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===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A2
/x/ JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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<S> <C>
Commission File Number: 1-6828 Commission File Number: 1-7959
HOTEL INVESTORS HOTEL INVESTORS
TRUST CORPORATION
(Exact name of registrant as specified (Exact name of registrant as specified
in its charter) in its charter)
Maryland Maryland
(State or other jurisdiction (State or other jurisdiction
of incorporation or organizaiton) of incorporation or organization)
52-0901263 52-1193298
(I.R.S. employer identification no.) (I.R.S. employer identification no.)
11845 W. Olympic Blvd., Suite 550 11845 W. Olympic Blvd., Suite 560
Los Angeles, California 90064 Los Angeles, California 90064
(Address of principal executive (Address of principal executive
offices, including zip code) offices, including zip code)
(310) 575-3900 (310) 575-3900
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Shares of Beneficial Interest, $1.00 par value, |
of Hotel Investors Trust ("Trust Shares") |
paired with | New York Stock Exchange
Shares of Common Stock, $0.10 par value, |
of Hotel Investors Corporation ("Corporation |
Shares") |
1986 Warrants to purchase Trust Shares |
paired with | American Stock Exchange
1986 Warrants to purchase Corporation Shares |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of each Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of March 25, 1994, the aggregate market value of the Registrants' voting
stock held by non-affiliates(1) was $18,627,000.
As of March 25, 1994, the Registrants had outstanding 12,132,948 Trust
Shares and 12,132,948 Corporation Shares.
- - - ---------------------------
(1)For purposes of this Joint Annual Report only, includes all voting shares
other than those held by the Registrants' Trustees or Directors and executive
officers or by persons known to either Registrant to hold of record or
beneficially 5% or more of such Registrant's voting shares.
===============================================================================
The undersigned Registrants hereby amend the the following items, the
statements, exhibits or other portions of their Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 as set forth in the pages attached
hereto:
<PAGE> 3
PART I
ITEM 3. LEGAL PROCEEDINGS.
Naomi Horowitz v. Hotel Investors Trust et al.; Joyce Uttan I.R.A. et al v.
Hotel Investors Trust et al
As of the filing of this Joint Annual Report, two purported
class actions are pending in the United States District Court for the Southern
District of California against the Trust, the Corporation, Ronald A. Young and
John F. Rothman.
The first purported class action was commenced in August 1991
by Naomi Horowitz. As amended, the complaint filed by Ms. Horowitz (the
"Horowitz complaint") alleges that the defendants violated federal and
California securities laws and the federal Racketeer Influenced and Corrupt
Organizations Act ("RICO"), and acted fraudulently, in connection with Hotel
Investors' public disclosures with respect to the Trust's purchase of its two
hotel/casinos and the Ramada Inn in Indian Wells, California from partnerships
controlled by Messrs. Young and Rothman. The Horowitz complaint purports to
assert claims on behalf of a class consisting of all persons who were allegedly
damaged by their purchase of Paired Shares between March 23, 1987 and May 29,
1990.
The second purported class action was filed in February 1992
by the Joyce Uttan I.R.A. and three individuals. This complaint (the "Uttan
complaint") also alleges violations by the defendants of Federal and California
state securities laws and RICO in connection with statements made by Hotel
Investors with respect to the purchases of the hotel/casinos and the Indian
Wells hotel, and further alleges that Mr. Rothman violated the Employee
Retirement Income Securities Act of 1974 ("ERISA") by causing monies held in a
pension plan established for casino employees at the King 8 to be invested in
Paired Shares. The Uttan complaint purports to assert claims on behalf of two
classes consisting of persons who purchased Paired Shares between either
October 10, 1986 or November 22, 1988 and, in either case, the date the
original Horowitz complaint was filed, and a third class consisting of
participants in the employee pension plan who were allegedly damaged by the
purchase of Paired Shares between July 1, 1985 and the date of the plan's
dissolution.
Each of the above-described complaints seeks compensatory
damages, rescission and/or treble and exemplary damages plus prejudgment
interest, and costs of suit that include attorneys' fees; the Uttan complaint
also seeks statutory damages under ERISA on behalf of the third purported class
described in this complaint.
The complaint filed on March 31, 1992 by Carno and Sonem,
allegedly on behalf of the Trust and the Corporation, in the Superior Court of
the State of California for San Diego County, against Messrs. Young, Rothman,
Graeme W. Henderson, Sherwin L. Samuels, Bruce M. Ford, Earle F. Jones and
Howard B. Levenson, and nominally against the Trust and the Corporation,
alleges that in authorizing the Trust's purchase of the hotel/casinos and the
Indian Wells property, the individual defendants (each of whom was at the time
a Trustee or a Director) breached their fiduciary duties, acted in a grossly
negligent manner and committed corporate waste. The Carno/Sonem complaint
seeks compensatory damages from each of the individual
3
<PAGE> 4
defendants, as well as an order requiring the individual defendants to return
to the Trust and the Corporation certain remuneration and costs of suit.
As of March 25, 1994, plaintiffs and defendants in the Horowitz,
Uttan and Carno/Sonem cases have agreed in principle that subject to
conditional certification for settlement purposes of the classes described in
the two purported class action complaints and to certain other court approval
and to certain other conditions, the Carno case will be dismissed with
prejudice, and all claims that were made in the Shareholder Litigation will be
released, upon the defendants' establishment of a $3,205,000 cash settlement
fund to be distributed to members of the plaintiff classes certified in the
Horowitz and Uttan cases. Of the settlement fund amount, $2,500,000 will be
paid by the insurance company that issued Hotel Investors' directors and
officers' policy applicable to the periods to which the Shareholder Litigation
relates, $400,000 will be paid by the Trust and the Corporation, and $350,000
will be paid by Messrs. Rothman and Young. In addition, the defendants have
agreed to establish a separate $45,000 fund to be used for purposes of
notifying the class and otherwise administering the settlement. Legal fees and
other costs incurred by the defendants in the Shareholder Litigation prior to
October 12, 1993 would be paid by the Trust and the Corporation; subsequent
defense costs would be paid by the above-mentioned insurance company.
The agreement in principle also contemplates that the Board of
Trustees and the Board of Directors of Hotel Investors will establish a joint
transaction committee of independent Trustees and Directors to make
recommendations to those Boards with respect to any transaction having a fair
market value of $20 million or more that may be proposed in the future by Hotel
Investors' managements, and that Messrs. Rothman and Young will provide to the
Corporation an irrevocable letter of credit in the amount of $800,000 to be
drawn upon by the Corporation conditioned upon final court approval of the
settlement (such amount will be recorded by the Corporation as income upon
final court approval). If the final settlement is approved by the court,
certain hotel management arrangements and agreements between Western Host and
certain partnerships of which Messrs. Rothman and Young are general partners
will be terminated. See "Management Obligations of Western Host" included in
Item 13 of this Joint Annual Report.
A settlement agreement implementing the terms of the agreement
in principle is being prepared and is anticipated to be signed in April 1994.
However, there can be no assurance that the settlement agreement will be
consummated or that the settlement will be ultimately approved by the court.
Wells Fargo Bank, N.A. et al v. Hotel Investors Trust
As previously reported, on April 10, 1992, the Lenders filed a
complaint against the Trust in the Superior Court of the State of California
for the County of San Diego, alleging breach of contract by the Trust and
seeking to recover the principal and interest then owed by the Trust to the
Lenders pursuant to the 1988 Loan Agreement and the Note Agreements; the
Lenders subsequently sought a right to attach order and a writ of attachment
with respect to all of the Trust's assets. On June 12, 1992, the Trust filed a
cross-complaint in this action, alleging that in connection with the debt
restructuring negotiations the Lenders acted fraudulently, made negligent
misrepresentations, breached their contracts with the Trust, intentionally
interfered with the Trust's business relations and violated the federal RICO
statute, and seeking damages based
4
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on promissory estoppel and otherwise. In January 1993, the Trust and the
Lenders agreed to a voluntary dismissal of this litigation with prejudice in
connection with the execution and delivery of the Credit Agreement.
Northview Corporation Bankruptcy
Information with respect to the reorganization of Northview
Corporation, the lessee of the Trust's hotels in Sacramento, Rosemead,
and Woodland Hills, California, and the settlement of the Trust's claims
against Northview in connection therewith is contained in Items 1 and 2
of this Joint Annual Report under the caption "Northview Corporation".
5
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PART II
ITEM 6. SELECTED FINANCIAL DATA.
The following data sets forth certain financial information for the
Trust, the Corporation, and the Trust and the Corporation on a combined basis.
This information is based on and should be read in conjunction with the
financial statements and the notes thereto appearing elsewhere in this Joint
Annual Report.
6
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(in thousands, except per share amounts)
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December 31,
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1993 1992 1991 1990 1989
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Operating Data
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Revenue:
Trust . . . . . . . . . . . . . . $ 20,342 $ 26,784 $ 29,550 $ 32,866 $ 31,389
Corporation . . . . . . . . . . . 114,828 116,172 110,361 112,555 110,587
Combined (1) . . . . . . . . . . . 117,155 117,656 113,436 117,024 115,619
Net Income (Loss):
Trust (2) . . . . . . . . . . . . (3,889) (9,818) (10,952) (13,362) (48,083)
Corporation (2) . . . . . . . . . (3,143) (9,925) (11,132) (14,224) (12,256)
Combined . . . . . . . . . . . . . (7,032) (19,743) (22,084) (27,586) (60,339)
Net Income (Loss) Per Share:
Trust . . . . . . . . . . . . . . $ (0.32) $ (0.81) $ (0.90) $ (1.10) $ (3.96)
Corporation . . . . . . . . . . . (0.26) (0.82) (0.92) (1.17) (1.01)
Combined . . . . . . . . . . . . . --------- --------- --------- --------- ---------
$ (0.58) $ (1.63) $ (1.82) $ (2.27) $ (4.97)
========= ========= ========= ========= =========
Balance Sheet Data
------------------
Total Assets:
Trust . . . . . . . . . . . . . . $ 232,845 $ 245,540 $ 246,498 $ 266,487 $ 274,316
Corporation . . . . . . . . . . . 49,993 53,611 55,807 31,946 34,580
Combined (1) . . . . . . . . . . . 195,352 210,945 221,917 240,998 263,414
Total Debt:
Trust . . . . . . . . . . . . . . 156,526 157,541 158,295 165,730 151,611
Corporation . . . . . . . . . . . 101,846 100,246 66,873 44,960 39,260
Combined (1) . . . . . . . . . . . 170,886 170,297 171,271 166,591 l152,781
Shareholders' Equity (Deficit):
Trust . . . . . . . . . . . . . . 72,205 76,371 86,188 97,087 117,727
Corporation . . . . . . . . . . .
Combined . . . . . . . . . . . . (58,879) (55,752) (45,828) (34,696) (20,487)
13,326 20,351 40,083 62,104 96,671
Shares outstanding at end of period. 12,133 12,133 12,133 12,133 12,132
Cash Flow and Dividend Data
---------------------------
Net cash provided by (used in) operating
activities:
Trust . . . . . . . . . . . . . . 3,136 2,773 (8,812) 8,921 7,270
Corporation . . . . . . . . . . . 2,396 1,917 2,654 (2,659) 2,856
Combined . . . . . . . . . . . . . 5,532 4,690 (6,158) 6,262 10,126
Net cash provided by (used in) investing
activities:
Trust . . . . . . . . . . . . . . . 2,474 (161) 12,889 (17,621) (26,579)
Corporation . . . . . . . . . . . . (4,426) (942) 472 10,731 12,313
Combined . . . . . . . . . . . . . (3,645) (1,514) 12,159 (7,058) (14,307)
Net cash provided by (used in) financing
activities:
Trust . . . . . . . . . . . . . . . (7,307) (850) (7,507) 6,583 11,738
Corporation . . . . . . . . . . . . (1,138) (816) (834) (309) (7.061)
Combined . . . . . . . . . . . . . (6,752) (1,255) (7,139) 6,442 4,718
Dividends to shareholders
Trust (3) . . . . . . . . . . . . $ 0 $ 0 $ 0 $ 7,644 $ 12,132
Dividends per share
Trust (3) . . . . . . . . . . . . $ 0.00 $ 0.00 $ 0.00 $ 0.63 $ 1.00
7
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- - - ---------------------------
(1) Trust and Corporation amounts do not add to Combined amounts due to
accounting elimination entries.
(2) For the Trust, includes gains (losses) on sales of ($53,000),
($791,000), $390,000, and $156,000 for the years ended December 31,
1993, 1992, 1991 and 1989, respectively, and provisions for investment
losses of $2,369,000, $3,419,000, $8,867,000, $15,100,000 and
$51,208,000 in the years ended December 31, 1993, 1992, 1991, 1990 and
1989, respectively. For the Corporation, includes gains on sales of
$74,000, $4,000 and $1,208,000 for the years ended December 31, 1993,
1992, and 1991, respectively, and provisions for investment losses of
$713,000, $3,047,000 and $4,593,000 in the years ended December 31,
1991, 1990 and 1989, respectively.
(3) Presented only for the Trust, as the Corporation did not pay dividends
for the periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
As discussed in Items 1 and 2 of this Joint Annual Report under the
caption "Recent Developments - Debt Restructuring", on January 28, 1993 the
Trust entered into the Credit Agreement which restructured its previously
unsecured notes payable to two banks and three insurance companies as Secured
Term Loan and a secured Revolving Line of Credit. Although the Trust is not in
default under the Credit Agreement through the date of this Joint Annual
Report, the Trust's ability to comply in the future with the requirements
(primarily the principal repayments required - see below) of the Credit
Agreement cannot presently be determined. Further, because of the substantial
operating losses and cash flow deficiencies experienced by the Corporation,
which also has a deficiency in net assets, the ultimate recovery of all amounts
due to the Trust from the Corporation is highly uncertain. These conditions
raise substantial doubts about the Companies' ability to continue as going
concerns.
As required under the terms of the Credit Agreement, a $1,000,000
payment was made on the Secured Term Loan on August 31, 1993. If the Trust
continues to comply with the terms of the Credit Agreement, minimum cumulative
principal payments for principal owed as of December 31, 1993 will be as
follows:
Cumulative
Date Principal Payments
---- ------------------
August 31, 1994 $ 10,000,000
August 31, 1995 $ 19,000,000
August 31, 1996 $ 27,000,000
August 31, 1997 $ 52,000,000
April 30, 1998 $128,802,000
In order to comply with the principal payment requirements of the
Credit Agreement, the Trust and the Corporation must sell properties. As of
December 31, 1993, properties having net book values of $15,699,000 and
$932,000 for the Trust and the Corporation, respectively, had been identified
for sale.
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In determining which properties were identified for sale, the
Companies considered for each property current and anticipated economic
performance, local market trends, physical condition and capital requirements.
In addition, properties with continuing negative or declining cash flows and
having the least potential for improvement were identified for future sale.
For information regarding the terms of the property sales completed during 1993
and for which offers had been accepted at December 31, 1993 see "Recent
Developments - Certain Property Sales" included in Items 1 and 2 of this Joint
Annual Report. As of the date of this Annual Report, the Trust and the
Corporation have no commitments to sell properties other than those described
under "Recent Developments - Certain Property Sales and Related Transactions".
Any sales of hotel properties will impact revenues and expenses of the
Trust and the Corporation. Because the Credit Agreement requires the net
proceeds from hotel sales to be applied to the repayment of debt, sales of
hotels will result in decreased interest expense for the Trust. In addition,
the income of the Trust will be decreased because the Trust will no longer
receive rental income from the Corporation in respect of a sold property, which
may be offset by payments to the Trust on any notes receivable generated from a
sale. Sales of hotel properties will also decrease the depreciation and
amortization expenses of the Trust. The aggregate impact on revenues and
expenses will depend on the terms and timing of the sales of the properties to
be sold.
The Credit Agreement requires the Trust and the Corporation to
maintain on a combined basis, a specified minimum adjusted net worth and a
specified minimum ratio of cash to cash interest plus capital expenditures, as
defined. At December 31, 1993, the Companies' were in compliance with these
covenants. The Credit Agreement contains covenants that restrict, among other
things, the Trust's ability to acquire or dispose of assets, to make
investments and to incur additional indebtedness, and covenants that prohibit
the payment of distributions to shareholders. In addition to establishing
certain operating restrictions and reporting requirements, the Credit Agreement
establishes daily operating thresholds, as defined. If these thresholds are
exceeded by the Trust and the Corporation, the excess amounts must be applied
to reduce the borrowings then outstanding under the Revolving Line of Credit,
but amounts so applied are available for future borrowings.
Further, the Trust may be required to continue to restructure the
indebtedness of the Corporation to the Trust on an annual or long-term basis to
allow the continued survival of the Corporation.
9
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Results of Operations for the Years Ended December 31, 1993 and 1992
The Trust. Rents from Corporation totaled $16,481,000 and
$21,177,000 for the years ended December 31, 1993 and 1992, respectively.
Approximately $1,106,000 of the decrease in rents resulted from the sale of
hotels in Irving, Texas (March 1992), Merrimack, New Hampshire (July 1992),
Spartanburg, South Carolina (September 1992), Smyrna, Georgia (January 1993),
Tucker, Georgia (June 1993), and St. Louis, Missouri (December 1993). The
remaining decrease was primarily due to the restructuring of eighteen of the
leases with the Corporation effective January 1, 1993, which reduced the fixed
and percentage rents payable by the Corporation. For additional information
regarding the lease restructuring, see "Liquidity and Capital Resources" below.
Interest from the Corporation decreased to $1,534,000 from
$4,123,000 for the years ended December 31, 1993 and 1992, respectively.
The decrease in interest income is a result of the January 1, 1993
restructuring of intercompany borrowings and advances made to the Corporation,
with the exception of the Milwaukee notes, into non-interest bearing demand
notes for calendar years 1993 and 1994, with interest at prime plus 2% payable
monthly thereafter.
For additional information with respect to Rents and Interest
from the Corporation in future periods, see "Liquidity and Capital Resources"
below.
Interest from mortgage and other notes receivable increased by
$187,000 for the year ended December 31, 1993 as compared to 1992. The
increase resulted from the additional interest income related to the mortgage
notes delivered to the Trust in connection with the sales of the hotel
properties located in Irving, Texas, Merrimack, New Hampshire, Spartanburg,
South Carolina, and Tucker, Georgia, having original principal balances of
$1,650,000, $1,440,000, $775,000, and $1,985,000, respectively.
The Trust and the Corporation periodically estimate the value of
their hotel assets and compare these values to the net book values of the hotel
assets. For hotel assets not held for sale, the undiscounted future cash flows
of the assets, on a hotel- by-hotel basis, are compared to the net book value
of the assets; and if the undiscounted future cash flows are less than the net
book value of the assets, the excess of the net book values over the estimated
fair values is charged to current earnings. When it is the opinion of
management that the fair value of a hotel that has been identified for sale, is
less than the net book value of the hotel a reserve for losses is established.
Fair value is determined based upon the discounted cash flow of the properties
at rates (11.0% to 14.5%) deemed reasonable for the type of property and
prevailing market conditions, appraisals and, if appropriate, then current
estimated net proceeds of sale. In determining whether to accept an offer for
the sale of a property, management considers the fairness of the offer in
comparison to the value of the property, the terms of the offer, whether the
offer is all cash or includes seller financing and the anticipated availability
of cash necessary in order to meet the next principal payment required under
the Credit Agreement. Losses on sales of hotel assets for the year ended
December 31, 1993 totaling $(53,000) reflected the sales of hotels in Smyrna
and Tucker, Georgia and the St. Louis, Missouri property. For additional
information regarding the terms of such sales of hotels see "Recent
Developments - Certain Property Sales and Related Transactions" included in
Items 1 and 2 of this Joint Annual Report.
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As described above, effective January 28, 1993, the Trust
restructured its debt. See "Liquidity and Capital Resources" below.
Management concluded that this debt restructuring (the "Debt Restructuring")
represented a "troubled debt restructuring" as defined under generally accepted
accounting principles, and accordingly, upon execution of the definitive
agreement, accrued all known current or future identifiable debt restructuring
costs as of December 31, 1992. No additional loan restructuring costs were
incurred during the year ended December 31, 1993.
Interest expense totaled $14,020,000 and $12,959,000 for the
years ended December 31, 1993 and 1992, respectively, an increase of
$1,061,000. The increase was primarily due to an increase in the average
interest rate and an increase in the borrowings outstanding under the Term Loan
and Revolving Line of Credit.
The sales of the properties discussed above and an increase in
the provision for investment losses are the primary reasons for the decline
in depreciation and amortization expense of $1,164,000 between 1993 and 1992.
Administrative and operating expenses totaled $2,212,000 and
$2,538,000 for the years ended December 31, 1993 and 1992, respectively,
a decrease of $326,000. The decrease was primarily the result of lower
legal and professional fees unrelated to the debt restructuring.
Administrative and operating expenses included an accrual of $219,000 at
December 31, 1993 in connection with the settlement of the Shareholder
Actions (see "Legal Proceedings" included in Item 3 of this Joint Annual
Report).
During 1993 a provision for investment losses (a non-cash charge to
operations) totaling $2,369,000 was recorded primarily as a result of the
acceptance of all cash offers to sell hotels previously identified for sale
at amounts lower than the then current net book values, (which cash was used to
meet the next principal payment due under the terms of the Credit Agreement)
and the continuing deterioration of hotel values in the Southeast.
No distributions were made by the Trust for the years ended
December 31, 1993 and 1992. For information with respect to restrictions on
distributions imposed by the Credit Agreement see "Distributions - The Trust"
included in Item 5 of this Joint Annual Report.
