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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
or
|_| TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-22930
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Allstar Inns Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0323962
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 E. Carrillo Street, #300
Santa Barbara, California 93101
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (805) 730-3383
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock
$.01 par value
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 |_|
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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 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 13, 1998, the aggregate market value of the Company's common
stock held by nonaffiliates of the registrant was $2,094,886.
As of March 13, 1998, there were 1,047,443 shares of common stock
outstanding.
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<PAGE>
PART I
ITEM 1. BUSINESS
General
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report contains information that is forward-looking. Such forward-looking
information involves risks and uncertainties that could significantly affect
expected results.
Allstar Inns Inc., a Delaware corporation (the "Company"), was
incorporated on November 12, 1992 and was formed to succeed to the business and
operations of Allstar Inns, L.P., a Delaware limited partnership (the "Company's
predecessor"). The Company's primary objective was to own and receive rental
income from economy motels or to sell the motels if Motel 6 Operating L.P., a
Delaware limited partnership (the "Motel 6 Operator") exercised its lease
purchase option (the "Lease Purchase Option"). At January 1, 1997, the Company
owned in fee or leased 71 motels with a total of 7,606 rooms. Of these motels,
44 were located in California, and the remainder were located in six other
western and southwestern states.
Effective January 30, 1997 and pursuant to the Master Lease Agreement, all
of the Company's motels were sold to the Motel 6 Operator and its assignees for
the Lease Purchase Option price of $40.0 million plus the assumption of
approximately $206 million of debt secured by the motels. Since January 30,
1997, the Company has sold for $910,000 five parcels of vacant land which were
purchased for the construction of new motels. The Company is currently engaged
in the final liquidation process and has filed a final federal tax return with
the Internal Revenue Service (the "IRS") and final state tax returns with six of
the states in which it did business.
Background
In July 1992, the stockholders of the Company approved a plan that placed
the business and operations of the Company's motels under the management of
Motel 6 Operating L.P., a Delaware limited partnership (the "Motel 6 Operator").
The Company entered into a Management Contract which provided that the Motel 6
Operator would operate and manage all the Company's motels through December 31,
2011. The Motel 6 Operator also had an option to purchase the Company's motels
between January 1, 1997 and December 31, 1998 at a price fixed by formula (zero
value to the Stockholders at December 31, 1994).
In May 1995, the stockholders of the Company approved the plan to
terminate the Management Contract effective January 1, 1995 and replace it with
a Master Lease Agreement under terms of which the Motel 6 Operator would lease
the Company's motels through December 31, 2009. Under the Master Lease
Agreement, the Motel 6 Operator had an option (the "Purchase Option") to
purchase the Company's motels prior to the end of 1998 at a price of $40.0
million plus assumption by the Motel 6 Operator of all indebtedness secured by
the Company's motels. The Purchase Option was exercised by the Motel 6 Operator
in January 1997. Effective January 30, 1997 and pursuant to the Master Lease
Agreement, all of the Company's motels were sold to the Motel 6 Operator and its
assignees for the Lease Purchase Option price of $40.0 million plus the
assumption of approximately $206 million of debt secured by the motels.
Business Plan and Prospects for Future Operations
Effective January 30, 1997 and pursuant to the Master Lease Agreement, all
of the Company's motels were sold to the Motel 6 Operator and its assignees for
the Lease Purchase Option price of $40.0 million plus the assumption of
approximately $206 million of debt secured by the motels. Since January 30,
1997, the Company has sold for $910,000 five parcels of vacant land. The Company
is currently engaged in the final liquidation process and has filed a final
federal tax return with the IRS and final state tax returns with six of the
states in which it did business.
2
<PAGE>
As a consequence of the sale of the motel assets, the Board of Directors
approved and recommended on March 14, 1997, and the stockholders approved on May
8, 1997, a Plan of Complete Liquidation and Dissolution of Allstar Inns Inc.
which, among other items, provides that:
The Company will be liquidated by the sale of its remaining assets after
paying or providing for all its claims, obligations and expenses, and will
distribute its cash to stockholders on a pro rata basis. An initial cash
distribution to stockholders of $28.00 per share, or approximately $29.3
million was paid on May 22, 1997 to stockholders of record on May 8, 1997.
The Company was subject to substantial Federal and State taxes on the gain
realized by the sale of its motel assets and the disposition of the additional
parcels of vacant land.
The Company's business strategy in order to achieve complete liquidation
and dissolution is as follows:
o Finalize all tax matters;
o Negotiate final settlement of all unexpired leases, contracts and
outstanding debt;
o Issue a press release notifying all parties of the Final Record Date
(when the Company will close its transfer books and its shares will
no longer be traded);
o Distribute remaining cash available in the Contingency Reserve to
stockholders according to their common stock holdings as of the
Final Record Date;
o Withdraw the Company from all states in which it has been authorized
to do business;
o Suspend the Company's reporting obligations under Section 15(d) of
the Securities Act of 1933, as amended, and terminate the Company's
registration statement under Section 12(g) of the Securities
Exchange Act of 1934, as amended; and
o Dissolve the Company under the General Corporation Law of the State
of Delaware.
Market Position and Pricing
As a result of the sale of all of the Company's motels to the Motel 6
Operator and its assignees and the planned liquidation and dissolution of the
Company, the Company no longer has marketing and pricing plans or policies.
Operations
The Company began 1997 leasing its motels to the Motel 6 Operator under
the terms of the Master Lease Agreement, however, in January 1997 the Motel 6
Operator exercised its Purchase Option. Effective January 30, 1997 and pursuant
to the Master Lease Agreement, all of the Company's motels were sold to the
Motel 6 Operator and its assignees for the Lease Purchase Option price of $40.0
million plus the assumption of approximately $206 million of debt secured by the
motels. Since January 30, 1997, the Company has sold for $910,000 five parcels
of vacant land. The Company is currently engaged in the final liquidation
process and has filed a final federal tax return with the IRS and final state
tax returns with six of the states in which it did business.
Employees. At December 31, 1997 four employees were employed by the
Company to manage the winding-up and liquidation activities, to prepare
financial and tax reports of the Company and to make required filings with the
Securities and Exchange Commission and other governmental agencies and otherwise
to carry out the continuing responsibilities of the Company. None of the
Company's employees is currently covered by a collective bargaining agreement.
Management believes that the Company's relations with its employees are
satisfactory.
3
<PAGE>
Competition
As a result of the sale of the Company motels to the Motel 6 Operator and
its assignees and the planned liquidation and dissolution of the Company, the
Company is no longer in competition with other lodging establishments.
ITEM 2. PROPERTIES
At the beginning of 1997, the Company owned in fee or leased 71 motels
with a total of 7,606 rooms. In addition to its motel properties, the Company
owned five parcels of unimproved land suitable for the construction of new
motels. Effective January 30, 1997 and pursuant to the Master Lease Agreement,
all of the Company's motels were sold to the Motel 6 Operator and its assignees
for the Lease Purchase Option price of $40.0 million plus the assumption of
approximately $206 million of debt secured by the motels. Since January 30,
1997, the Company has sold for $910,000 five parcels of vacant land which were
purchased for construction of new motels. The Company is currently engaged in
the final liquidation process and has filed a final federal tax return with the
IRS and final state tax returns with six of the states in which it did business.
The Company's headquarters are located in Santa Barbara, California. The
Company began leasing its office space from an independent third party in
October 1993. The original term of the lease is for five years with current
minimum rent payments of $75,145 per annum.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company was a party to lawsuits arising in the
ordinary course of its business. Substantially all of the claims made in these
lawsuits are covered by the Company's insurance policies. Management believes
that such lawsuits arising in the ordinary course of business will not have a
material adverse effect on the financial statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company began trading on the OTC Bulletin Board
Service on November 26, 1993 and the high bid and low ask prices are currently
reported under the symbol "ALST". The range of the high bid and low ask prices
of the Company's Common Stock for each of the quarters during 1997 are set forth
below:
1997
-----------------
High Low
------ ------
First Quarter.................. 30 29-1/2
Second Quarter................. 28-3/4 1-1/2
Third Quarter.................. 2 1-7/8
Fourth Quarter................. 2 2-1/4
As of February 27, 1998, there were 610 shareholders of record holding
1,047,443 shares of Common Stock.
