<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the annual period ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from to
------------- -------------
Commission File Number 0-14956
VMS National Hotel Partners
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3370590
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
630 Dundee Road, Suite 220, Northbrook, Illinois 60062
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(847)714-9600
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
None None
---- ----
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has 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 (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the 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]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I
<S> <C> <C>
Item 1 Business 3-5
Item 2 Properties 5
Item 3 Legal Proceedings 5-7
Item 4 Submission of Matters to a Vote
of Security Holders 7
PART II
Item 5 Market for the Partnerships' Limited Partnership
Interests and Related Security Holder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Item 8 Financial Statements and Supplementary Data 13
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 13
PART III
Item 10 Directors and Executive Officers 14-17
Item 11 Executive Compensation 17-18
Item 12 Security Ownership of Certain Beneficial
Owners and Management 18
Item 13 Certain Relationships and Related Transactions 18-19
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 20
SIGNATURES 21-22
</TABLE>
<PAGE> 3
PART I
Item 1 Business
General
VMS National Hotel Portfolio I ("Partnership I") and VMS National Hotel
Portfolio II ("Partnership II") are limited partnerships formed November 1,
1985 under the Uniform Limited Partnership Act of the state of Illinois.
Collectively, Partnership I and Partnership II are referred to as the
"Partnerships".
The Partnerships were formed to purchase a combined 99.9% interest in VMS
National Hotel Partners (the "Operating Partnership"), an Illinois general
Partnership formed in October, 1985. The term of the Operating Partnership
shall continue until December 31, 2035 unless sooner terminated; the term of
each of the Partnerships shall continue until December 31, 2035 unless sooner
terminated. The Operating Partnership was formed to acquire, own, operate and
dispose of up to 28 separate Holiday Inn hotels throughout the United States
(collectively, the "Hotels"). Only 24 hotels were purchased; no further
purchases of hotels will be made by the Operating Partnership. The Operating
Partnership conveyed ownership interest in certain of the Hotels to separate
partnerships so that each owns and operates a separate Hotel (collectively, the
"Sub-Partnerships") (as used herein, the term "Operating Partnership "
includes the Sub-Partnerships where the context requires). The general
partners of the Operating Partnership, in addition to the Partnerships, are VMS
Realty Investment, Ltd., an Illinois limited partnership and VMS Realty, Inc.,
an Illinois corporation (all of the capital stock of which is owned by VMS
Realty Partners). The Operating Partnership is the Managing General Partner of
each of the Sub-Partnerships and has at least a 99% general partnership
interest in each such Sub-Partnerships. Various other affiliates of the
Managing General Partner are minority general partners of, and own the
remaining general partnership interests in each such Sub-Partnerships. During
1995, 1994, 1993 and 1992, nine (one in 1995, two in 1994, two in 1993 and four
in 1992) of the hotels were sold. On May 10, 1996, the Operating Partnership
and affiliated sub-partnerships filed petitions for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court for the
Northern District of Illinois. This filing excludes Partnership I and
Partnership II. Pursuant to the Plan of Reorganization, the deeds to the
remaining hotels were transferred to the senior lender on September 26, 1996 in
consideration for the cancellation of the senior indebtedness (the "Transfer").
For further information relating to the Transfer and the financing
arrangements of the properties, see Notes 1 and 5 to the combined financial
statements.
The Managing General Partner of each of the Partnerships is VMS Realty
Investment, Ltd., an Illinois limited partnership (the "Managing General
Partner"). Effective January 1, 1987 Morris/Stone Associates assigned its
ownership in the Partnerships to VMS Realty Investment, Ltd. Prudential-Bache
Properties, Inc. is also a general partner of Partnership I (the "Minority
General Partner").
As described in Section 4 of the Amended and Restated Agreement of General
Partnership of VMS National Hotel Partners, dated November 1, 1985 (the
"Operating Partnership Agreement"), the Operating Partnership was formed to
engage in no business other than the ownership, operation, lease and sale of
all the Hotels which it had already purchased. Section 15 of the Operating
Partnership Agreement provides that upon the sale of all or substantially all
of the assets of the Operating Partnership, the Operating Partnership will be
dissolved. Proceeds received by the Operating Partnership from the sale or
refinancing of any or all of the Hotels shall be distributed to Partnership I
and Partnership II in accordance with the participating interest of each such
-3-
<PAGE> 4
Item 1. Organization (continued)
partnership in the Operating Partnership; none of such proceeds will be
reinvested by the Operating Partnership in additional Hotels or other assets.
Collectively, the limited partnership interests of the Partnerships are
referred to as the "Units". Partnership I offered and sold 514 Units of
limited partnership interests at a price of $150,000 per limited partnership
interest. The 514 Units represent total equity of $77,100,000 sold through
Prudential-Bache Securities, Inc. In 1985, Partnership II offered and sold 135
Units of limited partnership interests at a price of $150,000 per limited
partnership interest. The 135 Units represent total equity of $20,250,000 sold
through VMS Securities, Inc., an affiliate of the Managing General Partner of
each of the Partnerships. Since the Operating Partnership had originally
intended to purchase 28 Hotels and only 24 Hotels were purchased, each Limited
Partner was rebated $15,000 per Unit, payable over 5 years, reflecting the
reduced total purchase price of all Hotels purchased by the Operating
Partnership.
Each of the Partnerships used the net offering proceeds of their respective
offerings to make required contributions to the Operating Partnership and pay
for offering, financing and acquisition costs and commissions and the Managing
General Partner's fees. The participation interests in the Operating
Partnership of Partnership I and Partnership II are approximately 79.12% and
20.78%, respectively.
The Partnerships have no employees at December 31, 1997.
Recent Developments - Partnerships
During 1995, the Partnerships sold the Milwaukee West Quality Inn. As a result
of this sale, the Partnerships received $36,000 towards repayment of the
Closing Payment and $1,582,967 in principal was repaid on the senior debt. In
connection with this sale, the Partnerships recorded a provision for loss on
property and improvements of $886,000 in 1994 and a loss on sale of property
and improvements of $510,012 in 1995.
On May 10, 1996, the Operating Partnership and affiliated sub-partnerships
filed petitions for relief under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court for the Northern District of Illinois. This
filing excludes Partnership I and Partnership II. Pursuant to the Plan of
Reorganization, the deeds to the remaining hotels were transferred to the
senior lender on September 26, 1996 in consideration for the cancellation of
the senior indebtedness.
As a result of the Transfer, the Operating Partnership recognized an
extraordinary gain of $214,542,473 for financial reporting purposes, which
represents the excess of the remaining senior debt, related accrued interest,
other operating liabilities and net cash received by the Operating Partnership
of $810,160 (in conjunction with this transfer, the Operating Partnership
received amounts in lieu of sales advisory fees totaling $1,025,000 from the
senior lender, net of $214,840 of operating cash transferred to the senior
lender), over the carrying value of the property and improvements and operating
assets transferred. In addition, the Operating Partnership recognized an
extraordinary gain of $47,013,597 from the cancellation of the junior mortgage
indebtedness pursuant to the Plan of Reorganization.
The combined financial statements of the Operating Partnership reflect the
financial reporting guidance prescribed by the AICPA Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code", which was adopted by the Operating Partnership for the period from May
10, 1996 to September 26, 1996.
-4-
<PAGE> 5
Item 1. Organization (continued)
Items of income or expense that were realized or incurred as a result of the
reorganization are included in the Combined Statement of Operations as
reorganization items. During 1996 $410,000 was paid for professional,
consulting and other fees for the administration of Chapter 11 proceedings.
In the short term, the Partnerships will continue to maintain a cash reserve
for the payment of the remaining Partnerships' obligations and contingent
liabilities. In the long term, the Partnerships will wind-up their affairs and
will distribute any remaining Partnerships' funds to their Limited Partners
after paying all Partnerships' expenses and the Partnerships will be dissolved
at that time. It is anticipated that the Partnerships will be dissolved
sometime within the next two years.
Item 2 Properties
During 1995, 1994, 1993 and 1992, a total of nine of the original portfolio of
twenty-four hotels were sold and on May 10, 1996, the Operating Partnership and
affiliated sub-partnerships filed petitions for relief under Chapter 11 of the
federal bankruptcy laws in the United States Bankruptcy Court for the Northern
District of Illinois. This filing excludes Partnership I and Partnership II.
Pursuant to the Plan of Reorganization, the deeds to the remaining hotels were
transferred to the senior lender on September 26, 1996 in consideration for the
cancellation of the senior indebtedness. For further information related to
these sales and the Transfer, see Item 1. Business.
Item 3 Legal Proceedings
As disclosed in the prior reports on Form 10-Q or Form 10-K ("Prior Public
Filings"), the Partnerships including the General Partners, VMS Realty Partners
L.P., certain officers and directors of VMS Realty Partners L.P., and certain
other affiliates of the Partnerships are parties to certain pending legal
proceedings (other than litigation matters covered by insurance policies). The
adverse outcome of certain of the legal proceedings disclosed in this Report
and the Prior Public Filings could have a materially adverse effect on the
present and future operations of the Partnerships.