The Trust's net loss and net loss per share totaled $3,889,000, or
$0.32 per share, and $9,818,000, or $0.81 per share, for the years ended
December 31, 1993 and 1992, respectively.
The Corporation. Hotel revenues totaled $86,903,000 and $88,812,000
for the years ended December 31, 1993 and 1992, respectively, representing a
decrease of $1,909,000. The hotel sales described under the caption "The Trust"
above resulted in decreased revenue of $2,373,000, which was partially offset by
increased revenues of $835,000 resulting from increased average occupancy and
average room rates for properties which continue to be operated by the
Corporation and leased from the Trust.
The following table summarizes average occupancy and average room
rates for properties which continue to be operated by the Corporation under
lease from the Trust:
11
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Year Ended
December 31,
------------------------------------------
1993 1992
---- ----
Occupancy Rate 63% 59%
Average Room Rate $56.59 $53.18
Management of the Corporation believes that the improved national
economic trends experienced during 1993 resulted in increased business and
pleasure travel and related increases in average occupancy rates and average
room rates.
Gaming revenues totaled $27,505,000 and $26,150,000 for the years
ended December 31, 1993 and 1992, respectively. Management believes the
increased revenue of $1,355,000 at the two gaming facilities is a result of
increased customer travel to the Las Vegas area, and in particular, increased
customer traffic due to the close proximity of the King 8 Hotel and Casino to
several large hotel/casinos completed during 1993.
Management fees and other income decreased by $737,000 to $222,000
for the year ended December 31, 1993 as compared to 1992. The decreases were
primarily a result of the subcontracting of the management obligations of
Western Host with respect to seven hotels not owned by the Trust, to Westland
Hotel Corporation. For additional information pertaining to the subcontracts,
see Note 10 of the Notes to Financial Statements and Item 13 of this Joint
Annual Report.
For information regarding the carrying value of properties held for
sale, see the Trust above. Gain on sales of hotel assets totaled $74,000 and
$4,000 for the years ended December 31, 1993 and 1992, respectively, reflecting
the property sales described above.
Hotel expenses totaled $68,132,000 and $68,620,000, or 78% and 77% of
hotel revenues, for the years ended December 31, 1993 and 1992, respectively.
The increase in hotel expenses as a percentage of hotel revenues is principally
attributable to the payment of management fees to third party operators under
the 11 management contracts entered into in December 1992 and increased revenues
and expenses at the Dallas Marriott Park Central where operating expenses are
typically higher as a percentage of revenues than at other hotel properties
operated by or for the Corporation.
Gaming expenses totaled $24,055,000 and $23,699,000, or 87% and 91%
of gaming revenues, for the years ended December 31, 1993 and 1992,
respectively. Increased gaming revenues, coupled with improved casino win
percentages, resulted in the decreases in gaming expenses as a percentage of
gaming revenues.
For information with respect to rent and interest to the Trust during
the years ended December 31, 1993 and 1992, see "The Trust - Results of
Operations for the Years Ended December 31, 1993 and 1992" above and "Liquidity
and Capital Resources" below.
Administrative and operating expenses decreased by $827,000, or 22%,
for the year ended December 31, 1993 as compared to 1992. The decrease is
primarily the result of a reduction in the level of corporate staff.
Administrative and operating expenses include an accrual
12
<PAGE> 13
of $219,000 at December 31, 1993 in connection with the settlement of the
Shareholder Actions (see "Legal Proceedings" included in Item 3 of this Joint
Annual Report).
The Corporation's net loss totaled $3,143,000, or $0.26 per share, in
1993, as compared to $9,925,000, or $0.82 per share, for 1992.
Results of Operations for the Years Ended December 31, 1992 and 1991
The Trust. Rents from Corporation totaled $21,177,000 and $22,093,000
for the years ended December 31, 1992 and 1991, respectively. The decrease
resulted primarily from the sale of hotels in Indian Wells, California (May
1991), Brunswick, Georgia (July 1991), Albany, Georgia (September 1991),
Irving, Texas (March 1992), Merrimack, New Hampshire (July 1992) and
Spartanburg, South Carolina (September 1992) and the termination of the ground
and building lease for the St. Charles, Missouri property in August 1991. The
reductions in rental income resulting from property sales were partially offset
by additional rental income from the Columbus, Ohio property following the
Trust's reacquisition of that hotel in January 1992.
Interest from the Corporation decreased from $4,382,000 in 1991 to
$4,123,000 in 1992. In July 1991, a limited partnership of which the
Corporation is the general partner acquired the Milwaukee Marriott and assumed
the maker's obligations under an $11,000,000 promissory note held by the Trust.
The increase in interest income from the Corporation that resulted from this
debt being classified as intercompany debt was more than offset, however, by
decreases in the interest rate charged by the Trust to the Corporation (which
rate is tied to the prime rate of one of the Banks.)
For information with respect to anticipated reductions in
rents and interest income from the Corporation in future periods, see
"Liquidity and Capital Resources" below.
Interest from mortgage and other notes receivable decreased by
$339,000 in the year ended December 31, 1992 as compared to 1991. The
decrease resulted primarily from the cancellation of the mortgage note
receivable for the Best Western North, Columbus, Ohio and the partial
prepayment of the note receivable on the Ramada Inn in Jefferson City,
Missouri in January 1992 and the July 1991 reclassification of the
Milwaukee Marriott mortgage note receivable as a note due from the
Corporation. These decreases were partially offset by additional
interest income related to notes receivable delivered to the Trust in
connection with the hotel sales described above.
The reduction in other income of $82,000 for the year ended
December 31, 1992 as compared to 1991 was primarily the result of a
one-time recognition of income in 1991 resulting from the expiration of a
third-party option to acquire the King 8 and the Trust's retention of the
deposit paid in connection with that option.
For information regarding the carrying value of properties
held for sale and the factors considered in determining whether to accept an
offer for sale see "Results of Operations for the Years Ended December 31, 1993
and 1992", above. Losses on sales of hotel assets for the year ended December
31, 1992 ($791,000) reflect the sale of hotels in Spartanburg, South Carolina,
Merrimack, New Hampshire, and Irving, Texas and the recognition of a $91,000
13
<PAGE> 14
discount in connection with the early payoff of the mortgage note receivable
relating to the Brunswick, Georgia property. Gain on sales of hotel assets for
the year ended December 31, 1991 of $390,000 reflects the sale of three
properties and the termination of the ground and building lease for the St.
Charles, Missouri property described above.
Interest expense decreased between 1991 and 1992 by $2,900,000. The
decrease was due to a reduction in the interest rate applicable to borrowings
from the Lenders and the application of proceeds from property sales to reduce
those borrowings.
During the years ended December 31, 1992 and 1991, provisions
for investment losses (a non-cash charge to operations) totaling $3,419,000
and $8,867,000, respectively, were made, which amounts represent the difference
between the net book value of the Trust's properties which had been identified
for sale and their estimated fair values as well as the discounted future cash
flows for properties not held for sale which had undiscounted future cash flows
that were less than net book value. The 1992 provision was the result of
deterioration of hotel values in the Southeast and the acceptance of offers for
the sale of hotels at amounts less than net book value.
The 1991 provision primarily resulted from the continuing decline in
the market for small to medium sized hotel/casino properties in Las Vegas,
overbuilding in the hotel markets, difficulty in obtaining third party
financing and the impact of the economic recession.
Depreciation and amortization decreased by $2,236,000 between
1991 and 1992, primarily as a result of the above- mentioned property sales
and the provisions for investment losses recorded during 1992 and 1991.
Administrative and operating expenses decreased by $411,000 in
1992 as compared to 1991 principally as a result of the termination of certain
Trust employees in April 1991.
Loan restructuring costs for the year ended December 31, 1992
totaled $10,892,000, as compared to $3,797,000 for 1991. Of the 1992 costs,
$8,713,000 was accrued in December 31, 1992 for future costs that were known
and identifiable in connection with the debt restructuring. Upon execution and
delivery of the Credit Agreement, $700,000 was paid to the Lenders in cash, and
$4,032,000 was added to the balance of the Term Loan, pursuant to provisions of
the Credit Agreement requiring that the Lenders' debt restructuring costs be so
paid or reimbursed by the Trust.
No distributions were made by the Trust for the years ended
December 31, 1992 and 1991. For information with respect to restrictions on
distributions imposed by the Credit Agreement see "Distributions - The Trust"
included in Item 5 of this Joint Annual Report.
The Trust's net loss totaled $9,818,000, or $0.81 per share, for 1992
as compared to $10,952,000, or $0.90 per share, for 1991.
The Corporation. Hotel revenues increased between 1991 and
1992 by $3,656,000. An increase resulting from the inclusion of revenues
from the Milwaukee Marriott
14
<PAGE> 15
beginning in July 1991 and the Best Western North in Columbus, Ohio beginning
in January 1992 which totaled $9,238,000 was offset by the reduction in
revenues that resulted from property sales which amounted to $5,533,000.
The following table summarizes average occupancy and room
rates for properties leased by the Corporation from the Trust:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------------
1992 1991
------ ------
<S> <C> <C>
Average Occupancy Rate 59% 57%
Average Room Rate $53.18 $51.17
</TABLE>
Management of the Corporation believes that the increases in
the average occupancy rate resulted primarily from increased business and
pleasure travel throughout the United States, and that the increase in the
average room rate principally reflects the addition of the Milwaukee Marriott
(which hotel has a higher room rate than the Corporation's remaining mix of
properties).
Gaming revenues increased between 1991 and 1992 by $3,541,000,
primarily as a result of increased travel to the Las Vegas area and the
proximity of the King 8 to several large hotel/casinos which were under
development or had been recently completed.
Management fees and other income decreased by $108,000 for the
year ended December 31, 1992 as compared to 1991, due primarily to reduced
management fees (which fees are based on revenues) earned at the seven hotels
(excluding the Milwaukee Marriott which is combined in consolidation) managed
by the Corporation for entities other than the Trust.
Gain on sales of assets for the years ended December 31, 1992
and 1991 ($4,000 and $1,208,000, respectively) reflect the property sales
described above.
Expenses of hotel operations increased to $68,620,000, or
77.3% of hotel revenues, in 1992, as compared to $65,963,000, or 77.5% of hotel
revenues in 1991.
Expenses of gaming operations totaled $23,699,000, or 90.6% of
gaming revenues, as compared to $21,948,000, or 97.1% of gaming revenue, for
the years ended December 31, 1992 and 1991, respectively. Management believes
that increased gaming revenue, coupled with improved casino win percentages,
has resulted in decreased gaming expenses as a percentage of gaming revenue.
For information with respect to rent and interest paid by the
Corporation to the Trust during the years ended December 31, 1992 and 1991, see
"The Trust - Results of Operations for the Years Ended December 31, 1992 and
1991".
Interest - other increased by $650,000, and depreciation and
amortization increased by $744,000, for 1992 as compared to 1991, due to the
July 1991 restructuring of the ownership of the Milwaukee Marriott.
15
<PAGE> 16
Administrative and operating expenses increased to $3,827,000
in 1992 from $3,137,000 in 1991. The increase was due primarily to the payment
or accrual of severance compensation for certain of the Corporation's employees
as a result of the relocation of certain operations of the Corporation to Los
Angeles and reductions in personnel due to the contracting out to third- party
management companies of the operations of hotel properties previously operated
by the Corporation.
No provision for investment loss was established in 1992, as
compared to a provision for losses of $713,000 (a non- cash charge to
operations) in 1991; which related to the Milwaukee Marriott Hotel acquired by
the Corporation in July 1991.
The Corporation's net loss totaled $9,925,000, or $0.82 per
share, in 1992, as compared to $11,132,000, or $0.92 per share, for 1991.
16
<PAGE> 17
Liquidity and Capital Resources
The Trust - The primary sources of liquidity for the Trust are
cash generated from operations (i.e., its rents) and net proceeds from the sale
of hotels. The primary demands on the Trust's capital resources are debt
service payments, the funding of capital improvements to the Trust's properties
and the making of additional loans and advances to the Corporation.
As of December 31, 1992, an aggregate of $87,490,000 was owed
by the Corporation to the Trust as accrued but unpaid rent, interest and other
indebtedness (including the Milwaukee notes) of $12,667,000. As of January 1,
1993, a total of $448,000 of then accrued and unpaid rents and interest were
added to the debt. During 1993 and 1994, no interest accrued or will accrue on
the Corporation's debt to the Trust; beginning January 1, 1995, the outstanding
principal balance of the Corporation's debt to the Trust will bear interest at
an annual rate equal to the prime rate of one of the Banks from time to time
plus 2%. However, there can be no assurance that the Corporation's debt to the
Trust won't need to be further restructured in future years.
The 1993 restructuring of the Intercompany Leases (see "The
Trust - Investments - Equity Investments" included in Items 1 and 2 of this
Joint Annual Report), the two-year interest moratorium on the Corporation's
debt to the Trust and sales of the Trust's hotels which were managed by the
Corporation, are expected to lower the rents and interest received by the Trust
from the Corporation in 1994. The Trust's revenues were $20,342,000 in 1993 as
compared to $26,784,000 in 1992, and due to anticipated property sales are
expected to be lower in 1994 than in 1993. The Trust will seek to generate
from its operations sufficient cash flow to pay the interest due on the Secured
Term Loan, Revolving Line of Credit and the Trust's other mortgage debt, as
well as to fund required capital improvements; however, debt principal payments
are expected to be made primarily from the proceeds of hotel sales and (in the
case of mortgage debt other than the Restructured Debt) from debt refinancings.
(For information with respect to such mortgage debt, see Note 7 of Notes to
Financial Statements included in Item 8 of this Joint Annual Report.) In
addition to the $9,000,000 principal payment due on August 31, 1994 aggregate
principal payments due during 1994 on the outstanding mortgage notes payable of
the Trust amounted to $16,088,000 as of December 31, 1993, including three
mortgage notes maturing during 1994. Management of the Trust is currently
negotiating the refinance or extension of the mortgage notes due in 1994.
Management believes that there will be sufficient cash available from
operations and from the currently pending sales of properties to fund its
operations and obligations during 1994. (See "Recent Developments - Pending
Sales" included in Items 1 and 2 of this Joint Annual Report.) There can be no
assurance, however, that either the Trust's operations or the Trust's sale of
hotels will produce sufficient cash to make the required payments of principal
and interest. (See "Recent Developments - Debt Restructuring" included in
Items 1 and 2 of this Joint Annual Report.)
The Corporation - The primary source of liquidity for the
Corporation is cash generated from operations - i.e., from sales of rooms, food
and beverages at the hotels and hotel/casinos the Corporation leases from the
Trust and gaming revenues at the two Nevada properties, net of management fees
with respect to the 9 hotels managed by independent management companies. The
primary demands on the Corporation's capital resources are the payment of rents
and interest due to the Trust and the Corporation's general and administrative
17
<PAGE> 18
expenses. Although the two-year interest moratorium on the Corporation's debt
to the Trust and the reduction in future rentals due to the Trust are expected
to improve the Corporation's 1994 cash flows and income, sales of the Trust's
hotels managed by the Corporation have reduced, and are expected to continue to
reduce, the Corporation's revenues. The Corporation may continue to incur cash
flow deficiencies and the Corporation expects to continue to request that the
Trust loan the Corporation the funds required to meet those deficiencies. The
debt of the Corporation due to the Trust is payable on demand. The Corporation
currently has no other means of obtaining the funds to cover its cash flow
deficiencies or to repay the principal amount of the Corporation's debt to the
Trust.
As described in Items 1 and 2 hereof under the caption "Recent
Developments - Debt Restructuring", the Credit Agreement requires that the
Trust and the Corporation apply on a daily basis any cash in excess of certain
specified thresholds to borrowings outstanding under the Revolving Line of
Credit. Amounts so paid are available for future borrowings to pay interest on
the Restructured Debt, to make principal payments on the Term Loan and to pay
other expenses incurred in connection with Hotel Investors' operations. As of
December 31, 1993, $3,075,000 was available to the Trust under the Revolving
Line of Credit. However, should Hotel Investors fail to comply with its
obligations under the Credit Agreement and related documents, the Lenders will
have the power to substantially restrict Hotel Investors' access to and ability
to utilize its cash.
The Trust intends to make during 1994, improvements to the
Trust's properties that are necessary to maintain the properties in good
condition or that are required by franchisors or applicable health and safety
and other laws. The management of the Trust believes that the necessary funds
are available and the cost of such improvements will be approximately
$3,720,000 during 1994. As discussed in Items 1 and 2 of this Joint Annual
Report, Hotel Investors' capital improvements are subject to the approval of
the Senior Lenders.
For information with respect to potential hazardous waste
contamination and the presence of asbestos at certain of the Trust's hotels and
the possible impact thereof on the Trust's and the Corporation's financial
position, see "Other Information - Certain Environmental Matters" included in
Items 1 and 2 of this Joint Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by
this Item are included in Item 14 of this Joint Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Certain Beneficial Owners. To the knowledge of the Trust and
the Corporation, no person owns beneficially 5% or more of the Paired Shares,
except as follows:
<TABLE>
<Capt ion>
Amount
Name and Address Beneficially Percent of
Title of Class of Beneficial Owner Owned Class (1)
-------------- ------------------- ----- ---------
<S> <C> <C> <C>
Paired Shares Leonard M. Ross 1,190,400 (2) 9.8%
</TABLE>
18
<PAGE> 19
1011-1/2 North Beverly Drive
Beverly Hills, CA (2)
RRH Capital Management, Inc. 746,350 (3) 6.2%
1270 Avenue of the Americas
New York, NY 10020 (3)
R.B. Haave Associates, Inc. 749,200 6.2%
270 Madison Avenue
New York, NY 10016 (4)
(1) Based on the number of Paired Shares outstanding on March 25, 1994.
(2) Based on information contained in Amendment No. 8 to Schedule 13D
dated February 22, 1991. Mr. Ross has sole voting and dispositive power with
respect to all of these shares; however, 909,800 of these shares are pledged to
the Pacific Bank, along with other securities, as collateral for a previously
unsecured loan.
(3) Based on information contained in Schedule 13G dated February 11,
1993. RRH Capital Management, Inc. has sole dispositive power with respect to
all, and does not have voting power with respect to any, of these shares.
(4) Based on information contained in Schedule 13G dated February 7, 1994,
R.B. Haave Associates, Inc. has sole dispositive power and voting power with
respect to all of these shares.
Trustees and Officers of the Trust. The following table sets
forth the beneficial ownership of the paired shares as of March 25, 1994 by
each Trustee and each executive officer of the Trust named in the Summary Cash
Compensation Table included in Item 11 hereof who owns paired shares and by all
Trustees and executive officers of the Trust as a group. Except as otherwise
provided below, each beneficial owner has sole voting and investment power with
respect to all shares beneficially owned (other than shares acquired pursuant
to the Trust's 1987 share purchase plan, as to which shares the beneficial
owner has no investment power until his indebtedness to the Trust in respect of
these shares is repaid.
<TABLE>
<CAPTION>
Name of Amount Percent of
Beneficial owner Beneficially Owned Class (1)
---------------- ----- ----------
<S> <C> <C>
Jeffrey C. Lapin 69,084 (2) (3)
Michael W. Mooney 16,750 (4) (3)
Sherwin L. Samuels 98,820 (5) (3)
Graeme W. Henderson 51,500 (6) (3)
All Trustees and officers as a group 236,154 (7) 1.9%
</TABLE>
- - - --------------------
(1) Based on the number of paired shares outstanding on March 25, 1994.
19
<PAGE> 20
(2) Includes 63,334 shares subject to presently exercisable options and
5,000 shares owned in a pension plan of which Mr. Lapin is sole trustee and
beneficiary.
(3) Less than 1%.
(4) Includes 16,750 shares subject to presently exercisable options.
(5) Includes 14,320 shares held in a segregated account for the benefit of
Mr. Samuels by a pension plan trust; 7,500 shares acquired by Mr. Samuels
pursuant to a Trust share purchase plan; and 56,000 shares subject to presently
exercisable options and 1,000 shares issuable upon exercise of paired warrants
issued by the Trust and the Corporation. Does not include 359 shares owned by
Mr. Samuels's son (of which shares Mr. Samuels disclaims beneficial ownership).
(6) Includes 300 shares owned in a Keogh plan, 5,000 shares owned in a
pension plan of which Mr. Henderson is sole trustee and beneficiary and 5,000
shares acquired pursuant to a Trust share purchase plan and 16,000 shares
issuable upon exercise of paired warrants issued by the Trust and the
Corporation.
(7) Includes 137,384 shares that may be acquired upon the exercise of
presently exercisable options and 12,500 shares acquired by Trustees pursuant
to a Trust share purchase plan and 17,000 shares issuable upon exercise of
paired warrants issued by the Trust and the Corporation. Does not include
shares owned by Mr. Samuels' son (see note (5) above).
Directors and Officers of the Corporation. The following
table sets forth the beneficial ownership of paired shares as of March 25, 1994
by each Director and each executive officer of the Corporation named in the
Summary Cash Compensation Table included in Item 11 hereof who owns paired
shares and by all Directors and executive officers of the Corporation as a
group. Except as otherwise provided below, each beneficial owner has sole
voting and investment power with respect to all shares beneficially owned
(other than shares acquired pursuant to the Corporation's share purchase plans,
as to which shares the beneficial owner has no investment power until his
indebtedness to the Corporation in respect of these shares is repaid).
