<PAGE>
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)
<TABLE>
<S> <C> <C>
DELAWARE 1-12017 52-1979383
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification
Number)
</TABLE>
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
<PAGE>
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
<TABLE>
<C> <S>
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.
</TABLE>
1
<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Date: September 5, 1997
<TABLE>
<S> <C> <C>
CAPSTAR HOTEL COMPANY
By: /s/ JOHN EMERY
-----------------------------------------
John Emery
Chief Financial Officer
</TABLE>
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<C> <S>
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.
</TABLE>
4
<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
5
<PAGE>
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
<PAGE>
DETROIT METRO AIRPORT HILTON SUITES HOTEL
BALANCE SHEETS
JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(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
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
(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
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
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
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
(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
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
METROTOWN HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
(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
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
METROTOWN HOTEL LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
(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
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
METROTOWN HOTEL LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
METROTOWN HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
(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
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
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
<PAGE>
METROTOWN HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
ACCUMULATED NET BOOK NET BOOK
COST DEPRECIATION VALUE VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(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
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
(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
------------ ------------
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
(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
--------- ----------
</TABLE>
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
<PAGE>
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
<PAGE>
PACKWOOD JEKYLL LIMITED PARTNERSHIP
COMPARATIVE BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of this report.
2
<PAGE>
PACKWOOD JEKYLL LIMITED PARTNERSHIP
COMPARATIVE STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------
<S> <C> <C>
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)
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this report.
3
<PAGE>
PACKWOOD JEKYLL LIMITED PARTNERSHIP
COMPARATIVE STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this report.
4
<PAGE>
PACKWOOD JEKYLL LIMITED PARTNERSHIP
PARTNERS' CAPITAL
<TABLE>
<CAPTION>
BALANCE
JANUARY 1, DECEMBER 31,
1996 NET LOSS DRAWINGS 1996
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
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)
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of this report.
5
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
(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
<PAGE>
(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:
<TABLE>
<S> <C> <C>
1997 -- $ 114,301
1998 -- 4,105,810
1999 -- --
2000 -- --
2001 -- --
</TABLE>
The Partnership leases equipment for the hotels. Payments over the next five
years are as follows:
<TABLE>
<S> <C> <C>
1997 -- 24,276
1998 -- 19,060
1999 -- 11,883
2000 -- 1,287
2001 -- --
</TABLE>
(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
<PAGE>
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
<PAGE>
PACKWOOD JEKYLL LIMITED PARTNERSHIP
BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<S> <C> <C>
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
----------
<CAPTION>
LIABILITIES AND CAPITAL
<S> <C> <C>
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
----------
----------
</TABLE>
See Accountants' Compilation Report and Accompanying Notes to Financial
Statements.
2
<PAGE>
PACKWOOD JEKYLL LIMITED PARTNERSHIP
STATEMENT OF INCOME (LOSS)
JUNE 30, 1997
<TABLE>
<S> <C> <C>
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)
-----------
-----------
</TABLE>
See Accountants' Compilation Report and Accompanying Notes to Financial
Statements.
3
<PAGE>
PACKWOOD JEKYLL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
JUNE 30, 1997
<TABLE>
<S> <C> <C>
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
---------
---------
</TABLE>
See Accountants' Compilation Report and Accompanying Notes to Financial
Statements.
4
<PAGE>
PACKWOOD JEKYLL LIMITED PARTNERSHIP
PARTNERS' CAPITAL
<TABLE>
<CAPTION>
BALANCE
JANUARY 1, NET JUNE 30,
1997 LOSS DRAWINGS 1997
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
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)
------------- ---------- ----------- -------------
------------- ---------- ----------- -------------
</TABLE>
See Accountants' Compilation Report and Accompanying Notes to Financial
Statements.
5
<PAGE>
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:
<TABLE>
<S> <C>
Linen.............................................................................. $ 10,331
Food............................................................................... 8,067
Beverages.......................................................................... 7,452
Tickets and miscellaneous.......................................................... 2,000
---------
$ 27,850
---------
---------
</TABLE>
(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
<PAGE>
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:
<TABLE>
<S> <C>
June 30, 1998................................................................... $ 118,300
1999..................................................................... 4,027,155
2000..................................................................... --
2001..................................................................... --
2002..................................................................... --
</TABLE>
The Partnership leases equipment for the hotels. Payments over the next five
years are as follows:
<TABLE>
<S> <C>
June 30, 1998................................................................... $ 23,088
1999..................................................................... 14,370
2000..................................................................... 4,504
2001..................................................................... --
2002..................................................................... --
</TABLE>
(12) SUBSEQUENT EVENTS
In August 1997, the Partnership sold the hotel to the company that is
presently managing the hotel.
