1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
----------------
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported):
June 11, 1997
COMMISSION FILE NUMBER 0-26304
SUNSTONE HOTEL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
-----------------
MARYLAND 52-1891908
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
115 CALLE DE INDUSTRIAS, SUITE 201, SAN CLEMENTE, CA 92672
(Address of Principal Executive Offices) (Zip Code)
(714) 361-3900
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(former name or former address, if changed since last report)
2
Items 2 and 7 of the Current Report on Form 8-K dated June 25, 1997 and Items 5
and 7 of the Current Report on Form 8-K dated August 13, 1997 filed by Sunstone
Hotel Investors, Inc. are hereby amended to collectively read in their entirety
as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Not applicable.
ITEM 5. OTHER EVENTS
RECENT ACQUISITIONS
From January 1, 1997 through August 7, 1997, Sunstone Hotel Investors,
L.P., a Delaware limited partnership (the "Partnership") of which Sunstone Hotel
Investors, Inc., a Maryland corporation (individually and collectively, the
"Company"), is its sole general partner, completed the acquisition of the
following nine hotels (the "Recent Acquisitions"):
On January 17, 1997, the Company acquired the Ramada Hotel in Cypress,
California and the Holiday Inn Harbor View in San Diego, California from
Peacock, LLC and Shivani, LLC, respectively.
The Ramada Hotel - Cypress was acquired for approximately $12.1 million
in cash. The hotel is a 180-room interior-corridor hotel, contained in one
seven-story building and has a restaurant, lounge, approximately 3,300 square
feet of meeting space, swimming pool, whirlpool, gift shop and exercise room.
The hotel is located in the Cypress Business Park, approximately one mile north
of Interstate 405 in Orange County, California.
The Holiday Inn Harbor View - San Diego was acquired for total
consideration of approximately $8.8 million, $7.9 million in cash and the
balance funded with Partnership units. The hotel is a 202-room interior-corridor
hotel, contained in one 16-story cylindrical building and has a restaurant,
lounge, approximately 1,200 square feet of meeting space, swimming pool and
exercise room. The hotel is adjacent to Interstate 5 in downtown San Diego,
California.
On March 10, 1997, the Company acquired the 152-room Hawthorn Suites
Hotel in Kent, Washington from Kent Hospitality Partners, L.P. for approximately
$13.6 million in cash. The Hawthorn Suites Hotel - Kent, is a two-story,
all-suite hotel built in a similar fashion to a Residence Inn. Every suite has a
fully equipped kitchen and a fireplace, and the hotel has meeting rooms, a
heated pool and spa, an exercise room and a tennis court. The extended-stay
hotel was built in the mid-1980s and is located within five miles of Seattle
International Airport (SEA-TAC) and is proximate to Boeing Space & Defense
Center and Boeing Customer Training Facility. It is also five miles away from
the Company's Holiday Inn Hotel and Suites in Kent.
On March 31, 1997, the Company acquired the full-service 290-room
Holiday Inn Hotel in La Mirada, California from Gateway Center Group for
approximately $18.0 million in cash. The purchase price is estimated to be
approximately 65% of replacement cost. The hotel is an eight-story hotel located
20 miles from downtown Los Angeles and 10 miles from Disneyland.
On May 6, 1997, the Company acquired the 300-suite Fountain Suites Hotel
in Sacramento, California from Washington Plaza Associates and C.T.S. Hotel
Properties for approximately $16.8 million in cash. The purchase price is
estimated to be approximately 75% of replacement cost. The Company plans to
renovate the hotel and re-flag it as a Hawthorn Suites Hotel with 268 suites
(including 32 two-room suites). The hotel is an interior-corridor hotel,
consisting of six three-story buildings and a free-standing restaurant. As
presently configured, the suites are single rooms with an area divider. The
hotel has meeting rooms and a swimming pool and spa area. The hotel was built in
1988-1989 and is located just off Interstate 5, one mile north of downtown
Sacramento, California.
2
3
On June 11, 1997, the Company acquired the 151-room Ramada Plaza Hotel
in Old Town, San Diego, California from O.T. Hill, LLC for total consideration
of approximately $11.8 million, $7.4 million in cash and the balance funded with
Partnership units. The Ramada Plaza Old Town is an interior-corridor hotel,
consisting of a single, three-story, "L"-shaped building. The hotel opened in
1987 and has three meeting rooms, an outdoor swimming pool, exercise room,
restaurant and lounge. The hotel is located adjacent to Interstate 5 in the Old
Town area of San Diego, approximately two miles north of downtown San Diego and
within three miles of Sea World. The Company plans to renovate the hotel,
acquire adjacent land to accommodate the development of 27 additional suites,
and possibly rebrand the hotel to an upper mid-scale, full-service hotel with
178 rooms and suites.
On July 17, 1997, the Company acquired the full service 103-room Best
Western Landmark Inn in Lynnwood, Washington from Markland Hotel, Inc. for
approximately $7.2 million in cash. The purchase price is estimated to be
approximately 80% of replacement cost. The property is a five-story "H"-shaped
building which includes a lounge, indoor swimming pool and spa and a one-story
restaurant/banquet building of about 20,000 square feet. The property is on
approximately 5.4 acres which provides for an opportunity for expansion. The
hotel is 15 miles north of Seattle and is contained within the Technology
Corridor, a 10-mile stretch of seven master planned business parks.
On August 7, 1997, the Company acquired the leasehold interests in the
Best Western Crystal Suites Hotel and the Holiday Inn Mission Valley Stadium
Hotel from TSB Crystal Partnership and Shivani, LLC, respectively.
The Company purchased the leasehold interest in the 130-suite
interior-corridor Best Western Crystal Suites Hotel for approximately $8.7
million in cash. The purchase price is estimated to be approximately 80% of
replacement cost. The property consists of a single "L"-shaped, five-story
building which includes a breakfast room, fitness center, swimming pool and spa.
The Company plans to upgrade and brand the Crystal Suites hotel as an
extended-stay Hawthorne Suites, LTD franchise. The hotel is located within
walking distance of Disneyland Park and the Anaheim Convention Center and within
a short driving distance to other local attractions including Knott's Berry
Farm.
The Company purchased the leasehold interest in the full-service
175-room Holiday Inn Mission Valley Stadium Hotel for approximately $9.1 million
in cash. The purchase price is estimated to be approximately 80% of replacement
cost. The property consists of a single "V"-shaped building which includes a
restaurant and lounge, swimming pool and spa, several meeting rooms, an exercise
room, and both surface and under-structure parking. The hotel is located
adjacent to Interstate 15, in the area known as Mission Valley/Kearny Mesa, just
north of Qualcomm Stadium.
Amounts paid in cash for the Recent Acquisitions were primarily funded
through borrowings under the Company's line of credit facility with Bank One,
Credit Lyonnais and Wells Fargo Bank and through the proceeds of equity
offerings.
PROPOSED ACQUISITION - Kahler Realty Corporation
On August 5, 1997, the Company entered into a definitive agreement to
acquire all the capital stock of Kahler Realty Corporation, a privately held
Minnesota corporation ("Kahler") for an estimated purchase price of
approximately $322 million (plus estimated closing costs of $9,500,000 and
certain other amounts) ("Kahler Acquisition") from Westbrook Real Estate Fund I,
L.P. and Westbrook Real Estate Co-Investment Partnership I, L.P., affiliates of
Westbrook Partners, L.L.C., a real estate investment firm. The acquisition of
Kahler, which owns and operates 17 hotels with an aggregate of 4,255 rooms, will
almost double the number of hotel rooms in the Company's portfolio from the
current number. The transaction is expected to close during the fourth quarter
of 1997. The $322 million consideration to be paid at closing will consist of
approximately $95 million in cash, $25 million of newly issued preferred stock,
$32 million of newly issued common stock of the Company, and the assumption of
approximately $170 million of debt which, after closing, will be kept in place,
refinanced or retired. The purchase price is subject to an earnout calculation
which may increase the purchase price ultimately paid by the Company.
3
4
The Kahler Acquisition is described in greater detail in the Stock
Purchase Agreement and in the press release filed as exhibits to the Company's
Current Report on Form 8-K dated August 13, 1997.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired: See the Index to Financial
Information included on page F-1 of this report.
(b) Pro Forma Financial Information: See Index to Financial Information
included on page F-1 of this report.
(c) Exhibits:
10.1* Stock Purchase Agreement dated as of August 5, 1997
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG Peat Marwick LLP
99.1* Press Release dated August 6, 1997
- ----------
* Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated August 13, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SUNSTONE HOTEL INVESTORS, INC.
Date: August 22, 1997
By: /s/ Robert A. Alter, President
--------------------------------------
Robert A. Alter, President
4
5
SUNSTONE HOTEL INVESTORS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
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Sunstone Hotel Investors, Inc.