<TABLE>
<CAPTION>
Name of Number of Shares Percent of
Beneficial Owner Beneficially Owned Class (1)
---------------- ------------------ ---------
<S> <C> <C>
Kevin E. Mallory 16,750 (2) (3)
Bruce M. Ford 12,612 (4) (3)
Earle F. Jones 6,500 (5) (3)
Graeme W. Henderson 51,500 (6) (3)
All Directors and officers as a group 68,440 (7) (3)
</TABLE>
- - - -----------------------
(1) Based on the number of shares outstanding on March 25, 1994.
(2) Includes 16,750 shares subject to presently exercisable options.
(3) Less than 1%.
20
<PAGE> 21
(4) Includes 9500 shares acquired pursuant to a Corporation share purchase
plan and 2,422 shares issuable upon exercise of paired warrants issued by the
Trust and the Corporation, 172 of which are owned by Mr. Ford's wife.
(5) Includes 5,000 shares acquired pursuant to a Corporation share
purchase plan and 500 shares issuable upon exercise of paired warrants issued
by the Trust and the Corporation.
(6) Includes 300 shares owned in a Keogh Plan, 5,000 shares owned in a
pension plan of which Mr. Henderson is trustee and beneficiary and 5,000 shares
acquired pursuant to a Trust share purchase plan and 16,000 shares issuable
upon exercise of paired warrants issued by the Trust and the Corporation.
(7) Includes 16,750 shares that may be acquired upon the exercise of
presently exercisable options and 19,500 shares acquired by Directors pursuant
to the Trust's and the Corporation's share purchase plans and 18,922 shares
issuable upon exercise of paired warrants issued by the Trust and the
Corporation.
21
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOTEL INVESTORS TRUST HOTEL INVESTORS CORPORATION
(Registrant) (Registrant)
By: /s/ MICHAEL W. MOONEY By: /s/ KEVIN E. MALLORY
---------------------------- -------------------------------
Michael W. Mooney Kevin E. Mallory
Chief Financial Officer Executive Vice President
(Principal Executive Officer)
Dated: October 26, 1994
22
<PAGE> 23
HOTEL INVESTORS TRUST
HOTEL INVESTORS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
AS OF DECEMBER 31, 1993 AND 1992
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1993
INDEPENDENT AUDITORS' REPORT .............................................. F-1
HOTEL INVESTORS TRUST AND HOTEL INVESTORS CORPORATION:
Combined Balance Sheets ............................................ F-3
Combined Statements of Operations .................................. F-4
Combined Statements of Cash Flows .................................. F-5
Combined Statements of Shareholders' Equity ........................ F-6
HOTEL INVESTORS TRUST:
Balance Sheets ..................................................... F-7
Statements of Operations ........................................... F-8
Statements of Cash Flows ........................................... F-9
Statements of Shareholders' Equity ................................. F-10
HOTEL INVESTORS CORPORATION:
Balance Sheets ..................................................... F-11
Statements of Operations ........................................... F-12
Statements of Cash Flows ........................................... F-13
Statements of Shareholders' Deficit ................................ F-14
NOTES TO FINANCIAL STATEMENTS ............................................. F-15
SCHEDULES:
Schedule IV - Indebtedness of and to Related Parties ............... F-39
Schedule IX - Short-term Borrowings ................................ F-41
Schedule X - Supplementary Statements of Operations Information ... F-42
Schedule XI - Real Estate and Accumulated Depreciation ............. F-43
Schedule XII- Mortgage Loans on Real Estate ........................ F-47
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Boards of Trustees and Directors and Shareholders of
Hotel Investors Trust and Hotel Investors Corporation:
We have audited the accompanying separate and combined financial statements of
Hotel Investors Trust (a Maryland real estate investment trust) (the "Trust")
and Hotel Investors Corporation (a Maryland corporation) and its subsidiaries
(the "Corporation"), collectively the "Companies", as of December 31, 1993 and
1992, and for each of the three years in the period ended December 31, 1993,
listed in the foregoing index to financial statements and financial statement
schedules. Our audits also included the financial statement schedules listed
in the foregoing index to financial statements and financial statement
schedules. These financial statements and financial statement schedules are
the responsibility of the Trust's, the Corporation's and the Companies'
managements. Our responsibility is to express an opinion on the financial
statements and financial statement schedules 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, such separate and combined financial statements present fairly,
in all material respects, the financial position of the Companies and the
financial position of the Trust and the Corporation as of December 31, 1993 and
1992, and their respective results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
The accompanying financial statements and financial statement schedules have
been prepared assuming the Trust, the Corporation and the Companies will
continue as going concerns. As discussed in Note 2 to the financial
statements, the Trust was in default at December 31, 1992 on its obligations to
repay indebtedness under the Trust Line of Credit Agreement and Senior Notes
Agreements. As discussed in Note 6 to the financial statements, because of the
substantial operating losses and cash flow deficiencies experienced by the
Corporation, which also had a deficiency in net assets, the Corporation has
been unable to repay amounts due to the Trust. These conditions raise
substantial doubt about the Trust's, the Corporation's and the Companies'
ability to continue as going concerns.
F-1
<PAGE> 25
Managements' plans concerning these matters are described in Notes 2 and 6 to
the financial statements. The financial statements and financial statement
schedules do not include any adjustments that might result from the outcome of
these uncertainties.
We have not audited any financial statements of the Trust, the Corporation and
the Companies for any period subsequent to December 31, 1993. However, as
discussed in Note 13 to the financial statements, in October 1994, Starwood
Capital Group, L.P. ("Starwood") entered into negotiations with Leonard M. Ross
and his affliates ("Ross") who had opted out of the settlement of the
Shareholder Actions to settle the threatened litigation against the Trust and
the Corporation. The ultimate outcome of this matter cannot presently be
determined. Accordingly, no provision for any liability that might result upon
resolution of this matter has been made in the accompanying financial
statements.
Los Angeles, California
March 25, 1994, except for Note 13,
as to which the date is October 26, 1994
F-2
<PAGE> 26
HOTEL INVESTORS TRUST AND HOTEL INVESTORS CORPORATION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1993 1992
------------- -------------
<S> <C> <C>
ASSETS
Hotel assets held for sale - net .................... $ 16,631,000 $ 26,000,000
Hotel assets - net .................................. 150,618,000 151,462,000
------------- -------------
167,249,000 177,462,000
Mortgage notes receivable-net ....................... 11,642,000 10,010,000
Investment in joint venture hotel properties ........ 281,000 281,000
------------- -------------
Total real estate investments ................. 179,172,000 187,753,000
Cash and cash equivalents ........................... 5,652,000 10,517,000
Accounts receivable ................................. 4,360,000 4,464,000
Notes receivable - net .............................. 1,717,000 1,772,000
Inventories, prepaid expenses and other assets ...... 4,451,000 6,439,000
------------- --------------
$ 195,352,000 $ 210,945,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Secured notes payable and revolving line of credit .. $ 128,802,000 $ 128,223,000
Mortgage and other notes payable .................... 42,084,000 42,074,000
Accounts payable and other liabilities .............. 11,140,000 20,297,000
------------- -------------
182,026,000 190,594,000
------------- -------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Trust shares of beneficial interest,
$1.00 par value; authorized
30,000,000 shares; outstanding
12,132,948 shares ............................... 12,133,000 12,133,000
Corporation common stock, $0.10 par
value; authorized 30,000,000 shares;
outstanding 12,132,948 shares ................... 1,213,000 1,213,000
Additional paid-in capital .......................... 210,497,000 210,673,000
Share purchase notes ................................ (291,000) (474,000)
Accumulated deficit ................................. (210,226,000) (203,194,000)
------------- -------------
13,326,000 20,351,000
------------- -------------
$ 195,352,000 $ 210,945,000
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 27
HOTEL INVESTORS TRUST AND HOTEL INVESTORS CORPORATION
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Hotel ........................................... $ 86,903,000 $ 88,812,000 $ 85,156,000
Gaming .......................................... 27,505,000 26,150,000 22,609,000
Interest from mortgage and other notes .......... 1,412,000 1,348,000 1,761,000
Management fees and other income ................ 475,000 1,186,000 1,376,000
Rents from leased hotel properties
and income from joint ventures ............... 839,000 947,000 936,000
Gain (loss) on sales of hotel assets ............ 21,000 (787,000) 1,598,000
------------ ------------ ------------
117,155,000 117,656,000 113,436,000
------------ ------------ ------------
EXPENSES
Hotel operations ................................ 68,132,000 68,620,000 65,963,000
Gaming operations ............................... 24,055,000 23,699,000 21,948,000
Interest ........................................ 15,187,000 14,208,000 16,458,000
Depreciation and amortization ................... 9,232,000 10,196,000 11,688,000
Administrative and operating .................... 5,212,000 6,365,000 6,086,000
Loan restructuring costs ........................ 10,892,000 3,797,000
Provision for losses ............................ 2,369,000 3,419,000 9,580,000
------------ ------------ ------------
124,187,000 137,399,000 135,520,000
------------ ------------ ------------
NET LOSS $ (7,032,000) $(19,743,000) $(22,084,000)
============ ============ ============
NET LOSS PER PAIRED SHARE $ (0.58) $ (1.63) $ (1.82)
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 28
HOTEL INVESTORS TRUST AND HOTEL INVESTORS CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1993 1992 1991
----------- ------------ ------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................... $(7,032,000) $(19,743,000) $(22,084,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization .................... 9,232,000 10,196,000 11,688,000
Deferred interest ................................ 3,287,000
(Gain) loss on sales of hotel assets 787,000 (1,598,000)
Provision for investment losses .................. 2,369,000 3,419,000 9,580,000
Changes in assets and liabilities:
Accounts receivable, inventories
and prepaid expenses ........................... 2,118,000 14,000 (1,131,000)
Accounts payable and other liabilities ........... (4,421,000) 10,017,000 (2,613,000)
----------- ------------ ------------
Net cash provided by (used in)
operating activities ....................... 5,532,000 4,690,000 (6,158,000)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to hotel assets .......................... (6,577,000) (2,990,000) (4,551,000)
Net proceeds from sales of assets .................. 6,130,000 488,000 15,200,000
Increase in notes receivable ....................... (1,985,000)
Principal received on notes receivable ............. 409,000 1,006,000 1,110,000
Other intangible assets ............................ (47,000) (18,000) 244,000
Acquisition of minority interest/hotels ............ (1,575,000) 156,000
----------- ------------ ------------
Net cash provided by (used in)
investing activities ....................... (3,645,000) (1,514,000) 12,159,000
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage and
other notes payable .............................. (1,666,000) (1,146,000) (1,088,000)
Borrowings under mortgage and other notes .......... 632,000 761,000
Principal payments on secured notes payable and
revolving line of credit ......................... (5,695,000) (6,727,000)
Payments to minority shareholders .................. (28,000) (111,000) (125,000)
Principal received on share purchase notes ......... 5,000 2,000 40,000
----------- ------------ ------------
Net cash provided by (used in) financing
activities ................................. (6,752,000) (1,255,000) (7,139,000)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................. (4,865,000) 1,921,000 (1,138,000)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR ............................. 10,517,000 8,596,000 9,734,000
CASH AND CASH EQUIVALENTS
AT END OF YEAR ................................... $ 5,652,000 $ 10,517,000 $ 8,596,000
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 29
HOTEL INVESTORS TRUST AND HOTEL INVESTORS CORPORATION
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Trust Shares
of Corporation Additional
Beneficial Common Paid - in
Interest Stock Capital
------------ ----------- ------------
<S> <C> <C> <C>
Balance January 1, 1991 .................... $12,133,000 $1,213,000 $210,673,000
Principal payments and reductions
of share purchase notes .............
Net loss ...............................
----------- ---------- ------------
Balance December 31, 1991 .................. 12,133,000 1,213,000 210,673,000
Principal payments and reductions
of share purchase notes .............
Net loss ..............................
----------- ---------- -----------
Balance December 31, 1992 .................. 12,133,000 1,213,000 210,673,000
Principal payments and reductions
of share purchase notes .............. (176,000)
Net loss ...............................
----------- ---------- -----------
Balance December 31, 1993 .................. $12,133,000 $1,213,000 $210,497,000
=========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
Share Total
Purchase Accumulated Shareholders'
Notes Deficit Equity
--------- ------------- -------------
<S> <C> <C> <C>
Balance January 1, 1991 .................... $(548,000) $(161,367,000) $ 62,104,000
Principal payments and reductions
of share purchase notes ............. 63,000 63,000
Net loss ...............................
(22,084,000) (22,084,000)
--------- ------------- ------------
Balance December 31, 1991 .................. (485,000) (183,451,000) 40,083,000
Principal payments and reductions
of share purchase notes ............. 11,000 11,000
Net loss .............................. (19,743,000) (19,743,000)
--------- ------------- ------------
Balance December 31, 1992 .................. (474,000) (203,194,000) 20,351,000
Principal payments and reductions
of share purchase notes .............. 183,000 7,000
Net loss ............................... (7,032,000) (7,032,000)
--------- ------------- ------------
Balance December 31, 1993 .................. $(291,000) $(210,226,000) $ 13,326,000
========= ============= ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 30
HOTEL INVESTORS TRUST
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1993 1992
------------- -------------
<S> <C> <C>
ASSETS
Hotel assets held for sale - net .................... $ 15,699,000 $ 24,121,000
Hotel assets - net .................................. 114,219,000 116,897,000
------------- -------------
129,918,000 141,018,000
Mortgage notes receivable-net ....................... 11,642,000 10,010,000
Investment in joint venture hotel properties ........ 276,000 276,000
Total real estate investments ................. 141,836,000 151,304,000
Cash and cash equivalents ........................... 918,000 2,615,000
Accounts receivable ................................ 1,011,000 1,492,000
Rent and interest receivable - Corporation .......... 448,000
Notes receivable - Corporation ...................... 87,486,000 87,490,000
Notes receivable - net .............................. 1,025,000 1,025,000
Prepaid expenses and other assets ................... 569,000 1,166,000
------------- -------------
$ 232,845,000 $ 245,540,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Secured notes payable and revolving line of credit ... $ 128,802,000 $ 128,223,000
Mortgage and other notes payable ..................... 27,724,000 29,318,000
Accounts payable and other liabilities ............... 4,114,000 11,628,000
------------- -------------
160,640,000 169,169,000
------------- -------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Trust shares of beneficial interest,
$1.00 par value; authorized
30,000,000 shares; outstanding
12,132,948 shares ................................. 12,133,000 12,133,000
Additional paid-in capital ........................... 204,640,000 204,816,000
Share purchase notes ................................. (291,000) (190,000)
Accumulated deficit .................................. (144,277,000) (140,388,000)
------------- -------------
72,205,000 76,371,000
------------- -------------
$ 232,845,000 $ 245,540,000
============= =============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 31
HOTEL INVESTORS TRUST
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
REVENUE
Rents from Corporation ...................... $16,481,000 $21,177,000 $ 22,093,000
Interest from Corporation ................... 1,534,000 4,123,000 4,382,000
Interest from mortgage and other notes ...... 1,288,000 1,101,000 1,440,000
Rents from other leased hotel properties
and income from joint ventures ........... 839,000 947,000 936,000
Other income ................................ 253,000 227,000 309,000
Gain (loss) on sales of hotel assets ........ (53,000) (791,000) 390,000
20,342,000 26,784,000 29,550,000
----------- ----------- ------------
EXPENSES
Interest .................................... 14,020,000 12,959,000 15,859,000
Depreciation and amortization ............... 5,630,000 6,794,000 9,030,000
Administrative and operating ................ 2,212,000 2,538,000 2,949,000
Loan restructuring costs .................... 10,892,000 3,797,000
Provision for losses ........................ 2,369,000 3,419,000 8,867,000
24,231,000 36,602,000 40,502,000
----------- ----------- ------------
NET LOSS $(3,889,000) $(9,818,000) $(10,952,000)
=========== =========== ============
NET LOSS PER SHARE $ (0.32) $ (0.81) $ (0.90)
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 32
HOTEL INVESTORS TRUST
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................... $(3,889,000) $(9,818,000) $(10,952,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization .................. 5,630,000 6,794,000 9,030,000
Deferred interest ............................... 2,243,000
(Gain)/Loss on sales of hotel assets ........... 53,000 791,000 (390,000)
Provision for losses ........................... 2,369,000 3,419,000 8,867,000
Changes in operating assets and liabilities:
Rent and interest receivable - Corporation ..... (1,519,000) (8,238,000) (13,165,000)
Accounts receivable and prepaid expenses ....... 1,037,000 115,000 (659,000)
Accounts payable and other liabilities ......... (2,788,000) 9,710,000 (1,543,000)
----------- ----------- ------------
Net cash provided by (used in)
operating activities ..................... 3,136,000 2,773,000 (8,812,000)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to hotel assets ....................... (1,372,000) (1,700,000) (3,217,000)
Net proceeds from sales of assets ................ 5,360,000 189,000 13,596,000
Increase in mortgage notes receivable ............ (1,985,000)
Principal received on mortgage
and other notes receivable ..................... 353,000 957,000 1,064,000
Other intangible assets ......................... (18,000) 244,000
Net changes in notes receivable - Corporation .... 1,693,000 411,000 1,202,000
Acquisition of minority interest ................ (1,575,000)
----------- ----------- ------------
Net cash provided by (used in)
investing activities ..................... 2,474,000 (161,000) 12,889,000
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage and
other notes payable ........................... (1,594,000) (754,000) (708,000)
Principal payments on secured notes payable and
revolving line of credit ....................... (5,695,000) (6,727,000)
Payments to minority shareholders ................ (18,000) (97,000) (112,000)
Principal received on share purchase notes 1,000 40,000
----------- ----------- ------------
Net cash provided by (used in)
financing activities ..................... (7,307,000) (850,000) (7,507,000)
----------- ----------- ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .......................... (1,697,000) 1,762,000 (3,430,000)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR ........................... 2,615,000 853,000 4,283,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR ................................. $ 918,000 $ 2,615,000 $ 853,000
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE> 33
HOTEL INVESTORS TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares of Additional Share
Beneficial Paid - in Purchase
Interest Capital Notes
----------- ------------ -----------
<S> <C> <C> <C>
Balance January 1, 1991 . . . . . . . . . $12,133,000 $204,816,000 $(244,000)
Principal payments and reductions
of share purchase notes . . . . . . 53,000
Net loss . . . . . . . . . . . . . . . .
----------- ------------ ---------
Balance December 31, 1991 . . . . . . . . 12,133,000 204,816,000 (191,000)
Principal payments and reductions
of share purchase notes . . . . . . 1,000
Net loss . . . . . . . . . . . . . . . .
----------- ------------ ---------
Balance December 31, 1992 . . . . . . . . 12,133,000 204,816,000 (190,000)
Principal payments, reductions and
transfer of share purchase notes
from the Corporation-net . . . . . . (176,000) (101,000)
Net loss . . . . . . . . . . . . . . . .
----------- ------------ ---------
Balance December 31, 1993 . . . . . . . . $12,133,000 $204,640,000 $(291,000)
=========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Shareholders'
Deficit Equity
------------- ------------
<S> <C> <C>
Balance January 1, 1991 . . . . . . . . . $(119,618,000) $ 97,087,000
Principal payments and reductions
of share purchase notes . . . . . . 53,000
Net loss . . . . . . . . . . . . . . . . (10,952,000) (10,952,000)
------------- ------------
Balance December 31, 1991 . . . . . . . . (130,570,000) 86,188,000
Principal payments and reductions
of share purchase notes . . . . . . 1,000
Net loss . . . . . . . . . . . . . . . . (9,818,000) (9,818,000)
------------- ------------
Balance December 31, 1992 . . . . . . . . (140,388,000) 76,371,000
Principal payments, reductions and
transfer of share purchase notes
from the Corporation-net . . . . . . (277,000)
Net loss . . . . . . . . . . . . . . . . (3,889,000) (3,889,000)
------------- ------------
Balance December 31, 1993 . . . . . . . . $(144,277,000) $ 72,205,000
============= ============
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE> 34
HOTEL INVESTORS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1993 1992
------------ ------------
<S> <C> <C>
ASSETS
Hotel assets held for sale - net . . . . . . . . . $ 932,000 $ 1,878,000
Hotel assets - net . . . . . . . . . . . . . . . . 36,399,000 34,566,000
------------ ------------
37,331,000 36,444,000
Investment in joint venture hotel properties . . . 5,000 5,000
------------ ------------
Total real estate investments . . . . . . . 37,336,000 36,449,000
Cash and cash equivalents . . . . . . . . . . . . 4,734,000 7,902,000
Accounts receivable . . . . . . . . . . . . . . . 3,349,000 2,972,000
Notes receivable . . . . . . . . . . . . . . . . . 692,000 1,015,000
Inventories, prepaid expenses and other assets . . 3,882,000 5,273,000
------------ ------------
$ 49,993,000 $ 53,611,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES
Mortgage and other notes payable . . . . . . . . . $ 14,360,000 $ 12,756,000
Notes payable - Trust . . . . . . . . . . . . . . 87,486,000 87,490,000
Rent and interest payable - Trust . . . . . . . . 448,000
Accounts payable and other liabilities . . . . . . 7,026,000 8,669,000
------------ ------------
108,872,000 109,363,000
------------ ------------
Commitments and contingencies
SHAREHOLDERS' DEFICIT
Corporation common stock, $0.10 par
value; authorized 30,000,000 shares;
outstanding 12,132,948 shares . . . . . . . . . 1,213,000 1,213,000
Additional paid-in capital . . . . . . . . . . . . 5,857,000 5,857,000
Share purchase notes . . . . . . . . . . . . . . . (16,000)
Accumulated deficit . . . . . . . . . . . . . . . (65,949,000) (62,806,000)
------------ ------------
(58,879,000) (55,752,000)
------------ ------------
$ 49,993,000 $ 53,611,000
============ ============
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE> 35
HOTEL INVESTORS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Hotel . . . . . . . . . . . . . . . . . . $ 86,903,000 $ 88,812,000 $ 85,156,000
Gaming . . . . . . . . . . . . . . . . . . 27,505,000 26,150,000 22,609,000
Interest from notes receivable . . . . . . 124,000 247,000 321,000
Management fees and other income . . . . . 222,000 959,000 1,067,000
Gain (loss) on sales of hotel assets . . . 74,000 4,000 1,208,000
------------ ------------ ------------
114,828,000 116,172,000 110,361,000
------------ ------------ ------------
EXPENSES
Hotel operations . . . . . . . . . . . . . 68,132,000 68,620,000 65,963,000
Gaming operations . . . . . . . . . . . . 24,055,000 23,699,000 21,948,000
Rent - Trust . . . . . . . . . . . . . . . 16,481,000 21,177,000 22,093,000
Interest - Trust . . . . . . . . . . . . . 1,534,000 4,123,000 4,382,000
Interest - other . . . . . . . . . . . . . 1,167,000 1,249,000 599,000
Depreciation and amortization . . . . . . 3,602,000 3,402,000 2,658,000
Administrative and operating . . . . . . . 3,000,000 3,827,000 3,137,000
Provision for losses . . . . . . . . . . . 713,000
------------ ------------ ------------
117,971,000 126,097,000 121,493,000
------------ ------------ ------------
NET LOSS $ (3,143,000) $ (9,925,000) $(11,132,000)
============ ============ ============
NET LOSS PER SHARE $ (0.26) $ (0.82) $ (0.92)
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE> 36
HOTEL INVESTORS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . $(3,143,000) $(9,925,000) $(11,132,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . 3,602,000 3,402,000 2,658,000
Deferred interest . . . . . . . . . . . . . . . . 1,044,000
Gain on sales of hotel assets . . . . . . . . . . (74,000) (4,000) (1,208,000)
Provision for losses . . . . . . . . . . . . . . . 713,000
Changes in operating assets and liabilities:
Accounts receivable, inventories
and prepaid expenses . . . . . . . . . . . . . . 1,081,000 (101,000) (472,000)
Rent and interest payable - Trust . . . . . . . . 1,519,000 8,238,000 13,165,000
Accounts payable and other liabilities . . . . . . (1,633,000) 307,000 (1,070,000)
----------- ----------- ------------
Net cash provided by (used in)
operating activities . . . . . . . . . . . . 2,396,000 1,917,000 2,654,000
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to hotel assets . . . . . . . . . . . . . (5,205,000) (1,290,000) (1,334,000)
Net proceeds from sales of hotel assets . . . . . . 770,000 299,000 1,604,000
Increase in other assets . . . . . . . . . . . . . . (47,000)
Principal received on notes receivable . . . . . . . 56,000 49,000 46,000
Other intangible assets . . . . . . . . . . . . . .