At the Annual Meeting on May 8, 1997 the stockholders approved a Plan of
Complete Liquidation and Dissolution (the "Plan") of the Company. (For a more
detailed description of the Plan, refer to the Company's 1997 Proxy Statement
which was mailed to the Company's stockholders in April 1997.) Immediately
thereafter, the Board of Directors of the Company approved an initial
liquidating cash distribution of $28.00 per common share which was paid on May
22, 1997 to stockholders of record on May 8, 1997.
5
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The Company assumed operations of the Company's predecessor on November
25, 1993 and retained December 31st as the end of its fiscal year. The Company's
motels were operated under a Management Contract until December 31, 1994.
Effective January 1, 1997, the Management Contract was terminated and the
Company's motels were leased to the Motel 6 Operator pursuant to the Master
Lease Agreement. Effective January 30, 1997 the Motel 6 Operator and its
assignees exercised the Master Lease Agreement Purchase Option to purchase all
of the Company's motels.
SUMMARY FINANCIAL AND OPERATING DATA (1)
(in thousands except per share, motels, rooms,
rentals, occupancy and room rates)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING DATA
Revenues............................... $ 52,034 $ 56,842 $ 52,424 $ 24,743 $ 3,006
Operating, administrative and
lease expenses...................... 28,182 30,800 22,921 1,227 4,117
Motel 6 field overhead................. 1,323 1,468 1,006 -- --
Motel 6 accounting and
marketing fee....................... 2,084 2,277 1,809 -- --
Motel 6 license fee.................... 1,563 1,708 1,356 -- --
Motel 6 incentive fee.................. 832 -- 897 -- --
Interest expense....................... 15,920 17,132 20,064 19,061 1,508
Depreciation and amortization.......... 9,851 9,240 9,001 8,608 662
Other expense.......................... -- -- 4,953 12 62
Write down and losses on sales
of assets........................... -- 476 1,036(3) 123 487
Gain from sale of assets............... -- -- -- -- (116,408)
Effect of Master Lease
Agreement settlement................ -- -- (2,870) -- --
Provision (benefit) for income
taxes............................... -- 2 (7,012) (23,306) 45,937
Net income (loss)...................... (7,721) (6,261) (737) 19,018 66,641
Income (loss) per Share (2)............ (8.17) (6.63) (.77) 17.82 63.62
Dividend per Common Share (2).......... -- -- 2.00 2.00 28.00 (5)
STATISTICAL DATA
Motels at end of period................ 73 72 72 71 --
Average number of rooms
available........................... 7,747 7,734 7,641 7,606 --
Room rentals per available
room (4)............................ $ 6,717 $ 7,350 $ 7,671 $ 8,007 --
Occupancy percentage................... 61.6% 66.2% 67.1% 66.1% --
Average daily room rates............... $ 29.88 $ 30.41 $ 31.31 $ 33.11 --
BALANCE SHEET DATA
Total assets........................... $172,757 $174,048 $160,290 $177,679 $ 4,069
Total debt and lease
obligations......................... 202,472 199,086 206,967 204,189 --
Shareholders' (deficit) equity......... (45,522) (51,784) (54,470) (37,173) 3,641
</TABLE>
6
<PAGE>
- ----------
(1) Amounts are set forth accounting for different time periods in which the
Company's motels were (i) operated by the Company; (ii) operated by the
Motel 6 Operator under a management contract; (iii) leased to the Motel 6
Operator; and (iv) sold to the Motel 6 Operator and, as a result, such
amounts are not comparable.
(2) Amounts reflect the conversion to corporation and one-for-fifteen reverse
stock split.
(3) The Company in 1995 wrote down the carrying value of the vacant land held
for sale by $1.0 million.
(4) Room rentals per available room represents room rentals divided by the
average number of rooms available during the period.
(5) Represents the initial liquidating cash distribution approved by the Board
of Directors May 8, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
General
At a closing held January 30, 1997 in Santa Barbara, California, the Motel
6 Operator and its assignees purchased the Company's 71 motels at the Lease
Purchase Option price of $40.0 million plus assumption of the debt secured by
the motels of approximately $206 million. The sale of the motel properties
constitutes a sale of substantially all of the assets of the Company. Since
January 30, 1997, the Company has sold for $910,000 five parcels of vacant land
which were purchased for the construction of new motels.
The Company is subject to substantial Federal and State taxes on the gain
realized by the sale of its assets.
On March 14, 1997, the Board of Directors of the Company approved and
recommended, subject to stockholder approval, a Plan of Complete Liquidation and
Dissolution. At the Company's Annual Meeting of stockholders on May 8, 1997, the
stockholders approved the Plan. (For a more detailed description of the Plan,
refer to the Company's 1997 Proxy Statement which was mailed to the Company's
stockholders in April 1997.) At a meeting of the Board of Directors held
immediately after the Annual Meeting of stockholders, the Board of Directors
resolved that the Company would promptly make an initial cash distribution to
stockholders of $29.3 million, or $28.00 per share. The distribution was paid on
May 22, 1997 to stockholders of record on May 8, 1997.
As approved by the stockholders, the Plan provides for the Company to be
liquidated (i) by the sale of its remaining assets, (ii) after paying or
providing for all its claims, obligations and expenses, by distributing cash to
its stockholders pro rata and, (iii) if required by the Plan or deemed necessary
by the Board of Directors, by distributions of its assets from time to time to
one or more liquidating trusts established for the benefit of the then
stockholders, or by a final distribution of its then remaining assets to a
liquidating trust established for the benefit of the then stockholders. Should
the Board of Directors determine that one or more liquidating trusts are
required by the Plan or are otherwise necessary, appropriate or desirable,
approval of the Plan constituted stockholder approval of the appointment by the
Board of Directors of one or more trustees to any such liquidating trusts and
the execution of liquidating trust agreements with the trustees on such terms
and conditions as the Board of Directors, in its absolute discretion, shall
determine.
Fiscal Year Ended December 31, 1997
vs. December 31, 1996
Total revenues for 1997 were $3.0 million compared to $24.7 million for
1996. The variance from 1996 occurs as a result of the Company's sale of all of
its motel assets on January 30, 1997 to the Motel 6 Operator and its assignees.
7
<PAGE>
Administrative and general expenses were $4.1 million for 1997 compared to
$1.2 million for 1996. As a result of the exercise of the Purchase Option, the
Company was required under FASB Statement 123 - Accounting for Stock-Based
Compensation, to expense the fair market value of employee stock options of $2.4
million; and recognize as an expense employee severance pay of $1.0 million
payable through December 31, 1998.
Depreciation and amortization for 1997 were $.7 million compared to $8.6
million for 1996. The variance from 1996 occurs as a result of the Company's
sale of all of its motel assets on January 30, 1997.
Write-down and losses on sales of assets for 1997 were $.5 million
compared to $.1 million for 1996. The loss for 1997 resulted from the reduction
of the carrying value of land based on a sales program to recognize the
liquidation and dissolution of the Company.
Gain from sale of assets of $116.4 million for 1997 reflects the gain from
the sale of the Company's motels.
Interest expense for 1997 was $1.5 million compared to $19.1 million for
1996. The variance from 1996 is the result of the Company's sale of all of its
motel assets on January 30, 1997.
Provision (benefit) for income taxes for 1997 reflects a provision of
$45.9 million for the Federal and State tax liability on the gain from the sale
of the Company's motels. The amount for 1996, a benefit of $23.3 million,
reflects realizing all future deferred tax benefits as a result of the exercise
of the Master Lease Agreement Purchase Option by the Motel 6 Operator and its
assignees.
