCOME TAXES: No provision for Federal income taxes has been made for the Partnership as these taxes are the responsibility of the partners. Federal income taxes, current and deferred, for the Corporation are not significant. NET INCOME (LOSS) ALLOCATION: Net income or loss of the Partnership is allocated to the partners in accordance with the terms set forth in the Partnership Agreement. 6 WESTCHASE HOLDINGS, LTD. DBA WESTCHASE HILTON HOTEL AND TOWERS GAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 27, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Such allocations will include a 10% return on cash funds invested, to the extent of any positive balance in the partners' investment account, as defined by the Partnership Agreement. CASH EQUIVALENTS: For purposes of the Statement of Cash Flows, cash equivalents include all highly liquid investments with original maturities of three months or less. USE OF ESTIMATES: The preparation of combined 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 combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (2) CASH Under the mortgage note payable agreement, the Partnership is required to make quarterly deposits amounting to either $118,750 or 4% of revenues, whichever is greater. At December 27, 1996, $281,389 of cash was restricted for that purpose. At December 27, 1996, the Partnership had monies deposited in certain banks which were in excess of the federally insured limits. The Partnership monitors the financial condition of the banks and has experienced no losses associated with its accounts. (3) RELATED PARTY TRANSACTIONS The Partnership repaid a mortgage note payable of $2,275,400 to the Companies' principal partner and stockholder. Interest applicable to the promissory note of $328,341 was paid in 1996. During 1996, an Affiliate charged the Companies $32,500 for overhead expenses which are included in administrative and general expenses. In addition, the Affiliate charged management fees of $249,996 in 1996 for managing the Hotel. The Companies are provided insurance coverage under a group policy covering the Companies and other entities owned by the Companies' principal partner and stockholder. The Companies reimbursed the Affiliate for its pro-rata share of insurance expense. At December 27, 1996, the Companies, including another Affiliate, had two unused letters of credit from a bank with a total amount available of $268,816, payable with interest at 8.75%, expiring November 1996, related to workers compensation insurance. The Partnership is also required to maintain a certificate of deposit with a bank under the terms of the insurance agreement. At December 27, 1996, $109,255 was restricted for that purpose and is included in deposits. During 1996, the Partnership refinanced all their bank debt and a mortgage note payable to a related party with a finance company. In obtaining financing, the Partnership paid a fee of $175,000 to the Affiliate. Aggregate amounts payable to the Affiliate included in accounts payable and accrued expenses are approximately $79,700 at December 27, 1996. 7 WESTCHASE HOLDINGS, LTD. DBA WESTCHASE HILTON HOTEL AND TOWERS GAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 27, 1996 (3) RELATED PARTY TRANSACTIONS--(CONTINUED) At December 27, 1996, the Partnership had $1,168,436 in cash deposits and certificates of deposit with a bank owned by the Investor Limited Partner. The Partnership leases restaurant facilities to an affiliated company under an operating lease for a term of ten years expiring in 2002. Under the agreement, the minimum monthly rent is to be equal to the tenant's net income before specific deductions not to exceed $18,000 per month. Rental income for 1996 amounted to approximately $2,150. At December 27, 1996, the Partnership had a payable of $11,350 with such affiliated company. Total cost and accumulated depreciation at December 27, 1996 for property and equipment under this operating lease are as follows: Building and land............................................. $ 1,004,022 Furnishings, fixtures and equipment........................... 437,400 ----------- 1,441,422 Less: accumulated depreciation............................... (379,795) ----------- $ 1,061,627 ----------- -----------
(4) LONG-TERM DEBT Long-term debt consists of: Mortgage note payable to a finance company in monthly installments of $166,881 including interest at 9.35%, secured by first and second liens on the hotel property and assignment of rents and leases, maturing March, 2001..................... $15,628,427 Less: current portion......................................... 567,125 ---------- $15,061,302 ---------- ----------
The following are maturities of long-term debt for the next five years:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------- 1997........................................................................... $ 567,125 1998........................................................................... 622,483 1999........................................................................... 683,246 2000........................................................................... 749,939 2001........................................................................... 13,005,634 ------------- $ 15,628,427 ------------- -------------
The Partnership also has a "junior" note with the finance company with advances available up to $1,500,000. During 1996, the Partnership did not borrow funds on this junior note. 8 WESTCHASE HOLDINGS, LTD. DBA WESTCHASE HILTON HOTEL AND TOWERS GAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 27, 1996 (5) BANK CREDIT AGREEMENTS, COMMITMENTS, AND CONTINGENCIES In 1980, the previous owners of the Hotel entered into a 20-year license agreement with Hilton Inns, Inc. permitting it to promote and advertise the Hotel under the Hilton name. Under the terms of the agreement, the Partnership is committed to pay a monthly license fee equal to 6.0% in 1996 of the gross room sales of the Hotel. The Hotel is also committed to pay a monthly service fee equal to 4.55% of gross room sales of customers who participate in the Hilton Honors program. Total license and Honor fees were $596,234 in 1996. During 1990, the Partnership entered into a month-to-month management agreement with a hotel management company owned by the Companies' principal partner and stockholder. The agreement provides for a management fee of $20,833 per month. The agreement continues on a monthly basis unless either party terminates the agreement within the terms described in such agreement. (6) COMMON STOCK GAR Holdings, Inc. has authorized 100,000 shares of common stock and has 1,000 shares of $.01 par value common stock issued and outstanding. (7) EMPLOYEE BENEFIT PLAN The Companies participate in a multi-employer 401(k) employee benefit plan sponsored by an affiliated company. The plan covers all employees who meet certain age and service requirements. Employees may provide contributions to the plan through salary deferrals. Additionally, the Companies are required to make matching contributions of 50% of the first 6% of the employees contributions. During 1996, the Companies contributed approximately $52,000 to the Plan. (8) SUBSEQUENT EVENT Subsequent to year end, the Partnership sold the hotel property to a third party for $28,500,000. Upon completion of the sale, the third party assumed the mortgage note payable. 9 EX-99.11 12 EX-99.11 EXHIBIT 99.11 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying balance sheets of Ballston Hotel Limited Partnership (the "Partnership") as of June 30, 1996 and December 31, 1995 and 1994, and the related statements of operations, partners' deficit, and cash flows for the six months ended June 30, 1996 and for the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Partnership'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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ballston Hotel Limited Partnership as of June 30, 1996 and December 31, 1995 and 1994, and the results of its operations and its cash flows for the six months ended June 30, 1996 and for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in note 4 to the financial statements, the Partnership's note payable to a financial institution is in default and may be called at any time. This raises substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to this matter are also described in note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP Washington, D.C. July 11, 1996 1 BALLSTON HOTEL LIMITED PARTNERSHIP BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