7
<PAGE>
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
<PAGE>
EMBASSY SUITES PHILADELPHIA
BALANCE SHEETS
JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, DECEMBER
1997 31,
Assets (UNAUDITED) 1996
---------- -----------
<S> <C> <C>
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
---------- -----------
---------- -----------
<CAPTION>
Liabilities and Owners' Equity
<S> <C> <C>
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
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
EMBASSY SUITES PHILADELPHIA
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND
THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
------------- ------------
<S> <C> <C>
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)
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EMBASSY SUITES PHILADELPHIA
STATEMENTS OF OWNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EMBASSY SUITES PHILADELPHIA
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
-------------- ------------
<S> <C> <C>
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
-------------- ------------
-------------- ------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
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
<PAGE>
(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
<PAGE>
(5) COMMITMENTS (CONTINUED)
Future minimum lease payments under the non-cancelable operating lease as of
December 31, 1996 is as follows:
<TABLE>
<S> <C>
1997............................................................ $ 450,000
1998............................................................ 450,000
1999............................................................ 450,000
2000............................................................ 187,500
---------
Total future minimum lease payments............................. $1,537,500
---------
---------
</TABLE>
(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
<PAGE>
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
<PAGE>
RIVER HOTEL, LTD. I
(A TEXAS LIMITED PARTNERSHIP)
DBA DOUBLETREE HOTEL OF AUSTIN
BALANCE SHEETS
June 30, 1997 (Unaudited)
and December 31, 1996
<TABLE>
<CAPTION>
1997
Assets (UNAUDITED) 1996
----------- ----------
<S> <C> <C>
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
----------- ----------
----------- ----------
<CAPTION>
Liabilities and Partners' Deficit
<S> <C> <C>
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
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
1997
(UNAUDITED) 1996
------------ ------------
<S> <C> <C>
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)
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
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
<TABLE>
<CAPTION>
BROWN-
AUSTIN II, CLASS
INC. A & B
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
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)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
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
<TABLE>
<CAPTION>
1997
(UNAUDITED) 1996
----------- ----------
<S> <C> <C>
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
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
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
<PAGE>
(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):
<TABLE>
<CAPTION>
ACCRUED
PRINCIPAL INTEREST TOTAL
------------- ------------ ------------
<S> <C> <C> <C>
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
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
7
<PAGE>
(2) LONG-TERM DEBT (CONTINUED)
Long-term debt and related accrued interest consist of the following at
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
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
<PAGE>
(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:
<TABLE>
<CAPTION>
(UNAUDITED)
1997 1996
----------- ---------
<S> <C> <C>
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
----------- ---------
----------- ---------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(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
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
(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
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
3
<PAGE>
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
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
4
<PAGE>
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
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(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
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
5
<PAGE>
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:
<TABLE>
<CAPTION>
PERCENTAGE
INTEREST
-----------
<S> <C>
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%
-----------
-----------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
PERCENTAGE
INTEREST
-----------
<S> <C>
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%
-----------
-----------
</TABLE>
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
<PAGE>
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:
<TABLE>
<S> <C>
Organization costs................... 60 months
Deferred leasing costs............... Underlying lease terms
Franchise Fee........................ 245 months
Deferred loan costs.................. Life of the loan
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING PROFIT
ENDING JUNE 30, HURDLE
---------------- ----------------------
<S> <C>
1996........................................................... $ 4,574,759
1997........................................................... 5,211,617
1998........................................................... 5,712,092
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING PROFIT
ENDING JULY 31, HURDLE
---------------- ----------------------
<S> <C>
1996........................................................... $ 1,458,779
1997........................................................... 1,514,181
1998........................................................... 1,571,850
</TABLE>
- 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
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 300,000
1998........................................................................... 300,000
1999........................................................................... 300,000
2000........................................................................... 10,719,994
-------------
Total.......................................................................... $ 11,619,994
-------------
-------------
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 80,000
1998............................................................................ 80,000
1999............................................................................ 80,000
2000............................................................................ 3,640,000
------------
$ 3,880,000
------------
------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------- ------------
<S> <C>
1997............................................................................. $ 1,101,044
1998............................................................................. 1,111,516
1999............................................................................. 975,262
2000............................................................................. 694,562
2001............................................................................. 463,447
</TABLE>
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
<PAGE>
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
<PAGE>
CAPSTAR TINTON FALLS, L.P. AND CAPSTAR
KANSAS CITY PARTNERS, L.P.