Acquisition of hotels - net of cash . . . . . . . . 156,000
----------- ----------- ------------
Net cash provided by (used in)
investing activities . . . . . . . . . . . . (4,426,000) (942,000) 472,000
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in notes payable - Trust . . . . . . . . (1,693,000) (411,000) (1,202,000)
Principal payments on mortgage and
other notes payable . . . . . . . . . . . . . . . (72,000) (392,000) (380,000)
Borrowings under mortgage and other notes . . . . . 632,000 0 761,000
Payments to minority shareholders . . . . . . . . . (10,000) (14,000) (13,000)
Principal received on share purchase notes . . . . . 5,000 1,000 0
----------- ----------- ------------
Net cash provided by (used in)
financing activities . . . . . . . . . . . (1,138,000) (816,000) (834,000)
----------- ----------- ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . (3,168,000) 159,000 2,292,000
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR . . . . . . . . . . . . . . . 7,902,000 7,743,000 5,451,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR . . . . . . . . . . . . . . . . . . $ 4,734,000 $ 7,902,000 $ 7,743,000
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE> 37
HOTEL INVESTORS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Additional Share
Common Paid - in Purchase
Stock Capital Notes
---------- ---------- --------
<S> <C> <C> <C>
Balance January 1, 1991 . . . . . . . . . . $1,213,000 $5,857,000 $(17,000)
Net loss . . . . . . . . . . . . . . .
---------- ---------- --------
Balance December 31, 1991 1,213,000 5,857,000 (17,000)
Principal payments and reductions
of share purchase notes . . . . . . 1,000
Net loss . . . . . . . . . . . . . . .
---------- ---------- --------
Balance December 31, 1992 . . . . . . . . 1,213,000 5,857,000 (16,000)
Principal payments, reductions and
transfer of share purchase notes
to the Trust . . . . . . . . . . . . 16,000
Net loss . . . . . . . . . . . . . . .
---------- ---------- --------
Balance December 31, 1993 . . . . . . . . $1,213,000 $5,857,000 $ 0
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Shareholders'
Deficit Deficit
------------- -------------
<S> <C> <C>
Balance January 1, 1991 . . . . . . . . . . $(41,749,000) $(34,696,000)
Net loss . . . . . . . . . . . . . . . (11,132,000) (11,132,000)
------------ ------------
Balance December 31, 1991 (52,881,000) (45,828,000)
Principal payments and reductions
of share purchase notes . . . . . . 1,000
Net loss . . . . . . . . . . . . . . . (9,925,000) (9,925,000)
------------ ------------
Balance December 31, 1992 . . . . . . . . (62,806,000) (55,752,000)
Principal payments, reductions and
transfer of share purchase notes
to the Trust . . . . . . . . . . . . 16,000
Net loss . . . . . . . . . . . . . . . (3,143,000) (3,143,000)
------------ ------------
Balance December 31, 1993 . . . . . . . . $(65,949,000) $(58,879,000)
============ ============
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE> 38
HOTEL INVESTORS TRUST
AND HOTEL INVESTORS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies.
General
The accompanying financial statements include the accounts of Hotel
Investors Trust (the "Trust") and Hotel Investors Corporation and its
subsidiaries (the "Corporation"). The Trust was formed as a real estate
investment trust under the Internal Revenue Code ("REIT") in 1969. In 1980,
the Trust formed the Corporation and made a distribution to the Trust's
shareholders of one share of common stock of the Corporation for each share of
beneficial interest of the Trust. The shares of the Trust and the shares of
the Corporation are paired on a one-for-one basis, and can only be transferred
in units ("Paired Shares") consisting of the same number of shares of the Trust
and of the Corporation.
The combined financial statements include the accounts of the
Trust and the Corporation (the "Companies"). All material intercompany
balances and transactions have been eliminated in the combined and separate
consolidated financial statements. The intercompany balances and transactions
which have been eliminated in arriving at the combined balance sheets and
combined statements of operations include the elimination of the rent and
interest receivable and notes receivable from the Corporation recorded on the
Trust's balance sheets, and the related rent and interest payable and notes
payable to the Trust recorded on the Corporation's balance sheets. Rent and
interest income recorded on the Trust's statements of operations are eliminated
against the related rent and interest expense on the Corporation's statements
of operations.
The Companies own and operate hotels located throughout the United
States and two hotel/casinos in Las Vegas. The hotels range in size from 90 to
445 rooms and offer services to both business and transient travelers.
Basis of presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As discussed in
Note 2 the Trust was in default at December 31, 1992 on its obligations to
repay indebtedness under the Trust Line of Credit Agreement and Senior Notes
Agreements. Effective January 28, 1993, the Trust entered into a Credit
Agreement with its lenders to restructure such indebtedness. The agreement,
among other things, required the Trust to acquire all of the assets of the
Trust's subsidiary and to comply with specific financial covenants, operating
restrictions and reporting requirements. The Trust's ability to comply with
the requirements of the Credit Agreement, for which the inability to comply
therewith would result in a default under the Credit Agreement, cannot
presently be determined. As discussed in Note 6 to the financial statements,
because of the substantial operating losses and cash flow deficiencies
experienced by the Corporation, which also has a deficiency in net assets, the
ultimate recovery of all amounts due to the Trust from the Corporation is
highly uncertain. These conditions raise substantial doubt about the
Companies' ability to continue as going concerns.
Management's plans regarding the ability to continue as going concerns
are discussed in Notes 2 and 6 (see also Note 13 for Subsequent Events).
Management believes that these plans will permit the Trust, the Corporation and
the Companies to generate sufficient cash flow to support their operations
through December 31, 1994.
The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Trust, the
Corporation and the Companies be unable to continue as going concerns. The
Trust, the Corporation and the Companies'
F-15
<PAGE> 39
continuation as going concerns is dependent upon their ability to comply with
the requirements of the Credit Agreement and to generate sufficient cash flow
to meet their obligations on a timely basis.
Hotel assets
Hotel assets are stated at cost and are depreciated using
straight-line and declining-balance methods over estimated useful lives of five
to forty years for buildings and improvements and three to twelve years for
furniture, fixtures and equipment. Amounts allocated to leasehold interests
are amortized using the straight-line method over lease terms of ten to forty
years.
In connection with the debt restructuring (See Note 2), the Trust and
the Corporation intend to sell hotel assets at sale prices which the
managements of the Trust and the Corporation believe reflect the fair value of
the hotels. When it is the opinion of management that the fair value of a
hotel which has been identified for sale is less than the net book value of the
hotel, a reserve for losses is established. Fair value is determined based
upon discounted cash flow of the properties at rates (11.0% to 14.5%) deemed
reasonable for the type of property and prevailing market conditions,
appraisals and, if appropriate, current estimated net sales proceeds from
pending offers. A gain or loss is recorded to the extent the amounts
ultimately received differ from the adjusted book values of the hotel assets.
Gains on sales of hotel assets are recognized at the time the hotel assets are
sold, provided there is reasonable assurance of the collectability of the sales
price, and any future activities to be performed by the Companies relating to
the hotel assets sold are insignificant. Losses on sales of hotel assets are
recognized at the time the hotel assets are sold
The Trust and the Corporation estimate the fair values of each of their hotel
assets and compare these values to the net book values of the hotel assets.
For hotel assets not held for sale, the undiscounted future cash flows of the
assets (generally over a five- year period), on a hotel-by-hotel basis, are
compared to the net book values of the assets at least on an annual basis. If
the undiscounted future cash flows are less than the net book value of the
assets, the excess of the net book values over the estimated fair values is
charged to current earnings. A summary of hotel assets at December 31, 1993
and 1992 is as follows (in thousands):
<TABLE>
<CAPTION>
Trust Corporation
-------------------------- ---------------------------
1993 1992 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Land and leasehold
interests in land . . . $ 47,204 $ 46,218 $ 15,378 $ 15,378
Buildings and
improvements . . . . . . 148,460 166,537 22,545 19,220
Furniture, fixtures and
equipment . . . . . . . 28,506 30,685 16,867 17,150
Accumulated depreciation
and amortization . . . . (51,487) (49,483) (14,828) (12,673)
Reserve for losses . . . (42,765) (52,939) (2,631) (2,631)
-------- -------- -------- --------
Hotel assets - net . . $129,918 $141,018 $ 37,331 $ 36,444
======== ======== ======== ========
</TABLE>
Mortgage notes receivable
If a loan becomes delinquent or upon the occurrence of other events it
becomes known that the collectability of a specific loan is uncertain, interest
income is no longer accrued and an allowance for loss is established based upon
an analysis of the net realizable value of the underlying property
collateralizing the loan.
F-16
<PAGE> 40
Provision for losses
Provision for losses for the years ended December 31, 1993, 1992 and 1991 are
as follows:
<TABLE>
<CAPTION>
Trust 1993 1992 1991
--------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Hotel Assets $2,369,000 $3,196,000 $7,876,000
Mortgage Notes Receivable 223,000 991,000
---------- ---------- ----------
$2,369,000 $3,419,000 $8,867,000
========== ========== ==========
Corporation 1993 1992 1991
--------------------------------------- ---------- ---------- ----------
Hotel Assets $ 713,000
========== ========== ==========
</TABLE>
Statements of cash flows
Cash and cash equivalents are defined as cash on hand and in banks
plus all short-term investments with a maturity, at the date of purchase, of
three months or less.
Interest paid in cash by the Trust in the years ended December 31,
1993, 1992, and 1991 was $13,205,000, $12,992,000 and $17,653,000,
respectively.
Interest paid in cash by the Corporation in the years ended December
31, 1993, 1992, and 1991 was $140,000, $1,536,000 and $1,295,000, respectively.
The Corporation deferred interest of $1,519,000 and $1,667,000 on its
intercompany debt with the Trust in the years ended December 31, 1993 and 1992,
respectively.
In July, 1991, the Corporation, as a general partner of a limited
partnership, became the majority owner of the Milwaukee Marriott Hotel (See
Note 5). In conjunction with the acquisition, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired $23,872,000
Cash paid for partnership interest (51,000)
-----------
Liabilities assumed $23,821,000
===========
</TABLE>
In December 1993, the Corporation transferred $278,000 of Share Purchase loans
and reduced Notes Payable - Trust.
During 1993, $4,032,000 of accrued loan restructuring costs (included
in accounts payable and other liabilities at December 31, 1992) was added to
the loan balance of the secured notes payable and revolving line of credit.
Inventories
Inventories are stated at the lower of cost or market with cost
determined on a first-in, first-out basis.
Gaming revenue
Gaming revenue relates to the two hotel/casinos and includes the net
wins from gaming activities, as well as room, food, beverage and other
revenues, net of promotional allowances.
Income taxes
F-17
<PAGE> 41
The Trust and the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", effective
January 1, 1993. This Statement supersedes SFAS No. 96, "Accounting for Income
Taxes", which the Trust and the Corporation did not adopt and also supersedes
Accounting Principles Board Opinion No. 11 which the Trust and the Corporation
had previously applied. The effects of adopting SFAS No. 109 and related
disclosures are described below. The adoption of SFAS No. 109 did not have a
material effect on the financial statements of the Trust or the Corporation.
Trust:
No provision for federal income taxes has been made for the Trust
since, in the opinion of management, the Trust qualifies as a REIT under
sections 856 through 860 of the Internal Revenue Code (see Note 13).
Temporary differences in significant assets and liabilities for
financial and tax reporting purposes, include valuation allowances, loan
restructuring costs and depreciation. The tax basis of the Trust's hotel
assets as of December 31, 1993 was $145,943,000. As of December 31, 1993, the
Trust had a net operating loss carryforward for federal income tax purposes of
approximately $26,650,000 which expires in various years beginning in 2006.
Corporation:
Components of accumulated deferred income taxes as of December 31, 1993 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards $ 19,740,000
Losses from investments in partnerships 1,659,000
Property, equipment and other 1,224,000
Tax credit carryforwards 162,000
------------
22,785,000
Valuation allowance (22,785,000)
------------
Net deferred tax $
0
============
</TABLE>
A valuation allowance is recorded if based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
As of December 31, 1993, the Corporation had net operating loss
carryforwards for federal income tax purposes of approximately $56,400,000
which expire in various years beginning in 1997. The Corporation also has tax
credit carryforwards of approximately $162,000 as of December 31, 1993, which
expire in various years beginning in 1996.
Loan restructuring costs
Management of the Trust has concluded that the debt restructuring
discussed in Note 2 represented a "troubled debt restructuring" as defined
under generally accepted accounting principles, and accordingly, all
restructuring costs have been expensed as incurred. The Trust expensed loan
restructuring costs of $10,892,000 and $3,797,000 in the years ended December
31, 1992 and 1991, respectively. As a result of the execution of the
definitive agreement for debt restructuring in January, 1993, the Trust accrued
as of December 31, 1992, $8,713,000 for known future identifiable costs
connected with the restructuring. In February and March 1993, upon execution
of the definitive debt restructuring agreement, $700,000 was paid by the Trust
to the Institutional Lenders and $4,032,000 was added to the loan balance under
the terms of the Credit Agreement for restructuring costs due the Institutional
Lenders for legal and other experts, which was accrued as of December 31, 1992.
In addition, previously accrued restructuring costs of $2,662,000 were paid
during the year ended December 31, 1993.
Net loss per share
F-18
<PAGE> 42
Net loss per share is based on the weighted average number of common
and common equivalent shares outstanding during the year which is on a Paired
Share basis for purposes of the combined financial statements. Outstanding
options and warrants are included as common equivalent shares using the
treasury stock method when the effect is dilutive. The weighted average number
of shares and Paired Shares used in determining net loss per share and per
Paired Share was 12,132,948 for the years ended December 31, 1993, 1992 and
1991.
Fair value of financial instruments
The following disclosure of estimated fair value was determined by
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data and develop the
related estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and cash equivalents, accounts receivable and accounts payable
and other liabilities are carried at amounts which reasonably approximate their
fair value.
The carrying value of fixed rate mortgage notes receivable approximate
their fair value as their interest rates approximate rates available for
similar transactions at December 31, 1993.
The carrying value of the secured notes payable and revolving line of
credit approximate fair value as the related interest rates are variable.
Fixed rate notes payable with carrying values of $27,724,000 and
$14,360,000 for the Trust and Corporation at December 31, 1993 have a fair
value of $28,507,000 and $13,110,000 as estimated based on debt with similar
terms and maturities.
Reclassifications
Certain reclassifications have been made to the 1992 and 1991
financial statements to conform with the 1993 financial statement presentation.
2. Senior Notes Payable and Revolving Line of Credit and Debt
Restructuring.
As of March 31, 1991, the Trust was in default under the Trust Line of
Credit and the Senior Note Agreements due to the Trust's failure to comply with
certain financial covenants and to collect certain rents from the Corporation.
As a result of such defaults, upon the April 30, 1991 expiration of the
revolving line of credit provided by the Trust Line of Credit, the five-year
secured term loan originally contemplated by the Trust Line of Credit was not
made available to the Trust, and the entire amount of borrowings then
outstanding under the Trust Line of Credit were deemed due and payable. On May
6, 1991, the Insurance Companies notified the Trust that as a result of the
above-described defaults, all amounts due under the Senior Notes also were
immediately due and payable. In response to the foregoing events, the Trust
announced that it did not have sufficient funds to repay the approximately
$135,000,000 then outstanding under the Trust Line of Credit and the Senior
Notes and that as of April 30, 1991, the Trust was suspending the payment of
interest on such borrowings and certain related fees pending an agreement with
the Institutional Lenders for a debt restructuring.
Debt Restructuring - Effective January 28, 1993, the Trust executed a
definitive credit agreement (as subsequently amended, the "Credit Agreement")
that restructured the Trust's then outstanding borrowings from two banks (the
"Banks") and three insurance companies (together with the Banks, the
"Institutional Lenders") as a $12,500,000 revolving line of credit with one of
the Banks (the "Revolving Line of Credit") and a $115,723,000 term loan (the
"Term Loan", and together with the Revolving Line of Credit, the "Restructured
Debt").
F-19
<PAGE> 43
The terms of the Credit Agreement require that the debt restructuring
take place in several phases. At the first closing (the "First Closing"),
effective January 28, 1993, the maturity date of the Restructured Debt was
extended until March 29, 1993, and the Institutional Lenders were granted or
assigned for security direct and indirect liens on and security interests in
substantially all of the assets of the Trust and the Corporation (other than
the assets held by United States Equity & Mortgage Trust, the Trust's 95%-owned
subsidiary ("U.S. Equity")). In addition, the Institutional Lenders, on the
one hand, and the Trust and the Corporation, on the other, released all of
their claims against the other parties arising during the debt restructuring
process.
At the First Closing, the Trust and the Corporation entered into a
warrant agreement (as amended, the "Warrant Agreement") that originally
provided that the Trust and the Corporation (or, if the merger of the Trust and
the Corporation described below (the "Merger") occurs, the surviving company)
would issue to the Senior Lenders at the Third Closing (as defined below)
10-year warrants (the "Warrants") to purchase that number of shares equal to
9.9% (or if the Merger has occurred; 15%) of the Paired Shares then outstanding
at an exercise price of $.625 cents per share, which price was subject to
adjustment under certain circumstances.
The second closing under the Credit Agreement (the "Second Closing")
was held on March 29, 1993 at which time the Trust acquired all of the assets
of U.S. Equity for $1,575,000 eliminating the minority interest of $676,000 and
increasing hotel assets by $899,000. At the Second Closing, the maturity date
of the Restructured Debt was extended until September 15, 1993, and the
Institutional Lenders were granted liens on and security interests in the five
hotels and substantially all of the other assets formerly owned by U.S. Equity
and acquired by the Trust.
Pursuant to a series of six extension agreements, the maturity date of
the Restructured Debt was extended from September 15, 1993 to February 28,
1994.
At an interim closing held on February 28, 1994 (the "Interim
Closing"), the Credit Agreement was amended to, among other things, eliminate
the Trust's ability to issue the deferred interest notes described below, to
allow the Trust to apply all of the net proceeds from asset sales and of
insurance or condemnation proceeds received by the Trust in 1994 in excess of
$5 million, as described below, to the next principal payment or payments due
on the Restructured Debt, and to require the Trust to pay in cash certain costs
incurred by the Lenders in connection with the Restructured Debt. In addition,
the Lenders were collaterally assigned security interests in and liens on
substantially all of the Intercompany Leases and the monies received by the
Corporation in connection with the operation of those hotels, and the maturity
date of the Restructured Debt was extended until June 2, 1994. At the Interim
Closing, the Warrant Agreement was amended to provide for the immediate
issuance to the Lenders of Warrants for an aggregate of 1,333,143 Paired Shares
at the exercise price originally provided for in the Warrant Agreement.