Introduction to Unaudited Pro Forma Consolidated
Financial Statements F-3
Unaudited Pro Forma Consolidated Statement of
Financial Position as of June 30, 1997 F-4
Unaudited Pro Forma Consolidated Statement of Operations for the
Six Months Ended June 30, 1997 F-6
Unaudited Pro Forma Consolidated Statement of Operations for the
Year Ended December 31, 1996 F-7
Sunstone Hotel Properties, Inc.
Unaudited Pro Forma Consolidated Statement of Operations for the
Six Months Ended June 30, 1997 F-8
Unaudited Pro Forma Consolidated Statement of Operations for the
Year Ended December 31, 1996 F-10
Markland Hotel, Inc.
Report of Independent Accountants F-12
Balance Sheet as of May 31, 1997 F-13
Statement of Operations for the Year Ended May 31, 1997 F-14
Statement of Stockholders' Equity for the Year Ended May 31, 1997 F-15
Statement of Cash Flows for the Year Ended May 31, 1997 F-16
Notes to Financial Statements F-17
TSB Crystal Partnership
Report of Independent Accountants F-19
Balance Sheets as of and December 31, 1996 and March 31, 1997 (Unaudited) F-20
Statements of Operations for the Year Ended December 31, 1996 and
the Three Months Ended March 31, 1997 (Unaudited) F-21
Statements of Partners' Capital for the Year Ended December 31, 1996 and
the Three Months Ended March 31, 1997 (Unaudited) F-22
Statements of Cash Flows for the Year Ended December 31, 1996 and
the Three Months Ended March 31, 1997 (Unaudited) F-23
Notes to Financial Statements F-24
Gateway Center Group
Report of Independent Accountants F-27
Balance Sheets as of December 31, 1996 and March 30, 1997 (Unaudited) F-28
Statements of Operations for the Year Ended December 31, 1996 and for
the Period from January 1, 1997 to March 30, 1997 (Unaudited) F-29
Statements of Partners' Equity for the Year Ended December 31, 1996 and
for the Period from January 1, 1997 to March 30, 1997 (Unaudited) F-30
Statements of Cash Flows for the Year Ended December 31, 1996 and
for the Period from January 1, 1997 to March 30, 1997 (Unaudited) F-31
Notes to Financial Statements F-32
Holiday Inn Mission Valley Stadium Hotel
Report of Independent Accountants F-35
Statement of Assets and Liabilities as of May 31, 1997 F-36
Statement of Revenues and Expenses for the Period from June 12, 1996
(Date of Acquisition) to May 31, 1997 F-37
Statement of Members' Equity for the Period from June 12, 1996
(Date of Acquisition) to May 31, 1997 F-38
Statement of Cash Flows for the Period from June 12, 1996
(Date of Acquisition) to May 31, 1997 F-39
Notes to Financial Statements F-40
F-1
6
Page
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Kent Hospitality Partners, L.P.
Report of Independent Public Accountants F-42
Balance Sheets as of October 31, 1996 and February 28, 1997 (Unaudited) F-43
Statements of Operations for the Year Ended October 31, 1996 and
for the Period November 1, 1996 to February 28, 1997 (Unaudited) F-44
Statements of Partners' Capital for the Year Ended October 31, 1996
and for the Period November 1, 1996 to February 28, 1997 (Unaudited) F-45
Statements of Cash Flows for the Year Ended October 31, 1996 and
for the Period November 1, 1996 to February 28, 1997 (Unaudited) F-46
Notes to Financial Statements F-47
Kahler Realty Corporation and Subsidiaries
Independent Auditors' Report F-51
Consolidated Statements of Operations for the Period from
January 1, 1996 to August 12, 1996 (Predecessor Period)
and the Period from August 13, 1996 to December 29, 1996
(Successor Period) and the Six Months Ended June 29, 1997 and
June 30, 1996 (Unaudited) F-52
Consolidated Balance Sheets as of December 29, 1996 and June 29,
1997 (Unaudited) F-53
Consolidated Statements of Stockholders' Equity for the Period from
January 1, 1996 to August 12, 1996 (Predecessor Period) and
the Period from August 13, 1996 to December 29, 1996 (Successor
Period) and the Six Months Ended June 30, 1997 (Unaudited) F-55
Consolidated Statements of Cash Flows for the Period from January 1,
1996 to August 12, 1996 (Predecessor Period) and the Period from
August 13, 1996 to December 29, 1996 (Successor Period) and the
Six Months Ended June 29, 1997 F-56
Notes to Consolidated Financial Statements F-57
Independent Auditor's Report F-69
Consolidated Statements of Operations for the
Years Ended December 31, 1995 and January 1, 1995 F-70
Consolidated Balance Sheets as of December 31, 1995 and
January 1, 1995 F-71
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995 and January 1, 1995 F-73
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and January 1, 1995 F-74
Notes to Consolidated Financial Statements F-75
F-2
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SUNSTONE HOTEL INVESTORS, INC.
SUNSTONE HOTEL PROPERTIES, INC.
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of financial position of Sunstone
Hotel Investors, Inc. (the "Company") as of June 30,1997 is presented as if the
acquisitions that occurred in 1997 (Ramada Hotel in Cypress, California, Holiday
Inn Harbor View in San Diego, California, Hawthorn Suites Hotel in Kent,
Washington, Holiday Inn Hotel in La Mirada, California, Fountain Suites Hotel in
Sacramento, California, Ramada Plaza Hotel in Old Town, San Diego, California,
Best Western Landmark Inn in Lynnwood, Washington, Best Western Crystal Suites
Hotel in Anaheim, California and the Holiday Inn Mission Valley Stadium Hotel in
the Mission Valley/Kearny Mesa area of California) ("Recent Acquisitions") and
the proposed acquisition of Kahler Realty Corporation ("Kahler Acquisition") and
related Offering all had occurred by June 30, 1997.
The Company's and Sunstone Hotel Properties, Inc.'s (the "Lessee") unaudited pro
forma consolidated statements of operations for the six months ended June 30,
1997 and year ended December 31, 1996 are presented as if the Recent
Acquisitions and the Kahler Acquisition and proposed Offering had occurred as of
January 1, 1996 and carried forward through each period presented. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
The unaudited pro forma consolidated financial information assumes that the
proposed common stock Offering related to the Kahler Acquisition is limited to
the remaining amount under the Company's existing shelf registration of
approximately $70 million. The balance of the Kahler Acquisition purchase price
is assumed to be financed under terms similar to the Company's existing line of
credit. For pro forma purposes, the purchase price of the Kahler Acquisition
has been based on, among other items, the financial statements of Kahler Realty
Corporation as of June 30, 1997. The actual financing of the acquisition of
Kahler Realty Corporation may differ from the assumptions used. The Company has
not taken into consideration events subsequent to June 30, 1997.
The unaudited pro forma consolidated financial information is not necessarily
indicative of what the Company's or Lessee's financial position or results of
operations would have been assuming consummation of the Recent Acquisitions and
the Kahler Acquisition and proposed Offering on such date or at the beginning of
the period indicated, nor do they purport to project the Company's or Lessee's
financial position or results of operations at any future date or for any future
period.
F-3
8
SUNSTONE HOTEL INVESTORS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As of June 30, 1997
(Unaudited)
Pro Forma Adjustments
----------------------------------
Pro Forma
Sunstone Hotel Recent Kahler Sunstone Hotel
Investors, Inc.(A) Acquisitions Acquisition(D) Investors, Inc.
------------------ ------------- -------------- ---------------
ASSETS:
Investment in hotel properties, net $ 252,349,000 $ 24,873,000(B) $340,539,000 $617,761,000
Investment in joint venture -- -- 11,168,000 11,168,000
Mortgage notes receivable 2,850,000 -- 910,000 3,760,000
Cash 1,189,000 -- -- 1,189,000
Rent receivable - Lessee 3,904,000 -- -- 3,904,000
Prepaid expenses and other assets, net 2,724,000 -- 1,858,000 4,582,000
------------- ------------- ------------ ------------
$ 263,016,000 $ 24,873,000 $354,475,000 $642,364,000
============= ============= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving line of credit $ 18,800,000 $ 24,873,000(C) $ 45,327,000(E) $ 89,000,000
Mortgage notes payable 22,649,000 -- 170,742,000(F) 193,391,000
Accounts payable and other accrued expenses 2,235,000 -- 7,283,000 9,518,000
------------- ------------- ------------ ------------
43,684,000 24,873,000 223,352,000 291,909,000
Minority interest 24,521,000 -- 7,623,000 32,144,000
Stockholders' equity:
Common stock, $.01 par value,
50,000,000 authorized,
20,368,001 issued and outstanding 203,000 -- 70,000(G) 273,000
Preferred stock, $.01 par value,
10,000,000 authorized, no shares -- -- 15,000(G) 15,000
issued our outstanding
Additional paid-in capital 195,494,000 -- 123,415,000(G) 318,909,000
Distributions in excess of earnings (886,000) -- -- (886,000)
------------- ------------- ------------ ------------
194,811,000 -- 123,500,000 318,311,000
------------- ------------- ------------ ------------
$ 263,016,000 $ 24,873,000 $354,475,000 $642,364,000
============= ============= ============ ============
(A) Reflects the Company's historical consolidated balance sheet at June 30,
1997, which includes certain of the Recent Acquisitions which were
acquired prior to June 30, 1997 at an aggregate purchase price of
$81,100,000 (Ramada Hotel in Cypress, California, Holiday Inn Harbor
View in San Diego, California, Hawthorn Suites Hotel in Kent,
Washington, Holiday Inn Hotel in La Mirada, California, Fountain Suites
Hotel in Sacramento, California and the Ramada Plaza Hotel in Old Town,
San Diego, California).