Summarized below are certain developments in legal proceedings filed against
VMS Realty Partners, now known as VMS Realty Partners L.P. and its affiliates
which were disclosed in the Prior Public Filings. The inclusion in this Report
of any legal proceeding or developments in any legal proceeding is not intended
as a representation by the Partnership that such particular proceeding is
material. For those actions summarized below in which the plaintiffs are
seeking damages, the amount of damages being sought is an amount to be proven
at trial unless otherwise specified. There can be no assurance as to the
outcome of any of the legal proceedings summarized in this Report or in Prior
Public Filings.
A. VMS Limited Partnership Litigation
1. Settlement of Consolidated Class Actions
Forty-three actions were filed by investors in various limited partnerships
against VMS Realty Partners, now known as VMS Realty Partners, L.P. and certain
entities and individuals related to VMS Realty Partners, now known as VMS
Realty Partners, L.P.. Also named were certain selling agents, surety
companies, appraisers, accountants, attorneys, and other parties that were
involved in the syndication, sale, and management of the limited partnership
interests and properties. Thirty-eight of these actions (i.e., all of the
actions filed in federal court) were consolidated for
-5-
<PAGE> 6
pretrial and discovery purposes in the United States District Court for the
Northern District of Illinois under the caption In Re VMS Limited Partnership
Securities Litigation, No. 90 C 2412 (Judge James B. Zagel) (the "Consolidated
Actions"). In addition, for settlement purposes, one action (the "New Action")
was filed on behalf of all investors in approximately 100 non-publicly-traded
VMS-sponsored syndicated limited partnerships against those defendants in the
Consolidated Actions that had reached a Settlement Agreement with the class.
The nature of these actions was described in the Prior Public Filings.
After a final fairness hearing, on July 2, 1991 the United States District
Court gave final approval to the Settlement Agreement. The order dismissed
with prejudice all settling defendants from all of the Consolidated Actions and
dismissed the New Action in full. No appeals were filed and the Settlement
became effective on August 12, 1991. The terms of the Settlement Agreement
were described in the Prior Public Filings.
Subsequent to the effective date of the Settlement Agreement, the respective
general partner of the various VMS sponsored syndicated limited partnerships
has filed collection actions against the limited partners who remain in default
in the payment of their installment promissory notes which were given to the
limited partnership in consideration for the limited partner's partnership
interest.
2. CIGNA Claims
One of the non-settling defendants, CIGNA Securities, Inc. ("CIGNA"), has
asserted claims against VMS Realty Partners, now known as VMS Realty Partners,
L.P. and its affiliated entities for contribution and indemnification in cases
in which CIGNA is a defendant.
CIGNA subsequently entered into a class-action settlement agreement with a
class of investors in the consolidated actions who had purchased their interest
from CIGNA. As previously reported, on May 19, 1993, CIGNA and VMS executed a
mutual release, effective when the CIGNA class-action settlement is effective.
The CIGNA class action settlement is now effective and, pursuant to the terms
of the mutual release, CIGNA settling parties released the VMS released persons
of and from all claims and liabilities relating to or arising out of the
released claims in the VMS class-action settlement, including contractual
claims for indemnification. In exchange, the VMS settling parties released the
CIGNA released persons of and from all claims and liabilities relating to or
arising out of the released claims in the VMS class-action settlement,
including contractual claims for indemnification. However, the settling
parties expressly reserved all common law and contractual claims for
contribution and/or indemnification arising out of or relating to claims
brought by investors who opted out of both the VMS and CIGNA settlements,
except to the extent such claims are barred by; (1) Section 4.02(A) of the VMS
settlement agreement and the court's July 15, 1991 order approving the VMS
class-action settlement agreement, or (2) Section 4.2(A) of the CIGNA
class-action settlement agreement and any court order approving the CIGNA
settlement agreement. In addition, now that the CIGNA class-action settlement
agreement is effective, CIGNA's claims pending in the consolidated actions have
been dismissed, except the Corkery action which is brought by opt-outs from
both settlement agreements.
Paul J. Corkery; Ronnie Rone; Max C. Jordan; F.J. Vollmer; Paula Boedeker;
Norbert Braeuer; Dales Y. Foster; Billy J. Harris; Bob White; Gordon Flesch;
Travis Barton, Jr.; Satish A. Dhaget; Varsha S. Dhaget; Alan J. Young; Dennis
J. Cavanaugh; F. Jim Slater; Lois W. Rosebrook, Trustee; Sundaram V. Ramanan;
Chitraleka Ramanan; Jeffrey A. Matz; Charles C. Voorhis III; Gerald C. Miller;
Prince George's Orthopedic Associates, P.A.; John A. Martinez; Tom Rubattino;
Susan Rubattino; Harold W. Stark and William C. Riedesel v. VMS Realty
Partners; United States Fidelity and Guaranty Company; CIGNA Securities, Inc.;
Boettcher & Company, Inc.; and A.G. Edwards & Sons, Inc., CA. No. Ca 4-90 087-E
(U.S. District Court, N.D. Texas), filed February 5,
-6-
<PAGE> 7
1990, removed to 90 C 3841, United States District Court for Northern
District of Illinois, Eastern Division. CIGNA filed a Counterclaim against
plaintiffs, Cross-Claims against VMS Realty Partners and A.G. Edwards & Sons,
Inc., and a Third-Party Complaint against LaSalle/Market Streets Associates,
Ltd., Chicago Wheaton Partners, Peter Morris, Joel Stone, Robert Van Kampen,
Residential Equities, Ltd., Van Kampen Stone, Inc., VMS Realty Management,
Inc., VMS Realty, Inc., and VMS Mortgage Co. in this action. On December 21,
1995, the court dismissed Plaintiff's action against the VMS entities and CIGNA
Securities, Inc.
B. Other Litigation
In re: VMS National Hotel Partners et al., Debtor - NAHOP Partners, L.P. and
VMS National Hotel Partners, Plaintiffs, v. Associated Business Telephone
System, Corp., Defendant, Chapter 11 Case No. 96B12185, Adv. Pro. No. 98A00150
(U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division
(the "Bankruptcy Court")). This adversary proceeding was commenced in the
Bankruptcy Court on January 23, 1998. VMS National Hotel Partners and
Associated Business Telephone System, Corp. ("ABTS") were parties to a certain
Zero Plus Agreement pursuant to which ABTS was to provide VMS National Hotel
Partners with certain telephone services. VMS National Hotel Partners believes
that the Zero Plus Agreement was terminated, pursuant to the VMS National Hotel
Partners Bankruptcy Plan which was confirmed by the bankruptcy court on July
24, 1996, effective upon the transfer by VMS National Hotel Partners of its
properties to NAHOP Partners, L.P. on September 25, 1996. ABTS subsequently
brought an action in New Jersey State Court alleging that the Zero Plus
Agreement was improperly terminated. Although VMS National Hotel Partners is
not a party to ABTS' New Jersey state action, NAHOP Partners, L.P. has advised
VMS National Hotel Partners of the New Jersey action and stated that it was VMS
National Hotel Partners' responsibility to terminate the Zero Plus Agreement.
VMS National Hotel Partners has therefore brought this action for, among other
things, declaratory relief in the bankruptcy court.
Item 4 Submission of Matters to a Vote of Security Holders
The Partnerships did not submit any matter to a vote of its holders of units
during the fourth quarter of 1997.
-7-
<PAGE> 8
PART II
Item 5 Market for the Partnerships' Limited Partnership Interests and Security
Holder Matters
(a & b) Market Information and Holders
As of December 31, 1997, there were 893 Limited Partners in the
Partnerships. There is not a public market for, nor is it anticipated that
there will be a public market for Units. Upon request, the Managing General
Partner may attempt to assist a Limited Partner desiring to transfer his
Unit(s) and may utilize the services of broker-dealers in this regard. The
price to be paid for the units as well as the commission to be received by
any broker-dealer will be subject to negotiation by the Limited Partner.
The Managing General Partner will not redeem or repurchase the Units, nor
will it facilitate the matching of potential buyers and sellers of Units.
Pursuant to the terms of the Limited Partnership Agreements, there are
restrictions on the ability of the Limited Partners to transfer their Units.
In all cases, the Managing General Partner must consent to any transfer.
(c) Cash Distributions
No distributions were made in 1997, 1996 or 1995.