Fiscal Year Ended December 31, 1996
vs. December 31, 1995
Total revenues for 1996 were $24.7 million compared to $52.4 million for
1995 and comprised: rent income, resulting from leasing the Company's motels to
the Motel 6 Operator, of $24.0 million for twelve months of 1996 compared to
$6.1 million for three months of 1995; interest income of $.7 million for 1996
versus $1.2 million for 1995, earned from short-term investments of the
Company's cash balances; and room rentals of $-0- for 1996 compared to $45.2
million for 1995.
Operating expenses, lease, Motel 6 field overhead, Motel 6 accounting and
marketing fee, Motel 6 license fee and Motel 6 incentive fee were expenses
pertaining to the operating of the Company's motels by the Motel 6 Operator
under the Management Contract, which was replaced with the Master Lease
Agreement in the fourth quarter of 1995. As a result, for 1996, there were no
expenses for these items; this compares to $26.2 million of these expenses for
nine months of 1995.
Administrative and general expenses were $1.2 million for 1996 compared to
$1.8 million for 1995.
Depreciation and amortization was $8.6 million in 1996 compared to $9.0
million in 1995. The decrease was due to lower overall depreciation charges
resulting from fully depreciated assets.
Other expense for 1996 was $12.0 thousand compared to $5.0 million for
1995. 1995's expense included $1.6 million in legal costs in connection with the
Master Lease Agreement, $2.6 million in litigation settlement costs and a $.7
million write-off of prepaid loan fees.
Write-down and losses on sales of assets for 1996 was $.1 million, due to
a loss on a sale of an additional land parcel adjacent to one of the Company's
motels, compared to $1.0 million for 1995, which reflected a write-down in the
realizable carrying value of the remaining vacant land parcels held for sale.
Effect of Master Lease Agreement settlement was not applicable for 1996,
but was $(2.9) million for 1995 and represented the write-off of accrued assets
and liabilities in connection with the termination of the Management Contract.
8
<PAGE>
Interest expense in 1996 amounted to $19.1 million, compared to $20.1
million in 1995, all of which was paid by the Motel 6 Operator on the Company's
behalf to the Company's lenders. The amount of this interest is also reflected
in the Company's total revenues. The lower interest expense for 1996 primarily
reflects no tax deficiency interest incurred during 1996 compared to $.9 million
in 1995. The Company concluded its tax deficiency matter on October 3, 1995 by
paying taxes and interest to the IRS and California Franchise Tax Board the
aggregate amount of $9.0 million.
Provision (benefit) for income taxes for 1996 was $(23.3) million compared
to $(7.0) million for 1995. The amount for 1996 reflects realizing all future
deferred tax benefits. The amount for 1995 reflects the future deferred tax
benefits for the cumulative net operating losses for 1993, 1994 and 1995. As a
result of the exercise of the Purchase Option, subsequent to year-end, the
Company will use all net deferred tax assets to offset future Federal and State
tax liabilities.
Liquidity and Capital Resources
At December 31, 1997, the Company had $4.1 million of cash as compared to
$15.1 million at December 31, 1996. As of December 31, 1997, the Company had no
borrowing capacity.
EBITDA was $114.7 million for 1997 compared to $23.4 million for 1996.
EBITDA, as used above, is defined as earnings before interest expense, income
taxes, depreciation and amortization. The increase was the result of the $116.4
million gain from sale of assets resulting from the Motel 6 Operator and its
assignees exercising the Master Lease Agreement Purchase Option.
Net cash used in operating activities for 1997 was $(18.4) million
compared to $6.0 million provided by operating activities for 1996. 1997 results
reflects no Basic Rent receipts from the Motel 6 Operator, whereas last year's
results included $7.0 million, 1997 results also include Federal and State tax
payments of $15.6 million and severance payments payable through December 31,
1998 of $1.0 million.
Net cash provided by investing activities was $36.5 million for 1997
versus $.3 million provided by investing activities for 1996. 1997 favorable
variance was due to the receipt of $35.8 million of net proceeds from the sale
of the Company's motels to the Motel 6 Operator.
Net cash used in financing activities was $(29.2) million for 1997 versus
$(4.7) million used in financing activities for 1996. 1997 results include a
$28.00 per share initial liquidating cash distribution to stockholders which
totalled $29.3 million.
As approved by the Board of Directors and the stockholders of the Company,
the Plan of Complete Liquidation and Dissolution of the Company provides for the
Company to distribute pro rata to the Company's stockholders all its remaining
cash except such cash or assets as are required for paying or making provisions
for the claims and obligations of the Company. The Board of Directors resolved
that the Company would make an initial cash distribution to stockholders of
$29.3 million, or $28.00 per share, which was paid on May 22, 1997 to
stockholders of record on May 8, 1997. A more detailed description of the Plan
is provided in the Company's 1997 Proxy Statement which was mailed to the
Company's stockholders in April 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are included in response
and incorporated by reference to Item 14 of this Report.
9
<PAGE>
ALLSTAR INNS INC.
STATEMENT OF NET ASSETS IN LIQUIDATION (1997) AND BALANCE SHEET (1996)
(in thousands of dollars)
- --------------------------------------------------------------------------------
December 31,
---------------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents (Note 1) ............. $ 4,069 $ 15,131
Receivable from Motel 6 (Note 1) ............... -- 3,620
Other current assets ........................... -- 29
Deferred tax assets (Note 3) ................... -- 30,320
-------- ---------
Total current assets ..................... 4,069 49,100
Net property and equipment (Note 1) ................ -- 127,436
Land held for sale (Notes 1 and 7) ................. -- 1,107
Other assets including leased property
under capital lease, less accumulated
amortization of $222 (1996) ...................... -- 36
-------- ---------
$ 4,069 $ 177,679
======== =========
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities ....... $ 428 $ 5,215
Deferred Basic Rent (Note 1) ................... -- 3,500
Accrued interest ............................... -- 2,032
-------- ---------
Total current liabilities ................ 428 10,747
Long-term debt (Note 2) ............................ -- 204,105
Commitments and contingencies (Notes 4) ............ -- --
Stockholders' equity (deficit):
Preferred stock, $.01 par value,
authorized 1,000,000 shares; no
shares issued and outstanding
at December 31, 1997 and 1996 ............... -- --
Common stock, $.01 par value,
authorized 10,000,000 shares;
1,047,443 shares and 985,710
shares issued and outstanding
at December 31, 1997
and 1996, respectively ...................... 10 10
Additional paid-in capital ..................... -- 21,360
Accumulated equity (deficit) ................... 3,631 (58,543)
-------- ---------
Total stockholders' equity (deficit) ............... 3,641 (37,173)
-------- ---------
$ 4,069 $ 177,679
======== =========
See accompanying notes.
- --------------------------------------------------------------------------------
10
<PAGE>
ALLSTAR INNS INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION (1997)
AND STATEMENTS OF OPERATIONS (1996 AND 1995)
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
Revenues:
Rent income ........................ $ 1,839 $ 23,999 $ 6,108
Interest income .................... 1,167 744 1,164
Room rentals ....................... -- -- 45,152
--------- -------- --------
Total Revenues ............... 3,006 24,743 52,424
--------- -------- --------
Expenses:
Operating .......................... -- -- 20,850
Lease .............................. -- -- 271
Administrative and general ......... 4,117 1,227 1,800
Motel 6 field overhead ............. -- -- 1,006
Motel 6 accounting and
marketing fee .................... -- -- 1,809
Motel 6 license fee ................ -- -- 1,356
Motel 6 incentive fee .............. -- -- 897
Depreciation and amortization ...... 662 8,608 9,001
Other expense ...................... 62 12 4,953
Write-down and losses on
sales of assets .................. 487 123 1,036
Effect of Master Lease
Agreement settlement ............. -- -- (2,870)
Gain from sale of assets ........... (116,408) -- --
--------- -------- --------
Total (income) expense ....... (111,080) 9,970 40,109
--------- -------- --------
Operating income ....................... 114,086 14,773 12,315
Interest expense ....................... 1,508 19,061 20,064
--------- -------- --------
Net income (loss) before
provision for income taxes ........... 112,578 (4,288) (7,749)
Provision (benefit) for
income taxes ......................... 45,937 (23,306) (7,012)
--------- -------- --------
Net income (loss) ...................... $ 66,641 $ 19,018 $ (737)
========= ======== ========
Net income (loss) per
common share (Note 1) ................ $ 63.62 $ 19.28 $ (.77)
========= ======== ========
Net income (loss) per common
share assuming dilution (Note 1) ..... $ 63.62 $ 17.82 $ (.71)
========= ======== ========
Weighted average common
shares outstanding ................... 1,047 986 954
========= ======== ========
Weighted average common
shares outstanding plus
employee stock options ............. 1,047 1,067 1,036
========= ======== ========
See accompanying notes.