(B) Reflects the aggregate purchase price for certain of the Recent
Acquisitions which were acquired after June 30, 1997 (Best Western
Landmark Inn in Lynnwood, Washington, Best Western Crystal Suites Hotel
in Anaheim, California, Holiday Inn Mission Valley Stadium Hotel in the
Mission Valley/Kearny Mesa area of California).
(C) Reflects cash paid for certain of the Recent Acquisitions which occurred
subsequent to June 30, 1997, from draws on the Company's line of credit.
(D) Reflects the purchase of all of the outstanding stock in Kahler Realty
Corporation ("Kahler") for $151,680,000 plus estimated closing costs of
$9,500,000 and certain other amounts. The purchase price is comprised of
$94,680,000 in cash and $32,000,000 in common stock and $25,000,000 in
preferred stock to be issued to the seller and is subject to an earn out
calculation which may increase the purchase price ultimately paid. The
cash portion of the purchase price of this transaction may be financed
with proceeds from the Company's line of credit and/or from the issuance
of public or private debt or equity securities.
The carrying value of the Kahler assets and liabilities have been
adjusted to reflect management's estimates of fair value.
F-4
9
(E) Represents the following proposed transactions in connection with the
proposed acquisition of Kahler:
Cash portion of purchase price $ 94,680,000
Payment of transaction costs 9,500,000
Repayment of Kahler assumed debt 7,647,000
Net proceeds from public offering of common stock (66,500,000)
------------
$ 45,327,000
============
(F) Represents the following proposed transactions in connection with the
proposed acquisition of Kahler:
Kahler assumed debt $178,389,000
Repayment of portion of Kahler assumed debt
with line of credit proceeds (7,647,000)
------------
$170,742,000
============
(G) Represents the following proposed transactions in connection with
proposed acquisition of Kahler:
Issuance of unregistered common stock $ 32,000,000
Issuance of unregistered preferred stock 25,000,000
Proceeds from public offering of common stock 70,000,000
Expenses of public offering of common stock (3,500,000)
------------
$123,500,000
============
F-5
10
SUNSTONE HOTEL INVESTORS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
(Unaudited)
Pro Forma Adjustments(B)
----------------------------------------------------------
Sunstone Hotel Recent Kahler Proposed
Investors, Inc.(A) Acquisitions Acquisition Offering Other Pro Forma
------------------ ------------ -------------- ---------- --------- -----------
REVENUES:
Lease revenue $15,347,000 $4,133,000(C) $15,656,000(C) $ -- $ -- $35,136,000
Interest income 321,000 -- -- -- -- 321,000
----------- ---------- ----------- ----------- ------- -----------
Total revenues 15,668,000 4,133,000 15,656,000 -- -- 35,457,000
EXPENSES:
Real estate related
depreciation 3,900,000 1,267,000(D) 4,327,000(D) -- -- 9,494,000
Interest expense and
amortization
of financing costs 1,557,000 2,261,000(E) 10,356,000(G) (2,477,000)(I) -- 11,697,000
Real estate and personal
property taxes, ground
leases and insurance 1,360,000 281,000(F) 2,275,000(F) -- -- 3,916,000
General and administrative 801,000 -- 125,000(H) -- -- 926,000
----------- ---------- ----------- ----------- ------- -----------
Total expenses 7,618,000 3,809,000 17,083,000 (2,477,000) -- 26,033,000
----------- ---------- ----------- ----------- ------- -----------
Income (loss) before
minority interest 8,050,000 324,000 (1,427,000) 2,477,000 -- 9,424,000
Minority interest 953,000 -- -- -- (29,000)(J) 924,000
----------- ---------- ----------- ----------- -------- ----------
NET INCOME (LOSS) 7,097,000 324,000 (1,427,000) 2,477,000 29,000 8,500,000
Preferred dividend
requirements -- -- (988,000) -- -- (988,000)
----------- ---------- ----------- ----------- ------- -----------
Income available to
common shareholders $ 7,097,000 $ 324,000 $(2,415,000) $ 2,477,000 $29,000 $ 7,512,000
=========== ========== =========== =========== ======= ===========
NET INCOME PER
COMMON SHARE $ 0.43 $ 0.32
=========== ===========
Weighted average common
shares outstanding 16,505,000 23,455,929
=========== ===========
- ----------------
(A) Represents the Company's historical results of operations for the six
months ended June 30, 1997.
(B) Represents adjustments to the Company's results of operations assuming
the Recent Acquisitions and the Kahler Acquisition and Proposed Offering
had occurred at the beginning of the period presented.
(C) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the provisions of the standard Percentage
Leases to the historical revenue of the hotels acquired assuming January
1, 1997 was the start of the lease term.
(D) Represents depreciation on the hotels and other assets acquired.
Depreciation is computed using the straight-line method and is based
upon the estimated useful lives of 31.5 to 40 years for buildings and
improvements and 5 to 7.5 years for furniture and equipment.
(E) Represents interest expense and amortization of financing costs which
would have been incurred on the net borrowings under the line of credit
which was used to purchase hotel properties and other assets.
(F) Represents real estate and personal property taxes, ground leases and
insurance expense that would have been incurred by the Company based on
historical amounts of property taxes and ground lease expense and
estimated insurance premiums based upon the Company's existing
insurance policies.
(G) Represents interest expense incurred on the net borrowings under the
line of credit used to purchase Kahler and repay certain Kahler debt
plus interest on assumed Kahler debt.
(H) Represents the incremental corporate expenses that will be incurred as
a result of the Kahler acquisition.
(I) Represents the elimination of interest expense incurred on the portion
of borrowings under the line of credit which are expected to be repaid
with proceeds from the proposed offering.
(J) Calculated as a percentage of income before minority interest. The
percentage is equal to the percentage of the Partnership owned by
parties other than the Company (9.81%).
F-6
11
SUNSTONE HOTEL INVESTORS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(Unaudited)
Pro Forma Adjustments (B)
-----------------------------------------------------------
Sunstone Hotel Recent Kahler Proposed
Investors, Inc.(A) Acquisitions Acquisition Offering Other Pro Forma
------------------ ------------ ------------ ----------- -------- ------------
REVENUES:
Lease revenue $ 14,848,000 $ 13,497,000(C) $ 28,016,000(C) $ -- $ -- $ 56,361,000
Interest income 236,000 -- -- -- -- 236,000
------------ ------------ ------------ ----------- -------- ------------
Total revenues 15,084,000 13,497,000 28,016,000 -- -- 56,597,000
EXPENSES:
Real estate related
depreciation 4,514,000 4,259,000(D) 8,655,000(D) -- -- 17,428,000
Interest expense and
amortization
of financing costs 1,558,000 7,861,000(E) 20,112,000(G) (5,007,000)(I) -- 24,524,000
Real estate, personal
property taxes, ground
leases and insurance 1,273,000 1,001,000(F) 4,627,000(F) -- -- 6,901,000
General and administrative 1,015,000 -- 250,000(H) -- -- 1,265,000
------------ ------------ ------------ ----------- -------- ------------
Total expenses 8,360,000 13,121,000 33,644,000 (5,007,000) -- 50,118,000
------------ ------------ ------------ ----------- -------- ------------
Income (loss) before
minority interest 6,724,000 376,000 (5,628,000) 5,007,000 -- 6,479,000
Minority interest 1,090,000 -- -- -- (337,000)(J) 753,000
------------ ------------ ------------ ----------- -------- ------------
NET INCOME (LOSS) 5,634,000 376,000 (5,628,000) 5,007,000 337,000 5,726,000
Preferred dividend
requirements -- -- (1,975,000) -- -- (1,975,000)
------------ ------------ ------------ ----------- -------- ------------
Net income available to
common stockholders $ 5,634,000 $ 376,000 $ (7,603,000) $ 5,007,000 $337,000 $ 3,751,000
============ ============ ============ =========== ======== ============
NET INCOME PER
COMMON SHARE $ 0.71 $ 0.25
============ ============
Weighted average common
shares outstanding 8,050,990 15,001,919
============ ============
- ----------------
(A) Represents the Company's historical results of operations for the year
ended December 31, 1996.