-8-
<PAGE> 9
Item 6 Selected Financial Data
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
--------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues from
hotel operations $ --- $ 62,840,511 $ 80,044,055 $ 80,488,134 $ 82,517,939
========= ============= ============= ============= =============
Loss before provision for
loss on property and
improvements held for sale,
loss recognized on sale of
property and improvements,
and extraordinary gain from
extinguishment of debt $(345,219) $ (4,113,652) $ (59,759,067) $ (33,807,610) $ (25,393,094)
========= ============= ============= ============= =============
Loss on above per Limited
Partnership unit
outstanding during
the year (649 units) $ (526) $ (6,269) $ (91,066) $ (51,519) $ (38,696)
========= ============= ============= ============= =============
Net Income (loss) $(345,219) $ 257,442,418 $ (60,269,079) $ (41,596,624) $ 36,177,306
========= ============= ============= ============= =============
Net Income (loss) per
Limited Partnership Unit
outstanding during the year
(649 for all years) $ (526) $ 392,316 $ (91,843) $ (63,388) $ 55,130
========= ============= ============= ============= =============
Tax Income (loss) $(345,219) $ 265,139,919 $ (19,474,658) $ (36,788,023) $ (42,205,267)
========= ============= ============= ============= =============
Tax Income (loss) per
Limited Partnership
Unit outstanding during
the year (649 for all
years) $ (526) $ 404,123 $ (29,677) $ (55,929) $ (64,243)
========= ============= ============= ============= =============
Total assets $ 475,668 $ 877,063 $ 112,886,616 $ 161,411,760 $ 185,195,237
========= ============= ============= ============= =============
Mortgage loans and
notes payable $ --- $ --- $ 261,170,960 $ 262,753,927 $ 266,532,545
========= ============= ============= ============= =============
</TABLE>
The above selected financial data should be read in conjunction with the
combined financial statements and the related notes.
-9-
<PAGE> 10
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statements
The following discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
which reflect management's current views with respect to future events and
financial performance. Such forward-looking statements are subject to certain
risks and uncertainty.
Liquidity and Capital Resources
On May 10, 1996, the Operating Partnership and affiliated sub-partnerships
filed petitions for relief under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court for the Northern District of Illinois. This
filing excludes Partnership I and Partnership II. Pursuant to the Plan of
Reorganization, the deeds to the remaining hotels were transferred to the
senior lender on September 26, 1996 in consideration for the cancellation of
the senior indebtedness.
As shown on the Combined Statement of Cash Flows, cash and cash equivalents
decreased $371,731 from December 31, 1996 to December 31, 1997 and decreased
$5,332,256 from December 31, 1995 to December 31, 1996. The decrease from
1996 to 1997 was due to cash used in operating activities of $371,731. Cash
used in operating activities in 1997 was attributed to the net loss in the
amount of $345,219 for the year and the decrease in accounts receivable in the
amount of $29,664 and accounts payable and accrued expenses in the amount of
$56,176. The decrease from 1995 to 1996 is a combination of cash used in
operating activities of $4,286,185; cash used in investing activities of
$1,094,448 and cash provided by financing activities of $48,377. The decrease
from 1994 to 1995 is a combination of cash provided by operating activities of
$2,146,704; cash used in investing activities of $4,546,076; and cash used in
financing activities of $1,261,115.
Cash used in operating and reorganization activities in 1996 was primarily
attributable to the loss before extraordinary item for the year and decrease in
accrued interest payable, offset by a decrease in prepaid expenses and an
increase in accounts payable and accrued expenses. The use of cash in
investing activities in 1996 was primarily attributable to capital improvements
offset by net proceeds from the Transfer. Cash provided by financing
activities was primarily attributable partners' capital contributions.
Cash provided by operating activities in 1995 was attributed to the decrease in
accounts payable offset by the increase in accrued interest payable and
adjustments for depreciation and loss on sale of property and improvements and
to the net loss for the year. The use of cash in investing activities in 1995
was primarily attributable to capital improvements which offset net proceeds
from the hotel sale. The use of cash in financing activities in 1995 was
primarily attributable to debt service payments offset by partners' capital
contributions.
Cash used in operating and reorganization activities in 1994 was primarily
attributed to the net loss for the year and the decrease in accounts payable
and accrued expenses, offset by the increase in accrued interest payable and
the adjustments for depreciation and loss on sale of property and improvements
and provision for loss on property and improvements held for sale. The use of
cash in investing activities in 1994 was primarily attributed to capital
improvements which offset net proceeds from hotel sales and note receivable.
The use of cash in financing activities in 1994 was primarily attributable to
debt service payments offset by partners' capital contributions.
-10-
<PAGE> 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
In the short term, the Partnerships will continue to maintain a cash reserve
for the payment of the remaining Partnerships' obligations and contingent
liabilities. In the long term, the Partnerships will wind-up their affairs and
will distribute any remaining Partnerships' funds to their Limited Partners
after paying all Partnerships' expenses and the Partnerships will be dissolved
at that time. It is anticipated that the Partnerships will be dissolved
sometime within the next two years.
Results of Operations
The Operating Partnership had previously owned and operated 24 Holiday Inn
Hotels in 11 states. However, there were no revenues or expenses for the
hotel operations and reorganization items in 1997 due to the Transfer.
Partnership revenues for the year ended December 31, 1997 decreased by $80,977
or 71.8% from the same period in 1996. The decrease is due to the reduction in
interest income and interest on the collection of notes receivable in the
amounts of $15,885 and $65,092 respectively. The decrease in Partnership
revenue for 1997 is primarily due to the decreased amounts collected of
interest due on subscription notes. Also, the decrease in interest income can
be attributed to the Transfer.
Partnership expenses for the year ended December 31, 1997 decreased by
$1,387,882 or 78.6% from the same period in 1996. The decrease is primarily
due to a $973,089 reduction in General Partners fees which are based on the
gross revenues from the hotels. The decrease is also due to a $284,057
reduction in professional, consulting and other fees in the amount of $284,057
which is the result of the Transfer. The reduction in the writeoff of the
accrued interest receivable in the amount of $29,664 is due to the final
writeoff of the investor interest receivable in 1997.
In 1996, the Partnership recorded reorganization expenses of $410,000 for the
cost associated with the bankruptcy filing. No similar costs were recorded in
1997 or 1995.
For the years ended December 31, 1996 and 1995, the Operating Partnership owned
and operated 15 hotels (excluding one hotel sold in the third quarter of 1995)
located in 8 states throughout the continental United States. However, overall
revenues and expenses of the Partnerships decreased in 1996 due to the Transfer
on September 26, 1996. The Operating Partnership had previously owned and
operated 24 Holiday Inn Hotels in 11 states.
This analysis compares the results of operations for the years ended December
31, 1996 and 1995. Total 1996 operating revenues for the Hotels decreased
approximately $17.2 million, or 21.5%, to $62.8 million in 1996 from $80.0
million in 1995 due to the Transfer. However, total hotel revenues for 1996
exceeded revenues for the same period during 1995 by 1.9% due to higher hotel
occupancies (72.8% in 1996 versus 70.9% in 1995) and average daily rates (a
rate of $62.68 in 1996 versus a rate of $59.35 in 1995). The average occupancy
for the portfolio during 1996 increased 1.9% as compared to 1995.
Additionally, several hotels in the chronically sluggish Los Angeles area
generated higher revenues, due to an improvement in the local economy.
Overall daily room rates increased in 1996 and 1995 primarily as a result of
the implementation of the Encore/Hiro Software; a revenue maximizing package
which analyzes the inventory of rooms and the term of stay of hotel guests.
In addition, over the last three years, moderate economic growth and limited
new construction of full-service, mid-scale hotels have created a relationship
-11-
<PAGE> 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
where the rate of growth in demand for hotel rooms has exceeded the rate of
growth in supply, driving up the price of hotel occupancy and related room
revenues.
Total 1996 direct costs and expenses for the Hotels decreased approximately
$8.5 million, or 25.2%, to $25.2 million in 1996 from $33.7 million in 1995 due
to the Transfer. However, direct costs and expenses associated with the Hotels
for 1996 decreased by 1.5% relative to the same period in 1995 due to the sale
of one hotel in 1995. These costs and expenses were significantly lower as a
percentage of revenues due to higher average daily rates described above and
greater operating efficiencies due to downsizing.
Unallocated expenses, exclusive of mortgage interest expense and the provision
to reflect impairment in the value of property and improvements, related to
hotel operations decreased approximately $20.4 million, or 46.8%, to $23.2
million in 1996 from $43.6 million in 1995. This decrease has four components.
First, approximately $9.2 million due to the Transfer. Second, approximately
$10.4 million due to the adoption of FASB Statement No. 121 as of January 1,
1996 resulting in no depreciation expense being recorded for 1996. Third, the
Partnerships received approximately $366,200 in business interruption insurance
proceeds in 1996, which is shown as a reduction of administrative and general
expense. Finally, approximately $450,000 included in administration and
general expense during 1995 incurred for real estate tax analysis, appraisals
and other consulting services were not incurred for the same time period in
1996.
Mortgage interest expense decreased in 1996 approximately $5.8 million, or
26.0%, to $16.5 million in 1996 from $22.3 million in 1995 due to the Transfer.
However, mortgage interest expense recorded in 1996 was comparable for the
same period of time in 1995.