Assuming that the Trust does not fail to pay any monies owed to the
Institutional Lenders under the Credit Agreement and the Restructured Debt has
not otherwise been accelerated, the Warrants are subject to cancellation as
follows: (1) if on or before August 31, 1994, the Trust's cumulative principal
payments under the Term Loan equal or exceed $13,000,000, one-third of the
warrants will be canceled; (2) if as of August 31, 1996, the Trust's cumulative
principal payments under the Term Loan equal or exceed $40,000,000, an
additional one-third of the Warrants will be canceled; and (3) if on or before
April 30, 1998, all amounts outstanding under the Credit Agreement have been
repaid and the Trust pays a fee of $1,300,000 to the Institutional Lenders, the
remaining one-third of the Warrants will be canceled.
The third closing under the Credit Agreement (the "Third Closing") is
currently scheduled to be held on or prior to June 2, 1994. At the Third
Closing, the final maturity date of the Restructured Debt will be extended
until April 30, 1998.
The Credit Agreement requires in connection with the Third Closing
that the Trust and the Corporation seek the approval of their respective
shareholders to merge. If the Merger is accomplished, the surviving entity
will not qualify under Federal income tax laws as a REIT.
F-20
<PAGE> 44
A $1,000,000 principal payment was made on the Term Loan on August 31,
1993. If the Third Closing occurs, minimum cumulative principal payments under
the Credit Agreement for principal owed as of December 31, 1993 will be due as
follows:
<TABLE>
<CAPTION>
Date Cumulative Principal Payments
-------------- -----------------------------
<S> <C>
August 31, 1994 $ 10,000,000
August 31, 1995 19,000,000
August 31, 1996 27,000,000
August 31, 1997 52,000,000
April 30, 1998 128,802,000
</TABLE>
On April 30, 1998, all amounts then outstanding under the Credit Agreement are
due, including the remaining principal amount of the Term Loan and the then
outstanding borrowings under the Revolving Line of Credit, as well as any
deferred interest and capitalized expenses as described below.
The Trust has the option to prepay all or part of the Credit Agreement
indebtedness without penalty at any time. Net cash proceeds from the sale of
hotel assets are required to be applied to prepay the Restructured Debt. Up to
the first $5,000,000 of such proceeds may be applied to pay amounts outstanding
under the Revolving Line of Credit ($9,425,000 was outstanding at December 31,
1993) any other proceeds must be applied to prepay the Term Loan. Except as
otherwise described above with respect to 1994, to the extent that the
cumulative net cash proceeds applied against the Term Loan in any payment
period exceed the next principal payment due by more that $5,000,000, the
amount in excess of $5,000,000 must be applied one-half to the next principal
payment(s) then due under the Term Loan in direct order of maturity and
one-half to the principal payment due on April 30, 1998.
Interest on the principal amounts outstanding under the Credit
Agreement notes was originally at a stated rate of prime plus 2%. However,
because the Merger had not occurred on or prior to the 300th day after the
First Closing, the stated interest rate was increased to prime plus 3% from
November 24, 1993 until the Merger takes place. If the Merger takes place,
principal amounts outstanding under the Credit Agreement notes will bear
interest at the original stated rate of prime plus 2%. The Trust has the
option to pay interest at a lesser rate, if applicable, of 7.5% per annum
through August 31, 1994, 8.0% per annum from September 1, 1994 through August
31, 1997, and 9.0% per annum from September 1, 1997 through April 30, 1998,
with the difference between the interest accrued and the interest paid being
added monthly to the principal amount of the Restructured Debt.
The Credit Agreement originally provided that the Trust under certain
circumstances could defer for up to one year, the payment of up to $2,000,000
of interest payable on the Restructured Debt with respect to the period ending
on the date of the Third Closing by issuing deferred interest notes to the
Institutional Lenders. During February and March of 1993, an aggregate of
$1,623,000 in interest was so deferred. In connection with the Interim
Closing, the deferred interest notes were paid and further deferrals are no
longer available.
The Credit Agreement requires the Companies to maintain a specified
minimum adjusted net worth and a specified minimum ratio of cash to cash
interest plus capital expenditures, as defined. At December 31, 1993 the Trust
was in compliance with these covenants. In addition, the Credit Agreement
contains covenants that restrict, among other things, the Trust's ability to
acquire or dispose of assets, to make investments and to incur additional
indebtedness, and that prohibit the payment of distributions to shareholders.
In addition to imposing operating restrictions and reporting
requirements, the Credit Agreement establishes daily operating cash thresholds,
as defined. If these thresholds are exceeded by the Trust and the Corporation,
the excess amounts must be applied to reduce the borrowings then outstanding
under the Revolving Line of Credit, but amounts so applied are available for
future borrowings.
The Trust is required by the Credit Agreement to pay costs incurred by
the Institutional Lenders in connection with the debt restructuring during the
term of the Credit Agreement. To the extent that annual costs exceed $250,000,
the Trust may elect to add the excess to the principal balance of the Term
Loan. In connection
F-21
<PAGE> 45
with the Interim Closing, the Trust paid in cash the $250,000 which would have
otherwise been payable in respect of 1994 and agreed to pay in cash an
additional $250,000 of such costs in June 1994.
In order to meet the payment terms of the Credit Agreement, the Trust
and the Corporation are seeking to sell hotel assets. In the event that the
Trust or the Corporation cannot meet the requirements of the Credit Agreement
and any of the Institutional Lenders elect to exercise certain remedies, the
Trust and the Corporation may be required to file for reorganization under the
Federal Bankruptcy Statute.
3. Hotel Sales and Reserve for Losses.
In 1991 the Trust and Corporation recorded provisions for investment
losses of $7,876,000 and $713,000, respectively. The 1991 provisions primarily
resulted from the continuing deterioration of the market for small to medium
size hotel/casino properties in Las Vegas, overbuilding in the hotel market,
difficulty in obtaining third party financing and the impact of the economic
recession.
During the year ended December 31, 1991, the Trust and the Corporation
sold their interests in three hotel assets, the Ramada Inn in Indian Wells,
California, the Days Inn in Brunswick, Georgia, and the Days Inn in Albany,
Georgia, and terminated a ground and building lease for the Ramada Inn in St.
Charles, Missouri. The Indian Wells property was sold for $14,800,000 in cash.
The Brunswick property was sold for $1,200,000 consisting of $227,000 in net
cash proceeds and a $900,000 promissory note secured by the hotel. The Albany
property was sold for $1,200,000, consisting of $86,000 in net cash proceeds
and a $1,050,000 promissory note secured by the hotel. The Albany promissory
note bears interest at 10% per annum payable monthly with unpaid principal and
interest due in 1996; the Brunswick note had identical terms but was paid in
full in 1992.
During 1991, as a result of the three property sales, the Trust and
Corporation recognized net gains of approximately $390,000 and $1,208,000,
respectively.
During the year ended December 31, 1992, the Trust and the Corporation
sold their interests in three hotel assets, the Days Inn Texas Stadium, Irving,
Texas, the Best Western Merrimack Inn, Merrimack, New Hampshire and the Days
Inn, Spartanburg, South Carolina. The Irving property was sold in March 1992
for $1,950,000 consisting of $172,000 in net cash proceeds and a $1,650,000
promissory note secured by the hotel. The Merrimack property was sold for
$1,800,000 consisting of $259,000 in net cash proceeds and a $1,440,000
promissory note secured by the hotel. The Spartanburg property was sold for
$875,000 consisting of $57,000 in net cash proceeds and a $775,000 promissory
note secured by the hotel. The Irving note bears interest at 9% per annum with
accrued interest and principal due monthly based on a 30-year amortization
schedule, with all unpaid principal and interest due in March, 1997. The
Merrimack note bears interest at 9% per annum with accrued interest and
principal due monthly based on a 30-year amortization schedule, with all unpaid
principal and interest due in July, 1997. The Spartanburg note bears interest
at 9% per annum with interest and principal due monthly based on a 30-year
amortization schedule, with all unpaid principal and interest due in September,
1998.
During 1992, the Trust recognized a loss of $791,000 and the
Corporation a gain of $4,000 on sales of hotel assets, including a $91,000
discount recorded by the Trust resulting from the early payoff in 1992 of the
mortgage note receivable relating to the Brunswick, Georgia property sold in
1991. In 1992, the Trust recorded a provision for investment losses of
$3,196,000 which reflected the deterioration of hotel values located in the
Southeast, and the acceptance of offers for the sale of hotels at amounts lower
than net book value.
During the year ended December 31, 1993, the Companies sold their
interests in four hotel assets, the Best Western located in Smyrna, Georgia,
the Vantage Hotel located in Tucker, Georgia, the Best Western Motor Hotel in
Santa Maria, California, and the Ramada Inn-Westport in St. Louis, Missouri.
The Smyrna property was sold for an all cash price of $1,600,000. The Tucker
property was sold for $2,485,000 consisting of approximately $500,000 in cash
and a $1,985,000 promissory note secured by the hotel. The Tucker note bears
interest at 9% per annum with accrued interest and principal due monthly based
upon a 25-year amortization schedule, with all unpaid principal and interest
due in June 1998. The Santa Maria property was sold for an all cash price of
$140,000. The St. Louis property was sold for an all cash price of $2,500,000.
F-22
<PAGE> 46
For the year ended December 31, 1993, the Trust recognized a loss of
$53,000 and the Corporation a gain of $74,000 on sales of hotel assets. In
1993, the Trust recorded a provision for investment losses of $2,369,000
primarily as a result of the acceptance of offers for the sale of hotels at
amounts lower than net book value.
4. Mortgage Notes Receivable.
Jefferson City Ramada Inn
In August 1987, the Trust sold the Ramada Inn in Jefferson City,
Missouri, to JCR, Inc. ("JCR"). In connection with such sale, JCR executed and
delivered to the Trust a promissory note (the "JCR Note") in the original
principal amount of $4,500,000, secured by a first mortgage on the property.
The outstanding principal balance of the JCR Note was due September 1992, and
bore interest at 11% per annum.
After JCR failed to make the principal and interest payments due on
the JCR Note in January and February 1991, the Trust sent to JCR a notice of
default and accelerated the indebtedness evidenced by the JCR Note. In
December 1991, the Trust and JCR agreed to a restructuring pursuant to which
the Jefferson City Ramada Inn was sold by JCR to Jefftel, Inc., a Missouri
corporation ("Jefftel") and an associate of JCR; the Trust received from
Jefftel a cash payment in the amount of $1,000,000; and Jefftel assumed JCR's
indebtedness to the Trust in respect of the hotel. Although repayment of such
debt continues to be secured by the hotel, the outstanding principal amount of
such indebtedness was reduced to $1,800,000, with the $1,654,000 difference
being charged against the reserve for investment losses. The JCR note bears
interest at an annual rate of 11% with principal and interest payable monthly
based on a 30-year amortization schedule, with unpaid principal and interest
due in December, 1996.
Columbus Best Western North
In January 1992, in settlement of various disputes between the Trust,
the Corporation as the general partner of Columbus Hotel Limited Partnership
and its limited partners, and in lieu of foreclosure by the Trust on a
$6,127,000 mortgage ownership of the Columbus Best Western North was
transferred to the Trust. The fair value of the hotel assets received by the
Trust upon cancellation of its note approximated the net carrying value of the
mortgage note receivable at December 31, 1991.
Other
At December 31, 1993, in addition to the MHLP notes discussed in Note
5, the Trust held nine promissory notes secured by mortgages including the JCR
note described above. Eight notes ($11,405,000 in aggregate principal amount
at December 31, 1993), representing nine hotels, are secured by first
mortgages, and one note ($238,000 in aggregate principal amount at December 31,
1993), is secured by a second mortgage. At December 31, 1991, the Trust held a
$223,000 note secured by a second mortgage on a shopping center which was
foreclosed upon by the first mortgage holder during the year ended December 31,
1992, resulting in the cancellation of the Trust's second mortgage and the
recording of a provision for investment losses. The notes have fixed interest
rates ranging from 8.75% to 12% per annum, and two of the notes (representing
three properties) provide for contingent interest based on a percentage of
gross revenues of the properties securing such notes. The maturity dates of
the notes range from 1994 to 2017. Aggregate principal payments under the
mortgage notes receivable due within one year of December 31, 1993 are
$1,655,000. As of December 31, 1993 and 1992, the reserve for investment
losses for the mortgage notes receivable amounted to $140,000.
5. Milwaukee Marriott Hotel.
In December 1985, the Trust sold its interest in the Milwaukee
Marriott Hotel to Milwaukee Brookfield Limited Partnership ("Brookfield"). In
connection with the sale, the Trust received a second mortgage note (the
"Second Mortgage") from Brookfield in the original principal amount of
$13,200,000 with interest payable at 12.37% per annum through December 1990,
and interest thereafter payable at 10.5% per annum, plus additional interest
equal to 3% of gross revenues of the Milwaukee Marriott, as defined. The
Second Mortgage was due and payable in full in December 1995. At the time the
Second Mortgage was received, it was discounted to reflect an
F-23
<PAGE> 47
effective yield of 13% per annum; as a result, the original carrying amount
of the Second Mortgage was $11,991,000.
In July 1991, ownership and operation of the Milwaukee Marriott was
reorganized and ownership of the hotel was transferred from Brookfield to
Moorland Hotel Limited Partnership, ("MHLP"), a limited partnership in which
the Corporation has a 51% interest and is the sole general partner and
Brookfield is the sole limited partner. In connection with the reorganization,
the outstanding principal amount of the second mortgage note to the Trust was
reduced to $11,000,000, with the $991,000 difference on the Trust's books being
charged to the provision for investment losses. The second mortgage note had a
principal amount of $11,000,000, and was due in full in 1996. Interest on such
principal accrued at an annual rate of 10.5% and was payable monthly, but only
from the cash flow of the hotel remaining after payment of amounts due to the
holder of the first mortgage on the hotel, the Corporation's management fee and
all other expenses of the property. Interest deferred was added to the
previous month's principal balance of the promissory note. The operations of
MHLP are consolidated into the Corporation's financial statements from the date
of reorganization and, accordingly, the Trust has recorded the note receivable
from MHLP as a note receivable from the Corporation.
The Corporation and MHLP entered into an agreement for the Corporation
to manage the property. In addition, MHLP entered into an assignment and
forbearance agreement with Marriott Corporation ("Marriott"), the franchisor.
This agreement, among other things, required MHLP to renovate the hotel to
Marriott standards. The renovation was substantially complete at December 31,
1993.
During 1992, MHLP, Aetna Life Insurance Company ("Aetna"), the holder
of the first mortgage on the Milwaukee Marriott (the "Aetna Note"), Marriott,
the Trust, the Corporation, and Brookfield and various partners of Brookfield
reached agreements arranging financing for the renovation of the Milwaukee
Marriott and restructuring of debt for MHLP.
Effective December 1, 1992, Aetna agreed to defer for the period
December 1, 1992 through November 30, 1993, the monthly principal and interest
payments on its first mortgage note, which accrues interest at 11.25% per
annum, with the deferred interest added to principal monthly. Beginning
December 1, 1993, the loan amortizes in equal monthly installments over a
period of 17 years at 10% interest per annum until January 1, 1996, at which
time all unpaid interest and principal are due, including appreciation interest
("Appreciation Interest") . Appreciation Interest is defined as 50% of the
aggregate principal reduction in the Aetna mortgage from December 1, 1993 until
the loan is due in full as provided in the agreement. The amount of the Aetna
Note outstanding totaled $10,017,000 at December 31, 1993.
Marriott agreed to loan MHLP $750,000 secured by a second deed of
trust on the hotel for the purchase of equipment from a Marriott subsidiary.
The second mortgage note bears interest at 9% per annum, payable monthly
beginning May 31, 1993 through April 30, 1994, at which time fixed monthly
payments of principal and interest of approximately $49,000 become due until
December 31, 1994, at which time all unpaid interest and principal are due.
The Trust agreed to loan MHLP $1,000,000 to be used to complete the
renovation of the Milwaukee Marriott. The loan is secured by a third deed of
trust on the hotel and bears interest at 10.5% per annum, payable monthly.
Under certain circumstances, as defined in the agreement, interest is deferred
and added to the principal of the note monthly. The third mortgage note
outstanding totaled $1,102,000 as of December 31, 1993. The Trust may declare
due and payable the principal balance and any unpaid accrued interest thereon
at any time after January 1, 1994 through the maturity date of the note of
January 1, 1996.
The second mortgage note held by the Trust of $11,000,000 was modified
as of December 31, 1992 by adding deferred and previously unpaid interest of
$1,667,000 to principal due under the note and converting the note to a fourth
mortgage note. Further, $1,417,000 of interest at 10.5% per annum for the year
ended December 31, 1993, was deferred monthly and added to principal due under
the loan. The fourth mortgage note outstanding totaled $14,084,000 as of
December 31, 1993. Thereafter, interest is payable monthly unless deferred
under the provisions of the loan agreement until January 1, 1996 at which time
all remaining unpaid interest and principal are due.
F-24
<PAGE> 48
The Corporation agreed to defer and convert to a note up to $250,000
of management fees due under its management agreement with MHLP for a period of
up to twelve months commencing with base management fees due after January 1,
1993. The deferred fees bear interest at 9% per annum, which were added to the
principal balance of the note through December 1, 1993. Thereafter, the note
is due in twelve equal monthly installments of principal and interest
commencing on January 1, 1994 at 12% interest per annum. All unpaid interest
and principal is due December 1, 1994.
The $600,000 original loan made by GSI Acquisition Company, L.P., a
limited partner of Brookfield, ("GSI"), was modified as of December 31, 1992,
by converting deferred and previously unpaid interest of approximately $86,000
to principal. For the year ending December 31, 1993 interest at 10% per annum
was deferred monthly and added to the principal balance, which balance totals
$762,000 at December 31, 1993. Thereafter, interest is payable monthly unless
deferred under the provisions of the agreement until January 1, 1996 at which
time all remaining unpaid interest and principal are due.
The Trust evaluated the collectibility of the notes receivable secured
by the Milwaukee Marriott Hotel as of December 31, 1993. Factors considered by
the Trust in performing the evaluation included the discounted estimated future
cash flow (at 11.0%) over a five-year period. The Corporation evaluated the
recoverability of the net book value of the property as of December 31, 1993.
Factors considered by the Corporation in performing the evaluation included the
undiscounted estimated future cash flow of the property over a five-year
period. Based upon the evaluations, no provision for losses was required.
6. Real Estate Investments and Intercompany Transactions.
At December 31, 1993, the Trust owned equity interests in twenty-nine
hotels, including two hotel/casinos. Of that number, twenty-three properties
were owned in fee, five were held pursuant to long-term leases and one was
owned through a 5% general partnership interest in a joint venture that owns
the Omaha Marriott Hotel.
Twenty-five of the Trust's hotels (including the two hotel/casinos)
are leased to the Corporation or its subsidiaries. Three hotels have been
leased to and are operated by Northview Corporation, formerly Vagabond Inns,
Inc. The Omaha Marriott Hotel has been leased to an affiliate of the
Corporation, and is managed by Marriott pursuant to a long-term management
agreement. As of December 31, 1993, eight of the hotels leased by the
Corporation from the Trust are being managed by third-party operators. The
third-party management agreements are generally for three-year terms expiring
in 1995, subject to certain cancellation provisions. Base management fees
range from 2% to 2-1/2% of gross revenues with incentive management fees based
upon hotel profitability.
The leases are generally long-term and generally provide for annual
base, or minimum rents, plus contingent, or percentage rents based on the gross
revenues of the properties and are accounted for as operating leases. The
leases are "triple-net" in that the lessee is generally responsible for paying
all operating expenses of the properties, including maintenance, insurance and
real property taxes. The lessee is also generally responsible for any payments
required pursuant to underlying ground leases. Most leases provide for
cancellation by the Trust in the event that the Trust does not earn a specified
rent, or by the lessee (including the Corporation) in the event the lessee does
not earn a specified net operating profit.
As of December 31, 1993, the Corporation was indebted to the Trust for
an aggregate of $87,486,000 (including the $14,084,000 and $1,102,000, MHLP
mortgage notes - see Note 5). The debt to the Trust bore interest at various
rates ranging from 6.5% to 12% at December 31, 1992. Effective January 1,
1993, the Trust and Corporation modified the leases between the Trust and the
Corporation to, among other things, adjust the rents payable by the
Corporation, and restructured the Corporation's existing borrowings from the
Trust to include all outstanding borrowings plus accrued but unpaid rent of
$448,000 and interest as of December 31, 1992. The borrowings, which are due
on demand, were non-interest bearing for the year ending December 31, 1993,
with interest at prime plus 2% interest payable monthly, thereafter. Effective
January 1, 1994, the interest moratorium was extended until December 31, 1994,
with interest at prime plus 2% interest payable monthly, thereafter. Future
F-25
<PAGE> 49
advances by the Trust to the Corporation, if required, will be included in
demand note(s) under the same terms and conditions. Because the Corporation
has experienced substantial operating losses and cash flow deficiencies, and
has a deficiency in net assets, the Corporation has been unable to pay all
amounts due to the Trust.
In accordance with the Debt Restructuring, the Trust and the
Corporation are required to merge, subject to shareholder approval (See Note
2). In the event such a merger takes place, amounts receivable by the Trust
would be offset by amounts payable from the Corporation.