1996 1995 1994 ------------- ------------ ------------ ASSETS Cash and cash equivalents............................................. $ 271,215 501,433 98,904 Certificate of deposit................................................ -- 101,833 250,000 Hotel inventory, at cost.............................................. 37,481 51,635 52,794 Accounts receivable: Trade............................................................... 293,251 174,833 369,961 Affiliates (note 6)................................................. -- -- 757,624 ------------- ------------ ------------ Total accounts receivable, net........................................ 293,251 174,833 1,127,585 ------------- ------------ ------------ Hotel property (notes 4 and 7): Land................................................................ 2,073,323 2,073,323 2,073,323 Building, net of accumulated depreciation of $2,192,347 in 1996, $2,029,714 in 1995 and $1,704,449 in 1994......................... 10,818,285 10,980,918 11,306,183 Furniture, fixtures and equipment, net of accumulated depreciation of $1,163,947 in 1996, $1,060,156 in 1995 and $854,609 in 1994.... 1,889,117 1,983,728 1,742,714 Initial hotel supplies, net of accumulated amortization of $197,924 in 1996, $183,187 in 1995 and $153,713 in 1994.................... 244,189 258,926 288,400 Conversion costs, net of accumulated amortization of $107,181 in 1996, $98,491 in 1995 and $81,111 in 1994......................... 153,533 162,223 179,603 ------------- ------------ ------------ Total hotel property.................................................. 15,178,447 15,459,118 15,590,223 Investment in partnership (note 5).................................... 2,189,989 2,259,061 2,332,760 Other Assets.......................................................... 77,609 131,409 144,842 ------------- ------------ ------------ $ 18,047,992 18,679,322 19,597,108 ------------- ------------ ------------ ------------- ------------ ------------ LIABILITIES AND PARTNERS' DEFICIT Accounts payable and accrued expenses: Affiliates (note 6)................................................. $ 2,283,784 2,163,011 1,855,114 Trade............................................................... 473,641 338,665 340,846 ------------- ------------ ------------ Total accounts payable and accrued expenses........................... 2,757,425 2,501,676 2,195,960 Notes payable (notes 4 and 6): Financial institution............................................... 17,079,121 17,079,121 17,201,202 Affiliates.......................................................... 1,468,891 2,437,377 3,340,277 ------------- ------------ ------------ Total notes payable................................................... 18,548,012 19,516,498 20,541,479 ------------- ------------ ------------ Total liabilities..................................................... 21,305,437 22,018,174 22,737,439 Partners' deficit (note 3)............................................ (3,257,445) (3,338,852) (3,140,331) ------------- ------------ ------------ Commitments (notes 4 and 7)........................................... $ 18,047,992 18,679,322 19,597,108 ------------- ------------ ------------ ------------- ------------ ------------
See accompanying notes to financial statements. 2 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ---------- ---------- ---------- Hotel operating revenue: Room rental................................................ $ 3,173,738 5,820,170 5,408,935 5,116,700 Food and beverage sales.................................... 950,778 2,000,110 2,045,750 1,792,965 Telephone and other........................................ 128,037 303,194 260,190 269,030 ------------ ---------- ---------- ---------- Total hotel operating revenue................................ 4,252,553 8,123,474 7,714,875 7,178,695 ------------ ---------- ---------- ---------- Hotel operating expenses: Department expenses........................................ 1,538,843 3,140,757 3,100,077 2,810,690 Energy and engineering..................................... 351,538 602,512 574,578 518,924 Sales and marketing........................................ 327,356 659,284 604,457 629,567 General and administrative (note 6)........................ 458,119 981,849 927,024 907,215 Management fee (note 7).................................... 127,547 243,704 231,446 215,359 Other...................................................... 99,892 138,551 84,534 66,640 ------------ ---------- ---------- ---------- Total hotel operating expenses............................... 2,903,295 5,766,657 5,522,116 5,148,395 ------------ ---------- ---------- ---------- Income from hotel operations................................. 1,349,258 2,356,817 2,192,759 2,030,300 ------------ ---------- ---------- ---------- Fixed charges: Financial costs (note 6)................................... 739,867 1,571,261 1,438,463 1,327,641 Depreciation and amortization.............................. 290,467 611,645 700,566 723,020 Property insurance and taxes............................... 146,248 266,115 249,394 251,608 Parking costs.............................................. 42,733 99,093 103,057 106,833 ------------ ---------- ---------- ---------- Total fixed charges.......................................... 1,219,315 2,548,114 2,491,480 2,409,102 ------------ ---------- ---------- ---------- Other income (expense): Interest income............................................ 8,153 40,169 15,010 12,228 Equity in income of partnership (note 5)................... 15,355 36,510 41,105 31,309 Other...................................................... (72,044) (83,903) (6,908) (80) ------------ ---------- ---------- ---------- Total other income (expense), net............................ (48,536) (7,224) 49,207 43,457 ------------ ---------- ---------- ---------- Net income (loss)............................................ $ 81,407 (198,521) (249,514) (335,345) ------------ ---------- ---------- ---------- ------------ ---------- ---------- ----------
See accompanying notes to financial statements. 3 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
GENERAL LIMITED TOTAL PARTNER PARTNERS ------------- --------- ----------- Balance at December 31, 1992............................................... $ (2,555,472) (46,288) (2,509,184) Net loss................................................................. (335,345) (3,353) (331,992) ------------- --------- ----------- Balance at December 31, 1993............................................... (2,890,817) (49,641) (2,841,176) Net loss................................................................. (249,514) (2,495) (247,019) ------------- --------- ----------- Balance at December 31, 1994............................................... (3,140,331) (52,136) (3,088,195) Net loss................................................................. (198,521) (1,985) (196,536) ------------- --------- ----------- Balance at December 31, 1995............................................... (3,338,852) (54,121) (3,284,731) Net income............................................................... 81,407 8,141 73,266 ------------- --------- ----------- Balance at June 30, 1996................................................... $ (3,257,445) (45,980) (3,211,465) ------------- --------- ----------- ------------- --------- -----------