Partnership revenues decreased in 1996 approximately $81,000, or 41.8%, to
$113,000 in 1996 from $194,000 in 1995 due to more interest income received in
1995 on temporary investments. There was a decline in cash available for
investment in 1996.
General Partners fees decreased in 1996 approximately $428,000, or 29.5%, to
$1.0 million in 1996 from $1.45 million in 1995 due to the decrease in hotel
revenues from the Transfer.
In 1996, the Partnerships recorded an extraordinary gain of $261.6 million for
extinguishment of debt related to the Transfer. No similar gains were recorded
in 1997, 1996 or 1995.
Impact of Year 2000
In the year 2000, many existing computer programs that use only two digits
(rather than four) to identify a year in the date field could fail or create
erroneous results if not corrected. This computer program flaw is expected to
affect virtually all companies and organizations. The Partnerships cannot
quantify the potential costs and uncertainties associated with this computer
program flaw at this time, but does not anticipate that the effect of this
computer program flaw on the operations of the Partnerships' will be
significant. However, the Partnerships may be required to spend time and
monetary resources addressing any necessary computer program changes.
Inflation
Inflation had no significant impact for years ended December 31, 1997, 1996 and
1995 and is not anticipated to have a significant impact on the hotel
operations in the foreseeable future.
-12-
<PAGE> 13
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Furthermore, inflation generally does not affect the contractually fixed
long-term financing under which the hotels were purchased. Continued inflation
should allow for increased values of the hotels over time as revenues and
replacement costs continue to increase.
Item 8 Financial Statements and Supplementary Data
See Index to Combined Financial Statements and Financial Statement Schedule on
Page F-1 of Form 10-K. The supplementary financial information prescribed by
Item 302 of Regulation S-K is not applicable.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no reported changes in accountants or disagreements on any
matter of accounting principles or practices or financial statement disclosure.
-13-
<PAGE> 14
PART III
Item 10 Directors and Executive Officers of the Registrant
(a, b, c, d & e) The General Partners of the Partnerships are:
VMS Realty Investment, Ltd., an Illinois General Partnership, the Managing
General Partner of the Partnerships.
Prudential-Bache Properties, Inc., a Delaware Corporation, the Minority General
Partner of NHP I.
VMS Realty Investment, Ltd. is a limited partnership owned by Azel Realty
Corporation (100% owned by Robert D. Van Kampen), PRM Realty Corporation (100%
owned by Peter R. Morris), JAS Realty Corporation (100% owned by Joel A.
Stone), Brewster Realty Inc. (which is controlled by Messrs. Van Kampen and
Stone) and Residential Equities, Ltd. (which is 100% owned by Peter R. Morris)
and XCC Investment Corporation (a Delaware Corporation).
VMS Realty Partners ("VMS"), an affiliate of the General Partner, assisted the
Managing General Partner in the management and control of the Venture's affairs
through November 17, 1993, and Strategic Realty Advisors, Inc. ("SRA"), also an
affiliate of the General Partner, replaced VMS in assisting the Managing
General Partner effective November 18, 1993. VMS Realty Partners is an
Illinois general partnership whose partners are Van Kampen/Morris/Stone, Inc.
(100% owned by Robert D. Van Kampen, Peter R. Morris and Joel A. Stone),
Residential Equities, Ltd. (100% owned by Mr. Morris), XCC Investment
Corporation (a subsidiary of Xerox Credit Corporation) and Brewster Realty,
Inc. (100% owned by Messrs. Van Kampen and Stone). As VMS is a partnership
rather than a corporation, its Executive Committee operates in a similar manner
to a corporate board of directors. A substantial number of the officers of VMS
are also officers of entities affiliated with VMS. The principal executive
officers of VMS are the following:
<TABLE>
<S> <C>
Joel A. Stone............ President and Chief Executive Officer and
Member of the Executive Committee
Peter R. Morris.......... Member of the Executive Committee
Robert D. Van Kampen..... Member of the Executive Committee
Stuart Ross.............. Member of the Executive Committee
The principal executive officers of SRA are the following:
Joel A. Stone............ President and Chief Executive Officer
Richard A. Berman........ Senior Vice President/Secretary
Thomas A. Gatti.......... Senior Vice President
</TABLE>
-14-
<PAGE> 15
Item 10 Directors and Executive Officers of the Registrant (continued)
JOEL A. STONE, age 53, is President and Chief Executive Officer of Strategic
Realty Advisors, Inc., since November 1993. From the inception in 1981 of VMS
Realty Partners, he held the positions of President and then Chief Executive
Officer. Mr. Stone began his career as an Internal Revenue Agent and worked as
a certified public accountant and an attorney specializing in taxation and real
estate law. In 1972, Mr. Stone co-founded the certified public accounting firm
formerly known as Moss, Stone and Gurdak. In 1979, Mr. Stone joined the Van
Kampen group of companies, a privately held business engaged in investment
banking and in real estate activities. He served as Senior Vice President of
Van Kampen Merritt, Inc. until its sale to Xerox Corporation in 1984. An
alumnus of DePaul University, Mr. Stone earned a Bachelor of Science degree in
Accounting in 1966 and a Juris Doctorate in 1970. Mr. Stone is a member of the
Illinois Bar and a certified public accountant.
PETER R. MORRIS, age 48, is a member of the Executive Committee of VMS since
January, 1987, and is one of the three individuals owning the entities that
own VMS. Since 1993, Morris has served as a consultant to Strategic Realty
Advisors, Inc. Additionally, since 1993, Morris has been an investor and
principal in Success Multi Media Enterprises (SME). SME is an international
media based enterprise whose activities include ownership and publication of
Success Magazine, as well as the development of numerous complementary
businesses focusing on development, education and marketing of entrepreneurial
services and businesses. From July 1970 to June 1973, Mr. Morris was employed
by Continental Wingate Company, Inc., a firm engaged in the development of
inner city housing projects, in the capacities of Vice President/Finance,
Director/Consulting Division and Executive Assistant to the President. He has
published a book and numerous articles relating to real estate development and
syndication. Mr. Morris has been involved in the real estate and finance
business with Messrs. Van Kampen and Stone since 1977. Since 1991, Morris has
invested in real estate as well as consult in connection with real estate
acquisition, financing, development and planning. He received a Bachelor of
Arts degree (summa cum laude) from Princeton University in 1971 and a Juris
Doctorate (cum laude) from Harvard Law School in 1975.
ROBERT D. VAN KAMPEN, age 59, is a member of the Executive Committee of VMS
since January, 1987, and is one of the three individuals owning the entities
that own VMS. Mr. Van Kampen has been involved in various facets of the
municipal and corporate bond business for over 20 years. In 1967, he
co-founded the company now known as Van Kampen Merritt, Inc., which specializes
in municipal bonds and acts as a sponsor of unit investment trusts. The firm
was sold to Xerox Corporation in January 1984. Mr. Van Kampen is a general
partner of Van Kampen Enterprises. Mr. Van Kampen received his Bachelor of
Science degree from Wheaton College in 1960.
STUART ROSS, age 61, is a member of the Executive Committee of VMS. He is an
executive vice president of Xerox Corporation and chairman and chief executive
officer of Xerox Financial Services, Inc., a wholly owned subsidiary. Mr. Ross
joined Xerox in 1966 and has held a series of financial management positions.
he assumed his current position in May 1990. Prior to Xerox, Mr. Ross was a
financial representative for The Macmillan Publishing Company from 1963 to
1966, and a public accountant for Harris, Kerr, Forster & Company from 1958 to
1963. Mr. Ross is a director of Crum and Forster, Inc. and Ekco Group, Inc.,
and a trustee of the State University of New York at Purchase. He received a
bachelor of science degree in accounting from New York University in 1958 and a
master of business administrative degree from the City College of New York in
1966. Mr. Ross is a certified public accountant.
RICHARD A. BERMAN, age 46, is a Senior Vice President and General Counsel of
Strategic Realty Advisors, Inc. since November, 1993. From 1986 through 1993,
Mr. Berman was employed by VMS Realty Partners and was First Vice President and
Corporate Counsel. Prior to joining VMS
-15-
<PAGE> 16
Item 10 Directors and Executive Officers of the Registrant (continued)
Realty Partners, Mr. Berman was a partner in the law firm of Gottlieb and
Schwartz with his practice concentrated in corporate and real estate law. He
received a Juris Doctorate from Northwestern University School of Law (Cum
laude, 1976) and a Bachelor of Arts degree from the University of Illinois
(high honors, 1973). Mr. Berman is a member of the Illinois Bar.
THOMAS A. GATTI, age 41, is a Senior Vice President - Partnership Accounting of
Strategic Realty Advisors, Inc., effective November 18, 1993. Prior to this
time, Mr. Gatti was First Vice President - Partnership Accounting with VMS
Realty Partners, where he was employed since January, 1982. Prior to joining
VMS Realty Partners, he was with Coopers & Lybrand. Mr. Gatti received a
Bachelor of Science in Accounting from DePaul University in 1978. Mr. Gatti is
a Certified Public Accountant.