(B) Represents adjustments to the Company's results of operations assuming
the Recent Acquisitions and the Kahler Acquisition and Proposed
Offering had occurred at the beginning of the period presented.
(C) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the provisions of the standard Percentage
Leases to the historical revenue of the hotels acquired assuming January
1, 1996 was the start of the lease term.
(D) Represents depreciation on the hotels and other assets acquired.
Depreciation is computed using the straight-line method and is based
upon the estimated useful lives of 31.5 to 40 years for buildings and
improvements and 5 to 7.5 years for furniture and equipment.
(E) Represents interest expense and amortization of financing costs which
would have been incurred on the net borrowings under the line of credit
which was used to purchase hotel properties and other assets acquired.
(F) Represents real estate and personal property taxes, ground leases
and insurance expense that would have been incurred by the Company
based on historical amounts of property taxes and ground lease expense
and estimated insurance premiums based upon the Company's existing
insurance policies.
(G) Represents interest expense incurred on the net borrowings under the
line of credit used to purchase Kahler and repay certain Kahler debt
plus interest on assumed Kahler debt.
(H) Represents the incremental corporate expenses that will be incurred as
a result of the Kahler acquisition.
(I) Represents the elimination of interest expense incurred on the portion
of borrowings under the line of credit which are expected to be repaid
with proceeds from the proposed offering.
(J) Calculated as a percentage of income before minority interest. The
percentage is equal to the percentage of the Partnership owned by
parties other than the Company (11.62%).
F-7
12
SUNSTONE HOTEL PROPERTIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
(Unaudited)
Sunstone Hotel
Properties, Recent Kahler Pro Forma
Inc. (A) Acquisitions(A) Acquisition(A) Adjustments(B) Pro Forma
-------------- --------------- -------------- -------------- ------------
REVENUES:
Room $34,501,000 $ 8,192,000 $38,199,000 $ -- $ 80,892,000
Food and beverage 2,744,000 583,000 18,942,000 -- 22,269,000
Other 2,002,000 581,000 9,571,000 -- 12,154,000
----------- ----------- ----------- ------------- ------------
Total revenues 39,247,000 9,356,000 66,712,000 -- 115,315,000
----------- ----------- ----------- ------------- ------------
EXPENSES:
Room 7,735,000 2,061,000 9,036,000 -- 18,832,000
Food and beverage 2,296,000 473,000 14,361,000 -- 17,130,000
Laundry and other -- -- 1,904,000 -- 1,904,000
Amusement park tickets -- 144,000 -- -- 144,000
Telephone -- 91,000 -- -- 91,000
General and
administrative 3,734,000 971,000 -- -- 4,705,000
Management fees 759,000 152,000 -- 1,036,000(C) 1,947,000
Franchise costs 2,557,000 50,000 -- -- 2,607,000
Advertising and
promotion 2,300,000 745,000 -- -- 3,045,000
Utilities 1,792,000 394,000 -- -- 2,186,000
Repairs and maintenance 1,374,000 503,000 -- -- 1,877,000
Other operating 988,000 85,000 19,762,000 -- 20,835,000
Corporate expenses -- -- 1,475,000 (1,475,000)(D) --
Non-recurring expenses
and other -- -- 2,102,000 (2,102,000)(E) --
Property taxes, ground
lease payments and
insurance -- 217,000 2,517,000 (2,734,000)(F) --
Rent expense 15,347,000 -- -- 19,789,000 (G) 35,136,000
Depreciation -- 537,000 5,277,000 (5,814,000)(H) --
Interest -- 1,184,000 8,420,000 (9,604,000)(I) --
----------- ----------- ----------- ------------- ------------
Total expenses 38,882,000 7,607,000 64,854,000 (904,000) 110,439,000
----------- ----------- ----------- ------------- ------------
Net income $ 365,000 $ 1,749,000 $ 1,858,000 $ 904,000 $ 4,876,000
=========== =========== =========== ============= ============
- -------------
(A) Represents the historical results of operations of Sunstone Hotel
Properties, Inc. (the "Lessee"), the Recent Acquisitions and Kahler for
the six months ended June 30, 1997.
(B) Represents adjustments to the Lessee's combined historical results of
operations to reflect amounts which would not have been incurred by the
Lessee assuming the Recent Acquisitions and the Kahler Acquisition had
been leased to the Lessee at the beginning of the period presented.
(C) Represents the adjustment to reflect management fees of 2% of total
revenues from the Recent Acquisitions and 1-1/2% of total revenues from
the Kahler Acquisition.
(D) Represents the elimination of corporate expenses which would be a cost
of the Company.
(E) Represents the elimination of non-recurring and other expenses which
would not be incurred by the Lessee.
F-8
13
(F) Represents the elimination of property taxes, ground lease payments and
insurance which would have been incurred by the Company.
(G) Represents rent expense calculated on a pro forma basis by applying the
rent provisions of the standard Percentage Leases to the historical
revenues of the Recent Acquisitions and the Kahler Acquisition.
(H) Represents the elimination of depreciation expense which would be
incurred by the Company.
(I) Represents the elimination of interest expense which would be a
cost incurred by the Company.
F-9
14
SUNSTONE HOTEL PROPERTIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(Unaudited)
Sunstone Hotel
Properties, Recent Kahler Pro Forma
Inc.(A) Acquisitions(A) Acquisition(A) Adjustments(B) Pro Forma
------------- --------------- -------------- -------------- -------------
REVENUES:
Room $ 34,085,000 $ 29,499,000 $ 69,770,000 $ -- $ 133,354,000
Food and beverage 2,576,000 2,728,000 35,358,000 -- 40,662,000
Laundry -- -- 7,103,000 -- 7,103,000
Other 1,932,000 2,539,000 12,423,000 -- 16,894,000
------------- ------------- ------------- ------------- -------------
Total revenues 38,593,000 34,766,000 124,654,000 -- 198,013,000
------------- ------------- ------------- ------------- -------------
EXPENSES:
Room 9,041,000 7,896,000 17,010,000 -- 33,947,000
Food and beverage 2,436,000 2,602,000 27,365,000 -- 32,403,000
Laundry and other -- -- 5,163,000 -- 5,163,000
Amusement park tickets -- 687,000 -- -- 687,000
Telephone -- 401,000 -- -- 401,000
General and
administrative 4,098,000 3,438,000 -- -- 7,536,000
Management fees 983,000 1,089,000 -- 1,476,000 (C) 3,548,000
Franchise costs 1,326,000 225,000 -- -- 1,551,000
Advertising and
promotion 3,895,000 3,233,000 -- -- 7,128,000
Utilities 2,034,000 1,640,000 -- -- 3,674,000
Repairs and maintenance 1,829,000 1,984,000 -- -- 3,813,000
Other operating 1,265,000 248,000 37,572,000 -- 39,085,000
Corporate expenses -- -- 4,192,000 (4,192,000)(D) --
Non-recurring expenses
and other -- -- 3,465,000 (3,465,000)(E) --
Property taxes, ground
lease payments and
insurance -- 955,000 5,418,000 (6,373,000)(F) --
Rent expense 14,848,000 -- -- 41,513,000 (G) 56,361,000
Land and equipment
leases -- 357,000 -- -- 357,000
Depreciation -- 2,183,000 9,113,000 (11,296,000)(H) --
Interest -- 3,302,000 13,958,000 (17,260,000)(I) --
------------- ------------- ------------- ------------- -------------
Total expenses 41,755,000 30,240,000 123,256,000 403,000 195,654,000
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (3,162,000) $ 4,526,000 $ 1,398,000 $ (403,000) $ 2,359,000
============= ============= ============= ============= =============
- --------------
(A) Represents the historical results of operations of Sunstone Hotel
Properties, Inc. (the "Lessee"), the Recent Acquisitions and Kahler
for the year ended December 31, 1996.
(B) Represents adjustments to the Lessee's combined historical results of
operations to reflect amounts which would not have been incurred by the
Lessee assuming the Recent Acquisitions and the Kahler Acquisition had
been leased to the Lessee at the beginning of the period presented.
(C) Represents the adjustment to reflect management fees of 2% of total
revenues from the Recent Acquisitions and 1-1/2% of total revenues from
the Kahler Acquisition.
(D) Represents the elimination of corporate expenses which would be a cost
of the Company.
F-10
15
(E) Represents the elimination of non-recurring and other expenses which
would not be incurred by the Lessee.