- --------------------------------------------------------------------------------
11
<PAGE>
ALLSTAR INNS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
- --------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
------------ Paid-in Equity
Shares Amount Capital (Deficit)
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ................. 945 $ 9 $ 25,031 $(76,824)
Net loss ............................... -- -- -- (737)
Dividends ($2.00 per common share) ..... -- -- (1,950) --
Common stock grant ..................... 40 1 -- --
----- --- -------- --------
Balance, December 31, 1995 ................. 985 10 23,081 (77,561)
===== === ======== ========
Net income ............................. -- -- -- 19,018
Dividends ($2.00 per common share) ..... -- -- (1,956) --
Employee stock options ................. 1 -- 22 --
Amortization of 1995's
Restricted Stock Plan ............... -- -- 213 --
----- --- -------- --------
Balance, December 31, 1996 ................. 986 10 21,360 (58,543)
===== === ======== ========
Net income ............................. -- -- -- 66,641
Liquidating Distribution
($28.00 per common share) ........... -- -- (29,343) --
Employee stock options ................. 61 -- 1,740 --
Vesting of 1995's Restricted Stock Plan -- -- 913 --
Reserve payments to retained earnings .. -- -- -- 863
Adjustment to Paid-in-Capital to reflect
Liquidating Distributions ........... -- -- 5,330 (5,330)
----- --- -------- --------
Balance, December 31, 1997 ................. 1,047 $10 $ -- $ 3,631
===== === ======== ========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
12
<PAGE>
ALLSTAR INNS INC.
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
- --------------------------------------------------------------------------------
Years Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Cash received ......................... $ 2,748 $ 28,317 $ 50,326
Cash paid to suppliers and employees .. (3,996) (3,195) (35,448)
Interest paid ......................... (1,508) (19,119) (18,730)
Federal and state taxes paid .......... (15,617) -- --
Tax deficiency payment ................ -- -- (9,002)
--------- -------- --------
Net cash provided by (used in)
operating activities ............ (18,373) 6,003 (12,854)
Cash flows from investing activities:
Capital expenditures .................. -- (23) --
Total proceeds from sale of motels
to the Motel 6 Operator ............ 243,028 -- --
Payment of long-term debt from proceeds
from the sale of motels ............ (204,062) -- --
Refund of deferred Basic Rent ......... (3,212) -- --
Proceeds from sale of assets .......... 728 336 139
Other ................................. -- -- (19)
--------- -------- --------
Net cash provided by (used in)
investing activities ............ 36,482 313 120
Cash flows from financing activities:
Borrowing under credit agreements ..... -- -- 8,996
Payments under credit agreements ...... -- (1,439) (189)
Principal payments - mortgages and
capital lease obligation ........... (44) (1,310) (926)
Dividends paid to stockholders ........ (29,343) (1,956) (1,950)
Proceeds from exercise of stock options 216 2 --
Proceeds from common stock grant ...... -- -- 1
--------- -------- --------
Net cash provided by (used in)
financing activities ............ (29,171) (4,703) 5,932
--------- -------- --------
Net increase (decrease) in cash and
cash equivalents ...................... (11,062) 1,613 (6,802)
Cash and cash equivalents at
beginning of period ................... 15,131 13,518 20,320
--------- -------- --------
Cash and cash equivalents at
end of period ......................... $ 4,069 $ 15,131 $ 13,518
========= ======== ========
(Continued on next page)
- --------------------------------------------------------------------------------
13
<PAGE>
ALLSTAR INNS INC.
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
- --------------------------------------------------------------------------------
Years Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Net income (loss) ...................... $ 66,641 $ 19,018 $ (737)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ....... 662 8,608 9,001
Write-down of assets ................ 487 -- 1,000
Refund of deferred Basic Rent ....... 3,212 -- --
(Gain) loss on sale of assets ....... (116,408) 123 36
Amortization of restricted stock
and exercise of employee
stock options ...................... -- 234 --
Tax benefit resulting from the
exercise of employee stock
options and the vesting of
restricted stock ................... 2,436 -- --
Write-off obligation under
capital lease ...................... 84 -- --
Changes in assets and liabilities:
Decrease in restricted cash ...... -- -- 2,500
Decrease (increase) in receivable
from Motel 6 ................... 3,620 (1,531) (108)
Decrease in other current assets.. 29 17 119
Decrease in property and equipment -- -- 567
Decrease in other assets ......... -- -- 734
Decrease (increase) in deferred
tax assets ..................... 30,320 (23,307) (7,013)
Decrease in accounts payable
and accrued liabilities ........ (4,787) (602) (11,284)
Increase (decrease) in deferred
Basic Rent ..................... (3,500) 3,500 --
Increase (decrease) in accrued
interest ....................... (2,032) (57) 469
Increase (decrease) in accrued
tax litigation liabilities ..... -- -- (8,138)
Increase in accumulated equity
(deficit) ...................... 863 -- --
--------- -------- --------
Net cash provided by (used in)
operating activities ..................... $ (18,373) $ 6,003 $(12,854)
========= ======== ========
See accompanying notes.
- --------------------------------------------------------------------------------
14
<PAGE>
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
The Company at January 1, 1997 owned in fee or leased 71 motels with a
total of 7,606 rooms. Effective January 30, 1997 and pursuant to the Master
Lease Agreement, all of the Company's motels were sold to the Motel 6 Operator
and its assignees for the Lease Purchase Option price of $40.0 million plus the
assumption of approximately $206 million of debt secured by the motels. Since
January 30, 1997, the Company has sold for $910,000 five parcels of vacant land
which were purchased for the construction of new motels. The Company is
currently engaged in the final liquidation process and has filed a final federal
tax return with the IRS and final state tax returns with six of the states in
which it did business. In 1996 and 1995 the Company's business was to lease the
motels to the Motel 6 Operator to operate under the "Motel 6" logo under the
terms of the Master Lease Agreement. In 1994 the Company engaged the Motel 6
Operator to operate its motels under terms of a Management Contract.
Accordingly, the accompanying financial statements reflects the business as
conducted in each period.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
statement, which is effective for fiscal years beginning after December 15,
1995, requires that an entity evaluate long-lived assets and certain other
identifiable intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the asset may not be
recoverable. An impairment loss meeting the recognition criteria is to be
measured as the amount by which the carrying amount for financial reporting
purposes exceeds the fair value of the asset. The Company adopted this statement
in 1996 and the adoption of the statement has had no effect on the Company's
financial position or results of operations.
As of the date of adoption of dissolution, May 8, 1997, the Company
changed its method of accounting from the going concern basis to the liquidation
basis. Under the liquidation basis of accounting assets are presented at amounts
expected to be realized in liquidation and liabilities at amounts expected to be
paid to creditors.
Master Lease Agreement
In 1992, the security holders of the Company approved a plan that placed
the business and operations of the Company's motels under the management of
Motel 6 Operating L.P., a Delaware limited partnership (the "Motel 6 Operator").