See accompanying notes to financial statements. 4 BALLSTON HOTEL LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ----------- ----------- ---------- ---------- Cash flows from operating activities: Net income (loss)............................................ $ 81,407 (198,521) (249,514) (335,345) Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: Depreciation and amortization............................ 290,467 611,645 700,566 723,020 Increase (decrease) in provision for doubtful accounts... 397 (8,072) 11,323 (1,375) Decrease in certificates of deposit...................... 101,833 148,167 -- -- Equity in income of partnership.......................... (15,355) (36,510) (41,105) (31,309) Decrease (increase) in accounts receivable............... (118,815) 960,824 (789,828) (87,582) Decrease (increase) in hotel inventory................... 14,154 1,159 (930) (9,997) Decrease (increase) in other assets...................... 53,800 (20,258) (58,614) 42,031 Increase in accounts payable and accrued expenses........ 255,749 305,716 375,580 320,816 ----------- ----------- ---------- ---------- Total adjustments............................................ 582,230 1,962,671 196,992 955,604 ----------- ----------- ---------- ---------- Net cash provided (used) by operating activities............... 663,637 1,764,150 (52,522) 620,259 ----------- ----------- ---------- ---------- Cash flows from investing activities: Additions to hotel property.................................. (9,796) (446,849) (133,901) (195,323) Distributions from investee partnership...................... 84,427 110,209 120,694 204,761 ----------- ----------- ---------- ---------- Net cash provided (used) by investing activities............... 74,631 (336,640) (13,207) 9,438 ----------- ----------- ---------- ---------- Cash flows from financing activities: Principal payments on notes payable.......................... (968,486) (1,024,981) (110,072) (818,644) Borrowings on notes payable.................................. -- -- -- 20,000 ----------- ----------- ---------- ---------- Net cash used by financing activities.......................... (968,486) (1,024,981) (110,072) (798,644) ----------- ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents........... (230,218) 402,529 (175,801) (168,947) Cash and cash equivalents at beginning of period............... 501,433 98,904 274,705 443,652 ----------- ----------- ---------- ---------- Cash and cash equivalents at end of period..................... $ 271,215 501,433 98,904 274,705 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest....................................... $ 619,094 1,263,364 1,135,123 1,120,853 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
See accompanying notes to financial statements. 5 BALLSTON HOTEL LIMITED PARTNERSHIP Notes to Financial Statements June 30, 1996 and December 31, 1995 and 1994 (1) ORGANIZATION Ballston Hotel Limited Partnership (the "Partnership") was formed on January 1, 1988 pursuant to the Commonwealth of Virginia Uniform Limited Partnership Act. The principal business activity of the Partnership is the development and operation of a hotel complex as part of the mixed-use Ballston Metro Center project (the "Project") located in Arlington, Virginia. Ballston Condo Limited Partnership ("BCLP") and Ballston Office Limited Partnership ("BOLP"), affiliates of the Partnership, constructed the condominium and office building components of the Project, respectively. The hotel opened on October 5, 1989 and operated as the Arlington Renaissance Hotel at Ballston Metro Center (the "Hotel"). Management intends to operate the hotel under a franchise agreement with Hilton Inns, Inc. to be entered into in August 1996. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING RECORDS AND INCOME TAXES The Partnership maintains its accounting records on the accrual basis for both financial statement and federal income tax reporting purposes. Federal and state income taxes accrue to the individual partners; accordingly, no federal and state income taxes have been provided in the accompanying financial statements. BUILDING AND LAND Contributed land is recorded at the fair value at the date of contribution as agreed to by the partners. Purchased land and building costs are recorded at cost. The building is depreciated over 40 years using the straight-line method. HOTEL FURNITURE, FIXTURES AND EQUIPMENT Hotel furniture, fixtures and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. INITIAL HOTEL SUPPLIES Initial hotel supplies required for the Hotel's operations, such as linens, china, silverware and other expendable supplies, are recorded at cost and are being amortized over 15 years using the straight-line method. Additional purchases of linens, china, silverware and other expendable supplies are expensed when purchased. CONVERSION COSTS Conversion costs were incurred to convert the Ramada Hotel into a Renaissance Hotel. These costs are recorded at cost and are being amortized over 15 years using the straight-line method. INVESTMENT IN PARTNERSHIP Investment in partnership is accounted for under the equity method. Accordingly, the investment is stated at cost and adjusted for the Partnership's share of earnings or loss and distributions of the investee partnership. 6 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) CASH EQUIVALENTS For financial statement purposes, the Partnership considers investments with an original maturity date of three months or less to be cash equivalents. USE OF ESTIMATES Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosures of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. (3) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES All profits and losses are allocated in proportion to each partner's respective percentage interest in the Partnership as follows: General partner...................................................... 1.0% Limited partners..................................................... 99.0 --------- 100.0% --------- ---------
(4) NOTES PAYABLE Notes payable at June 30, 1996 and December 31, 1995 and 1994 consist of the following:
1996 1995 1994 ------------- ------------- ------------- Financial institution--prime rate plus 1% or a LIBOR/CD rate option note, secured by a first deed of trust on land and improvements of hotel complex and the shared improvements of the condominium constructed by BCLP and an assignment of existing and future revenue derived from the collateral; interest only payable monthly, principal payable annually, based on 30-year amortization, with remaining principal and interest due October 5, 1995.............................................................. $ 17,079,121 17,079,121 17,201,202 Limited partner--prime rate plus 2% unsecured note.................. 1,468,891 2,437,377 3,340,277 ------------- ------------- ------------- $ 18,548,012 19,516,498 20,541,479 ------------- ------------- ------------- ------------- ------------- -------------
Ballston Hotel, Inc., the general partner, and IDI, L.C. (formerly IDI Associates), IDI Financial Associates and Ballston Realty, Inc., affiliates of the Partnership, jointly and severally guarantee the financial institution note payable. The note payable to the financial institution, which matured on October 5, 1995, is in default. The Partnership has been unable thus far to refinance the note but continues to make the regular monthly interest payments. Given the status of the note payable with the financial institution and the nature of the terms of the note payable to the limited partner, management is unable to determine the fair value of the notes payable. 7 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (5) INVESTMENT IN PARTNERSHIP FINANCIAL STATEMENT SUMMARY The following is a summary of the assets, liabilities and equity of the unconsolidated partnership, Ballston Parking Associates ("BPA") as of June 30, 1996 and December 31, 1995 and 1994, and the results of its operations for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993. The unconsolidated partnership was formed primarily to operate the hotel and office building parking garage of the Project. The Partnership's interest in the unconsolidated partnership was 35.02%, 35.48% and 35.60% as of June 30, 1996 and December 31, 1995 and 1994, respectively. The percentage of the Partnership interest in BPA will decrease in accordance with BPA's partnership agreement based upon the number of parking space easements sold.