Prudential-Bache Properties, Inc.
Prudential-Bache Properties, Inc. (PBP), pursuant to the Partnership Agreement,
does not participate in or exercise control over the affairs of the
Partnership.
The directors and officers of PBP and their positions with regard to managing
the Registrant are as follows:
<TABLE>
<S> <C>
Brian J. Martin............... President, Chief Executive Officer,
Chairman of the Board of Directors,
and Director
Barbara J. Brooks............. Vice President - Finance and
Chief Financial Officer
Eugene D. Burak............... Vice President and Chief Accounting Officer
Frank W. Giordano............. Director
Nathalie P. Maio.............. Director
Chester A. Piskorowski........ Senior Vice President
</TABLE>
BRIAN J. MARTIN, age 47, is the President, Chief Executive Officer, Chairman of
the Board of Directors and Director of PBP. Prior to his assuming the
aforementioned officerships, we was a Senior Vice President and Diligence
Officer in the Specialty Finance Department for the past five years. He is a
Senior Vice President of Prudential Securities Incorporated ("PSI"), an
affiliate of PBP. Mr. Martin also serves in various capacities for certain
other affiliated companies. Mr. Martin joined PSI in 1980. Mr. Martin is a
member of the Pennsylvania Bar.
BARBARA J. BROOKS, age 49, has been the Vice President-Finance and Chief
Financial Officer of PBP since 1990. Her responsibilities within PBP include
all record keeping, reporting and treasury aspects of various partnerships for
which PBP serves as the general partner. Ms. Brooks is also a Senior Vice
President of PSI and has held several positions within PSI and its affiliates
since 1983. Ms. Brooks is a certified public accountant.
EUGENE D. BURAK, age 52, has been a Vice President of PBP since 1995. His
responsibilities within PBP include the financial reporting and treasury
aspects of various partnership for which PBP serves as the general partner.
Mr. Burak is also a First Vice President of PSI. Prior to joining PSI in
September 1995, he was a management consultant for three years and was a Vice
-16-
<PAGE> 17
Item 10 Directors and Executive Officers of the Registrant (continued)
President of Equitable Capital Management Corporation from March 1990 to May
1992. Mr. Burak is a certified public accountant.
FRANK W. GIORDANO, age 55, is a Director of PBP. He is currently a Senior Vice
President and Senior Legal Counsel of PSI and for the preceding five years was
Executive Vice President and General Counsel of Prudential Mutual Fund
Management, LLC, an affiliate of PSI. Mr. Giordano also serves in various
capacities for other affiliated companies. He has been with PSI since July
1967.
NATHALIE P. MAIO, age 47, is a Director of PBP. She is presently and for the
preceding five years has been a Senior Vice President and Deputy General
Counsel of PSI and supervises non-litigation legal work for PSI. She joined
PSI's Law Department in 1983; presently, she also serves in various capacities
for other affiliated companies.
CHESTER A. PISKOROWSKI, age 54, is a Senior Vice President of PBP. He is a
Senior Vice President of PSI and is the Senior Manager of the Specialty Finance
Asset Management area for the last five years. This area is responsible for
monitoring and managing the limited partnerships sold by PSI. Mr. Piskorowski
has held several positions within PSI since 1972. Mr. Piskorowski is a member
of the New York and Federal Bars.
THOMAS F. LYNCH, III, ceased to serve as President, Chief Executive Officer,
Chairman of the Board of Directors and Director of Prudential-Bache Properties,
Inc. effective May 2, 1997. Effective May 2, 1997, Brian J. Martin was elected
President, Chief Executive Officer, Chairman of the Board of Directors and
Director of Prudential-Bache Properties, Inc.
There are no family relationships among any of the foregoing directors or
officers. All of the foregoing officers and/or directors have indefinite
terms.
(f) Legal Proceedings
See Item 3, Legal proceedings, for a discussion of legal proceedings during the
past five years which may be material to an evaluation of the ability or
integrity of any of the aforementioned directors or officers and VMS Realty
Partners and its affiliates.
Item 11 Executive Compensation
(a,b,c,d,e,f,g and h)
Neither the General Partners nor the Partnerships pay the officers of the
General Partners any current or any proposed compensation in such capacities.
In addition, the Partnerships have not given and do not propose to give any
options, warrants or rights, including Partnership interests to any such
persons. No long-term incentive plan exists with any such persons resulting
from his/her resignation, retirement or any other termination. Therefore,
tables relating to these topics have been omitted.
For information concerning fees paid or payable to the Managing General Partner
or an affiliate thereof, see Item 13. Certain Relationships and Related
Transactions.
(j) The Partnerships did not have a Compensation Committee in 1997, 1996
and 1995 and do not currently have such a committee. During the 1997,
1996 and 1995 fiscal years, no current or former officer or employee of
the General Partners or their subsidiaries
-17-
<PAGE> 18
participated in deliberations regarding the General Partners'
compensation as it relates to the Partnerships.
Item 12 Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners.
No person owns of record or is known by the Managing General Partner to
own beneficially more than 5% of the outstanding Units of either of the
Partnerships as of December 31, 1995. Partnership I and Partnership II
have a 79.12% and 20.78% participation interest, respectively, in the
Operating Partnership.
(b) Security ownership of management.
No partners of VMS Realty Investment, Ltd., VMS Realty Partners, VMS
Securities, Inc. or Prudential-Bache Properties, Inc., own any Units in
the Partnerships.
No general partners, officers or directors of the General Partners of the
Operating Partnership or the Partnerships possess the right to acquire a
beneficial ownership of Units of either of the Partnerships.
(c) Changes in Control
The Registrant is not aware of any arrangements the operation of which
may result in a change of control.
Item 13 Certain Relationships and Related Transactions
The Partnerships are entitled to engage in various transactions involving
affiliates of the General Partners of the Partnerships, including the
following:
VMS Realty Partners served as asset manager and rendered services in connection
with monitoring the activities of the property manager, American General
Hospitality, Inc. ("AGHI"), including a review of the Annual Plan for the
Hotels and the compliance of the property manager with the terms of the AGHI
Management Agreement and the Annual Plan. For these services, the asset
manager received a fee equal to 1% of gross revenues of the Hotels plus an
additional .75% payable only if sufficient cash flow was available to make such
payment. Asset management fees paid in 1996 and 1995 totaled $1,205,176 and
$1,403,491, respectively. No asset management fees were paid in 1997 due to
the Transfer.
An annual salary fee of $50,000 is to be paid to the Managing General Partner
of the Partnerships for overseeing the management of the Partnerships'
operations. The salary fees for 1997, 1996 and 1995 were paid in the
respective years.
A non-affiliate of the Managing General Partner earned interest on a long-term
assignment note which it received in consideration for the assignment and
transfer of an agreement it entered into for the purchase of the Hotels from an
unaffiliated third party. Pursuant to the Settlement Agreement reached in the
matter entitled In re VMS Partnership Securities Litigation (Case No. 90 C
2412), this note ceased to bear interest after April 10, 1991. The long-term
assignment note was canceled in 1996 as part of the Transfer. No payments with
respect to the long-term assignment note were made in 1996 or 1995.
-18-
<PAGE> 19
Item 13 Certain Relationships and Related Transactions (continued)
The Operating Partnership reimburses the Managing General Partner and its
affiliates for all reasonable costs and expenses incurred by them on behalf of
the applicable Partnerships including, without limitation, costs incurred by
said parties in performing certain activities, including salaries (plus an
allocable portion of overhead billed on an hourly basis), organization costs,
loan placement costs, travel and communication expenses of staff members
engaged in such activities. The amount paid to the Managing General Partner
and its affiliates for these services and costs in 1997, 1996 and 1995 totaled
$61,149, $251,292 and $267,744, respectively, with an additional $1,485 and
$1,919 remaining unpaid at December 31, 1997 and 1996, respectively.
The Operating Partnership acquired its ownership interest in the Hotels from an
affiliate which, in turn, had acquired its ownership interest from Holiday
Inns, Inc. For further information, see Note 1 to the Combined Financial
Statements.
Reference is made to Note 7 to the Combined Financial Statements for other
amounts paid to related parties.
-19-
<PAGE> 20
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) The following exhibits are filed as part of this report:
(I) Agreement of Limited Partnership of VMS National Hotel
Portfolio I; (this exhibit is incorporated by reference to the
Form 10 dated September 5, 1986.)
(ii) Agreement of Limited Partnership of VMS National Hotel
Portfolio II; (this exhibit is incorporated by reference to the
Form 10 dated September 5, 1986.)
(iii) Amended and Restated Agreement of General Partnership of VMS
National Hotel Partners. (This exhibit is incorporated by
reference to the Form 10 dated September 5, 1986.)
(2) Financial data schedule (Ex-27)
(b) No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1997.
(c) See Item 14(a)(3) above.
(d) There are no additional financial schedules which are required to be
presented pursuant to Regulation S-X.