The Company entered into a management contract which provided that the Motel 6
Operator would operate and manage all the Company's motels through December 31,
2011. In September 1995 the Company and the Motel 6 Operator terminated the
Management Contract and entered into a new Master Lease Agreement (the "Master
Lease Agreement") relating to the Company's motels. For a description of the
events leading up to the Master Lease Agreement, see the Company's Proxy
Statement relating to its 1995 Annual Meeting of Stockholders.
The Lease was a "net, net, net" lease for a 15-year term commencing as of
January 1, 1995. Annual rent was an amount sufficient to cover debt service on
the indebtedness secured by the Company's motels plus (i) through 1998, $3.5
million, (ii) in 1999, satisfaction of the Company's indebtedness to the an
affiliate of the Motel 6 Operator (the "Motel 6 Lender") (approximately $37.0
million at December 31, 1996), plus (iii) annually in 1999 through 2009, $5.0
million (plus cost of living increases from 1995). Under the Master Lease
Agreement, the Motel 6 Operator had an option (the "Purchase Option") to
purchase the Company's motels prior to the end of 1998 at a price of $40.0
million plus assumption by the Motel 6 Operator of the indebtedness, including
the Motel 6 Lender indebtedness, secured by the Company's motels. Upon such
purchase, the Motel 6 Operator would receive $3.0 million representing a
furniture, fixture and equipment reserve. The Master Lease Agreement was
assignable
15
<PAGE>
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to an assignee with a net worth of at least $350 million. The Purchase Option
was assignable so long as the Motel 6 Operator or its parent guarantees the
performance of the assignee.
On January 30, 1997 the Motel 6 Operator and its assignees formally
exercised the Purchase Option. The closing of the sale of the Company's motels
took place on January 30, 1997.
At a closing held in Santa Barbara, California, the Motel 6 Operator
purchased the Company's 71 motels at the Lease Purchase Option price of $40.0
million plus assumption of the debt secured by the motels of approximately $206
million. The sale of the motel properties constituted a sale of substantially
all of the assets of the Company. The Company also sold five parcels of vacant
land constituting the balance of the Company's real estate holdings.
The Company was subject to substantial Federal and State taxes on the gain
realized by the sale of its motel assets.
At the Annual Meeting on May 8, 1997 the stockholders approved a Plan of
Complete Liquidation and Dissolution of the Company (the "Plan"). (For a more
detailed description of the Plan, refer to the Company's 1997 Proxy Statement
which was mailed to the Company's stockholders in April 1997.) Immediately
thereafter, the Board of Directors of the Company approved an initial
liquidating cash distribution of $28.00 per common share which was paid on May
22, 1997 to stockholders of record on May 8, 1997.
The Company's business strategy in order to achieve complete liquidation and
dissolution is as follows:
o Finalize all tax matters;
o Negotiate final settlement of all unexpired leases, contracts and
outstanding debt;
o Issue a press release notifying all parties of the Final Record Date
(when the Company will close its transfer books and its shares will
no longer be traded);
o Distribute remaining cash available in the Contingency Reserve to
stockholders according to their common stock holdings as of the
Final Record Date;
o Withdraw the Company from all states in which it has been authorized
to do business;
o Suspend the Company's reporting obligations under Section 15(d) of
the Securities Act of 1933, as amended, and terminate the Company's
registration statement under Section 12(g) of the Securities
Exchange Act of 1934, as amended; and
o Dissolve the Company under the General Corporation Law of the State
of Delaware.
Reclassifications
Certain amounts as previously reported have been reclassified to conform
to the December 31, 1996 presentation.
16
<PAGE>
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Depreciation and amortization of property and equipment, leasehold
interests and leased property under capital lease is computed on the
straight-line basis over the estimated useful lives of the assets as follows:
Property and equipment:
Buildings........................................ 30 - 40 years
Improvements..................................... 3 - 22 years
Furniture and equipment.......................... 3 - 11 years
Leasehold interests.................................. Lease term
Leased property under capital lease.................. 16 years
Property and equipment is stated at cost and consists of the following at
December 31:
(in thousands)
1997 1996
---- ----
Land ..................................... $ -- $ 30,843
Buildings and improvements................. -- 166,199
Furniture and equipment.................... -- 42,477
Leasehold interests........................ -- 2,498
-------- ---------
-- 242,017
Less accumulated depreciation
and amortization........................ -- 114,581
-------- ---------
Net property and equipment................. $ -- $ 127,436
======== =========
All of the Company's assets were sold to the Motel 6 Operator and its
assignees on January 30, 1997.
Cash Equivalents
The Company has no investments; its liquid assets consist of cash in its
Contingency Reserve bank account.
Net Income (Loss) Per Common Share
For the year ended December 31, 1997, the Company has calculated the net
income per share under standards and procedures in FASB Statement No. 128,
Earnings Per Share. The new standards require the earnings per share to be
calculated under two methods. The first method, Earnings per common share, is
calculated using only outstanding stock. This method is new and is required to
be reported on for the current year 1997 and prior years 1996 and 1995. The
second method, Earnings per common share assuming dilution, incorporates
potential dilution from all potentially dilutive securities. There has been no
change to the calculation of this method.
17
<PAGE>
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accounting for Stock Based Compensation
The Company accounts for its stock based compensation arrangements under
the provisions of APB 25, Accounting for Stock Issued to Employees, and the
Company has adopted the disclosure only provisions of Statement of Accounting
Financial Standards No. 123, Accounting for Stock Based Compensation.
Receivable from Motel 6
Receivable from Motel 6 was comprised of the following:
(in thousands)
1997 1996
---- ----
Amount owed to the Company.................... $ -- $1,588
Interest owed to the Company's lenders........ -- 2,032
------ ------
Receivable from Motel 6.................... $ -- $3,620
====== ======
Deferred Basic Rent
Deferred Basic Rent reflected 1997's annual Basic Rent payment received
from the Motel 6 Operator on December 31, 1996.
Land Held for Sale
Land held for sale is stated at the lower of cost or estimated net
realizable value. In 1995 the Company wrote down the carrying value of the land
held for sale by $1.0 million.
(2) LONG-TERM DEBT
(in thousands)
December
------------------
1997 1996
---- ----
WFB mortgage loans maturing 1998 .................. $ -- $102,105
Coast Federal Bank mortgage loans maturing 1998.... -- 44,643
Great Western Bank and WHC-One Investors, L.P.
mortgage loans maturing 2005 and 2006 ......... -- 20,317
Motel 6 Lender secured subordinated loans
maturing 1998 ................................. -- 37,040
-------- --------
Total long-term debt ....................... $ -- $204,105
======== ========
As a result of the sale of the Company's motel assets, all of the
Company's lenders were paid-in-full by the Motel 6 Operator and its assignees
pursuant to the terms of the Purchase Option.
During 1997, 1996 and 1995 interest expense totaled $1.5 million, $19.1
million and $20.1 million, respectively.
18
<PAGE>
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(3) INCOME TAXES
Pursuant to SFAS 109, the Company had no deferred tax assets as of
December 31, 1997 compared to $30.3 million as of December 31, 1996. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
(in thousands)
1997 1996
---- ----
Deferred tax assets:
Prior years' bases differences ...................... $ -- $21,038
Contingent liability provision ...................... -- 1,107
Deferred loan fees .................................. -- 1,008
Write-down of land held for sale .................... -- 1,058
Net operating loss carry-forward .................... -- 8,493
Deferred Basic Rent ................................. -- 1,400
Other ............................................... -- 72
-------- -------
Total deferred tax assets ........................ -- 34,176
Deferred tax liabilities:
Tax depreciation in excess of book depreciation ..... -- 3,490
Tax loss over book loss on asset sale ............... -- 44
Capitalized interest ................................ -- 322
-------- -------
Total deferred tax liabilities ................... -- 3,856
Net deferred tax assets ................................. $ -- $30,320
======== =======
As a result of the sale of the Company's motel assets to the Motel 6
Operator and its assignees, the Company incurred significant federal and state
tax liabilities that were paid during 1997. After recognizing net deferred tax
assets, the federal and state taxes paid during 1997 were $12.0 million and $3.6
million, respectively.