CONDENSED BALANCE SHEETS 1996 1995 1994 --------- --------- --------- ASSETS Cash..................................................... $ 1,267 4,263 3,055 Accounts receivable...................................... 29,250 31,200 27,080 Garage property, net of accumulated depreciation......... 4,125,801 4,224,801 4,359,801 Other assets............................................. 4,521 4,521 4,203 --------- --------- --------- $4,160,839 4,264,785 4,394,139 --------- --------- --------- --------- --------- --------- LIABILITIES AND EQUITY Total accounts payable and accrued liabilities........... $ -- 6,121 7,000 Equity: The Partnership........................................ 1,443,210 1,501,136 1,552,543 Other partners......................................... 2,717,629 2,757,528 2,834,596 --------- --------- --------- $4,160,839 4,264,785 4,394,139 --------- --------- --------- --------- --------- ---------
CONDENSED STATEMENTS OF OPERATIONS 1996 1995 1994 1993 --------- --------- --------- --------- Parking revenue........................................ $ 288,562 538,898 520,479 538,047 Loss on sales of parking spaces........................ (9,080) (7,000) (3,329) (20,149) --------- --------- --------- --------- Total income........................................... 279,482 531,898 517,150 517,898 Operating expenses..................................... 187,642 353,490 333,542 333,149 --------- --------- --------- --------- Net income............................................. $ 91,840 178,408 183,608 184,749 --------- --------- --------- --------- --------- --------- --------- --------- Equity in net income: The Partnership...................................... $ 26,501 58,802 63,397 53,601 Other partners....................................... 65,339 119,606 120,211 131,148 --------- --------- --------- --------- $ 91,840 178,408 183,608 184,749 --------- --------- --------- --------- --------- --------- --------- ---------
NOTE TO CONDENSED FINANCIAL STATEMENTS Contributed property is recorded at fair value at the date of contribution as agreed to by the partners. 8 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (5) INVESTMENT IN PARTNERSHIP--(CONTINUED) RECONCILIATION OF INVESTMENT IN PARTNERSHIP AND EQUITY IN INCOME The following is a reconciliation of the Partnership's investment in partnership as of June 30, 1996 and December 31, 1995 and 1994 and equity in income for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993, as indicated above, to the amounts reported in the accompanying financial statements.
INVESTMENT IN PARTNERSHIP EQUITY IN INCOME ------------------------------------ ------------------------------------------ 1996 1995 1994 1996 1995 1994 1993 ------------ ---------- ---------- --------- --------- --------- --------- Balance per condensed financial statements............................. $ 1,443,210 1,501,136 1,552,543 26,501 58,802 63,397 53,601 Adjustment for costs incurred in excess of agreed-upon basis in property....... 746,779 757,925 780,217 (11,146) (22,292) (22,292) (22,292) ------------ ---------- ---------- --------- --------- --------- --------- $ 2,189,989 2,259,061 2,332,760 15,355 36,510 41,105 31,309 ------------ ---------- ---------- --------- --------- --------- --------- ------------ ---------- ---------- --------- --------- --------- ---------
(6) RELATED-PARTY TRANSACTIONS Interest expense of approximately $121,000 in 1996, $308,000 in 1995, $303,000 in 1994 and $294,000 in 1993 was incurred on note payable to BPA, L.P., the limited partner, and are included in financial costs in the accompanying financial statements. Accrued interest payable of $2,283,784, $2,163,011 and $1,855,114 as of June 30, 1996 and December 31, 1995 and 1994, respectively, is recorded as accounts payable to affiliates in the accompanying financial statements. The Partnership entered into an agreement with IDI Management, Inc., an affiliate of the Partnership, to perform administrative services for the Hotel effective January 1, 1991. The administrative fee is based on 0.5% of the gross revenues of the Partnership except for any distributions from BPA related to parking. The Partnership incurred administrative fees of $21,257 in 1996, $41,952 in 1995, $39,771 in 1994 and $37,103 in 1993. These fees are included in general and administrative expenses in the accompanying financial statements. The Partnership has advanced funds to affiliates. Advances outstanding were $757,624 at December 31, 1994. (7) COMMITMENTS HOTEL MANAGEMENT AGREEMENT The Partnership has entered into a 20-year agreement with Renaissance Hotel Operating Company ("Renaissance") for the management of the Hotel. The Partnership has committed to pay the following management fees: (1) base management fee equal to 3% of the Hotel's gross revenue, as defined in the agreement, payable monthly; (2) reservation and advertising fees equal to 4.5% of the Hotel's gross room revenue, as defined in the agreement, payable monthly; and 9 BALLSTON HOTEL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (7) COMMITMENTS--(CONTINUED) (3) incentive management fee equal to 10% of the Hotel's gross operating profit, as defined in the agreement, earned and payable annually if certain cash flow requirements are met. Base management fees of $127,547 in 1996, $243,704 in 1995, $231,446 in 1994 and $215,359 in 1993 and reservation and advertising fees of $142,818 in 1996, $261,908 in 1995, $243,402 in 1994 and $230,252 in 1993 were incurred by the Partnership. No incentive management fees were incurred since none of the cash flow requirements were met. 10 EX-99.12 13 EX-99.12 EXHIBIT 99.12 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Arlington Hilton (the "Hotel") for the period from January 1, 1996 to April 17, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel'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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Arlington Hilton's operations and its cash flows for the period from January 1, 1996 to April 17, 1996 and the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. July 18, 1996 1 ARLINGTON HILTON STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ---------- ---------- ---------- Revenue: Rooms...................................................... $ 1,907,168 6,309,256 5,875,281 5,453,149 Food and beverage.......................................... 824,816 2,846,102 2,755,550 2,708,330 Other operating departments................................ 195,137 639,420 505,739 553,640 ------------ ---------- ---------- ---------- 2,927,121 9,794,778 9,136,570 8,715,119 ------------ ---------- ---------- ---------- Operating costs and expenses: Rooms...................................................... 420,844 1,526,054 1,361,027 1,342,080 Food and beverage.......................................... 654,451 2,225,510 2,072,864 2,137,821 Other operating departments................................ 115,854 351,577 301,793 276,276 Undistributed operating expenses: Administrative and general................................. 250,896 1,044,680 1,347,488 1,252,493 Sales and marketing........................................ 195,671 646,496 510,261 501,991 Management fees............................................ 87,814 313,579 90,998 86,165 Property operating costs................................... 296,643 1,004,445 871,365 1,006,770 Property taxes, insurance and other........................ 160,884 645,504 479,755 475,144 Depreciation and amortization.............................. 242,528 823,414 794,256 794,600 Interest expense........................................... -- 257,494 927,325 337,114 ------------ ---------- ---------- ---------- 2,425,585 8,838,753 8,757,132 8,210,454 ------------ ---------- ---------- ---------- Net income................................................... $ 501,536 956,025 379,438 504,665 ------------ ---------- ---------- ---------- ------------ ---------- ---------- ----------