(F) Represents the elimination of property taxes, ground lease payments and
insurance which would be a cost incurred by the Company.
(G) Represents rent expense calculated on a pro forma basis by applying the
rent provisions of the standard Percentage Leases to the historical
revenues of the Recent Acquisitions and the Kahler Acquisition.
(H) Represents the elimination of depreciation expense which would be
incurred by the Company.
(I) Represents the elimination of interest expense which would be a cost
incurred by the Company.
F-11
16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Sunstone Hotel Investors, Inc.:
We have audited the accompanying balance sheet of Markland Hotel, Inc. as of
May 31, 1997 and the related statements of operations, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Markland Hotel, Inc. as of May
31, 1997, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
San Francisco, California
July 17, 1997
F-12
17
MARKLAND HOTEL, INC.
BALANCE SHEET
MAY 31, 1997
--------------------
ASSETS
Real estate assets, at cost:
Building and improvements $2,563,884
Land 760,711
Furniture, fixtures and equipment 511,285
----------
3,835,880
Accumulated depreciation (537,679)
----------
Net real estate assets 3,298,201
Cash and cash equivalents 167,711
Other assets, net of accumulated amortization of $21,850 49,737
----------
Total assets $3,515,649
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage payable $1,903,649
Other liabilities 108,982
----------
2,012,631
Stockholders' equity 1,503,018
----------
$3,515,649
==========
The accompanying notes are an integral part of these financial statements.
F-13
18
MARKLAND HOTEL, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1997
--------------------
Revenue:
Rooms $ 1,629,670
Other 121,077
------------
Total revenue 1,750,747
------------
Cost and operating expenses:
Room 375,304
Administrative and general 158,441
Marketing 101,078
Utilities 61,997
Property taxes 38,730
Maintenance and repairs 82,210
Management fees 52,600
Other operating expenses 71,471
Depreciation and amortization 170,512
Interest expense 195,065
------------
Total costs and operating expenses 1,307,408
------------
Net income $ 443,339
============
The accompanying notes are an integral part of these financial statements.
F-14
19
MARKLAND HOTEL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MAY 31, 1997
--------------------
Balance, June 1, 1996 $ 1,324,816
Dividends (265,137)
Net income 443,339
------------
Balance, May 31, 1997 $ 1,503,018
============
The accompanying notes are an integral part of these financial statements.
F-15
20
MARKLAND HOTEL, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 1997
--------------------
Cash from operating activities:
Net income $ 443,339
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 170,512
Decrease in other assets 7,240
Decrease in other liabilities (65,353)
---------
Net cash provided by operating activities 555,738
---------
Cash used from investing activities:
Purchase of building improvements and furniture and equipment (159,730)
---------
Cash used in financing activities:
Principal payments on mortgage payable (36,540)
Dividends (265,137)
---------
Net cash used in financing activities (301,677)
---------
Net increase in cash and cash equivalents 94,331
Cash and cash equivalents, beginning of year 73,380
---------
Cash and cash equivalents, end of year $ 167,711
=========
Interest paid $ 195,065
=========
The accompanying notes are an integral part of these financial statements.
F-16
21
MARKLAND HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION:
The Markland Hotel, Inc. (the Company) is a corporation organized under
the laws of the State of Washington to acquire and own a hotel located
in Lynnwood, Washington.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, all highly liquid debt
instruments with maturities of three months or less on the date of
acquisition are considered to be cash equivalents. All of the Company's
cash is deposited with one major banking institution.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. All property and building
improvements are depreciated using the straight-line method over 39
years. All furniture and fixtures are depreciated using the
double-declining balance method over 5 years.
Maintenance and repairs are charged to operations as incurred and major
renewals and betterments are capitalized.
AMORTIZATION:
Deferred loan costs are amortized over the life of the mortgage loan.
Organizational costs are amortized on the straight-line method over 5
years.
PROVISION FOR INCOME TAXES:
The Company, with the consent of its shareholders, has elected to have
its income taxed as an S-Corporation which provides that in lieu of
corporate income taxes, the shareholders are taxed on their
proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal income taxes is reflected in these
financial statements.
REVENUE RECOGNITION:
Revenue is recognized as earned. Earned is generally defined as the
date upon which a guest occupies a room or utilizes the Hotel's
services. Ongoing credit evaluations are performed and potential credit
losses are expensed at the time the accounts receivable is estimated to
be uncollectible. Historically, credit losses have not been material to
the Hotel's results of operations.
Continued
F-17
22
MARKLAND HOTEL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, including disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results may,
in some instances, differ from previously estimated amounts.
3. MORTGAGE PAYABLE:
The mortgage payable to a bank dated June 21, 1994 bears interest at fixed
rate of 10%. Interest and principal are payable in equal monthly
installments of $ 19,300 until maturity on July 1, 2001, at which time
the remaining balance is payable. The mortgage payment is collateralized
by all Hotel property.
Principal payments required in future years are as follows:
Fiscal Year
Ending May 31,
--------------
1998 $ 44,249
1999 48,882
2000 54,001
2001 59,656
2002 1,696,861
------------
$ 1,903,649
============
4. RELATED PARTY TRANSACTIONS:
For the year ended May 31, 1997, the Company paid $52,600 to a shareholder
for management services.
5. SUBSEQUENT EVENT:
On July 17, 1997, the Hotel was sold to Sunstone Hotel Investors, Inc.
F-18
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Sunstone Hotel Investors, Inc.:
We have audited the accompanying balance sheet of TSB Crystal Partnership (the
"Partnership") as of December 31, 1996, and the related statements of
operations, partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TSB Crystal Partnership as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
San Francisco, California
August 7, 1997
F-19
24
TSB CRYSTAL PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
-----------------------
DECEMBER 31, MARCH 31,
ASSETS 1996 1997
--------------- --------------
(unaudited)
Investments in hotel property, at cost:
Land $ 700,000 $ 700,000
Building and improvements 3,742,682 3,709,724
Furniture and equipment 3,165,257 3,386,936
Accumulated depreciation (3,085,468) (3,237,144)
--------------- --------------
Net investment in hotel property 4,522,471 4,559,516
Cash 48,081 77,175
Restricted cash 59,056 13,336
Accounts receivable 99,734 74,475
Inventories and prepaid expenses 83,342 58,500
Other assets, net of accumulated amortization of $415,086 and
$433,151 (unaudited), respectively
50,674 32,609
--------------- --------------
Total assets $ 4,863,358 $ 4,815,611
=============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable, trade and accrued expenses $ 135,059 $ 139,263
Notes payable 6,123,055 6,042,049
--------------- --------------
Total liabilities 6,258,114 6,181,312
Partners' capital (1,394,756) (1,365,701)
--------------- --------------
Total liabilities and partners' capital $ 4,863,358 $ 4,815,611
=============== ==============
The accompanying notes are an integral part of these financial statements.
F-20
25
TSB CRYSTAL PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED MARCH 31, 1997
-----------------------
For the Year For the Three
Ended Months Ended
December 31, 1996 March 31, 1997
----------------- --------------
(unaudited)
Revenues:
Rooms $3,388,894 $724,531
Telephone and other 135,143 32,023
Amusement park tickets 732,810 93,071
---------- --------
Total revenue 4,256,847 849,625
---------- --------
Expenses:
Rooms 901,686 182,629
Telephone 99,273 8,657
Amusement park tickets 686,743 72,096
General and administrative 163,632 45,919
Utilities and other operating costs 184,100 45,929
Repairs and maintenance 182,968 42,645
Management fees 127,059 22,402
Real estate taxes 46,194 11,549
Advertising and promotion 364,763 55,958
Interest expense 695,390 163,045
Depreciation and amortization 678,965 169,741
---------- --------
Total expenses 4,130,773 820,570
---------- --------
Net income $ 126,074 $ 29,055
========== ========
The accompanying notes are an integral part of these financial statements.
F-21
26
TSB CRYSTAL PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED MARCH 31, 1997
-----------------------
Balance, January 1, 1996 $(1,070,830)
Net income 126,074
Distributions (450,000)
-----------
Balance, December 31, 1996 (1,394,756)
Net income (unaudited) 29,055
-----------
Balance, March 31, 1997 (unaudited) $(1,365,701)
===========
The accompanying notes are an integral part of these financial statements.