Rents accrued by the Trust from leased hotel properties are summarized
as follows (in thousands):
<TABLE>
Years Ended December 31,
------------------------
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Corporation:
Minimum $14,184 $18,136 $19,287
Contingent 2,297 3,041 2,806
------- ------- -------
16,481 21,177 22,093
------- ------- -------
Other:
Minimum 437 437 437
Contingent 402 510 499
------- ------- -------
839 947 936
------- ------- -------
Total $17,320 $22,124 $23,029
======= ======= =======
</TABLE>
Minimum future rents at December 31, 1993 due under non-cancelable
operating leases for the years ending December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 Thereafter
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Corporation . $14,615 $14,217 $11,577 $11,577 $11,577 $38,962
Other . . . 437 437 437 437 426 283
------- ------- ------- ------- ------- -------
Total . . . $15,052 $14,654 $12,014 $12,014 $12,003 $39,245
======= ======= ======= ======= ======= =======
</TABLE>
The Corporation is committed under its leases with the Trust to pay
the rents payable with respect to seven ground leases which expire in 1994
through 2029, including renewal options. The leases generally provide for a
minimum rent plus a percentage of gross revenues of the properties in excess of
the minimum rent. Future minimum lease payments under the leases are $319,000
per year through 1998, and $7,270,000 thereafter. The Trust is the primary
obligor under the leases; however, the Corporation as lessee/operator of the
hotels makes payments under these leases directly to the lessors. Rent expense
incurred by the Corporation as a lessee/operator under these leases was
$854,000, $787,000, and $846,000 in the years ended December 31, 1993, 1992 and
1991, respectively.
In addition, the Trust is committed under an office lease. Future
minimum lease payments under the office lease are $85,000 in 1994 and 1995.
7. Mortgage and Other Notes Payable.
At December 31, 1993, the Trust had outstanding six mortgage notes
payable which are secured by seven of the Trust's hotels, with a net book value
at December 31, 1993 of $49,875,000. At December 31, 1993 and 1992, the Trust
had the following outstanding debt obligations:
F-26
<PAGE> 50
<TABLE>
<CAPTION>
December 31, December 31,
1993 1992
------------ ------------
<S> <C> <C>
Mortgage Notes:
11.75% first mortgage note, due in 2015, callable
by lender in 1995, 2000, 2005, or 2010 $ 6,417,000 $ 6,477,000
12.875% first mortgage note, due in 1994 9,478,000 9,568,000
8.50% first and second mortgage notes, due in
1997 and 1998 891,000
12.625% first mortgage note, due in 1994 4,195,000 4,301,000
9.25% first mortgage note, due in 1994 2,010,000 2,151,000
10.25% first mortgage note, due in 2001 5,447,000 5,716,000
9.0% first mortgage note, due in 1997 177,000 214,000
----------- -----------
Total mortgage notes payable $27,724,000 $29,318,000
=========== ===========
</TABLE>
Aggregate principal payments due for the years ending December 31 are
$16,088,000 in 1994, $6,723,000 in 1995, $412,000 in 1996, $456,000 in 1997,
$449,000 in 1998, and $3,596,000 thereafter.
At December 31, 1993 and 1992, the Corporation had the following
outstanding debt obligations:
<TABLE>
<CAPTION>
December 31, December 31,
1993 1992
------------ -----------
<S> <C> <C>
Secured by Milwaukee Marriott Hotel:
10.0% first mortgage note, due 1996 $10,017,000 $ 9,050,000
9.0% second mortgage note, due 1994 754,000
10.5% fifth mortgage note, interest only, due 1996 762,000 686,000
12.0% sixth mortgage note, interest only (to the
extent of available cash flow), due 1996 2,000,000 2,000,000
9-10% notes payable, due 1995-1996 297,000 418,000
----------- -----------
13,830,000 12,154,000
Other:
9.75% first mortgage note, due 1997 438,000 467,000
Obligations under capital leases 92,000 135,000
----------- -----------
Total mortgage and other notes payable $14,360,000 $12,756,000
=========== ===========
</TABLE>
At December 31, 1993, the Corporation's outstanding mortgage notes are
secured by the Milwaukee Marriott Hotel which had a net book value of
$23,786,000.
Minimum lease and principal payments on the Corporation's indebtedness
for the years ending December 31 are due as follows:
<TABLE>
<CAPTION>
Minimum Future Principal Payments
Year Lease Payments Due Under Notes
----- -------------- ------------------
<S> <C> <C>
1994 $49,000 $ 1,153,000
1995 32,000 431,000
1996 18,000 12,357,000
1997 327,000
1998
------- -----------
Total 99,000 $14,268,000
Amount representing interest 7,000 ===========
-------
Present value of future
minimum lease payments $92,000
=======
</TABLE>
F-27
<PAGE> 51
At December 31, 1993 and 1992 the Corporation had $1,222,000 and
$1,321,000, respectively, in assets (less $828,000, and $780,000, respectively,
in accumulated amortization) recorded under capital leases. Such amounts are
included in furniture, fixtures and equipment.
8. Shareholders' Equity.
Warrants to purchase paired shares
At December 31, 1993, there were outstanding 1,659,974 warrants to
purchase Paired Shares at an exercise price of $16.95 per Paired Share through
September 1996. Additional warrants were issued to the Institutional Lenders
under the terms of the Credit Agreement (See Note 2).
Share option plans
The Trust and the Corporation each have Incentive and Non-Qualified
Share Option Plans which provide for the purchase of up to an aggregate of
700,000 Paired Shares by Trustees, Directors, officers and employees pursuant
to option grants. During the year December 31, 1993, the Trust and the
Corporation granted options to purchase 45,000 Paired Shares at an exercise
price of $2.625 per Paired Share. During the year ended December 31, 1992, the
Trust and Corporation granted options to purchase 100,000 Paired Shares at an
exercise price of $.75 per Paired Share. No options were granted during the
year ended December 31, 1991. Such options, which are granted at fair market
value on the date of grant, vest over three years. No options have been
exercised as of December 31, 1993.
At December 31, 1993, outstanding options granted under all plans of
the Trust and Corporation (including options granted to officers and directors
of a company previously acquired by the Trust) aggregated 212,000 Paired
Shares. At December 31, 1993, options for 165,667 Paired Shares are fully
vested with exercise prices ranging from $.75 to $22.68 per Paired Share.
Share purchase plans
Prior to December 1989, the Trust and the Corporation each had a Share
Purchase Plan, whereby an aggregate of 200,000 Paired Shares were available to
be purchased by Trustees, Directors, officers and employees at their fair
market value on the date of sale with monies borrowed from the Trust or
Corporation.
In December 1989, the Trust's Board of Trustees and the Corporation's
Board of Directors voted to terminate the Share Purchase Plans for purposes of
prospective eligibility, and to irrevocably waive the right of the Trust and
the Corporation to accelerate the payment of a note executed by a participating
Trustee or Director upon termination of such participant's relationship with
the Companies.
In January 1991, the Companies entered into agreements with certain
Trustees and Directors who had agreements outstanding pursuant to the Share
Purchase Plans to which each such Board member agreed to stand for re-election
as a Trustee or Director at the next annual shareholders' meeting if requested
to do so by their respective Boards', or if the Boards' did not so request, to
act, for a period of up to two years and at mutually agreed upon times and
places, as an advisor to the Trust or the Corporation on matters within such
Board member's experience and expertise, and the Trust or the Corporation
agreed that any outstanding promissory note executed by such Board member in
partial payment for Paired Shares purchased under the Share Purchase Plans
would be amended to cause such promissory note to be without recourse to the
maker.
In March 1992, certain of the aforementioned notes were restructured
to bear an annual interest rate of 8% as of February 2, 1992, with such notes
to be payable interest only from February 2, 1992 until February 15, 1995, at
which time the principal and interest accrued will become payable in equal
monthly installments over a ten-year period.
The share purchase agreement between Mr. Young and the Corporation was
terminated in connection with his December 31, 1992 resignation as an officer
of the Corporation, and the 10,000 Paired Shares acquired by
F-28
<PAGE> 52
Mr. Young pursuant to that agreement were assigned by him to the Corporation.
Mr. Young's share purchase note in the amount of $112, 500, was written off
at December 31, 1993. The share purchase notes of other former officers,
directors and employees aggregating $63,917 were also written off at
December 31, 1993.
Preferred shares
The Corporation has 10,000,000 authorized preferred shares, $1.00 par
value, none of which are issued or outstanding.
9. Commitments and Contingencies.
Litigation
In late 1991 and early 1992 three complaints were filed against the
Trust and the Corporation and certain other related persons. As amended, two
of the complaints allege that the Trust and the Corporation, a Director and
officer of the Corporation and a former officer/Trustee of the Trust violated
the Racketeer Influenced and Corrupt Organizations Act ("RICO") and Federal and
California securities laws and acted fraudulently in connection with the
Trust's and the Corporation's public disclosures with respect to the Trust's
purchase of its two hotel/casinos and the Ramada Inn in Indian Wells,
California. Both of these complaints are seeking class action certification.
The third complaint was filed purportedly on behalf of the Trust and the
Corporation and alleges that certain former and present Trustees and Directors
breached their fiduciary duties in connection with the purchase of the Ramada
Inn in Indian Wells and the two hotel/casinos. As of December 31, 1993, the
Companies have provided for a $500,000 provision for loss of which $426,000 in
1992 and $74,000 in 1991 have been included in administrative and operating
expenses for legal expenses already paid or expected to be paid, which is equal
to the Companies deductible under their directors and officers liability
insurance policies.
In March 1994, plaintiffs and defendants in the litigation have agreed
in principle that subject to conditional certification for settlement purposes
of the classes described in two of the complaints and to certain other court
approvals, the third complaint will be dismissed with prejudice and all claims
that were made or could have been made in the litigation will be released, upon
the establishment of a $3,205,000 cash settlement fund to be distributed to
members of the certified classes. Of the settlement fund amount, $2,500,000
will be paid by the insurance company that issued Hotel Investors' directors'
and officers' policy applicable to the periods to which the litigation relates,
$400,000 will be paid by the Trust and the Corporation, and $350,000 will be
paid by Messrs. Rothman and Young. Legal fees and other costs incurred by the
defendants in the litigation prior to October 12, 1993 would be paid by the
Trust and the Corporation; subsequent defense costs would be paid by the
above-mentioned insurance company.
The agreement in principle also contemplates that Messrs. Rothman and
Young will provide to the Corporation an irrevocable letter of credit in the
amount of $800,000 (such amount will be recorded as income by the Corporation
upon final court approval) and that the Corporation will accept the termination
of various management agreements and arrangements between Western Host and
certain partnerships of which Messrs. Rothman and Young are general partners
(See Note 10) if the litigation is completed.
A settlement agreement implementing the terms of the agreement in
principle is being prepared and is anticipated to be signed in April 1994.
However, there can be no assurance that the settlement agreement will be
consummated or that the settlement will be ultimately approved by the court.
At December 31, 1993, the Companies have provided an additional $438,000 for
expenses expected to be incurred as a result of the settlement agreement. (See
Note 13).
Environmental matters
In connection with the Debt Restructuring (see Note 2), the Trust
obtained in the latter part of 1991 preliminary or "Phase I" environmental site
assessments with respect to the Trust's hotel properties and the Milwaukee
Marriott Hotel.
F-29
<PAGE> 53
The potential for environmental impairment was assessed as moderate to
high only at the Embassy Suites Hotel in Phoenix, Arizona. According to the
assessment of that property, petroleum hydrocarbons are present in the land
beneath this hotel; however, the Trust could not determine without further
investigation the extent of the potential contamination or whether this
contamination resulted from the underground storage tanks placed on the
property by the property's former owner or from similar tanks located on land
adjacent to the property, which tanks are known to have suffered leakage. A
magnetic survey conducted on the property did not detect the continuing
existence of the underground storage tanks on Hotel Investors' property, and
the environmental consultant did not recommend that any further action be
taken. Phoenix municipal authorities have indicated an awareness of possible
ground water contamination in the area, but to date have taken no action.
A tank leak test conducted at the Bourbon Street Hotel in early 1992
revealed no evidence of leakage. A release of petroleum from an underground
storage tank at the Bay Valley Hotel and Resort was reported to the appropriate
state agency in 1992. After the tank and surrounding soils were removed,
additional soils and groundwater testing was performed, which revealed
environmental contamination in a localized area. The Trust plans to test the
site in the near future to determine whether it qualifies as a "low priority
site" under the relevant state law. If the site qualifies for that status, the
Trust anticipates conducting quarterly groundwater sampling for one year, and
then determining whether any remedial work will be necessary. If the site does
not qualify for low priority status, the Trust may be required to undertake
remediation more quickly. Any further investigation and remediation costs that
are incurred may be reimbursed to Hotel Investors by a Michigan environmental
fund, although there is some question as to whether the fund will have
sufficient resources to pay all claims made against it. If the Trust does not
receive reimbursement for its future investigation and remediation costs, the
Trust will bear those costs.
Neither the Trust nor the Corporation has been identified by the U.S.
Environmental Protection Agency or any similar state agency as a responsible or
potentially responsible party for, nor has Hotel Investors been the subject of
any governmental proceeding with respect to, any hazardous waste contamination.
If Hotel Investors were to be identified as a responsible party, Hotel
Investors in most circumstances would be strictly liable, jointly and severally
with other responsible parties, for environmental investigation and clean-up
costs incurred by the government and, to a more limited extent by private
persons. Managements of the Trust and the Corporation expect that the cost of
any required remediation would be the responsibility of the Trust.
Based upon environmental reports, the Trust believes that a
substantial number of its hotel properties incorporate potentially
asbestos-containing materials. Under applicable current Federal, state and
local laws, asbestos need not be removed from or encapsulated in a hotel unless
and until the hotel is renovated or remodeled. The removal of asbestos from
portions of the Milwaukee Marriott Hotel required in connection with the
renovation of that property has been completed.
Based upon the above-described environmental testing and facts known
to management of the Trust and the Corporation, future remediation costs, if
any, are not expected to have a material adverse effect on the Trust's and the
Corporation's results of operations or financial position and compliance with
environmental laws has not had and is not expected to have a material effect on
the capital expenditures, earnings or competitive position of the Trust and the
Corporation, and compliance with environmental laws has not had and is not
expected to have a material effect on the capital expenditures, earnings or
competitive position of the Trust and the Corporation.
Performance bonds and restricted cash
The Corporation is required to post performance bonds or cash
collateral as security for certain obligations. At December 31, 1993, the
Corporation had posted performance bonds totaling approximately $485,000 to
cover such obligations; however, no amounts had been drawn against such bonds.
At December 31, 1993, inventories, prepaid expenses and other assets
include $145,000 and $2,006,000 for the Trust and the Corporation,
respectively, which were restricted as to use. At December 31, 1992,
inventories, prepaid expenses and other assets include $125,000 and $2,615,000
for the Trust and the Corporation, respectively, which were restricted as to
use. Other than the performance bonds, the restricted cash of the Corporation
primarily is the cash of MHLP (see Note 5).
F-30
<PAGE> 54
Vagabond Inns
The Trust owns three Vagabond Inns that are leased to and operated by
Northview Corporation d/b/a Calmark Hospitality Systems ("Calmark"). In March
1990, Calmark and its related entities filed for reorganization under Chapter
11 of the Bankruptcy Code. As of December 31, 1993, the Trust was owed
approximately $458,000 in annual rents for periods prior to the bankruptcy
filing, which amounts will be paid in eight quarterly installments at 8%
interest per annum which began on March 1, 1993, under Calmark's plan of
reorganization approved by the Federal Bankruptcy Court. In addition, the
Trust via the quarterly installments, will be reimbursed for $100,000 in legal
costs incurred in connection with the bankruptcy reorganization, which will be
recognized as collected. The Trust has continued to receive all base and
percentage rents from Calmark earned subsequent to the date of the bankruptcy
filing.
10. Related Party Transactions.
The Corporation, through its subsidiary Western Host, Inc. ("Western
Host") manages seven properties owned by partnerships of which Ronald A. Young,
former President and Chief Executive Officer and current Director of the
Corporation, is a general partner (the "Western Host Partnerships"). The
Corporation accrued management fees and administrative services fees pursuant
to such management agreements of approximately $863,000, and $937,000, during
the years ended December 31, 1992 and 1991, respectively.
Termination agreement and management subcontracts - Effective December 29,
1992, Mr. Young and the Corporation entered into a termination agreement
whereby Mr. Young tendered his resignation as President and Chief Executive
Officer. Under the terms of the agreement, Mr. Young received payment of
accrued vacation pay in the amount of $54,000 and assigned to the Corporation
the ownership of the 10,000 Paired Shares which secured the non-recourse
promissory note in the amount of $121,000, including interest, which was issued
in connection with the 1987 Share Purchase Plan (See Note 8). In addition,
Western Host agreed to subcontract its duties under the management contracts
for six of the Western Host Partnerships to Westland Hotel Corporation, a hotel
management company formed by Mr. Young. Under the terms of each subcontract,
which is cancelable upon 30 days notice, Westland Hotel Corporation is required
to remit to Western Host, Inc. all management fees collected from the Western
Host Partnerships in excess of 3% of revenues, as defined.
For the year ended December 31, 1993 management fees and other
compensation payable by the Western Host Partnerships after payment of the
submanagement fee totaled $308,000. At March 25, 1994 $242,000 of such fees
remained unpaid and was not accrued at December 31, 1993.
As of December 31, 1993 the Western Host Partnerships and/or Westland
owed Western Host and/or the Corporation $100,000 representing amounts advanced
for the expenses of the managed Western Host hotels which remains unpaid at
March 25, 1994 and is included in inventories, prepaid expenses and other
assets at December 31, 1993.
At December 31, 1993, the Trust has an $800,000 unsecured note
receivable from John Rothman, the former President and Chief Executive Officer
of the Trust. The principal amount of the note receivable is due in 1999 and
bears interest due annually at 10%.
The Companies incurred legal fees from law firms in which a Trustee
and officer of the Trust was or currently is a partner during the years ended
December 31, 1993, 1992 and 1991 totaling $235,000, $955,000, and $901,000,
respectively.
11. Industry Segment Information.
The Corporation operates in two segments of the hospitality industry,
hotel and gaming. The hotel segment consists of room, food and beverage and
other revenues recognized in connection with the operation of hotels owned by
the Corporation or under lease from the Trust, and income from management
contracts. The
F-31
<PAGE> 55
gaming segment consists of net win from casino operations, as well as room,
food and beverage and other revenues recognized in connection with the
operation of the two hotel/casinos under lease from the Trust.
F-32
<PAGE> 56
The following information summarizes revenue and operating results by
industry segment:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
HOTEL:
Revenue:
Room . . . . . . . . . . . . $58,917,000 $60,068,000 $58,167,000
Food and beverage . . . . . . 23,337,000 23,975,000 22,786,000
Other . . . . . . . . . . . . 4,649,000 4,769,000 4,203,000
----------- ----------- -----------
Hotel revenue . . . . . . . . 86,903,000 88,812,000 85,156,000
Management fees . . . . . . . 90,000 952,000 1,041,000
----------- ----------- -----------
Total revenue . . . . . . . . 86,993,000 89,764,000 86,197,000
----------- ----------- -----------
Expenses:
Room . . . . . . . . . . . . 22,340,000 21,917,000 14,570,000
Food and beverage . . . . . . 15,116,000 15,256,000 16,792,000
Other (including undistributed
operating expenses and .
fixed charges) . . . . . 30,676,000 31,447,000 34,601,000
Rent to Trust . . . . . . . . 14,081,000 17,612,000 18,528,000
Depreciation and amortization 3,060,000 3,086,000 2,193,000
Allocated Corporate overhead . 950,000 1,600,000 1,288,000
Provision for loss . . . . . 713,000
----------- ----------- -----------
Total expenses . . . . . . . 86,223,000 90,918,000 88,685,000
----------- ----------- -----------
Operating income (loss) . . . . . . . $ 770,000 $(1,154,000) $(2,488,000)
=========== =========== ===========
GAMING:
Revenue:
Casino . . . . . . . . . . . 14,861,000 $14,461,000 $12,836,000
Room . . . . . . . . . . . . 4,305,000 3,709,000 2,941,000
Food and beverage . . . . . . 5,226,000 5,396,000 4,954,000
Other . . . . . . . . . . . . 5,370,000 4,930,000 3,706,000
Less promotional allowances . (2,257,000) (2,346,000) (1,828,000)
----------- ----------- -----------
Gaming revenue . . . . . . . 27,505,000 26,150,000 22,609,000
----------- ----------- -----------
Expenses:
Casino . . . . . . . . . . . 6,019,000 5,852,000 5,906,000
Room . . . . . . . . . . . . 2,042,000 1,894,000 1,687,000
Food and beverage . . . . . . 4,564,000 4,888,000 5,019,000
Other (including undistributed
operating expenses and fixed .
charges) . . . . . . . . . . 11,430,000 11,065,000 9,336,000
----------- ----------- -----------
Expenses of gaming operations. 24,055,000 23,699,000 21,948,000
Rent to Trust . . . . . . . . 2,400,000 3,565,000 3,565,000
Depreciation and amortization. 477,000 262,000 331,000
----------- ----------- -----------
Total expenses . . . . . . . 26,932,000 27,526,000 25,844,000
----------- ----------- -----------
Operating income (loss) . . . . . . . . $ 573,000 $(1,376,000) $(3,235,000)
=========== =========== ===========
</TABLE>
F-33
<PAGE> 57
A reconciliation of the combined segment operating income (loss) to the
combined net loss of the Trust and the Corporation is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
Combined operating income
(loss) . . . . . . . . . . . . . . $ 1,343,000 $(2,530,000) $ (5,723,000)
Interest and other income . . . . . 330,000 250,000 1,555,000
Interest expense . . . . . . . . . . (2,701,000) (5,372,000) (4,981,000)
Corporate expenses . . . . . . . . . (2,115,000) (2,281,000) (1,983,000)
----------- ----------- ------------
Net income (loss) . . . . . . . $(3,143,000) $(9,925,000) $(11,132,000)
=========== =========== ============
Additional financial data by industry segment for the Corporation is as follows:
December 31,
-----------------------------------------------------
1993 1992 1991
----------- ----------- -----------
IDENTIFIABLE ASSETS:
Hotel . . . . . . . . . $41,712,000 $43,620,000 $44,792,000
Gaming . . . . . . . . 3,743,000 4,059,000 3,884,000
Corporate and other . . 4,538,000 5,932,000 7,131,000
----------- ----------- -----------
Total . . . . . . . . . $49,993,000 $53,611,000 $55,807,000
=========== =========== ===========
CAPITAL EXPENDITURES:
Hotel . . . . . . . . . $ 4,859,000 $ 1,160,000 $ 1,167,000
Gaming . . . . . . . . 220,000 123,000 138,000
Corporate and other . . 126,000 7,000 29,000
----------- ----------- -----------
Total . . . . . . . . . $ 5,205,000 $ 1,290,000 $ 1,334,000
=========== =========== ===========
DEPRECIATION AND
AMORTIZATION:
Hotel . . . . . . . . . $ 3,060,000 $ 3,086,000 $ 2,193,000
Gaming . . . . . . . . 477,000 262,000 331,000
Corporate and other . . 65,000 54,000 134,000
----------- ----------- -----------
Total . . . . . . . . . $ 3,602,000 $ 3,402,000 $ 2,658,000
=========== =========== ===========
</TABLE>
The Trust is an owner/lessor of real property and does not "operate" in
different segments, and is therefore not subject to disclosure by segment. The
Trust's net investment (initial cost less accumulated depreciation and
provision for loss) in the two Las Vegas hotel/casinos was $22,798,000, and
$22,929,000 December 31, 1993 and 1992, respectively.