See accompanying notes to financial statements. 2 ARLINGTON HILTON STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ------------ ---------- ----------- Cash flows from operating activities: Net income............................................... $ 501,536 956,025 379,438 504,665 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization........................ 242,528 823,414 794,256 794,600 Interest added to loan payable to General Partner.... -- -- 18,777 13,482 Decrease (increase) in accounts receivable........... (107,923) 41,059 (9,969) 47,634 Decrease (increase) in inventory and other assets.... (90,676) 110,942 (17,697) 6,803 Decrease (increase) in restricted funds.............. -- 215,868 477,431 (44,462) Increase (decrease) in accounts payable and accrued expenses........................................... 120,770 (1,027,915) 284,120 231,758 ------------ ------------ ---------- ----------- Total adjustments........................................ 164,699 163,368 1,546,918 1,049,815 ------------ ------------ ---------- ----------- Net cash provided by operating activities.................. 666,235 1,119,393 1,926,356 1,554,480 ------------ ------------ ---------- ----------- Cash flows used by investing activities--purchase of furniture and equipment.................................. (15,499) (660,359) (232,583) (178,368) ------------ ------------ ---------- ----------- Cash flows from financing activities: Principal payments on capital lease obligations.......... (13,442) (41,262) (36,415) (27,314) Repayments of note payable............................... -- -- (357,390) (1,532,401) Capital distribution..................................... -- (1,232,055) -- -- ------------ ------------ ---------- ----------- Net cash used by financing activities...................... (13,442) (1,273,317) (393,805) (1,559,715) ------------ ------------ ---------- ----------- Net increase (decrease) in cash and cash equivalents....... 637,294 (814,283) 1,299,968 (183,603) Cash and cash equivalents at beginning of period........... 946,895 1,761,178 461,210 644,813 ------------ ------------ ---------- ----------- Cash and cash equivalents at end of period................. $ 1,584,189 946,895 1,761,178 461,210 ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Supplemental disclosure of cash flow information: Cash paid for interest................................... $ 2,570 13,612 18,459 337,114 Additions to property and equipment through capital leases................................................. -- -- -- 101,765 Conversion of notes payable to equity.................... -- 19,338,404 -- -- ------------ ------------ ---------- ----------- ------------ ------------ ---------- -----------
See accompanying notes to financial statements. 3 ARLINGTON HILTON Notes to Financial Statements For the period from January 1, 1996 to April 17, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993 (1) ORGANIZATION The Arlington Hilton (the "Hotel") is located near the Dallas/Fort Worth Airport, adjacent to Six Flags over Texas theme park. The Hotel opened in 1984. The Hotel has 310 rooms, one restaurant, one nightclub/bar, meeting facilities for up to 400, a business center, an indoor/outdoor pool and a fitness center. Until March 7, 1995, the Hotel was owned by Hotel Associates of Arlington Limited Partnership ("Hotel Associates"). On March 7, 1995, the Hotel was conveyed through bankruptcy to the holders of the note, Arlington Hotel Investors, LTD ("Arlington Investors"). The Hotel was sold on April 17, 1996 to EquiStar for a purchase price of $18,200,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel were included in the financial records of its various owners until the Hotel was sold to EquiStar. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivables and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the Hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities were passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. DEPRECIATION Depreciation is computed on the cost of the hotel property and equipment using the straight-line method over 25 years for building and building improvements, and five years for furniture and equipment. 4 ARLINGTON HILTON NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) RELATED-PARTY TRANSACTIONS Prior to March 7, 1995 (the date the lenders took possession of the Hotel), the Hotel was managed by Capitol Hotel Group, Inc. ("CHG"), an affiliate of the owners, for a 1% management fee based on gross revenues. For the period from March 7, 1995 through April 17, 1996 (date of acquisition by EquiStar), the Hotel was managed by DePalma Hotel Corporation, an affiliate of the lenders, for a 3% management fee based on gross revenues. Upon foreclosure on the property, the loan and all related accrued interest payable to the general partner of Hotel Associates were converted to equity in the statement of partners' capital. 5 EX-99.13 14 EX-99.13 EXHIBIT 99.13 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Georgetown Latham Hotel (the "Hotel") for the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel'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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Georgetown Latham Hotel's operations and its cash flows for the period from January 1, 1996 to March 8, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 12, 1996 1 GEORGETOWN LATHAM HOTEL STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ------------ ------------ ------------ Revenue: Rooms.................................................. $ 612,857 3,790,580 3,764,567 3,784,884 Food and beverage...................................... 628,269 3,699,257 3,448,669 3,192,731 Other operating departments............................ 81,116 360,958 419,968 374,672 ------------ ------------ ------------ ------------ 1,322,242 7,850,795 7,633,204 7,352,287 ------------ ------------ ------------ ------------ Operating costs and expenses: Rooms.................................................. 187,244 1,081,472 1,069,864 1,177,839 Food and beverage...................................... 553,396 3,268,979 3,095,593 3,032,272 Other operating departments............................ 50,228 313,870 272,476 185,028 Undistributed operating expenses: Administrative and general............................. 110,613 996,666 795,642 663,466 Sales and marketing.................................... 