F-22
27
TSB CRYSTAL PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED MARCH 31, 1997
-----------------------
For the Year For the Three
Ended Months Ended
December 31, 1996 March 31, 1997
----------------- --------------
(unaudited)
Cash flows from operating activities:
Net income $ 126,074 $ 29,055
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 678,965 169,741
Changes in assets and liabilities:
Accounts receivable 50,124 25,259
Inventories and prepaid expenses and other assets 39,849 24,842
Accounts payable and accrued expenses (34,775) 4,204
Restricted cash (8,408) 45,720
---------- -----------
Net cash provided by operating activities 851,829 298,821
Cash flows from investing activities:
Improvements and additions to hotel property (127,595) (188,721)
---------- -----------
Net cash used in investing activities (127,595) (188,721)
Cash flows from financing activities:
Principal payments on notes payable (306,659) (81,006)
Distributions to partners (450,000) --
---------- -----------
Net cash used in financing activities (756,659) (81,006)
Net change in cash (32,425) 29,094
Cash, beginning of period 80,506 48,081
---------- -----------
Cash, end of period $ 48,081 $ 77,175
========== ===========
Interest paid $ 694,228 $ 163,045
========== ===========
The accompanying notes are an integral part of these financial statements.
F-23
28
TSB CRYSTAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
-----------------------
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION:
TSB Crystal Partnership (the "Partnership") was formed for the purpose
of owning, operating and holding for investment and ultimate resale the
Best Western Crystal Suites (the "Hotel"), a 130-suite, full service
Hotel in Anaheim, California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited financial statements for the three-month
period ended March 31, 1997 and as of March 31, 1997, have been
prepared in accordance with the requirements for presentation of
interim financial statements and, therefore, do not include all
information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity
with generally accepted accounting principles. In the opinion of
management, all adjustments consisting only of normal recurring
adjustments that are necessary for a fair presentation for interim
periods presented have been reflected.
RESTRICTED CASH:
Restricted cash balances at December 31, 1996 and March 31, 1997 are
required under certain debt agreements to secure the payment of certain
replacements and capital improvements.
INVENTORIES:
Inventories consist of guest supplies and are stated at cost, which
approximates market.
INVESTMENT IN HOTEL PROPERTY:
Investment in hotel property is stated at cost. Depreciation is
computed using the straight-line method based upon useful
lives ranging from 5 to 32 years.
Maintenance and repairs are charged to operations as incurred and major
renewals and betterments are capitalized.
OTHER ASSETS:
Other assets consist primarily of deferred loan costs which are
recorded at cost and amortized over the lives of the related loans.
Continued
F-24
29
TSB CRYSTAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
-----------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
INCOME TAXES:
No provision has been made in the accompanying financial statements for
federal or state income taxes as the taxable income or loss of the
Partnership is included in the owners' federal and state income tax
returns. The Partnership's tax returns and the amount of allocable
income or loss are subject to examination by the federal and state
taxing authorities. If such examinations result in changes to income or
loss, the tax liability of the partners could be changed accordingly.
REVENUE RECOGNITION:
Revenue is recognized as earned. Earned is generally defined as the
date upon which a guest occupies a room and utilizes the Hotel's
services. Ongoing credit evaluations are performed and potential credit
losses are expensed at the time the accounts receivable are estimated
to be uncollectible. Historically, credit losses have not been material
to the Hotel's results of operations.
The Hotel purchases tickets to a local amusement park for the ultimate
resale to hotel guests. Revenue from the ticket sales is recognized
upon the sale of tickets.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, including disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results may, in some
instances, differ from previously estimated amounts.
Continued
F-25
30
TSB CRYSTAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
-----------------------
3. NOTES PAYABLE:
At December 31, 1996, notes payable consist of the following:
Mortgage note payable, monthly payments of principal and interest at
prime plus 2.50% until maturity on September 29, 1997,
collateralized by the Hotel and guaranteed by the partners $4,778,633
Mortgage note payable, monthly payments of principal and interest at
10.51% until maturity on September 29, 1997, collateralized by
the Hotel and guaranteed by the partners 1,344,422
----------
$6,123,055
==========
At December 31, 1996, the Partnership was not in compliance with a
covenant requiring a minimum debt service coverage ratio of 1.35. The
notes payable were subsequently repaid (Note 5).
4. RELATED PARTIES:
In 1996, the Partnership incurred management fees of $127,059, payable to
a partner. At December 31, 1996, the Partnership had management fees
payable of $26,706, included in accrued expenses.
5. SUBSEQUENT EVENT:
On August 7, 1997, the Partnership sold the Hotel to Sunstone Hotel
Investors, Inc.
F-26
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Sunstone Hotel Investors, Inc.:
We have audited the accompanying balance sheet of the Gateway Center Group (the
"Partnership") as of December 31, 1996, and the related statements of
operations, partners' equity, and cash flows for the year ended December 31,
1996. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Gateway Center Group as of
December 31, 1996, and the results of its operations and its cash flows for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
San Francisco, California
July 18, 1997
F-27
32
GATEWAY CENTER GROUP
BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 30, 1997
--------------------
December 31, March 30,
1996 1997
--------------- ------------------
ASSETS (unaudited)
Investment in hotel property, at cost:
Land $ 1,042,886 $ 1,042,886
Building and improvements 12,569,249 12,583,161
Furniture and equipment 4,462,308 4,477,826
Accumulated depreciation (13,300,401) (13,346,465)
-------------- ----------------
Net investment in hotel property 4,774,042 4,757,408
Cash 227,532 482,364
Accounts receivable 217,959 159,860
Prepaid expense and other assets, net of accumulated amortization of
$1,730,541 and $1,732,736 (unaudited), respectively
125,079 120,284
-------------- ----------------
Total assets $ 5,344,612 $ 5,519,916
============== ================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $ 1,420,487 $ 1,603,894
Note payable - third party 5,725,000 5,625,000
Note payable - related party 3,112,590 3,112,590
-------------- ----------------
Total liabilities 10,258,077 10,341,484
-------------- ----------------
Partners' equity (deficit) (4,913,465) (4,821,568)
-------------- ----------------
Total liabilities and partners' equity $ 5,344,612 $ 5,519,916
============== ================
The accompanying notes are an integral part of these financial statements.
F-28
33
GATEWAY CENTER GROUP
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE
PERIOD FROM JANUARY 1, 1997 TO MARCH 30, 1997
--------------------
For the Year For the Period from
Ended January 1, 1997 to
December 31, 1996 March 30, 1997
----------------- -------------------
(unaudited)
Revenue:
Rooms $ 3,764,444 $ 1,041,057
Telephone and other 342,347 91,711
------------- -----------
Total revenue 4,106,791 1,132,768
Expenses:
Rooms 912,985 242,457
General and administrative 401,700 182,831
Utilities and other operating costs 365,870 86,628
Repairs and maintenance 263,219 64,890
Management fees 150,611 42,001
Advertising and promotion 492,662 148,508
Property taxes 90,293 33,026
Interest expense 787,657 192,271
Depreciation and amortization 184,221 48,259
------------- -----------
Total expenses 3,649,218 1,040,871
------------- -----------
Net income $ 457,573 $ 91,897
============= ===========
The accompanying notes are an integral part of these financial statements.
F-29
34
GATEWAY CENTER GROUP
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE
PERIOD FROM JANUARY 1, 1997 TO MARCH 30, 1997
--------------------
Deficit, January 1, 1995 $ (5,371,038)
Net income 457,573
-------------
Deficit, December 31, 1996 (4,913,465)
Net income (unaudited) 91,897
-------------
Deficit, March 30, 1997 (unaudited) $ (4,821,568)
=============
The accompanying notes are an integral part of these financial statements.
F-30
35
GATEWAY CENTER GROUP
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE
PERIOD FROM JANUARY 1, 1997 TO MARCH 30, 1997
--------------------
For the Year For the Period from
Ended January 1, 1997 to
December 31, 1996 March 30, 1997
----------------- -------------------
(unaudited)
Cash flows from operating activities:
Net income $ 457,573 $ 91,897
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 184,221 48,259
Bad debt expense 25,262 --
Changes in assets and liabilities:
Accounts receivable (166,484) 58,099
Prepaid expenses and other assets (74,577) 2,600
Accounts payable and accrued expenses 148,411 183,407
------------ ------------
Net cash provided by operating activities 574,406 384,262
------------ ------------
Cash flows from investing activities:
Acquisition, improvements and additions to hotel properties (1,211,849) (29,430)
------------ ------------
Net used in investing activities (1,211,849) (29,430)
------------ ------------
Cash flows from financing activities:
Principal payments on notes payable (5,375,000) (100,000)
Proceeds from notes payable 5,700,000 --
------------ ------------
Net cash (used in) provided by financing activities 325,000 (100,000)
Net change in cash (312,443) 254,832
Cash, beginning of period 539,975 227,532
------------ ------------
Cash, end of period $ 227,532 $ 482,364
============ ============
Interest paid $ 763,520 $ 192,271
============ ============
The accompanying notes are an integral part of these financial statements.