(4) COMMITMENTS AND CONTINGENCIES
Leases
As a result of the sale of the Company's motels to the Motel 6 Operator
and its assignees, the Motel 6 Operator and its assignees assumed the Company's
eight lease agreements involving motel land and buildings. The Company is
currently only a party to the lease agreement involving its headquarters. The
following is a schedule by years of future minimum rental payments required
under the headquarters' office lease:
19
<PAGE>
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands)
Operating
Leases
------
1998 ..................................... $ 59
1999...................................... --
2000...................................... --
2001...................................... --
2002...................................... --
Thereafter................................ --
------
Total minimum lease payments.............. $ 59
======
The Company's headquarters are located in Santa Barbara, California. The
Company began leasing its office space from an independent third party in
October 1993. The original term of the lease is for five years with current
minimum rent payments of $75,145 per annum.
Employment Agreements
Mr. Shaughnessy is employed to manage the Company on a part-time basis
pursuant to an Executive Employment Agreement (the "Shaughnessy Agreement").
During October 1992, Mr. Shaughnessy's salary was reduced from $518,000 to
$200,000 annually, but he continues to receive substantially the same employee
benefits as he previously received and is entitled to receive all other benefits
which have generally been granted to senior executives of the Company.
Mr. Shaughnessy was granted Options and related Stock Appreciation Rights,
which were fully vested at April 30, 1993, to purchase 19,000 common shares. The
options were exercisable for a period of ten years. The option price of $7.50
per share was the fair market value of a share on the date of the grant. On
February 10, 1997 Mr. Shaughnessy exercised his stock appreciation rights for
these options. The market value on the exercise date was $29.50 per share of
common stock.
The Company has three other Company employees managing the winding-up and
liquidation activities. The Company will pay these employees their current
salaries through December 31, 1999.
(5) EMPLOYEE STOCK OPTION PLAN
Under the Company's employee stock option plan, options to acquire a
maximum of 63,333 common shares were granted to employees of the Company at an
exercise price not less than the fair market value of a Share on the date of
grant. During 1997, as a result of the sale of the Company's motels and the
result of agreements entered into with the Company's employees (regarding the
early vesting of all stock options if the Master Lease Agreement Lease Purchase
Option was exercised), all employee stock options were fully vested and
exercised. The market value of the stock options when exercised ranged from
$27.875 to $29.50 per share. At December 31, 1997, 1996 and 1995 there were
outstanding options for the purchase of -0-, 62,333 and 63,333 shares,
respectively, at prices ranging from $2.25 to $22.50 per share.
20
<PAGE>
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Employee
Stock Options
-------------
Outstanding, December 31, 1996........................ 62,333
Granted............................................ --
Cancelled.......................................... --
Exercised, at prices ranging from
$2.25 to $22.50................................ 62,333
------
Outstanding, December 31, 1997........................ --
======
Exercisable, December 31, 1997........................ --
======
The 62,333 outstanding options included 22,600 with stock appreciation
rights. One thousand options were exercised in 1996 and no options were
exercised during 1995.
(6) RESTRICTED STOCK PLAN
Restricted Stock awards of a total of 40,000 shares of the Company's
Common Stock were granted by the Board of Directors on October 11, 1995 to the
Company's employees. During 1997, as a result of the sale of the Company's
motels, all restrictions were removed from the restricted stock and the stock
was issued to the Company's employees. The market value of the restricted stock
when the restrictions were removed was $27.875 per share. During 1997, 1996 and
1995, $913,000, $213,000 and $-0-, respectively, was deducted as expense
relating to the plan.
(7) VACANT LAND
Since January 30, 1997 the Company has sold for $910,000 its five
unimproved land parcels which were purchased for the construction of new motels.
(8) LEGAL PROCEEDINGS
From time to time the Company is a party to lawsuits arising in the
ordinary course of its business. Substantially all of the claims made in these
lawsuits (other than any claims for punitive damages made in certain actions)
are covered by the Company's insurance policies. Management believes that such
lawsuits arising in the ordinary course of business will not have a material
adverse effect on the financial statements of the Company.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate the
value:
Cash. The carrying amount is actual cash value.
The fair values of the Company's financial instruments are summarized as
follows:
21
<PAGE>
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(in thousands)
December 31, 1997 December 31, 1996
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Cash and cash equivalents $ 4,069 $ 4,069 $ 15,131 $ 15,131
Receivable from Motel 6 -- -- 3,620 3,620
Long-term debt -- -- 204,105 200,252
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Allstar Inns Inc.
We have audited the statement of net assets in liquidation of Allstar Inns Inc.
as of December 31, 1997, and the related statements of changes in net assets in
liquidation, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the stockholders of Allstar
Inns Inc. approved a plan of liquidation on May 8, 1997, and the Company began
liquidation shortly thereafter. As a result, the Company changed its basis of
accounting for periods after May 8, 1997, from the going concern basis to the
liquidation basis.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the net assets in liquidation of Allstar Inns Inc. as of
December 31, 1997, and the changes in net assets in liquidation and cash flows
for the period then ended, in conformity with generally accepted accounting
principles.
MCGOWAN GUNTERMANN
March 17, 1998
Santa Barbara, CA
23
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying balance sheet of Allstar Inns Inc. as of
December 31, 1996, and the related statements of operations, shareholders'
deficit and cash flows for each of the two years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allstar Inns Inc. at December
31, 1996, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Woodland Hills, California
January 24, 1997
24
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In light of the fact that the Company is presently in the process of
liquidating and dissolving, the Company determined to replace its ongoing
accounting firm, Ernst & Young LLP, with a local accounting firm, McGowan
Guntermann, to conduct the Company's final audit for the fiscal year ended
December 31, 1997, on the basis that it would be more economically prudent to
engage a local accountant for such audit under the Company's present
circumstances. The new accountant was engaged on March 10, 1998 to conduct the
Company's audit for the fiscal year ended December 31, 1997. Reference is also
made to the current report on Form 8-K filed with the Securities and Exchange
Commission on March 18, 1998, which report is hereby incorporated by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company, as of December 31,
1997, are as set forth below. Brief summaries of the Directors and Officers'
respective business experience and certain other information are as set forth
following the table.
Name Age Position(s)
---- --- -----------
Daniel R. Shaughnessy 70 Director, Chairman of the Board
and Chief Executive Officer
Edward J. Gallagher 61 Director, Vice Chairman and
Principal Accounting Officer
Edward A. Paul 56 Vice President and Principal
Financial Officer
Joseph Martin, Jr. 82 Director
Mr. Shaughnessy has been Chairman of the Board and Chief Executive Officer
of the Company's predecessors since April 1983.
Mr. Gallagher has been Vice Chairman and Principal Accounting Officer
since April 1994 and a Director since June 4, 1997. During the period August
1992 to April 1994 he participated in the transition of Allstar Inns to the
Motel 6 Management Contract. From May 1983 thru July 1992, he was President and
Chief Operating Officer of the Company's predecessors.
Mr. Paul has been Vice President, Treasurer and Assistant Secretary of the
Company's predecessors since April 1983 and has held the additional positions of
Secretary and Principal Financial Officer of the Company since August 1992.
Mr. Martin served as a Director of the Company and the Company's
predecessors since 1983, resigned in 1993 and rejoined the Company as a Director
on June 4, 1997.
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Summary of Compensation
The following Summary Compensation Table sets forth the annual and
long-term compensation for services in all capacities to the Company paid (or
accrued) by the Company during each of the last three fiscal years to the Chief
Executive Officer, Vice Chairman and the Vice President - Secretary and
Treasurer, who were the only officers whose annual salary and bonus exceeded
$100,000 during 1997 (the "Named Executive Officers").