-20-
<PAGE> 21
SIGNATURES
PURSUANT to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VMS National Hotel Partners
(Registrant)
By: VMS National Hotel Portfolio I
By: VMS Realty Investment, Ltd.
Managing General Partner
By: JAS Realty Corporation
By: /s/ Joel A. Stone Date: March 23, 1998
--------------------------------------
Joel A. Stone, President
By: /s/ Thomas A. Gatti Date: March 23, 1998
--------------------------------------
Thomas A. Gatti, Senior Vice President
and Principal Accounting Officer
By: VMS Realty Investment, Ltd.
Executive Committee
By: /s/ Joel A. Stone Date: March 23, 1998
--------------------------------------
Joel A. Stone, Executive Committee Member
By: /s/ Joel A. Stone Date: March 23, 1998
--------------------------------------
Joel A. Stone, as attorney in fact for
Peter R. Morris, Executive Committee Member
By: /s/ David Allen Date: March 23, 1998
--------------------------------------
David Allen, as attorney in fact for Robert
D. Van Kampen, Executive Committee Member
-21-
<PAGE> 22
SIGNATURES (Continued)
By: VMS National Hotel Portfolio II
By: VMS Realty Investment, Ltd.
Managing General Partner
By: JAS Realty Corporation
By: /s/ Joel A. Stone Date: March 23, 1998
-------------------------------------
Joel A. Stone, President
By: /s/ Thomas A. Gatti Date: March 23, 1998
-------------------------------------
Thomas A. Gatti, Senior Vice President
and Principal Accounting Officer
By: VMS Realty Investment, Ltd.
Executive Committee
By: /s/ Joel A. Stone Date: March 23, 1998
-------------------------------------
Joel A. Stone, Executive Committee Member
By: /s/ Joel A. Stone Date: March 23, 1998
-------------------------------------
Joel A. Stone, as attorney in fact for
Peter R. Morris, Executive Committee Member
By: /s/ David Allen Date: March 23, 1998
-------------------------------------
David Allen, as attorney in fact for Robert
D. Van Kampen, Executive Committee Member
-22-
<PAGE> 23
INDEX TO COMBINED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Auditors F-2
Combined Financial Statements:
Combined Balance Sheets - December 31, 1997 and 1996 F-3
Combined Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Combined Statements of Partners' Capital (Deficit) for
the years ended December 31, 1997, 1996 and 1995 F-5
Combined Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to the Combined Financial Statements F-8
</TABLE>
Schedules are omitted for the reason that they are inapplicable or equivalent
information has been included elsewhere herein.
F-1
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
To the Partners of
VMS National Hotel Portfolio I,
VMS National Hotel Portfolio II and
VMS National Hotel Partners
We have audited the accompanying combined balance sheets of VMS NATIONAL HOTEL
PORTFOLIO I, VMS NATIONAL HOTEL PORTFOLIO II (Illinois limited partnerships)
and VMS NATIONAL HOTEL PARTNERS (an Illinois general partnership),
(collectively the "Partnerships"), as of December 31, 1997 and 1996, and the
related combined statements of operations, partners' capital (deficit), and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Partnerships'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of VMS NATIONAL HOTEL
PORTFOLIO I, VMS NATIONAL HOTEL PORTFOLIO II and VMS NATIONAL HOTEL PARTNERS at
December 31, 1997 and 1996, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 6, 1998
F-2
<PAGE> 25
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 475,668 $ 847,399
Interest receivable --- 29,664
--------- ---------
Total assets $ 475,668 $ 877,063
========= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Accounts payable and accrued expenses:
Affiliates $ 1,485 $ 1,919
Nonaffiliates 41,591 97,333
--------- ---------
Total liabilities 43,076 99,252
--------- ---------
Partners' capital (deficit):
General Partners (687,880) (684,087)
Limited Partners:
Portfolio I - 514 Interests 708,004 980,393
Portfolio II - 135 Interests 412,468 481,505
--------- ---------
Total partners' capital (deficit) 432,592 777,811
--------- ---------
Total liabilities and partners'
capital (deficit) $ 475,668 $ 877,063
========= =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE> 26
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
HOTEL OPERATIONS 1997 1996 1995
---------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Rooms $ --- $ 46,593,341 $ 58,597,065
Food and beverage --- 11,379,465 15,739,522
Telephone --- 2,229,625 2,539,273
Other --- 2,638,080 3,168,195
---------- ------------- -------------
Total hotel revenues --- 62,840,511 80,044,055
Direct costs and expenses:
Rooms --- 11,866,634 15,619,368
Food and beverage --- 9,599,143 13,189,654
Telephone --- 2,177,871 2,881,070
Other --- 1,559,891 2,024,464
---------- ------------- -------------
Total direct hotel
costs and expenses --- 25,203,539 33,714,556
Unallocated expenses:
Administrative and general --- 6,809,682 10,918,689
Management fees --- 1,349,601 1,547,350
Marketing --- 5,829,277 7,885,422
Energy --- 2,978,149 4,006,605
Property operations
and maintenance --- 2,973,509 4,552,972
Property taxes and insurance --- 2,490,445 3,168,431
Rent --- 802,432 1,161,738
Mortgage interest expense --- 16,455,405 22,342,886
Depreciation --- --- 10,362,227
Provision to reflect impairment
in the value of property
and improvements --- --- 38,200,000
---------- ------------- -------------
Total unallocated expenses --- 39,688,500 104,146,320
---------- ------------- -------------
Loss from hotel operations --- (2,051,528) (57,816,821)
---------- ------------- -------------
PARTNERSHIP OPERATIONS
Revenues:
Interest on subscription notes --- 65,092 60,705
Interest on temporary investments 31,876 47,761 133,046
---------- ------------- -------------
Total partnership revenues 31,876 112,853 193,751
---------- ------------- -------------
Expenses:
Managing General Partners' fees 50,000 1,023,089 1,450,767
Professional, consulting and
other fees:
Affiliates 60,715 253,251 221,720
Nonaffiliates 236,716 328,237 463,510
Write off of accrued
interest receivable 29,664 160,400 ---
---------- ------------- -------------
Total partnership expenses 377,095 1,764,977 2,135,997
---------- ------------- -------------
Loss from partnership operations (345,219) (1,652,124) (1,942,246)
---------- ------------- -------------
REORGANIZATION ITEMS:
Professional, consulting and
other fees --- 410,000 ---
---------- ------------- -------------
Total reorganization expenses --- 410,000 ---
---------- ------------- -------------
Loss before loss recognized
on sale of property and
improvements, and
extraordinary gain
from extinguishment of debt (345,219) (4,113,652) (59,759,067)
Loss recognized on sale of
property and improvements --- --- (510,012)
---------- ------------- -------------
Loss before extraordinary gain
from extinguishment of debt (345,219) (4,113,652) (60,269,079)
Extraordinary gain from
extinguishment of debt --- 261,556,070 ---
---------- ------------- -------------
Net income (loss) $ (345,219) $ 257,442,418 $ (60,269,079)
========== ============= =============
Net income (loss) allocated to
General Partners (3,793) $ 2,829,292 $ (662,358)
========== ============= =============
Net income (loss)allocated to
Limited Partners (341,426) $ 254,613,126 $ (59,606,721)
========== ============= =============
Loss before extraordinary item
Portfolio I (514 Interests) $ (530) $ (6,315) $ (92,518)
========== ============= =============
Portfolio II (135 Interests) $ (511) $ (6,094) $ (89,279)
========== ============= =============
Extraordinary item
Portfolio I (514 Interests) $ --- $ 401,509 $ ---
========== ============= =============
Portfolio II (135 Interests) $ --- $ 387,452 $ ---
========== ============= =============
Net income (loss)
Portfolio I (514 Interests) $ (530) $ 395,194 $ (92,518)
========== ============= =============
Portfolio II (135 Interests) $ (511) $ 381,358 $ (89,279)
========== ============= =============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE> 27
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
VMS National
Hotel
Partners VMS National Hotel Portfolio I
---------- ---------------------------------------------------------------------------------
Limited Partners
------------------------------------------------
General General Subscription
Partners Partners Total Notes Net Total
---------- ----------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Partners' deficit at
January 1, 1995 $ (272,866) $(2,053,667 $(153,435,400 $(1,357,337) $(154,792,737) $(156,846,404)
Collection on
subscription notes --- --- --- 148,941 148,941 148,941
Net loss for the year (60,269) (480,345) (47,554,111) --- (47,554,111) (48,034,456)
---------- ----------- ------------- ------------ ------------- -------------
Partners' deficit at
December 31, 1995 (333,135) (2,534,012) (200,989,511) (1,208,396) (202,197,907) (204,731,919)
Collection on
subscription notes --- --- --- 48,509 48,509 48,509
Net income for the year 257,442 2,051,816 203,129,791 --- 203,129,791 205,181,607
---------- ----------- ------------- ------------ ------------- -------------
Partners' capital (deficit) at
December 31, 1996 (75,693) (482,196) 2,140,280 (1,159,887) 980,393 498,197
Net loss for the year (345) (2,751) (272,389) --- (272,389) (275,140)
---------- ----------- ------------- ------------ ------------- -------------
Partners' capital (deficit) at
December 31, 1997 $ (76,038) $(484,947) $ 1,867,891 $(1,159,887) $ 708,004 $ 223,057