COMBINED BALANCE SHEETS
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
(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
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to combined financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
(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
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to combined financial statements.
3
<PAGE>
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
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
See accompanying notes to combined financial statements.
4
<PAGE>
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
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
(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
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to combined financial statements.
5
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
HIGHGATE PORTFOLIO
COMBINED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
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
--------------
--------------
</TABLE>
See accompanying notes to combined financial statements.
2
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
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)
-------------
-------------
</TABLE>
See accompanying notes to combined financial statements.
3
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF OWNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Balance, December 31, 1995..................................................... $(11,660,873)
Foreign currency translation adjustment........................................ 7,270
Net loss....................................................................... (366,210)
-----------
Balance, December 31, 1996..................................................... $(12,019,813)
-----------
-----------
</TABLE>
See accompanying notes to combined financial statements.
4
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
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
-------------
-------------
</TABLE>
See accompanying notes to combined financial statements.
5
<PAGE>
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
<PAGE>
(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:
<TABLE>
<S> <C>
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
</TABLE>
7
<PAGE>
(4) NOTES PAYABLE (CONTINUED)
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
Aggregate maturities of the above notes payable are as follows:
<TABLE>
<CAPTION>
For the year ended
- ---------------------------------------------------------------
<S> <C>
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
----------
----------
</TABLE>
(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
<PAGE>
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
<PAGE>
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
COMBINED BALANCE SHEET
DECEMBER 27, 1996
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
See notes to combined financial statements.
2
<PAGE>
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 27, 1996
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
See notes to combined financial statements.
3
<PAGE>
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
COMBINED STATEMENT OF OWNER'S DEFICIT
YEAR ENDED DECEMBER 27, 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED PARTNERS'
STOCK CAPITAL EARNINGS CAPITAL TOTAL
------------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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)
<CAPTION>
------------- ------------- --------- ------------- -------------
------------- ------------- --------- ------------- -------------
</TABLE>
See notes to combined financial statements.
4
<PAGE>
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 27, 1996
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
See notes to combined financial statements.
5
<PAGE>
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"):
<TABLE>
<CAPTION>
FORM OF ENTITY
----------------------
<S> <C>
Westchase Holdings, Ltd. ("Partnership")
dba Westchase Hilton Hotel and Towers................................ Limited Partnership
GAR Holdings, Inc. ("GAR")............................................ Corporation
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
Building and land............................................. $ 1,004,022
Furnishings, fixtures and equipment........................... 437,400
-----------
1,441,422
Less: accumulated depreciation............................... (379,795)
-----------
$ 1,061,627
-----------
-----------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
The following are maturities of long-term debt for the next five years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 567,125
1998........................................................................... 622,483
1999........................................................................... 683,246
2000........................................................................... 749,939
2001........................................................................... 13,005,634
-------------
$ 15,628,427
-------------
-------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
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
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
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)
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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
<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNER PARTNERS
------------- --------- -----------
<S> <C> <C> <C>
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)
------------- --------- -----------
------------- --------- -----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
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
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
General partner...................................................... 1.0%
Limited partners..................................................... 99.0
---------
100.0%
---------
---------
</TABLE>
(4) NOTES PAYABLE
Notes payable at June 30, 1996 and December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
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
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
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
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE TO CONDENSED FINANCIAL STATEMENTS
Contributed property is recorded at fair value at the date of contribution
as agreed to by the partners.
8
<PAGE>
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.
<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP EQUITY IN INCOME
------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1996 1995 1994 1993
------------ ---------- ---------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
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
------------ ---------- ---------- --------- --------- --------- ---------
------------ ---------- ---------- --------- --------- --------- ---------
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
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 -- --
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
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 --
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
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)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
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)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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
<PAGE>
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