F-31
36
GATEWAY CENTER GROUP
NOTES TO FINANCIAL STATEMENTS
--------------------
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION:
The Gateway Center Group (the "Partnership") was formed for the purpose
of owning and operating The Holiday Inn - La Mirada, a 290-room, full
service Hotel in La Mirada, California (the "Hotel").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited financial statements for the three month
period ended March 31, 1997 and as of March 31, 1997, have been
prepared in accordance with the requirements for presentation of
interim financial statements and, therefore, do not include all
information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity
with generally accepted accounting principles. In the opinion of
management, all adjustments consisting only of normal recurring
adjustments that are necessary for a fair presentation for interim
periods presented have been reflected.
INVESTMENT IN HOTEL PROPERTY:
Investment in hotel property is stated at cost. Depreciation is
computed using the straight-line method based upon useful lives ranging
from five to forty years.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition,
the asset and related accumulated depreciation are removed from the
accounts, and the gain or loss is included in operations.
OTHER ASSETS:
Other assets consist primarily of deferred loan costs which are
recorded at cost and amortized over the life of the loan.
INCOME TAXES:
No provision has been made in the accompanying financial statements for
federal or state income taxes as the taxable income or loss of the
Partnership is included in the owners' federal and state income tax
returns. The Partnership's tax returns and the amount of allocable
income or loss are subject to examination by the federal and state
taxing authorities. If such examinations result in changes to income or
loss, the tax liability of the partners could be changed accordingly.
Continued
F-32
37
GATEWAY CENTER GROUP
NOTES TO FINANCIAL STATEMENTS
--------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
REVENUE RECOGNITION:
Revenue is recognized as earned. Earned is generally defined as the
date upon which a guest occupies a room and utilizes the Hotel's
services. Ongoing credit evaluations are performed and potential credit
losses are expensed at the time the accounts receivable are estimated
to be uncollectible. Historically, credit losses have not been material
to the Hotel's results of operations.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, including disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results may, in some
instances, differ from previously estimated amounts.
3. NOTE PAYABLE - THIRD PARTY:
The mortgage note payable to Comerica Bank-California bears monthly
payments of interest only at 7.88% until maturity on February 1, 2001 and
is collateralized by the Hotel. The mortgage note payment was repaid
subsequent to December 31, 1996 (Note 6).
4. NOTE PAYABLE - RELATED PARTY:
The note payable-related party is payable to Lewis Wolff, a partner. The
note bears interest at 15% until maturity on March 31, 2000 and is
collateralized by the Hotel. The note was repaid subsequent to December
31, 1996 (Note 6).
Continued
F-33
38
GATEWAY CENTER GROUP
NOTES TO FINANCIAL STATEMENTS
--------------------
5. RELATED PARTIES:
For the year ended December 31, 1996 and the period from January 1, 1997
to March 30, 1997, the Partnership accrued management fees of $150,611 and
$42,001 (unaudited), respectively, payable to an affiliate of a partner.
In addition, as of December 31, 1996 and March 30, 1997 accounts payable
and accrued expenses includes $876,877 and $884,862 (unaudited),
respectively, payable to an affiliate of a partner.
6. SUBSEQUENT EVENT:
On March 31, 1997, the Partnership sold the Hotel to Sunstone Hotel
Investors, Inc.
F-34
39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Sunstone Hotel Investors, Inc.:
We have audited the accompanying statement of assets and liabilities of the
Holiday Inn Mission Valley Stadium Hotel (the "Hotel") as of May 31, 1997, and
the related statements of revenue and expenses, members' equity, and cash
flows for the period June 12, 1996 (date of acquisition) to May 31, 1997.
These financial statements are the responsibility of the management of the
Hotel. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets and liabilities of the Holiday Inn Mission
Valley Stadium Hotel as of May 31, 1997, and its revenues and expenses and its
cash flows for the period June 12, 1996 (date of acquisition) to May 31, 1997,
in conformity with generally accepted accounting principles.
San Francisco, California
August 7, 1997
F-35
40
HOLIDAY INN MISSION VALLEY STADIUM HOTEL
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997
--------------------
ASSETS
Investment in hotel property, at cost:
Land $ 847,072
Building and improvements 5,163,663
Furniture and equipment 546,565
Accumulated depreciation (254,961)
-----------
Net investment in hotel property 6,302,339
Cash 60,066
Accounts receivable 173,714
Inventories 14,141
Other assets, net of accumulated amortization of $106,628 37,213
-----------
Total assets $ 6,587,473
===========
LIABILITIES AND MEMBERS' EQUITY
Accounts payable and other accrued expenses $ 273,680
Note payable 3,780,000
-----------
Total liabilities 4,053,680
Members' equity 2,533,793
-----------
Total liabilities and members' equity $ 6,587,473
===========
The accompanying notes are an integral part of these financial statements.
F-36
41
HOLIDAY INN MISSION VALLEY STADIUM HOTEL
STATEMENT OF REVENUES AND EXPENSES
FOR THE PERIOD FROM JUNE 12, 1996 (DATE OF ACQUISITION)
TO MAY 31, 1997
--------------------
Revenues:
Rooms $2,982,950
Restaurant 415,928
Telephone and other 262,052
----------
Total revenue 3,660,930
----------
Expenses:
Rooms 681,720
Restaurant 361,895
General and administrative 300,803
Utilities and other operating costs 317,840
Repairs and maintenance 172,286
Management fees 325,000
Advertising and promotion 497,400
Property taxes 39,176
Interest expense 417,648
Depreciation and amortization 361,589
----------
Total expenses 3,475,357
----------
Net income $ 185,573
==========
The accompanying notes are an integral part of these financial statements.
F-37
42
HOLIDAY INN MISSION VALLEY STADIUM HOTEL
STATEMENT OF MEMBERS' EQUITY
FOR THE PERIOD FROM JUNE 12, 1996 (DATE OF ACQUISITION)
TO MAY 31, 1997
--------------------
Balance, June 12, 1996 --
Contributions $ 2,348,220
Net income 185,573
-----------
Balance, May 31, 1997 $ 2,533,793
===========
The accompanying notes are an integral part of these financial statements.
F-38
43
HOLIDAY INN MISSION VALLEY STADIUM HOTEL
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 12, 1996 (DATE OF ACQUISITION)
TO MAY 31, 1997
--------------------
Cash flows from operating activities:
Net income $ 185,573
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 361,589
Changes in assets and liabilities:
Accounts receivable (173,714)
Inventories (14,141)
Other assets (24,341)
Accounts payable and accrued expenses 189,190
------------
Net cash provided by operating activities 524,156
Cash flows from investing activities:
Acquisition, improvements and additions to hotel property (2,657,300)
------------
Net cash used in investing activities (2,657,300)
Cash flows from financing activities:
Contributions from members 2,348,220
Principal payments on notes payable (120,000)
Capital lease 86,404
Payments on capital lease obligation (1,914)
Payment of loan costs (119,500)
------------
Net cash provided by financing activities 2,193,210
Net change in cash 60,066
Cash, beginning of period --
------------
Cash, end of period $ 60,066
============
Interest paid $ 417,648
============
The accompanying notes are an integral part of these financial statements.
F-39
44
HOLIDAY INN MISSION VALLEY STADIUM HOTEL
NOTES TO FINANCIAL STATEMENTS
--------------------
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION:
The Holiday Inn Mission Valley Stadium Hotel is a 176-room, full
service hotel in San Diego, California ("the Hotel"). The Hotel is
owned by Shivani, LLC (the "Company"), which also owns several other
hotel properties. These financial statements include only the related
assets and liabilities, revenues and expenses, and cash flows of the
Hotel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVESTMENT IN HOTEL PROPERTY:
Investment in hotel property is stated at cost. Depreciation is
computed using the straight-line method based upon the following useful
lives:
YEARS
-----
Building and improvements 39
Furniture, fixtures and equipment 5
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition,
the asset and related accumulated depreciation are removed from the
accounts, and the gain or loss is included in operations.
OTHER ASSETS:
Other assets consist primarily of deferred loan costs which are
recorded at cost and amortized over the life of the loan.
INCOME TAXES:
No provision has been made in the accompanying financial statements for
federal or state income taxes as the taxable income or loss of the
Company is included in the owners' federal and state income tax
returns. The Company's tax returns and the amount of allocable income
or loss are subject to examination by the federal and state taxing
authorities. If such examinations result in changes to income or loss,
the tax liability of the members could be changed accordingly.
REVENUE RECOGNITION:
Revenue is recognized as earned. Earned is generally defined as the
date upon which a guest occupies a room and/or utilizes the Hotel's
services. Ongoing credit evaluations are performed and potential credit
losses are expensed at the time the accounts receivable are estimated
to be uncollectible. Historically, credit losses have not been material
to the Hotel's results of operations.