25
<PAGE>
TABLE I
Summary Compensation Table
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION (3)
-------------------------------------------- ------------------------------------
Other Annual Restricted Stock Securities Underlying
Name & Principal Position Year Salary($)(4) Bonus($) Compensation(1) Grant(s)($)(2) Options/SARs(#)
- ------------------------- ---- ------------ -------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Shaughnessy 1997 200,000 -- 67,038 -- --
Chief Executive Officer 1996 200,000 -- 76,701 -- --
1995 200,000 1,000,000 70,450 400,000 --
Edward J. Gallagher 1997 140,000 -- 18,613 -- --
Vice Chairman 1996 140,000 -- 18,241 -- --
1995 140,000 100,000 15,723 100,000 6,733
Edward A. Paul 1997 87,000 -- 1,125 -- --
Vice President - 1996 87,000 -- 1,069 -- --
Secretary & Treasurer 1995 79,833 50,000 2,162 60,000 3,000
</TABLE>
- ----------
(1) For Mr. Shaughnessy, Other Annual Compensation includes the value of a
company automobile and life insurance in the amounts of $625 and $66,413,
respectively, for the year 1997.
For Mr. Gallagher, Other Annual Compensation includes the value of a
company automobile and life insurance in the amounts of $625 and $17,988,
respectively, for the year 1997.
For Mr. Paul, Other Annual Compensation is life insurance in the amount of
$1,125 for the year 1997.
(2) The number of shares and value of the restricted stock granted to all
Company employees on the date of grant, as determined by the closing price
on the OTC Bulletin Board, was 40,000 and $800,000. The number of shares
and value of restricted stock holdings of each of the named officers on
the date of grant, and May 8, 1997, the date the employees received their
unrestricted stock, were 20,000, $400,000 and $557,500 (Mr. Shaughnessy);
5,000, $100,000 and $139,375 (Mr. Gallagher); and 3,000, $60,000 and
$83,625 (Mr. Paul).
(3) On January 30, 1997 the Motel 6 Operator and its assignees purchased all
the Company's motels under the terms of the Master Lease Agreement
Purchase Option. As a result of this transaction, the forfeiture
conditions of the Restricted Stock were waived.
(4) Does not include severance payments for 1998.
Option Grants in Last Fiscal Year
No stock option grants were made during fiscal 1997. No Stock Appreciation
Rights ("SARs") were granted in fiscal 1997.
Option Exercises
Table II sets forth information regarding stock options exercised during
fiscal year 1997 by each of the Named Executive Officers.
26
<PAGE>
TABLE II
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (1) AT FY-END (1)
---------------------------- ---------------------------
Value
Shares Acquired Realized Exercisable Unexercisable Exercisable Unexercisable
Name on Exercise(#)(1) ($) (3) (#) (#) ($) ($)
- --------------------- ----------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Shaughnessy -- -- -- -- -- --
Edward J. Gallagher 19,333 (2) 555,632 -- -- -- --
Edward A. Paul 10,400 (2) 289,900 -- -- -- --
</TABLE>
- ----------
(1) On January 30, 1997 the Motel Operator and its assignees purchased all of
the Company's motels under the terms of the Master Lease Agreement
Purchase Option. As a result of this transaction, all Stock Option grants
became fully vested.
(2) On May 8, 1997 Mr. Gallagher and Mr. Paul exercised all of their stock
option grants which were fully vested and fully paid.
(3) The value realized equals the market value of the common stock acquired on
the date of exercise.
The table below sets forth the SAR Exercise position of the named officers
during fiscal year 1997:
<TABLE>
<CAPTION>
SAR EXERCISES IN FISCAL YEAR 1997
---------------------------------------------------------------------------------
Number of Value of Unexercised
Unexercised Options In-The-Money Options
Option/ -------------------------- --------------------------
SAR Value
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) ($) ($)
- --------------------- -------- -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Shaughnessy 19,000 (4) 418,000 -- -- -- --
Edward J. Gallagher -- -- -- -- -- --
Edward A. Paul -- -- -- -- -- --
</TABLE>
(4) On February 10, 1997 Mr. Shaughnessy exercised his SAR with respect to
19,000 shares pursuant to terms of his stock option agreement dated
October 6, 1992. The exercise was at the average of the closing bid and
asked price ($29.50) as furnished by NASDAQ Over- The-Counter Market on
February 10, 1997. The SAR exercise resulted in a payment of $418,000 to
Mr. Shaughnessy.
Compensation of Directors
During 1997, Director Joseph Martin, Jr. received $14,000 of compensation
for his services rendered which included cost of attending Board meetings.
27
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to (i) those persons
known to the Company to be beneficial owners of more than 5% of the outstanding
Common Stock and (ii) each of the Company's directors, the Named Executive
Officers and all directors and executive officers as a group as of December 31,
1997. The percentage ownership figures set forth in the table are calculated on
the basis of the number of shares of Common Stock outstanding as of December 31,
1997. As of December 31, 1997 there were 609 stockholders of record and
1,047,443 shares of common stock outstanding. Beneficial ownership has been
calculated in accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Unless otherwise
indicated, all shares are owned directly and the owner has sole voting and
investment power with respect thereto.
28
<PAGE>
Common Stock of Company
-------------------------------
Number Percent
Name and Address of Beneficial Owner of Shares of Class
- ------------------------------------ --------- --------
SHI Partners, L.P. 128,058 (1) 12.2%
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue, 10th Floor
New York, New York 10017
Gotham Partners, L.P. 149,363 14.3%
110 E. 42nd Street, 18th Floor
New York, New York 10017
First Chicago Investment Corporation 79,646 7.6%
c/o: Madison Dearborn Partners, Inc.
Three First National Plaza, Suite 1330
Chicago, Illinois 60670
Meridian Properties, No. Five 68,267 6.5%
(USA) Ltd.
c/o Enpro International, Inc.
152 W. 57th Street, 58th Floor
New York, New York 10019
SHI, Inc. 57,255 (1) 5.5%
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue, 10th Floor
New York, New York 10017
The Rainbow Fund, L.P. 54,019 5.2%
888 West Sixth Street, 10th Floor
Los Angeles, California 90017
Daniel R. Shaughnessy 58,861 5.6%
200 East Carrillo Street, Suite 300
Santa Barbara, California 93101
Edward J. Gallagher 27,506 2.6%
200 East Carrillo Street, Suite 300
Santa Barbara, California 93101
Edward A. Paul 13,818 1.3%
200 East Carrillo Street, Suite 300
Santa Barbara, California 93101
All directors and executive officers 100,185 9.6%
as a group (3 persons)
- ----------
(1) Warburg, Pincus & Co. ("WP & Co.") owns all of the outstanding voting
stock of SHI, Inc. and is the sole general partner of SHI Partners, L.P.
WP & Co., as the sole general partner of Warburg, Pincus Associates, L.P.
("Associates"), has a 21% interest in the profits of Associates.
Associates owns 7,631 shares of Common Stock (approximately 0.7%) of the
Company.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements of the Company as set forth under Item 8 are
filed as part of this Report.
2. Financial Statement Schedules
All financial statement schedules are omitted since the required
information is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements and notes thereto.
3. Exhibits
See the Exhibit Index included in paragraph (c) below.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed below are filed with this Report.
(7) 3.1 Certificate of Incorporation of Allstar Inns Inc.
(7) 3.2 By Laws of Allstar Inns Inc.
(8) 3.3 Certificate of Merger dated November 11, 1993.
(8) 4.1 Form of certificate representing the Registrant's Common
Stock.
(2) 10.1 Executive Employment Agreement, dated April 26, 1983 by and
between Shaughnessy Holdings, Inc. and Daniel R. Shaughnessy.