F-34
<PAGE> 58
12. Selected Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Combined Trust
_________________________________________________ ______________________________________________
1993 1992 1991 1993 1992 1991
_________________________________________________ ______________________________________________
<S> <C> <C> <C> <C> <C> <C>
Revenue . . . . . . . $27,831,000 $ 27,974,000 $ 26,222,000 $ 5,082,000 $ 6,795,000 $ 7,347,000
Net income (loss) . . (1,366,000) (2,380,000) (3,289,000) (208,000) 393,000 (10,000)
Net income (loss)
per share . . . . . (0.11) (0.20) (0.27) (0.02) 0.03 0.00
Cash distributions
per share. . . - - - - - -
Second Quarter
Revenue . . . . . . . $30,310,000 $ 30,071,000 $ 29,563,000 $ 5,477,000 $ 6,837,000 $ 7,963,000
Net income (loss) . . (204,000) (352,000) (1,937,000) 41,000 1,188,000 (974,000)
Net income (loss)
per share . . . . . (0.02) (0.03) (0.16) 0.00 0.10 (0.08)
Cash distributions
per share . . . . . - - - - - -
Third Quarter
Revenue . . . . . . . $30,530,000 $ 30,598,000 $ 28,870,000 $ 5,198,000 $ 6,582,000 $ 7,221,000
Net income (loss) . . (1,268,000)(1) (3,112,000) (3,868,000) (1,412,000)(1) (1,957,000) (1,479,000)
Net income (loss)
per share . . . . . (0.10) (0.26) (0.32) (0.12) (0.16) (0.12)
Cash distributions
per share . . . . . - - - - - -
Fourth Quarter
Revenue . . . . . . . $28,484,000 $ 29,013,000 $ 28,781,000 $ 4,585,000 $ 6,570,000 $ 7,019,000
Net loss . . . . . . (4,194,000)(1) (13,899,000)(2) (12,990,000) (2,310,000)(1) (9,442,000)(2) (8,489,000)
Net loss . . . . . .
per share . . . . . (0.35) (1.14) (1.07) (0.19) (0.78) (0.70)
Cash distributions
per share . . . . . - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Corporation
___________________________________________
1993 1992 1991
___________________________________________
<S> <C> <C> <C>
First Quarter
Revenue . . . . . . . $27,253,000 $27,541,000 $25,736,000
Net income (loss) . . (1,158,000) (2,773,000) (3,279,000)
Net income (loss)
per share . . . . . (0.10) (0.23) (0.27)
Cash distributions
per share. . . - - -
Second Quarter
Revenue . . . . . . . $29,421,000 $29,721,000 $27,016,000
Net income (loss) . . (245,000) (1,540,000) (963,000)
Net income (loss)
per share . . . . . (0.02) (0.13) (0.08)
Cash distributions
per share . . . . . - - -
Third Quarter
Revenue . . . . . . . $29,998,000 $30,397,000 $28,373,000
Net income (loss) . . 144,000 (1,155,000) (2,389,000)
Net income (loss)
per share . . . . . 0.01 (0.10) (0.20)
Cash distributions
per share . . . . . - - -
Fourth Quarter
Revenue . . . . . . . $28,156,000 $28,513,000 $29,236,000
Net loss . . . . . . (1,884,000) (4,457,000) (4,501,000)
Net loss . . . . . .
per share . . . . . (0.16) (0.36) (0.37)
Cash distributions
per share . . . . . - - -
</TABLE>
(1) During the quarter ended September 30, 1993, the Trust recorded a
provision for investment losses of $1,167,000. During the quarter ended
December 31, 1993, the Trust recorded a provision for investment losses of
$1,202,000 and the Trust and the Corporation each recorded a provision of
$219,000 for expenses expected to be incurred upon settlement of
shareholder litigation (see Note 9).
(2) At December 31, 1993, the Trust recorded a provision of $8,713,000 for
known future identifiable costs connected with the Restructuring.
F-35
<PAGE> 59
13. Subsequent Events.
Reorganization
On June 13, 1994, the Trust and the Corporation, subject to
shareholder and stockholder approval, agreed with Starwood Capital, L.P., a
private investment firm, to create an "UPREIT" structure. In connection with
the "UPREIT" structure it is contemplated that two limited partnerships would
be formed (the "Reorganization"). The Trust would be the general partner and
contribute to SLT Realty Limited Partnership all of its assets subject to its
liabilities. The Corporation and its subsidiaries would be the general
partners and contribute to SLC Operating Limited Partnership all of their
assets subject to their liabilities. Starwood Capital Group, L.P., and its
affiliates would be the limited partners in the two partnerships and would
contribute cash and a portfolio of hotel equity and mortgage interests, subject
to certain existing debt.
Starwood's limited partnership interests would be exchangeable into
paired shares of the Trust and the Corporation, such that on a fully converted
basis, Starwood would own between 67% and 75% of the outstanding paired shares
of the Trust and Corporation (but subject to limitations to preserve the REIT
status of the Trust and its paired share structure with the Corporation).
Starwood also agreed, at the Trust's option, to purchase the Trust's
Albany, Georgia property for approximately $6 million; and the Trust would use
the proceeds to make certain payments on its outstanding senior secured debt
and retire a portion of the warrants issued to its senior lenders in connection
with the restructuring of the senior secured debt in January 1993. The Trust
exercised the option in August 1994, accounting for the transaction as a
financing and no gain or loss was recognized. In connection with the
Reorganization, Starwood has agreed to contribute the Albany property to the
partnership.
In connection with the Reorganization, $63,000,000 of the debt between
the Trust and the Corporation will be canceled.
Income Taxes
The Trust recently discovered that there were issues concerning its
having met all of the requirements for maintenance of REIT status for prior
years. On July 27, 1994, the Trust applied to the IRS for, and has
subsequently received, permission to terminate its election to be taxed as a
REIT retroactive to 1991 and to re-elect REIT status for 1995. Because the
Trust had net losses and did not pay any dividends for 1991, 1992 and 1993 and
expects to incur a net loss for tax purposes and not pay any dividends for
1994, the Trust will not owe any federal income tax and the Holders of Paired
Shares will not be adversely affected for these years. In addition, the
granting of the Trust's request does not effect the pairing status of the Trust
and the Corporation shares.
Litigation
On July 20, 1994, the United States District Court for the Southern
District of California entered a Final Judgment of Dismissal With Prejudice
("Final Judgment") of the two purported class actions filed in that Court. For
additional information with respect to these actions and the related derivative
action (the "Shareholder Actions"), filed in the Superior Court of the State of
California for San Diego County see Note 9.
Pursuant to the Final Judgment, the District Court, among other
things, approved the settlement set forth in stipulations of settlement
("Stipulation") entered into among the plaintiffs and defendants in the
Shareholder Actions, as well as the insurance company that issued Hotel
Investors' directors and officers policy applicable to the period to which
Shareholder Actions relate.
Under the Final Judgment, all claims that were or might have been made
in the Shareholder Actions are deemed released as of the Effective Date (as
defined in the Stipulation), and a $3,205,000 cash settlement fund is to be
established which, after the deduction of fees and costs to plaintiffs'
counsel, will be distributed to qualified members of the certified plaintiff
classes according to an allocation formula that includes a calculation based on
certain shares that have opted out of the settlement. Of the settlement fund,
$2,500,000 will be paid by the
F-36
<PAGE> 60
insurance company, $400,000 will be paid by Hotel Investors, and $350,000 will
be paid by Messrs. John Rothman and Ronald Young. Upon completion of the
claims administration process, any funds remaining, up to a limit of $325,000,
shall be returned to the parties who contributed to the settlement fund on a
pro rata basis. The parties contributing to the settlement fund have
previously established a separate $45,000 fund to be used for purposes of
notifying the classes and otherwise administering the settlement. Legal fees
and other costs incurred by the defendants in the Shareholder Actions prior to
October 12, 1993, will be paid by Hotel Investors; subsequent defense costs
will be paid by the insurance company. An aggregate of approximately 1,199,000
shares opted out of the settlement.
The Stipulation also requires that the Trust's Board of Trustees and
the Corporation's Board of Directors establish a joint transaction committee of
independent Trustees and Directors to make recommendations to those Boards with
respect to any transaction proposed in the future by management and having a
fair market value of $20 million or more.
In connection with the settlement of the Shareholder Actions, Messrs.
Young and Rothman and certain of their affiliated partnerships have terminated
the management agreements that existed between those partnerships and the
Corporation's subsidiary, Western Host, Inc. (the "Management Contracts"), and
Western Host has agreed to forbear from disputing such action and has withdrawn
as a general partner of two additional affiliated partnerships. In
satisfaction of any damages that Hotel Investors may incur as a result of the
termination of the Management Contracts, Messrs. Rothman and Young have
provided to Hotel Investors an irrevocable letter of credit in the amount of
$800,000 which has a one-year term.
Upon final Court approval of the Shareholder Actions, proceeds from
the letter of credit would be paid to Hotel Investors, and the parties to the
Management Contracts, Messrs. Rothman and Young and Hotel Investors, will
release all of their respective claims related to the termination of the
Management Contracts.
Ross Settlement Agreement
Subsequent to the settlement of the Shareholder Actions described
above, Leonard M. Ross and his affiliates ("Ross"), who hold 1,190,400 paired
shares and had opted out of the settlement, have threatened litigation against
the Trust and the Corporation.
In October 1994, Starwood Capital Group, L.P. ("Starwood") entered
into negotiations with Ross to settle the threatened litigation.
Under the agreement being negotiated, Starwood would agree to purchase
Ross' paired shares, at Ross' election, in a 60-day period beginning on the
earlier of the first anniversary of the closing of the Reorganization or
December 15, 1995 at a price of $5.625 per paired share plus 10% per annum less
any distributions and insurance proceeds paid to Ross. Starwood would also
have the right to elect to purchase such paired shares at the same time and on
the same terms. The ultimate outcome of this matter cannot presently be
determined.
The estimated fair value of the put/call provisions of the Ross
settlement agreement is approximately $2,649,000 and will be charged against
the earnings of the Trust and Corporation in 1994 if the agreement is
consummated.
Certain Assets Sales
In May 1994, the Best Western-South located in Austin, Texas which was
subject to public condemnation for the purpose of highway construction, was
sold to an agency of the State of Texas for an all cash price, resulting in a
gain of $619,000 and $15,000 for the Trust and the Corporation, respectively.
In August 1994, the Sheraton Inn located in New Port Richey, Florida
and the Holiday Inn located in Brunswick, Georgia were sold for $4,300,000,
consisting of net cash proceeds of $1,067,000 and a $3,070,000 promissory note
secured by the properties, resulting in a gain of $70,000 and $16,000 for the
Trust and the Corporation, respectively.
F-37
<PAGE> 61
In connection with the Reorganization, the Holiday Inn located in
Albany, Georgia was sold to Starwood for an all cash purchase price of
$6,000,000. No gain or loss was recorded as a result of the sale.
The Trust's ability to sell hotels is restricted under the terms of
the agreement with Starwood.
Mortgage Notes Maturing During 1994
Three of the mortgage notes payable secured by four of the hotels
owned by the Trust matured during 1994. The mortgage note, which matured in
April 1994, for which the principal amount outstanding was $4,195,000 at
December 31, 1993, was extended to January 1995 and management of the Trust is
currently negotiating the refinance or extension of the note. The mortgage
note which matured in June 1994, for which the principal amount outstanding was
$9,478,000 at December 31, 1993, was extended to June 30, 1997. The third
mortgage note, which matured during August 1994, for which the principal amount
outstanding was $2,010,000 at December 31, 1993, was extended to December 31,
1994 and management of the Trust is currently negotiating the refinance or
extension of the note.
Dallas Park Central Hotel
The management contract and franchise agreement with Marriott
Corporation with respect to the Dallas property expired in March 1994. Since
March 1994, the hotel has been managed by Sage Mountain View, Inc. and is being
operated as an independent hotel (the Dallas Park Central Hotel).
Mortgage Note Receivable in Default
The borrower under the Trust's mortgage note receivable secured by the
Ramada Inn, Merrimack, New Hampshire with an outstanding principal balance of
$1,427,000 at December 31, 1993 is currently in default. Management of the
Trust is pursuing all remedies including foreclosure. A foreclosure auction of
the property is currently scheduled for November 17, 1994.
Secured Notes Payable and Revolving Line of Credit
The Trust made the principal payment required under the terms of the
Credit Agreement on August 31, 1994 as well as the optional amount which
canceled 444,381 of the warrants previously issued to the Senior Lenders. The
maturity date of the Restructured Debt has been extended to May 31, 1995.
F-38
<PAGE> 62
SCHEDULE IV
INDEBTEDNESS OF AND TO RELATED PARTIES (NOT CURRENT)
<TABLE>
<CAPTION>
HOTEL INVESTORS TRUST: Deductions
Balance at ------------------------- Balance at
Beginning of Amounts Amounts End of
Description Period Additions Collected Written Off Period
- - - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDEBTEDNESS OF RELATED PARTIES:
DECEMBER 31, 1991:
Loans to Hotel Investors
Corporation (1) (3) $44,099,000 $11,000,000 $(1,202,000) $53,897,000
John F. Rothman (2) 800,000 800,000
-------------------------------------------------------------------
$44,899,000 $11,000,000 $(1,202,000) $54,697,000
===================================================================
DECEMBER 31, 1992:
Loans to Hotel Investors
Corporation (1) (4) $53,897,000 $34,004,000 $ (411,000) $87,490,000
John F. Rothman (2) 800,000 800,000
-------------------------------------------------------------------
$54,697,000 $34,004,000 $ (411,000) $88,290,000
===================================================================
DECEMBER 31, 1993:
Loans to Hotel Investors
Corporation (1) $87,490,000 $ 2,519,000 $(2,523,000) $87,486,000
John F. Rothman (2) 800,000 800,000
-------------------------------------------------------------------
$88,290,000 $ 2,519,000 $(2,523,000) $88,286,000
===================================================================
</TABLE>
(1) The Notes from the Corporation earn interest at various rates ranging from
the bank's prime rate to 12% per annum. Effective January 1, 1993 the term
of these notes were amended, see Note 6 of Notes to Financial Statements.
(2) On December 31, 1987, in connection with its acquisition of the Atlanta
partnership a working capital loan of $890,000 was assumed by John F.
Rothman, General Partner of Western Host Atlanta Partners and President and
Chief Executive Officer of the Trust. The note from Mr. Rothman earns
interest at 10% per annum.
(3) In September 1991, in connection with the acquisition of the Milwaukee
Marriott Hotel, Hotel Investors Corporation became the 51% General Partners
in the new Partnership and assumed $11,000,000 of the mortgage debt due to
the Trust. For Financial Statement purposes, the results of the Milwaukee
Marriott are consolidated and intercompany transactions are eliminated.
See Note 5 of Notes to Financial Statements.
(4) In December 1992, in connection with the Debt Restructuring the Trust and
Corporation restructured the existing borrowings from Trust to included all
outstanding borrowings plus accrued but unpaid rent and interest as of
December 31, 1992. See Note 6 of Notes to Financial Statements.
F-39
<PAGE> 63
SCHEDULE IV (Continued)
INDEBTEDNESS OF AND TO RELATED PARTIES (NOT CURRENT)
<TABLE>
<CAPTION>
HOTEL INVESTORS CORPORATION: Deductions
Balance at -------------------------- Balance at
Beginning of Amounts Amounts End of
Description Period Additions Collected Written Off Period
- - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDEBTEDNESS OF RELATED PARTIES:
DECEMBER 31, 1991:
Loans to Hotel
Investors Trust (1) (2) $44,099,000 $11,000,000 $(1,202,000) $53,897,000
====================================================================
DECEMBER 31, 1992:
Loans to Hotel
Investors Trust (1) (3) $53,897,000 $34,004,000 $ (411,000) $87,490,000
====================================================================
DECEMBER 31, 1993:
Loans to Hotel
Investors Trust (1) $87,490,000 $ 2,519,000 $(2,523,000) $87,486,000
====================================================================
</TABLE>
(1) The Notes from the Corporation earn interest at various rates ranging from
the bank's prime rate to 12% per annum. Effective January 1, 1993 the term
of these notes were amended, see Note 6 of Notes to Financial Statements.
(2) In September 1991, in connection with the acquisition of the Milwaukee
Marriott Hotel, Hotel Investors Corporation became the 51% General Partners
in the new Partnership and assumed $11,000,000 of the mortgage debt due to
the Trust. For Financial Statement purposes, the results of the Milwaukee
Marriott are consolidated and intercompany transactions are eliminated.
See Note 5 of Notes to Financial Statements.
(3) In December 1992, in connection with the Debt Restructuring the Trust and
Corporation restructured the existing borrowings from Trust to included all
outstanding borrowings plus accrued but unpaid rent and interest as of
December 31, 1992. See Note 6 of Notes to Financial Statements.
F-40
<PAGE> 64
SCHEDULE IX
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Weighted
Average average
Category of Weighted Maximum amount interest
aggregate Balance at average amount outstanding rate
short-term end of interest outstanding during during
borrowings period rate during the period the period
period (2) (3)
- - - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HOTEL INVESTORS TRUST:
DECEMBER 31, 1991:
Notes payable
to banks (1) $ 71,318,000 9.00% $ 71,545,000 $ 68,166,000 8.91%
Senior Notes
Payable $ 56,905,000 9.21% $ 60,000,000 $ 58,095,000 9.95%
DECEMBER 31, 1992:
Notes payable
to banks (1) $ 71,318,000 7.00% $ 71,318,000 $ 71,318,000 7.29%
Senior Notes
Payable $ 56,905,000 7.00% $ 56,905,000 $ 56,905,000 7.29%
DECEMBER 31, 1993:
Secured notes payable and
revolving line of credit $128,802,208 7.00% $133,785,234 $130,785,234 7.94%
- - - ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents borrowings under the Trust's line of credit. See Note 2 of
Notes to Financial Statements.
(2) Computed using the weighted average of the outstanding balances at the end
of each month. For the Corporation, the average amount outstanding for the
period is computed using the period the line of credit was available to the
Corporation.
(3) Computed using the weighted average of the month-end balance and interest
rate for each month in which a balance was outstanding.