94,903 511,975 478,520 606,068 Management fees........................................ 39,581 235,523 248,270 288,779 Property operating costs............................... 105,258 649,576 672,065 585,158 Property taxes, insurance and other.................... 65,278 328,299 244,123 328,451 Depreciation and amortization.......................... 81,782 674,537 637,614 574,751 Interest expense....................................... 87,771 476,901 5,265 -- ------------ ------------ ------------ ------------ 1,376,054 8,537,798 7,519,432 7,441,812 ------------ ------------ ------------ ------------ Net income (loss)........................................ $ (53,812) (687,003) 113,772 (89,525) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to financial statements. 2 GEORGETOWN LATHAM HOTEL STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ----------- ----------- ---------- Cash flows from operating activities: Net income (loss)........................................... $ (53,812) (687,003) 113,772 (89,525) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 81,782 674,537 637,614 574,751 Decrease (increase) in accounts receivable.............. (26,055) 43,384 83,943 (305,105) Decrease (increase) in other assets..................... (29,166) 121,568 (311,111) (184,175) Increase (decrease) in accounts payable and accrued expenses.............................................. 165,028 42,727 (384,682) 450,341 Increase in interest payable............................ -- 33,880 5,265 -- ---------- ----------- ----------- ---------- Net cash provided by operating activities..................... 137,777 229,093 144,801 446,287 ---------- ----------- ----------- ---------- Cash flows from investing activities: Purchase of furniture, fixtures and equipment............... (18,907) (262,176) -- (276,520) Proceeds from sale of furniture, fixtures and equipment..... -- -- 91,933 -- ---------- ----------- ----------- ---------- Net cash provided (used) by investing activities.............. (18,907) (262,176) 91,933 (276,520) ---------- ----------- ----------- ---------- Cash flows from financing activities: Principal repayments on capital leases...................... (3,770) (21,857) -- -- Proceeds from note payable.................................. -- -- 4,500,000 -- Principal payments on note payable.......................... (6,849) (35,573) -- -- Advances to affiliate....................................... -- -- (3,825,000) -- Repayments of advances to affiliate......................... -- 3,825,000 -- -- Capital distributions....................................... -- (4,206,759) (593,312) (134,115) ---------- ----------- ----------- ---------- Net cash provided (used) by financing activities.............. (10,619) (439,189) 81,688 (134,115) ---------- ----------- ----------- ---------- Net increase (decrease) in cash............................... 108,251 (472,272) 318,422 35,652 Cash at beginning of year..................................... 32,193 504,465 186,043 150,391 ---------- ----------- ----------- ---------- Cash at end of year........................................... $ 140,444 32,193 504,465 186,043 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest...................................... $ 118,085 443,021 -- -- Additions to capital lease obligations...................... $ -- -- 71,004 -- ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
See accompanying notes to financial statements. 3 GEORGETOWN LATHAM HOTEL Notes to Financial Statements For the period from January 1, 1996 to March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993 (1) ORGANIZATION The Georgetown Latham Hotel (the "Hotel") is located on 3000 M Street in Washington, D.C. It is close to the Smithsonian, embassies, monuments, the Kennedy Center and the downtown business district, and caters mainly to tourists and business travelers. The Hotel has 143 rooms; fine dining in the CITRONELLE restaurant; meeting and banquet facilities; an outdoor pool; business center; limousine rental service; and valet parking. Until 1993, the Hotel was owned by Muben/LCP Hotel Partners, L.P. ("Muben/LCP"), a limited partnership which owned 9 hotels. On October 1, 1993, LCP Hotel Ventures, L.P., a partner in Muben/LCP ("LCP Ventures"), conveyed its 10% interest in Muben/LCP for 100% ownership of the Hotel. The Hotel was sold on March 8, 1996 to EquiStar for a purchase price of $12,000,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel were included in the financial records of Muben/LCP and then LCP Ventures, as described above, until the Hotel was sold to EquiStar. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. DEPRECIATION Depreciation is computed on the cost of the Hotel property and equipment using the straight-line method over 31.5 years for the building and building improvements and over five years for furniture, fixtures and equipment. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the Hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. 4 GEORGETOWN LATHAM HOTEL NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) INTEREST EXPENSE On December 23, 1994, the Hotel obtained financing from CPC Advisors No. 3, L.L.C. The original note balance was $4,500,000 and had a fixed interest rate of 10.53%. Principal and interest payments were due monthly. The note was scheduled to mature on December 27, 1999. (4) RELATED-PARTY TRANSACTIONS The Hotel was managed by an affiliate of LCP Ventures. For the period from January 1, 1993 through September 30, 1993 the Hotel incurred management fees of 4% of gross revenue, as defined in the management agreement. For the remainder of 1993 through March 8, 1996 the Hotel incurred base management fees of 3% and an incentive management fee equal to 5% of the amount by which the net operating income exceeds the amount of preferred return, as defined in the management agreement. Management fees incurred during 1996, 1995, 1994 and 1993 were $39,581, $235,523, $248,270 and $288,779, respectively. No incentive management fees were earned. 5 EX-99.14 15 EX-99.14 EXHIBIT 99.14 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Orange County Airport Hilton (the "Hotel") for the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel'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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Orange County Airport Hilton's operations and its cash flows for the period from January 1, 1996 to February 22, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. April 20, 1996 1 ORANGE COUNTY AIRPORT HILTON STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ------------ ------------- ------------- ------------- Revenue: Rooms............................................... $ 854,685 4,564,294 3,479,926 3,137,865 Food and beverage................................... 409,200 2,554,156 2,188,612 2,204,286 Other operating departments......................... 48,828 314,723 239,755 183,980 ------------ ------------- ------------- ------------- 1,312,713 7,433,173 5,908,293 5,526,131 ------------ ------------- ------------- ------------- Operating costs and expenses: Rooms............................................... 