========== =========== ============= ============ ============= =============
<CAPTION>
VMS National Hotel Portfolio II
---------------------------------------------------------------------------------
Limited Partners
------------------------------------------------
General Subscription Combined
Partners Total Notes Net Total Totals
---------- ----------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Partners' deficit at
January 1, 1995 $(524,488) $(38,771,950) $(192,204) $(38,964,154) $(39,488,642) $(196,607,912)
Collection on
subscription notes --- --- 9,054 9,054 9,054 157,995
Net loss for the year (121,744) (12,052,610) --- (12,052,610) (12,174,354) (60,269,079)
---------- ----------- ------------- ------------ ------------- -------------
Partners' deficit at
December 31, 1995 (646,232) (50,824,560) (183,150) (51,007,710) (51,653,942) (256,718,996)
Collection on
subscription notes --- --- 5,880 5,880 5,880 54,389
Net income for the year 520,034 51,483,335 --- 51,483,335 52,003,369 257,442,418
---------- ----------- ------------- ------------ ------------- -------------
Partners' capital (deficit) at
December 31, 1996 (126,198) 658,775 (177,270) 481,505 355,307 777,811
Net loss for the year (697) (69,037) --- (69,037) (69,734) (345,219)
---------- ----------- ------------- ------------ ------------- -------------
Partners' capital (deficit) at
December 31, 1997 $(126,895) $ 589,738 $(177,270) $ 412,468 $ 285,573 $ 432,592
========== =========== ============= ============ ============= =============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE> 28
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
---------- -------------- -------------
<S> <C> <C> <C>
OPERATING AND REORGANIZATION ACTIVITIES
Net (loss) income $ (345,219) $ 257,442,418 $ (60,269,079)
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating and reorganization activities:
Loss recognized on sale of property and improvements --- --- 510,012
Write-off of accrued interest receivable 29,664 --- ---
Depreciation --- --- 10,362,227
Provision to reflect impairment in the value of property and improvements --- --- 38,200,000
Extraordinary gain from the extinguishment of debt --- (261,556,070) ---
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable --- (302,664) 1,094,671
Decrease in interest receivable --- 161,968 22,000
Decrease (increase) in prepaid expenses --- 749,402 (995,151)
Decrease in inventories --- 20,990 15,991
Decrease in other deferred costs --- 3,841 37,126
(Decrease) increase in accounts payable and accrued expenses (56,176) 2,342,146 (1,673,979)
(Decrease) increase in accrued interest payable --- (3,148,216) 14,842,886
---------- -------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING
AND REORGANIZATION ACTIVITIES (371,731) (4,286,185) 2,146,704
---------- -------------- -------------
INVESTING ACTIVITIES
Additions to property and improvements --- (1,904,608) (6,285,876)
Net proceeds from transfer of deeds to property and improvements --- 810,160 ---
Net proceeds from sale of property and improvements --- --- 1,739,800
---------- -------------- -------------
NET CASH USED IN INVESTING ACTIVITIES --- (1,094,448) (4,546,076)
---------- -------------- -------------
FINANCING ACTIVITIES
Partners' capital contributions --- 54,389 157,995
Principal payment on mortgage loan payable --- --- (1,582,967)
(Increase) decrease in escrow and other deposits --- (6,012) 163,857
---------- -------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES --- 48,377 (1,261,115)
---------- -------------- -------------
Net decrease in cash and cash equivalents (371,731) (5,332,256) (3,660,487)
Cash and cash equivalents at beginning of year 847,399 6,179,655 9,840,142
---------- -------------- -------------
Cash and cash equivalents at end of year $ 475,668 $ 847,399 $ 6,179,655
========== ============== =============
Interest Paid $ --- $ 19,603,621 $ 7,500,000
========== ============== =============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE> 29
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosure of noncash investing and financing activities:
The following assets and liabilities were transferred to the senior lender in
consideration for the cancellation of senior indebtedness on September 26,
1996:
<TABLE>
<S> <C>
Property and improvements $ 102,204,472
Cash and cash equivalents 214,840
Escrow and other deposits 110,000
Accounts receivable 2,979,408
Prepaid expenses 654,298
Inventories 1,621,643
Other deferred costs 384,559
--------------
Total assets $ 108,169,220
==============
Mortgage loan payable $ 261,170,960
Accrued interest payable 99,718,116
Other accounts payable and accrued expenses 7,811,214
--------------
Total liabilities $ 368,700,290
==============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-7
<PAGE> 30
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. Organization
VMS National Hotel Partners, an Illinois general partnership (the "Operating
Partnership") was formed on November 1, 1985 under the laws of the State of
Illinois and commenced operations on November 26, 1985, the date of the
Hotel acquisitions. The Operating Partnership was formed to acquire, own
and operate twenty-four Holiday Inn hotels (the "Hotels"). The Operating
Partnership conveyed thirteen of the Hotels to other affiliated partnerships
(the "Subpartnerships") that each own and operate a Hotel (as used herein,
the term "Operating Partnership" includes the Subpartnerships where context
requires). The Operating Partnership holds at least a 99% interest as a
general partner in each Subpartnership. VMS Realty, Inc., an Illinois
corporation, is the Managing General Partner of the Operating Partnership.
In 1995 one Hotel was sold and in 1994 two of the Hotels were sold.
VMS National Hotel Portfolio I ("Portfolio I") and VMS National Hotel
Portfolio II ("Portfolio II") are Illinois limited partnerships formed to
purchase an aggregate 99.9% interest as General Partners in the Operating
Partnership (as used herein, the term Partnerships includes the Operating
Partnership, Portfolio I and Portfolio II where context requires). VMS
Realty Investment, Ltd. is the Managing General Partner of Portfolios I and
II. In addition, an unaffiliated corporation is the Minority General
Partner of Portfolio I.
On August 13, 1993 and again on May 10, 1996, the Operating Partnership
filed for Chapter 11 bankruptcy protection in the United States Bankruptcy
Court for the Central District of California. The filings included only the
Operating Partnership and excluded Portfolio I and Portfolio II. On May 9,
1994, the United States Bankruptcy Court, Northern District of Illinois,
confirmed the original Plan of Reorganization (the "Plan") subject to the
final negotiations of the Second Amended and Restated Note Purchase and Loan
Agreement and certain other events. On July 27, 1994, the Second Amended and
Restated Note Purchase and Loan Agreement (the "Loan Agreement") was
consummated and the remaining terms of the Plan were finalized on August 11,
1994. Under the Plan, the Operating Partnership was to sell properties as
stated in the Loan Agreement. Pursuant to the Plan, all pre-petition
payables have been paid. The Operating Partnership subsequently negotiated
a further restructuring of its outstanding debt with certain secured
lenders. As a result, the Operating Partnership filed a second pre-packaged
Plan of Reorganization (the "Second Plan") on May 10, 1996. The Second Plan
was confirmed by the court on July 24, 1996. Pursuant to the Second Plan,
the deeds to the properties were transferred to the senior lender on
September 26, 1996 in consideration for the cancellation of the senior
indebtedness (the "Transfer") (See Note 5).
As a result of the Transfer, the Partnerships recognized an extraordinary
gain of $214,542,473 for financial reporting purposes, which represents the
excess of the remaining senior debt, related accrued interest, other
operating liabilities and net cash received by the Partnerships of $810,160
(in conjunction with the Transfer, VMS National Hotel Partners received
amounts in lieu of sales advisory fees totaling $1,025,000 from the senior
lender, net of $214,840 of operating cash transferred to the senior lender),
over the carrying value of the property and
F-8
<PAGE> 31
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. Organization (Continued)
improvements and operating assets transferred. In addition, the
Partnerships recognized an extraordinary gain of $47,013,597 from the
cancellation of the junior mortgage indebtedness pursuant to the Second
Plan.
2. Summary of Significant Accounting Policies
A. Basis of Combination: The accompanying combined financial statements
include the accounts of Portfolio I, Portfolio II and the Operating
Partnership (collectively the "Partnership"). Significant intercompany
accounts and transactions have been eliminated in the combination of
these financial statements.
B. The 1996 combined financial statements reflect the financial reporting
guidance prescribed by the AICPA Statement of Position 90-7 (SOP 90-7),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code", during the period the Operating Partnership was in bankruptcy.
Items of income or expense that were realized or incurred as a result of
the reorganization are included in the combined statement of operations
as reorganization items. During 1996, $410,000 was paid for
professional, consulting and other fees for the administration of Chapter
11 proceedings.