F-41
<PAGE> 65
SCHEDULE X
SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
Charged to Costs and Expenses
-------------------------------------------------
Year Ended December 31,
Item 1993 1992 1991
- - - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HOTEL INVESTORS TRUST:
Amortization:
Amortization of Debt Issue Costs $ 39,000 $ 39,000 $ 188,000
Amortization of Franchise Costs 2,000 2,000 145,000
HOTEL INVESTORS CORPORATION:
Maintenance and Repairs $5,837,000 $5,893,000 $5,677,000
Amortization:
Franchise Costs 30,000 29,000 155,000
Real and Personal Property Taxes 3,587,000 3,915,000 4,110,000
Advertising Costs 438,000 695,000 659,000
</TABLE>
F-42
<PAGE> 66
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1993
<TABLE>
<CAPTION>
HOTEL INVESTORS TRUST Initial Cost to Company
-----------------------
Building and
Description Encumbrances Land Improvements
- - - ------------------------------------------------------------------------------
<S> <C> <C> <C>
HOTEL ASSETS:
Embassy Suites - Phoenix, AZ $9,478,177 $2,889,000 $11,658,000
Plaza Hotel - Tucson, AZ (2) 898,000 3,809,000
Vagabond Inn - Rosemead, CA 700,000 2,100,000
Vagabond Inn - Sacramento, CA 700,000 3,200,000
Vagabond Inn - Woodland Hills, CA 1,200,000 3,200,000
Hilton Inn - Gainesville, FL 1,002,000 3,759,000
Holiday Inn and Conference Center
- Jacksonville, FL 2,000,000 11,345,000
Sheraton Inn - New Port Richey, FL 1,003,000 5,445,000
Holiday Inn - Albany, GA 796,000 4,980,000
Holiday Inn - Brunswick, GA 397,000 2,954,000
Best Western Riverfront Inn -
Savannah, GA 431,000 3,745,000
Bay Valley Hotel - Bay City, MI 4,195,174 2,500,000 5,472,000
Bourbon Street Hotel and Casino -
Las Vegas, NV 8,435,000 8,668,000
King 8 Hotel and Casino - Las
Vegas, NV 177,885 5,396,000 13,579,000
Best Western Airport Inn -
Albuquerque, NM (3) 285,000 4,880,000
Best Western Mesilla Valley Inn -
Las Cruces, NM 1,150,000 3,295,000
Ramada Inn - Fayetteville, NC 520,000 2,330,000
Columbus Best Western - Columbus, OH 854,000 2,300,000
Portland Inn - Portland, OR } 2,009,636 1,900,000 3,768,000
Riverside Inn - Portland, OR } 1,300,000 3,375,000
Best Western South - Austin, TX 2,100,000 2,776,000
Marriott Park Central - Dallas, TX 5,446,534 (3) 3,814,000 8,018,000
Best Western Airport Inn - El
Paso, TX 1,400,000 3,409,000
Residence Inn - Tysons Corner, VA 6,416,696 1,418,000 4,119,000
Days Inn Town Center - Seattle, WA 250,000 1,483,000
Meany Tower Hotel - Seattle, WA (3) 1,700,000 6,270,000
Sixth Avenue Inn - Seattle, WA 1,150,000 1,570,000
Tyee Motor Inn - Tumwater, WA (3) 1,008,000 1,562,000
- - - ------------------------------------------------------------------------------
$27,724,102 $47,196,000 $133,069,000
- - - ------------------------------------------------------------------------------
<CAPTION>
Costs
Subsequent Gross amount
to at which carried
Acquisition at close of period
------------------------------------------------
(1) (1)
Accumulated
Building and Building and Depreciation(4)
Description Improvements Land Improvements Amortization
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOTEL ASSETS:
Embassy Suites - Phoenix, AZ $539,000 $2,889,000 $12,197,000 $3,341,000
Plaza Hotel - Tucson, AZ 24,000 898,000 3,833,000 1,005,000
Vagabond Inn - Rosemead, CA 700,000 2,100,000 437,000
Vagabond Inn - Sacramento, CA 700,000 3,200,000 666,000
Vagabond Inn - Woodland Hills, CA 1,200,000 3,200,000 666,000
Hilton Inn - Gainesville, FL 1,534,000 1,002,000 5,293,000 1,006,000
Holiday Inn and Conference Center
- Jacksonville, FL 680,000 2,000,000 12,025,000 11,290,000
Sheraton Inn - New Port Richey, FL 169,000 1,003,000 5,614,000 4,414,000
Holiday Inn - Albany, GA 123,000 796,000 5,103,000 665,000
Holiday Inn - Brunswick, GA 122,000 397,000 3,076,000 1,936,000
Best Western Riverfront Inn -
Savannah, GA 187,000 431,000 3,932,000 1,827,000
Bay Valley Hotel - Bay City, MI 1,159,000 2,501,000 6,631,000 1,808,000
Bourbon Street Hotel and Casino -
Las Vegas, NV 5,446,000 8,435,000 14,114,000 13,786,000
King 8 Hotel and Casino - Las
Vegas, NV 1,938,000 5,396,000 15,517,000 7,969,000
Best Western Airport Inn -
Albuquerque, NM 285,000 4,880,000 1,066,000
Best Western Mesilla Valley Inn -
Las Cruces, NM 28,000 860,000 3,323,000 728,000
Ramada Inn - Fayetteville, NC 531,000 520,000 2,861,000 2,410,000
Columbus Best Western - Columbus, OH 854,000 2,300,000 131,000
Portland Inn - Portland, OR } 213,000 2,019,811 3,981,000 785,000
Riverside Inn - Portland, OR } 222,000 1,419,811 3,597,000 703,000
Best Western South - Austin, TX 342,000 2,100,000 3,118,000 2,288,000
Marriott Park Central - Dallas, TX 578,000 3,815,000 8,596,000 4,172,000
Best Western Airport Inn - El
Paso, TX 74,000 1,400,000 3,483,000 715,000
Residence Inn - Tysons Corner, VA 274,000 1,418,000 4,393,000 1,214,000
Days Inn Town Center - Seattle, WA 17,000 250,000 1,500,000 1,063,000
Meany Tower Hotel - Seattle, WA 207,000 1,819,811 6,477,000 1,302,000
Sixth Avenue Inn - Seattle, WA 25,000 1,150,000 1,595,000 1,580,000
Tyee Motor Inn - Tumwater, WA 959,000 945,000 2,521,000 456,000
- - - ------------------------------------------------------------------------------------------------------
$15,391,000 $47,204,433 $148,460,000 $69,429,000
---------------------------
Land 47,204,433
Furniture and Equipment 28,505,567 24,823,000
------------ -----------
Total hotels and land
under lease $224,170,000 (5) $94,252,000
============ ===========
<CAPTION>
Year Date
Description Construction Acquired Life
- - - ----------------------------------------------------------------------
<S> <C> <C> <C>
HOTEL ASSETS:
Embassy Suites - Phoenix, AZ 1981 12/13/83 35
Plaza Hotel - Tucson, AZ 1971 9/16/86 35
Vagabond Inn - Rosemead, CA 1974 9/16/86 35
Vagabond Inn - Sacramento, CA 1975 9/16/86 35
Vagabond Inn - Woodland Hills, CA 1973 9/16/86 35
Hilton Inn - Gainesville, FL 1974 11/24/86 35
Holiday Inn and Conference Center
- Jacksonville, FL 1959/1975 9/16/86 35
Sheraton Inn - New Port Richey, FL 1973 12/11/86 35
Holiday Inn - Albany, GA 1989 6/9/89 35
Holiday Inn - Brunswick, GA 1972 12/11/86 35
Best Western Riverfront Inn -
Savannah, GA 1971 12/11/86 35
Bay Valley Hotel - Bay City, MI 1973 5/10/84 35
Bourbon Street Hotel and Casino -
Las Vegas, NV 1964/1975 2/01/88 35
King 8 Hotel and Casino - Las
Vegas, NV 1974/1979 2/1/88 35
Best Western Airport Inn -
Albuquerque, NM 1980 9/16/86 35
Best Western Mesilla Valley Inn -
Las Cruces, NM 1974 9/16/86 35
Ramada Inn - Fayetteville, NC 1973 12/11/86 35
Columbus Best Western - Columbus, OH 1971 1/24/92 35
Portland Inn - Portland, OR } 1962 9/16/86 35
Riverside Inn - Portland, OR } 1964 9/16/86 35
Best Western South - Austin, TX 1973 9/16/86 35
Marriott Park Central - Dallas, TX 1972 9/09/88 35
Best Western Airport Inn - El
Paso, TX 1974 9/16/86 35
Residence Inn - Tysons Corner, VA 1984 7/01/84 35
Days Inn Town Center - Seattle, WA 1957 9/16/86 13
Meany Tower Hotel - Seattle, WA 1932 9/16/86 35
Sixth Avenue Inn - Seattle, WA 1959 9/16/86 13
Tyee Motor Inn - Tumwater, WA 1961 2/17/87 35
</TABLE>
(1) As of December 31, 1993, real estate and furniture and equipment have a
cost of $147,231,000 for federal income tax purposes.
(2) Land cost includes costs allocated to leasehold interest in land of
$548,000 at the Tucson property.
(3) Land cost represents costs allocated to leasehold interest in land.
(4) Includes reserve for losses as discussed in Notes 1 and 3 of Notes to the
Financial Statements.
(5) Substantially all properties are encumbered by the Secured Note Payable and
Revolving Line of Credit.
(continued)
F-43
<PAGE> 67
SCHEDULE XI (Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
A reconciliation of the Trust's investment in real estate, furniture and
fixtures and related accumulated depreciation is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
REAL ESTATE AND FURNITURE
AND FIXTURES:
Balance at beginning of period $246,356,000 $258,902,000 $278,335,000
Additions during period:
Acquisitions 0 0 0
Improvements 1,372,000 9,384,000 3,217,000
U.S. Equity Step-up Basis 899,000 0 0
Reclass of construction
in progress 0 (113,000) 0
Deductions during period:
Sales of properties (24,457,000) (21,817,000) (22,650,000)
------------ ------------ ------------
Balance at end of Period 224,170,000 246,356,000 258,902,000
------------ ------------ ------------
LAND UNDER LEASE:
Balance at beginning of period 0 0 0
Sales during period
------------ ------------ ------------
Balance at end of period 0 0 0
------------ ------------ ------------
$224,170,000 $246,356,000 $258,902,000
============ ============ ============
ACCUMULATED DEPRECIATION:
Balance at beginning of period $105,338,000 $108,134,000 $ 99,080,000
Additions - depreciation expense 5,630,000 6,753,000 8,696,000
Deductions - sales of properties (19,085,000) (12,746,000) (7,518,000)
Provision for investment losses:
St. Louis, MO 858,000(1)(3)
Dallas, TX 459,000(3) 600,000(3)
Jacksonville, FL 272,000(3) 1,050,000(2)(3)
Savannah, GA 300,000(3) 760,000(2)(3)
New Port Richey, FL 200,000(1)(3)
Brunswick, GA 150,000(1)(3) 440,000(2)(3)
Merrimack, NH 1,000,000(3)
Fayetteville, NC 100,000(1)(3)
Cumberland, GA 697,000(2)(3) 576,000(3)
Northlake, GA 250,000(2)(3)
Bourbon Street, NV 5,500,000(4)
Irving, TX 200,000(3)
Rosemead, CA 30,000(3)
------------ ------------ ------------
2,369,000 3,197,000 7,876,000
------------ ------------ ------------
Allocation of reserve for losses
------------ ------------ ------------
Balance at end of period $ 94,252,000 $105,338,000 $108,134,000
============ ============ ============
</TABLE>
(1) Provision for loss was recorded primarily as a result of all cash offers
to sell hotels, previously identified for sale, at amounts lower than
their current net book values.
(2) Provision for loss was recorded as a result of the deterioration of hotels
in the Southeast and the acceptance of offers for the sale of hotels at
amounts less than net book value.
(3) Provision for loss was recorded as a result of the difference between the
net book value of properties which had been identified for sale and their
estimated fair values.
(4) Provision for loss was recorded as a result of the difference between the
net book value and the discounted future cash flows for properties held
for investment which had undiscounted future cash flows that were less
than net book value.
F-44
<PAGE> 68
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1993
<TABLE>
<CAPTION>
Initial Cost to Company
HOTEL INVESTORS CORPORATION -----------------------
(3) Land and Building and
Description Encumbrances Leaseholds Improvements
- - - ---------------------------------------------------------------------------------
<S> <C> <C> <C>
HOTEL ASSETS:
Embassy Suites - Phoenix, AZ
Plaza Hotel - Tucson, AZ $595,000
Hilton Inn - Gainesville, FL
Holiday Inn and Conference Center
- Jacksonville, FL 1,587,000
Sheraton Inn - New Port Richey, FL
Holiday Inn - Albany, GA
Holiday Inn - Brunswick, GA
Bay Valley Hotel - Bay City, MI
Best Western North - Columbus, OH
Best Western Airport Inn -
Albuquerque, NM 325,000
Best Western Mesilla Valley Inn -
Las Cruces, NM
Ramada Inn - Fayetteville, NC
Portland Inn - Portland, OR 2,185,000
Riverside Inn - Portland, OR 2,123,000 87,000
Best Western South - Austin, TX
Best Western Airport Inn - El
Paso, TX
Residence Inn - Tysons Corner, VA
Days Inn Town Center - Seattle, WA 429,000 4,000
Meany Tower Hotel - Seattle, WA 3,437,000 302,000
Sixth Avenue Inn - Seattle, WA 1,515,000 24,000
Best Western Inn - Savannah, GA
Marriott Hotel - Milwaukee, WI $13,381,000 2,500,000 17,422,000
-------------------------------------------
$13,381,000 $14,696,000 $17,839,000
-------------------------------------------
<CAPTION>
Costs
Subsequent Gross amount
to at which carried
Acquisition at close of period
---------------------------------------------
(1) (1) Accumulated
Building and Land and Building and Depreciation/
Description Improvements Leaseholds Improvements Amortization (2)
- - - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOTEL ASSETS:
Embassy Suites - Phoenix, AZ $45,000 $45,000 $5,000
Plaza Hotel - Tucson, AZ 0 $978,000 149,000
Hilton Inn - Gainesville, FL 39,000 39,000 8,000
Holiday Inn and Conference Center
- Jacksonville, FL 126,000 1,587,000 126,000 1,601,000
Sheraton Inn - New Port Richey, FL 24,000 24,000 2,000
Holiday Inn - Albany, GA 64,000 64,000 4,000
Holiday Inn - Brunswick, GA 62,000 62,000 4,000
Bay Valley Hotel - Bay City, MI 179,000 179,000 19,000
Best Western North - Columbus, OH 37,000 37,000 2,000
Best Western Airport Inn - 0
Albuquerque, NM 0 372,000 0 68,000
Best Western Mesilla Valley Inn - 0
Las Cruces, NM 0 252,000 0 17,000
Ramada Inn - Fayetteville, NC 15,000 15,000 1,000
Portland Inn - Portland, OR 78,000 2,185,000 78,000 426,000
Riverside Inn - Portland, OR 25,000 2,123,000 112,000 427,000
Best Western South - Austin, TX 35,000 35,000 4,000
Best Western Airport Inn - El
Paso, TX 18,000 18,000 3,000
Residence Inn - Tysons Corner, VA 33,000 33,000 4,000
Days Inn Town Center - Seattle, WA 204,000 429,000 208,000 206,000
Meany Tower Hotel - Seattle, WA 66,000 3,437,000 368,000 731,000
Sixth Avenue Inn - Seattle, WA 118,000 1,515,000 142,000 641,000
Best Western Inn - Savannah, GA 39,000 39,000 1,000
Marriott Hotel - Milwaukee, WI 3,499,000 2,500,000 20,921,000 953,000
-----------------------------------------------------
$4,706,000 $15,378,000 $22,545,000 $5,276,000
-----------------------
Land 15,378,000
Furniture and Equipment 16,867,000 12,183,000
---------- ----------
Total hotels and land
under lease 54,790,000 17,459,000
========== ==========
<CAPTION>
Year of Date
Construction Acquired Life
- - - -------------------------------------------------------------------------------------
<S> <C> <C> <C>
HOTEL ASSETS:
Embassy Suites - Phoenix, AZ 1981 12/13/83 35
Plaza Hotel - Tucson, AZ 1971 9/16/86 35
Hilton Inn - Gainesville, FL 1974 11/24/86 35
Holiday Inn and Conference Center
- Jacksonville, FL 1959/1975 9/16/86 35
Sheraton Inn - New Port Richey, FL 1973 12/11/86 35
Holiday Inn - Albany, GA 1989 6/9/89 35
Holiday Inn - Brunswick, GA 1972 12/11/86 35
Bay Valley Hotel - Bay City, MI 1973 5/10/84 35
Best Western North - Columbus, OH
Best Western Airport Inn -
Albuquerque, NM 1980 9/16/86 35
Best Western Mesilla Valley Inn -
Las Cruces, NM 1974 9/16/86 35
Ramada Inn - Fayetteville, NC 1973 12/11/86 35
Portland Inn - Portland, OR 1962 9/16/86 35
Riverside Inn - Portland, OR 1964 9/16/86 35
Best Western South - Austin, TX 1973 9/16/86 35
Best Western Airport Inn - El
Paso, TX 1974 9/16/86 35
Residence Inn - Tysons Corner, VA 1984 7/01/84 35
Days Inn Town Center - Seattle, WA 1957 9/16/86 13
Meany Tower Hotel - Seattle, WA 1932 9/16/86 35
Sixth Avenue Inn - Seattle, WA 1959 9/16/86 13
Best Western Inn - Savannah, GA 1961 2/17/87 35
Marriott Hotel - Milwaukee, WI
(1) As of December 31, 1993, real estate and furniture and equipment have a
cost of $38,254,000 for federal tax income purposes.
(2) Includes reserve for losses discussed in Notes 1 and 3 of Notes to
Financial Statements.
(3) Amount excludes $14,084,000 second trust deed note payable to the Trust.
And $1,102,000 third trust deed note payable. See Note 6 of Notes to
Financial Statements.
(Continued)
</TABLE>
F-45
<PAGE> 69
SCHEDULE XI (Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
A reconciliation of the Corporation's investment in real estate, furniture
and fixtures and related accumulated depreciation is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
REAL ESTATE AND FURNITURE
AND FIXTURES:
Balance at beginning of year $51,972,000 $ 51,199,000 $27,571,000
Additions during period:
Improvements 5,205,000 1,290,000 1,334,000
Acquisitions 22,585,000
Deductions: Reclass 388,000
Sales of properties (2,775,000) (517,000) (291,000)
Balance at end of year $54,790,000 $ 51,972,000 $51,199,000
ACCUMULATED DEPRECIATION:
Balance at beginning of year $15,413,000 $ 12,377,000 $ 9,779,000
Additions -
Depreciation expense 3,602,000 3,373,000 2,503,000
Deductions -
Sales of properties (1,842,000) (337,000) (114,000)
Provision for investment losses (1):
Milwaukee, WI 713,000
Reclass 286,000 0 (504,000)
----------------------------------------------------
Balance at end of year $17,459,000 $105,338,000 $12,377,000
====================================================
</TABLE>
(1) Provision for loss was recorded as a result of the difference between the
net book value and the discounted future cash flows for the properties
held for investment with undiscounted future cash flows that were less
than net book value.
F-46
<PAGE> 70
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1993
<TABLE>
<CAPTION>
Principal
amount
of loans
Carrying subject
Face Amount of to delinquent
Interest Final Periodic Prior Amount of Mortgages principal or
Description Rate Maturity Payment Liens Mortgages (1) interest
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HOTEL INVESTORS TRUST
First Mortgages:
Vagabond Inns - Stockton and 10.00% 1996 (2) no $ 1,995,000 $ 1,816,000
Modesto, CA
Vagabond Inn - Reno, NV 12.00% 1994 (2) no 1,600,000 1,448,000
Ramada Inn - Jefferson City, MO 11.00% 1996 (3) no 4,500,000 1,784,000
Days Inn - Albany, GA 10.00% 1996 $12,554(5) no 1,050,000 827,000
Best Western - Merrimack, NH 9.00% 1997 11,587(6) no 1,440,000 1,426,000
Days Inn - Spartanbug, SC 9.00% 1998 5,954(7) no 775,000 736,000
Days Inn - Irving, TX 9.00% 1997 13,276(8) no 1,650,000 1,531,000
Vangage Hotel - Tucker, GA 9.00% 1998 9,000(9) no 1,985,000 1,976,000
Second Mortgages:
Viscount Hotel - Dallas, TX 8.75% 2017 1,982(4) yes 264,000 238,000
Allowance for loan losses (140,000)
------------------------------------------
$15,259,000 $11,642,000 $0
==========================================
</TABLE>
(1) As of December 31, 1993, the aggregate cost (before allowance for loan
losses) for federal income tax purposes is not significantly different from
that used for book purposes.
(2) The notes provide for monthly payments of interest plus additional annual
payments based on a percentage of the hotels' sales, a portion of which is
applied to principal.
(3) Principal and interest due monthly based on a 30 year amortization schedule
with unpaid principal of $1,750,000 due in December 1996.
(4) Plus contingent interest of 4% of room sales of the hotel.
(5) Principal and interest due monthly based on a 10 year amortization schedule
with additional principal of $50,000 due in November 1993 and all unpaid
principal of $591,000 due in November 1996.
(6) Principal and interest due monthly based on a 30 year amortization schedule
with unpaid principal of $1,382,000 due in July 1997.
(7) Principal and interest due montly based on a 30 year amortization schedule
with additional principal of $35,000 due in September 1993 and all unpaid
principal of $704,00 due in September 1998.
(8) Principal and interest due monthly based on a 30 year amortization schedule
with additional principal of $90,000 due in March 1993 and all unpaid
principal of $1,485,000 due in March 1997.
(9) Principal and interest due monthly based on a 25 year amortization schedule
with unpaid principal of $1,857,000 due in June 1998.
F-47
<PAGE> 71
SCHEDULE XII (Continued)
RECONCILIATION OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1993 1992 1991
-----------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $10,010,000 $10,669,000 $ 21,749,000
Additions -
New Mortgage Loans 1,985,000 3,865,000 1,950,000
Reclassification -
Reclassification of
indebtedness of and to
related parties (1) (11,000,000)
Deductions -
Principal repayments (353,000) (957,000) (1,039,000)
Amortization of discount
Allowance for loan loss (223,000) (991,000)
Discount for pre-payment (3) (90,000)
Cancellation of Note (2) (3,254,000)
-----------------------------------------------------
Balance at end of year $11,642,000 $10,010,000 $ 10,669,000
=====================================================
</TABLE>
(1) In September 1991, in connection with the acquisition of the Milwaukee
Marriott Hotel, Hotel Investors Corporation became the 51% General Partner
in the new Partnership and assumed the mortgage debt. For Financial
statement purposes, the results of the Milwaukee Marriott are consolidated
with intercompany transactions eliminated. See Note 4 of Notes to Financial
Statements.
(2) In January 1992, in lieu of foreclosure, the Trust cancelled its note and
released its mortgage on the Columbus Best Western North.
(3) The Trust discounted the Note on the Brunswick, Georgia property as
consideration for the early pay-off of the note.
F-48