254,389 1,302,612 1,009,792 875,825 Food and beverage................................... 346,563 1,882,782 1,617,235 1,543,846 Other operating departments......................... 23,005 147,896 116,224 84,197 Undistributed operating expenses: Administrative and general.......................... 222,566 1,050,388 1,022,104 869,499 Sales and marketing................................. 126,979 692,052 452,070 449,615 Management fees..................................... 35,000 210,000 197,500 150,000 Property operating costs............................ 96,410 763,258 704,873 691,160 Property taxes, insurance and other................. 57,301 342,177 386,464 467,055 Depreciation and amortization....................... 112,129 832,958 798,442 854,566 Interest expense.................................... 608,294 3,510,997 2,688,580 2,193,590 ------------ ------------- ------------- ------------- Total expenses........................................ 1,882,636 10,735,120 8,993,284 8,179,353 ------------ ------------- ------------- ------------- Net loss.............................................. $ (569,923) (3,301,947) (3,084,991) (2,653,222) ------------ ------------- ------------- ------------- ------------ ------------- ------------- -------------
See accompanying notes to financial statements. 2 ORANGE COUNTY AIRPORT HILTON STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ----------- ----------- ----------- ----------- Cash flows from operating activities: Net loss................................................. $ (569,923) (3,301,947) (3,084,991) (2,653,222) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................ 112,129 832,958 798,442 854,566 Decrease (increase) in accounts receivable........... (56,580) (198,792) (27,765) 203,192 Decrease (increase) in other assets.................. 67,637 (42,736) 26,502 38,421 Increase (decrease) in accounts payable and accrued expenses........................................... 296,914 540,514 11,866 (12,467) Increase in accrued interest......................... 358,294 3,010,996 2,568,580 2,167,618 ----------- ----------- ----------- ----------- Total adjustments........................................ 778,394 4,142,940 3,377,625 3,251,330 ----------- ----------- ----------- ----------- Net cash provided by operating activities.................. 208,471 840,993 292,634 598,108 ----------- ----------- ----------- ----------- Cash flows used by investing activities--additions to hotel.................................................... -- (76,435) (54,925) (17,811) ----------- ----------- ----------- ----------- Cash flows from financing activities: Repayments of note payable............................... -- (30,099) (55,000) -- Capital distributions.................................... (43,445) (896,802) (274,594) (397,073) Increase (decrease) in bank overdrafts................... (165,026) 162,343 91,885 (183,224) ----------- ----------- ----------- ----------- Net cash used by financing activities...................... (208,471) (764,558) (237,709) (580,297) ----------- ----------- ----------- ----------- Net increase in cash....................................... -- -- -- -- Cash at beginning of period................................ -- -- -- -- ----------- ----------- ----------- ----------- Cash at end of period...................................... $ -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Supplemental disclosure of cash flow information: Cash paid for interest................................... $ 250,000 500,000 120,000 25,972 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to financial statements. 3 ORANGE COUNTY AIRPORT HILTON Notes to Financial Statements For the period from January 1, 1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993 (1) ORGANIZATION The Orange County Airport Hilton (the "Hotel") is located near the Orange County Airport in Irvine, California, approximately 45 miles from Los Angeles. The Hotel opened in 1976 and was operated under a franchise agreement with Radisson Hotels International, Inc. during the periods under audit. Since April 1, 1996, the Hotel has been operating as a Hilton. The Hotel has 290 rooms, an outdoor pool and jacuzzi, fitness center and same day valet service. The dining facilities include Mimi's Grill and The Promenade Lounge. The Hotel has approximately 30,000 square feet of meeting space. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel were included in the financial records of GMY Investment Company ("GMY"), a limited partnership which owned the Hotel until it was sold to EquiStar on February 22, 1996 for $19,200,000. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared using the accrual basis of accounting. DEPRECIATION Depreciation is computed on the cost of hotel property and equipment using the Modified Accelerated Cost Recovery method over 39 and 31.5 years for the building and building improvements and over five to seven years for furniture, fixtures and equipment. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivable and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the Hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities were passed through to the individual partners in accordance with the partnership agreement and the Internal Revenue Code. USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 4 ORANGE COUNTY AIRPORT HILTON NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) INTEREST EXPENSE GMY entered into a promissory note with an original balance of $19,000,000 in June 1989. Interest accrued at 10% for the first year, and then adjusted to the Bank of America National Trust and Savings Association prime rate as announced from time to time. On December 1, 1991, GMY stopped making scheduled interest and principal payments and the note was in default. From the default date, interest was computed using the prime rate plus four percentage points on the outstanding balance plus any accrued interest. (4) RELATED-PARTY TRANSACTIONS The Hotel incurred management fees of $35,000, $210,000, $197,500 and $150,000 for the period from January 1, 1996 to February 22, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively. The management fees were paid to an affiliate of the Hotel. 5 EX-99.15 16 EX-99.15 EXHIBIT 99.15 INDEPENDENT AUDITORS' REPORT The Partners EquiStar Hotel Investors, L.P.: We have audited the accompanying statements of operations and cash flows of the Charlotte Sheraton Airport Plaza (the "Hotel") for the period from January 1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Hotel'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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Charlotte Sheraton Airport Plaza's operations and its cash flows for the period from January 1, 1996 to February 2, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. March 29, 1996 1 CHARLOTTE SHERATON AIRPORT PLAZA STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ---------- ---------- ----------- ---------- Revenue: Rooms....................................................... $ 404,646 4,353,741 4,279,608 3,764,540 Food and beverage........................................... 