C. Method of Accounting: The books and records are maintained on the
accrual basis of accounting used for federal income tax reporting
purposes. The accompanying combined financial statements have been
prepared from these records, after making appropriate adjustments, to
reflect the accounts in accordance with generally accepted accounting
principles (GAAP). The significant items causing these adjustments are:
(1) the differing lives and methods of depreciation used (see below); (2)
provision to reflect impairment in the value of property and improvements
recorded under the GAAP basis not recorded under a tax basis; (3) the
treatment of certain fees and other consideration due to the Managing
General Partner and its affiliates (see below); (4) the costs incurred in
connection with raising capital (offering costs) and subscription notes,
which are treated as reductions to the Limited Partners' capital for GAAP
purposes and as assets for tax purposes; (5) the differing lives over
which deferred loan costs are being amortized; and (6) the treatment of
restructured debt.
F-9
<PAGE> 32
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (Continued)
D. Depreciation: Depreciation was computed using the following methods
and useful lives:
<TABLE>
GAAP Basis Tax Basis
------------------------ -------------------------------
Lives Lives
Method Years Method Years
------------------------ -------------------------------
<S> <C> <C> <C> <C>
Building and Straight-line 7.5 to 39 Straight-line 19 or 39
improvements (ACRS)
Personal Straight-line 3 to 5 150% declining- 5
property balance (ACRS)
200% declining- 5, 7 or 15
balance (Modified
ACRS) for
assets acquired in
1987 through 1990
</TABLE>
Pursuant to the Plan, all properties had been held for sale and accordingly
were classified as Property and Improvements held for sale on the Combined
Balance Sheet as of January 1, 1996 and no further depreciation expense was
recorded subsequent to that date.
E. Fees and Expenses Paid to Affiliates: Various fees and expense
reimbursements are made to the Managing General Partner and its
affiliates. These charges are accounted for using the following basis:
<TABLE>
<CAPTION>
GAAP Basis Tax Basis
---------- ---------
<S> <C> <C>
Salary reimbursement Charged to expense in the Deducted in the year
fee year service is rendered paid
Asset management fee Charged to expense in the Deducted in the year
year service is rendered paid
Assignment note Interest has been waived The note was discounted
interest under the terms of the in 1991, with the
note agreement discount being
maturity date amortized through
</TABLE>
F-10
<PAGE> 33
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
F. Income Taxes: No provision (benefit) for income taxes or related
credits has been recorded in the Partnerships' combined financial
statements as the results of their operations are includable in the
income tax returns of the Partners.
G. Cash Equivalents and Other Financial Instruments: The Partnerships
consider all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. Cash and cash
equivalents and other financial instruments are carried at cost which
approximates their fair value, based upon their relatively short
maturity.
H. Use of Estimates: The preparation of the combined financial
statements in conformity with generally accepted accounted principles
requires management to make estimates and assumptions that affect the
amounts reported in the combined financial statements and accompanying
notes. Actual results could differ from those estimates.
I. Reclassifications: Certain reclassifications have been made to the
previously reported 1996 and 1995 combined financial statements in
order to provide comparability with the 1997 combined financial
statements. These reclassifications have not changed the 1996 or 1995
results.
3. Partnership Agreements
Profits and losses of the Operating Partnership are allocated to Portfolio I
and Portfolio II on a pro rata basis using the ratio of their respective
Limited Partnership units issued and outstanding. The profits and losses of
Portfolio I and Portfolio II are allocated 99% to the Limited Partners and
1% to the General Partners.
Cash flow distributions of the Operating Partnership will be made as
follows: 99.9% in total to Portfolio I and Portfolio II, on a pro rata
basis in proportion to their contributions to the Operating Partnership.
The remaining .1% will be distributed equally to the two General Partners of
the Operating Partnership. Cash flow distributions by Portfolio I and
Portfolio II will be made at the discretion of the Managing General Partner
first to the Limited Partners in an amount equal to 12% per annum (on a
noncumulative basis) of their contributed capital, then to the extent that
cash flow is available to pay the General Partners of Portfolio I and
Portfolio II a subordinated incentive fee in an amount equal to 28.57% of
remaining cash flow. For Portfolio I, 20.86% will be paid to the Managing
General Partner and 7.71% will be paid to the Minority General Partner. Any
remaining cash flow will be distributed 99% to the Limited Partners and 1%
to the General Partners.
4. Subscription Notes
Under the terms of the Partnership Agreements for Portfolio I and Portfolio
II, the General Partners offered 514 and 135 units of Limited Partnership
interests, respectively. All units
F-11
<PAGE> 34
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. Subscription Notes (Continued)
offered were sold as of December 31, 1985. The Limited Partners agreed to
contribute capital of $77,100,000 (reduced to $77,082,812 as of December
31, 1992 by investors opting out of the settlement agreement) to Portfolio I
and $20,250,000 to Portfolio II. Of these amounts, $75,922,925 and
$20,072,730, respectively, had been contributed to each as of December 31,
1997. The remaining balance, in the aggregate amount of $1,337,157 as of
December 31, 1997, is represented by promissory notes of the Limited
Partners. This balance is included in the combined financial statements as a
reduction of Partners' Capital. The promissory notes as originally executed
required that the Limited Partners make installment payments to Portfolios I
and II with the final installment due March 1, 1990. However, a settlement
agreement has been reached which enables the settling Limited Partners to
have the option of making their remaining principal payments on terms more
favorable than originally provided in their subscription notes. Amounts due
from those Limited Partners not paying under the more favorable terms are
considered past due. The principal amounts due from those Limited Partners
paying under the more favorable terms bear interest at prime plus 2% per
annum. The principal amounts due from Limited Partners considered past due
bear interest at 18% per annum.
5. Mortgage Loans Payable
The Partnerships had two groups of mortgage loans. The first was a group of
10% first mortgage loans, payable from available cash flows and the second
was a group of non-interest bearing junior mortgage loans. In 1996, the
Mortgage Loans were forgiven in conjunction with the Transfer.
In accordance with SOP 90-7, the accrual of interest on all mortgage loans
was discontinued as of the bankruptcy filing dates due to the "unsecured" or
"underscored" positions on these Notes obligations. All of the 1996
contractual interest was paid and recorded in 1996.
6. Management Agreement
Management of the Holiday Inn and Crowne Plaza hotel properties (the
"Hotels") previously owned by the Partnerships was performed by American
General Hospitality, Inc. ("AGHI") Under the terms of the management
agreement with AGHI, the Operating Partnership was assessed a basic
management fee at the lesser of 2.25% of gross revenue, as defined, or the
amount of available cash flow in excess of the base year cash flow as set
forth in the management agreement. During 1996 and 1995, management fees
of $1,349,601 and $1,547,350, respectively, were incurred under the
agreement with AGHI.
F-12
<PAGE> 35
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. Related Party Transactions
Under the terms of the various Partnership Agreements, the Managing General
Partner and its affiliates are to provide management, financing,
organization and other services to the Partnerships in return for certain
fees as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- --------------------- ---------------------
Paid Payable Paid Payable Paid Payable
------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Managing General
Partner salary (1) $ 50,000 $ --- $ 50,000 $ --- $ 50,000 $ ---
Asset Management
fees (2) --- --- 1,205,176 --- 1,403,491 105,485
-------- -------- ---------- -------- ---------- --------
Total management
fees and salary 50,000 --- 1,255,176 --- 1,453,491 105,485
Other services
and costs (3) 61,149 1,485 251,292 1,919 267,744 8,872
-------- -------- ---------- -------- ---------- --------
$111,149 $ 1,485 $1,506,468 $ 1,919 $1,721,235 $114,357
======== ======== ========== ======== ========== ========
</TABLE>
(1) The Partnership Agreements specify the dollar amount of the fees. The
various Partnerships are obligated to incur $50,000 per year of salary
fees in the future.
(2) This fee was assessed at 1.75% of gross revenue of the Hotels.
(3) These fees represent reimbursement for partnership accounting, due
diligence, data processing and travel and communication expenses incurred
by affiliates of the Managing General Partner for operation of the
Partnerships.
8. Lease Commitments
The Operating Partnership leased the land on which five hotel properties
were located. Rent expense under these leases was approximately $640,394
and $894,986 for the years ended December 31, 1996 and 1995, respectively.
The Operating Partnership is no longer obligated under the lease commitments
due to the Transfer.
9. Litigation
The Partnership is involved in various claims and legal actions. The
adverse outcome of certain of the legal proceedings could have a materially
adverse effect on the present and future operations of the Partnership.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from VMS National
Hotel Portfolio I, VMS National Hotel Portfolio II, and VMS National Hotel
Partners 1997 10-K and is qualified in its entirety by reference to such 10-K
filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 475,668
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 475,668
<CURRENT-LIABILITIES> 43,076
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 432,592
<TOTAL-LIABILITY-AND-EQUITY> 475,668
<SALES> 0
<TOTAL-REVENUES> 31,876
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 377,095
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (345,219)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (345,219)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345,219)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