(1) 10.2 Form of Indemnification Agreement by and among Shaughnessy
Holdings, Inc. and its officers.
(1) 10.3 Form of Indemnification Agreement by and among Shaughnessy
Holdings, Inc. and its directors.
(3) 10.4 Form of Deed of Trust, Financing Statement, Security Agreement
and Fixture Filing (with Assignment of Rents and Leases) by
and among Allstar Inns Operating L.P., as Trustor, Coast Fed
Services, as Trustee, and Coast Savings and Loan Association,
as Beneficiary.
(3) 10.5 First Amendment to Promissory Note, Deed of Trust, and
Assignment of Lessor's Interest in Leases, dated as of
December 21, 1987, by and among Allstar Inns Operating L.P.,
and Coast Savings and Loan Association.
30
<PAGE>
(3) 10.6 Form of Security Agreement by and between Allstar Inns
Operating L.P. and Coast Savings and Loan Association.
(3) 10.7 License of Tradename and Logo, dated as of December 21, 1987,
by and between Allstar Inns Operating L.P. and Coast Fed
Mortgage Corporation.
(4) 10.8 Form of Mortgage, Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing by and among
Allstar Inns Operating L.P., as Trustor, Ticor Title Insurance
Company of California, as Trustee, and Wells Fargo Bank,
National Association, as Beneficiary.
(4) 10.9 Form of Deed of Trust, Financing Statement, Security Agreement
and Fixture Filing (with Assignment of Rents and Leases) by
and among Allstar Inns Operating L.P., as Trustor, Ticor Title
Insurance Company of California, as Trustee, and Coast Fed
Mortgage Corporation, as Beneficiary.
(4) 10.10 Form of Security Agreement by and between Allstar Inns
Operating L.P. and Coast Fed Mortgage Corporation.
(4) 10.11 First Amendment to Security Agreement and First Amendment to
Assignment of Operating Agreements and Warranties by and
between Allstar Inns Operating L.P. and Coast Savings and Loan
Association.
(4) 10.12 Form of Consent of Guarantor and Agreement by and between
Allstar Inns, L.P. and Coast Savings and Loan Association.
(2) 10.13 Allstar Inns Inc. Employee Stock Option Plan (1990), as
amended.
(2) 10.14 Form of Allstar Inns Inc. Non-Qualified Stock Option
Agreement.
(6) 10.15 Amended and Restated Credit Agreement, dated as of July 27,
1992, by and among Allstar Inns, L.P., Allstar Inns Operating
L.P., and Wells Fargo Bank, N.A.
(6) 10.16 Loan Modification Agreement, dated as of July 28, 1992, by and
among Allstar Inns Operating L.P., Allstar Inns, L.P. and
Coast Federal Bank.
(6) 10.17 Texas Loan Modification Agreement, dated as of May 28, 1992,
by and between Allstar Inns Operating L.P. and Great Western
Bank.
(6) 10.18 California Loan Modification Agreement, dated as of May 28,
1992, by and between Allstar Inns Operating L.P. and Great
Western Bank.
(6) 10.19 Credit Agreement, dated as of August 3, 1992, by and among
Allstar Inns, L.P., Allstar Inns Operating L.P. and Motel 6
Financial Services, L.P.
(2) 10.20 Executive Employment Agreement dated August 6, 1992, as
amended, granted to Daniel R. Shaughnessy.
(2) 10.21 Allstar Inns Inc. Restricted Stock Plan.
(2) 10.22 Form of Allstar Inns Inc. Restricted Stock Plan Restricted
Stock Award Agreement.
(9) 10.23 Master Lease Agreement dated as of January 1, 1995 among
Allstar Inns Inc., Motel 6 Operating L.P., Motel 6 G.P. Inc.
and IBL Limited, Inc.
31
<PAGE>
(10) 10.24 Loan Modification Agreement, dated as of September 29, 1995 by
and between Allstar Inns Inc. and Wells Fargo Bank, N.A.
(10) 10.25 Amendment to Credit Agreement, dated September 28, 1995, by
and between Motel 6 Financial Services, L.P. and Allstar Inns
Inc.
(11) 10.26 Plan of Complete Liquidation and Dissolution of Allstar Inns
Inc.
(12) 16.1 Letter from Ernst & Young LLP to the Commission dated March
12, 1998.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
- ----------
(1) Incorporated herein by reference to an exhibit previously filed with the
Registration Statement on Form S-1 (Registration No. 33-12223) filed with
the Securities and Exchange Commission on February 25, 1987 by Allstar
Inns, L.P.
(2) Incorporated herein by reference to an exhibit previously filed with the
Registration Statement on Form S-8 (File No. 333-00432) filed with the
Securities and Exchange Commission on January 9, 1996 by Allstar Inns Inc.
(3) Incorporated herein by reference to an exhibit previously filed with the
Form 10-K (File No. 1-9415) filed with the Securities and Exchange
Commission for the period ended December 31, 1987 by Allstar Inns, L.P.
(4) Incorporated herein by reference to an exhibit previously filed with the
Form 10-K (File No. 1-9415) filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1988 by Allstar Inns,
L.P.
(5) Incorporated herein by reference to an exhibit previously filed with the
Form 10-K (File No. 1-9415) filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1989 by Allstar Inns,
L.P.
(6) Incorporated herein by reference to an exhibit previously filed with the
Registration Statement on Form S-1 (Registration No. 33-43509) filed with
the Securities and Exchange Commission on July 17, 1992.
(7) Incorporated herein by reference to an exhibit previously filed with the
Registration Statement on Form S-4 (Registration No. 33-53654) filed with
the Securities and Exchange Commission on September 2, 1993.
(8) Incorporated herein by reference to an exhibit previously filed with the
Form 10-K (File No. 0-22930) filed with the Securities and Exchange
Commission on March 18, 1994.
(9) Incorporated herein by reference to an exhibit previously filed with the
Form 10-K (File No. 0-22930) filed with the Securities and Exchange
Commission on March 30, 1995.
(10) Incorporated herein by reference to an exhibit previously filed with the
Form 10-K (File No. 0-22930) filed with the Securities and Exchange
Commission on March 18, 1996.
(11) Incorporated herein by reference to Exhibit A previously filed with the
1997 Proxy Statement filed with the Securities and Exchange Commission on
March 19, 1997.
(12) Incorporated herein by reference to an exhibit previously filed with the
Form 8-K (File No. 0-22930) filed with the Securities and Exchange
Commission on March 18, 1998.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLSTAR INNS INC.
(Registrant)
By: /s/ Daniel R. Shaughnessy
-------------------------------
Daniel R. Shaughnessy
Chairman of the Board and
Chief Executive Officer
Date: March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title
--------- -----
/s/ Daniel R. Shaughnessy Chairman of the Board and
- ---------------------------- Chief Executive Officer
Daniel R. Shaughnessy
/s/ Edward J. Gallagher Director, Vice Chairman and
- ---------------------------- Principal Accounting Officer
Edward J. Gallagher
/s/ Edward A. Paul Vice President and Principal
- ---------------------------- Financial Officer
Edward A. Paul
/s/ Joseph Martin, Jr. Director
- ----------------------------
Joseph Martin, Jr.
Date: March 18, 1998
33
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Allstar Inns Inc. of our report dated January 24, 1997, included in the 1997
Annual Report to Shareholders (Form 10-K) of Allstar Inns Inc.
ERNST & YOUNG LLP
Woodland Hills, CA
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the financial
statements of Part II, Item 8, of the December 31, 1997 Form 10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4069
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4069
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4069
<CURRENT-LIABILITIES> 428
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4069
<SALES> 0
<TOTAL-REVENUES> 3006
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5328
<LOSS-PROVISION> (116408)
<INTEREST-EXPENSE> 1508
<INCOME-PRETAX> 112578
<INCOME-TAX> 45937
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66641
<EPS-PRIMARY> 63.62
<EPS-DILUTED> 63.62
</TABLE>