330,471 3,136,701 2,698,709 2,625,091 Other operating departments................................. 21,096 609,342 861,007 779,557 ---------- ---------- ----------- ---------- 756,213 8,099,784 7,839,324 7,169,188 ---------- ---------- ----------- ---------- Operating costs and expenses: Rooms....................................................... 111,163 1,067,053 1,151,114 976,178 Food and beverage........................................... 258,901 2,101,504 1,906,329 1,854,924 Other operating departments................................. 13,740 114,588 82,500 80,354 Undistributed operating expenses: Administrative and general.................................. 73,487 375,920 263,728 254,309 Sales and marketing......................................... 90,546 922,890 927,186 863,274 Management fees............................................. 22,497 269,689 391,966 358,459 Property operating costs.................................... 67,286 618,771 556,634 519,500 Property taxes, insurance and other......................... 41,126 425,563 404,523 356,690 Depreciation and amortization............................... 49,600 595,522 603,543 587,150 Interest expense............................................ -- 689,563 3,378,933 1,466,088 ---------- ---------- ----------- ---------- 728,346 7,181,063 9,666,456 7,316,926 ---------- ---------- ----------- ---------- Net income (loss)............................................. $ 27,867 918,721 (1,827,132) (147,738) ---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
See accompanying notes to financial statements. 2 CHARLOTTE SHERATON AIRPORT PLAZA STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996 (DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993 ----------- ----------- ----------- ---------- Cash flows from operating activities: Net income (loss)......................................... $ 27,867 918,721 (1,827,132) (147,738) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization......................... 49,600 595,522 603,543 587,150 Decrease (increase) in accounts receivable............ 70,128 (86,461) (45,518) (44,970) Increase in intercompany receivable................... (450,000) (1,444,939) (1,937,634) (263,645) Decrease (increase) in other assets................... 50,127 87,415 (5,447) 40,469 Increase (decrease) in accounts payable and accrued expenses............................................ (80,687) 165,657 193,488 75,714 Increase in interest payable.......................... -- 689,563 3,378,346 92,000 ----------- ----------- ----------- ---------- Net cash provided (used) by operating activities............ (332,965) 925,478 359,646 338,980 ----------- ----------- ----------- ---------- Cash flows from investing activities--purchases of furniture, fixtures and equipment......................... (57,124) (257,302) (346,957) (133,901) ----------- ----------- ----------- ---------- Cash flows from financing activities--principal payments on note payable.............................................. -- -- -- (203,839) ----------- ----------- ----------- ---------- Net increase (decrease) in cash............................. (390,089) 668,176 12,689 1,240 Cash at beginning of period................................. 712,894 44,718 32,029 30,789 ----------- ----------- ----------- ---------- Cash at end of period....................................... $ 322,805 712,894 44,718 32,029 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest.................................... $ -- -- 587 1,374,088 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------
See accompanying notes to financial statements. 3 CHARLOTTE SHERATON AIRPORT PLAZA Notes to Financial Statements For the period from January 1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31, 1995, 1994 and 1993 (1) ORGANIZATION The Charlotte Sheraton Airport Plaza (the "Hotel") is a 226 room, full-service hotel located near the Charlotte Douglas International Airport. The Hotel was constructed in 1985. The Hotel was owned by Krisch Realty Associates, L.P. ("Krisch Realty") during 1993, 1994 and through March 7, 1995, when it was conveyed to the lender. The Hotel was sold on February 2, 1996 to EquiStar for a purchase price of $18,000,000. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounts of the Hotel were included in the financial records of Krisch Realty, which owned the Hotel until it was conveyed to the lender. The accompanying statements of operations and cash flows include the accounts of the Hotel only, as if it were a separate legal entity, and have been prepared on the accrual basis of accounting. DEPRECIATION Depreciation is computed on the cost of hotel property and equipment using the straight-line method over 45 years for the building, ten years for most building improvements, and five to eight years for furniture, fixtures and equipment. BAD DEBT EXPENSE Bad debt expense is accounted for using the allowance method. Management reviews the aging of accounts receivables and other current information on debtors to establish an allowance for doubtful accounts. Write-offs occur when management deems a receivable uncollectible. REVENUE Revenue is earned primarily through the operations of the hotel and recognized when earned. INCOME TAXES The financial statements contain no provision for federal income taxes since the Hotel was owned by a partnership and, therefore, all federal income tax liabilities are passed through to the individual partners in accordance with the Partnership Agreement and the Internal Revenue Code. USE OF ESTIMATES Management has made a number of estimates and assumptions to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 4 CHARLOTTE SHERATON AIRPORT PLAZA NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) INTEREST EXPENSE For the period from January 1, 1995 to February 2, 1995, and during 1994 and 1993, financing for the Hotel was provided through a two-tier loan. The first tier loan, which had an original principal balance of $12,523,925, had an interest rate of prime plus 1%. Principal and interest payments on the first tier loan were due monthly. The second tier loan, which had an original principal balance of $7,444,062, required interest payments based on the Hotel's cash flow. During January 1994, the owner ceased making payments on the loan and the loan went into default. From that point, the first and second tiers of the loan accrued interest at the default rate of 16% until March 7, 1995, when the Hotel was conveyed to the lender. (4) OTHER RELATED-PARTY TRANSACTIONS Krisch Hotels, Inc. ("Krisch"), an affiliate of the Hotel's owner, managed the Hotel until March 7, 1995, and charged the Hotel base management fees of 3% of gross revenues. The Hotel management agreement also provided for incentive management fees to be paid to Krisch of 10% of net operating income, as defined in the agreement. After March 7, 1995, the Hotel incurred only base management fees of 3% of gross revenues. For the period from January 1, 1996 to February 2, 1996, and for 1995, 1994 and 1993, base and incentive management fees incurred by the Hotel totaled $22,497, $269,689, $391,966 and $358,459, respectively. 5 -----END PRIVACY-ENHANCED MESSAGE-----