Continued
F-40
45
HOLIDAY INN MISSION VALLEY STADIUM HOTEL
NOTES TO FINANCIAL STATEMENTS
--------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, including disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results may differ from
previously estimated amounts.
3. NOTES PAYABLE:
The mortgage note payable was assumed as part of the acquisition of the
Hotel.
The mortgage note payable requires monthly payments of principal and
interest and bears variable interest at prime plus 2.50% through maturity
on June 30, 2001. The mortgage note payable is collateralized by the
Hotel.
Principal payments required in future years are as follows:
FISCAL YEAR ENDING
MAY 31,
------------------
1998 $ 150,000
1999 180,000
2000 210,000
2001 3,240,000
----------
$3,780,000
==========
The mortgage note payable was repaid subsequent to May 31, 1997 (Note 5).
4. RELATED PARTIES:
For the period June 12, 1996 to May 31, 1997, the Company incurred
management fees of $325,000, payable to a member.
5. SUBSEQUENT EVENT:
On August 7, 1997, the Company sold the Hotel to Sunstone Hotel Investors,
Inc.
F-41
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners,
Kent Hospitality Partners, L.P.:
We have audited the accompanying balance sheet of Kent Hospitality Partners,
L.P. (a Washington limited partnership), as of October 31, 1996, and the related
statements of operations, partners' capital and cash flows for the year ended
October 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kent Hospitality Partners,
L.P., as of October 31, 1996, and the results of its operations and its cash
flows for the year ended October 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 20, 1996
F-42
47
KENT HOSPITALITY PARTNERS, L.P.
-------------------------------
(A Washington Limited Partnership)
----------------------------------
BALANCE SHEETS
--------------
OCTOBER 31, FEBRUARY 28,
1996 1997
----------- ------------
(unaudited)
ASSETS
------
CASH, including restricted cash of $46,657 and $2,504 $ 802,023 $ 799,313
INVESTMENT PROPERTY, at cost:
Land 691,623 691,623
Buildings and improvements 3,134,479 3,134,479
Furniture, fixtures and equipment 1,349,778 1,351,278
Less- Accumulated depreciation (725,438) (842,788)
----------- -----------
Total investment property 4,450,442 4,334,592
ACCOUNTS RECEIVABLE 132,123 121,072
OTHER 99,210 81,591
----------- -----------
$ 5,483,798 $ 5,336,568
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
MORTGAGE NOTE PAYABLE $ 3,406,047 $ 3,391,706
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 337,455 385,687
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 1,740,296 1,559,175
----------- -----------
$ 5,483,798 $ 5,336,568
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-43
48
KENT HOSPITALITY PARTNERS, L.P.
-------------------------------
(A Washington Limited Partnership)
----------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEAR FOR THE PERIOD
ENDED NOVEMBER 1, 1996
OCTOBER 31, 1996 TO FEBRUARY 28, 1997
---------------- --------------------
(unaudited)
OPERATING REVENUES:
Rooms $3,166,192 $1,001,675
Other 233,005 73,672
---------- ----------
Total operating revenues 3,399,197 1,075,347
---------- ----------
OPERATING EXPENSES:
Rooms 866,228 256,972
Administrative and general 409,554 157,820
Advertising and business promotion 280,213 94,802
Property maintenance and energy 308,700 98,656
Local taxes and insurance 160,218 47,986
Hotel management fees 135,506 42,932
Other 121,901 47,628
---------- ----------
Total operating expenses 2,282,320 746,796
---------- ----------
Net operating income 1,116,877 328,551
INTEREST EXPENSE 297,170 92,322
DEPRECIATION AND AMORTIZATION 352,053 117,350
---------- ----------
NET INCOME $ 467,654 $ 118,879
========== ==========
The accompanying notes are an integral part of these financial statements.
F-44
49
KENT HOSPITALITY PARTNERS, L.P.
-------------------------------
(A Washington Limited Partnership)
----------------------------------
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
General Limited
Partner Partner Total
----------- ----------- -----------
BALANCE, October 31, 1995 $ 367,087 $ 1,432,221 $ 1,799,308
NET INCOME 166,394 301,260 467,654
DISTRIBUTIONS (152,933) (373,733) (526,666)
----------- ----------- -----------
BALANCE, October 31, 1996 $ 380,548 $ 1,359,748 $ 1,740,296
=========== =========== ===========
NET INCOME (unaudited) 40,040 78,839 118,879
DISTRIBUTIONS (unaudited) (169,200) (130,800) (300,000)
----------- ----------- -----------
BALANCE, February 28, 1997
(unaudited) $ 251,388 $ 1,307,787 $ 1,559,175
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-45
50
KENT HOSPITALITY PARTNERS, L.P.
-------------------------------
(A Washington Limited Partnership)
----------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEAR FOR THE PERIOD
ENDED FROM NOVEMBER 1, 1996
OCTOBER 31, 1996 TO FEBRUARY 28, 1997
---------------- ---------------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 467,654 $ 118,879
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 352,053 117,350
Decrease in accounts receivable 7,364 11,051
Decrease in other assets 54,739 17,619
Increase in accounts payable, accrued expenses and other liabilities 122,404 52,793
----------- ----------
Net cash provided by operating activities 1,004,214 317,692
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment property (293,034) (1,500)
----------- ----------
Net cash used in investing activities (293,034) (1,500)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital distributions (526,666) (300,000)
Principal payments on mortgage note payable (13,953) (14,341)
Payments on other liabilities (13,043) (4,561)
----------- ----------
Net cash used in financing activities (553,662) (318,902)
----------- ----------
NET INCREASE (DECREASE) IN CASH 157,518 (2,710)
CASH, beginning of period 644,505 802,023
----------- ----------
CASH, end of period $ 802,023 $ 799,313
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 264,907 $ 110,246
The accompanying notes are an integral part of these financial statements.
F-46
51
KENT HOSPITALITY PARTNERS, L.P.
-------------------------------
(A Washington Limited Partnership)
----------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. ORGANIZATION AND
BASIS OF PRESENTATION:
----------------------
Kent Hospitality Partners, L.P. (the Partnership), a Washington limited
partnership, owns and operates a limited-service hotel located in Kent,
Washington (the Property). Kent Hospitality, Inc. (KHI), a Washington
corporation, owns a 20 percent interest and is the general partner of the
Partnership. Velocity One, Inc. (VOI), owns an 80 percent interest and is the
sole limited partner.
The Partnership provides, among other things, that the Partnership will
terminate upon the earlier of the sale or disposition of all or substantially
all of the Partnership's assets or December 31, 2004; the general partner has
the exclusive right and power to conduct the business affairs of the Partnership
and to make all decisions not characterized as "major decisions," as defined,
and the right and duty to manage the day-to-day business of the Property in
accordance with the annual budget approved by the general and limited partners.
Generally, the Partnership's losses are to be allocated in proportion to the
positive capital account balances of the partners and, if such capital accounts
are not positive, then the allocation will be made equally between KHI and VOI.
Partnership profits are allocated first to the partners to the extent and in the
proportion that they were allocated losses; second to VOI to the extent of the
preferred return, as defined; third to KHI to the extent of the preferred
return; and thereafter in equal proportions. Distributions are to be made if, in
the general partner's sole opinion, there is sufficient cash available for
distribution, as defined. Distributions shall be made first, to pay an annually
compounded return of 10 percent during the first 24 months of the Partnership,
and 12 percent, thereafter, on the unreturned capital contributions of the
limited partner; second, to pay such return to the general partner; third, in
full satisfaction of the amount of any loans made by the partners to the
Partnership; fourth, in satisfaction of any additional capital contributions, as
defined; and thereafter, 50 percent to the general partner and 50 percent to the
limited partner or as otherwise defined in the Agreement. Additionally, the
partners have the right to approve certain transfers of ownership to certain
parties. The Agreement provides that KHI is obligated to contribute funds
necessary to make up any negative cash flow, as defined, on a monthly basis, in
the form of a capital contribution up to and including $100,000 in the
aggregate.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
--------------------
Unaudited Interim Financial Statements
- --------------------------------------
The accompanying unaudited financial statements for the four-month period ended
February 28, 1997 and as of February 28, 1997, have been prepared in accordance
with the requirements for presentation of interim financial statements and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, all adjustments consisting only of normal recurring adjustments that
are necessary for a fair presentation for interim period presented have been
reflected. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-47
52
Investment Property
- -------------------
Investment property is stated at cost which is not less than fair market value.
All additions, renovations and repairs which improve or extend the life of the
property are capitalized. Buildings and improvements are depreciated using the
straight-line method over 39 years. Depreciation of furniture, fixtures and
equipment is provided using the double declining-balance method over their
estimated useful lives which range from three to seven years.
Income Taxes
- ------------
No provision for income taxes is made in the accounts of the Partnership since
such taxes are liabilities of the partners and depend upon their respective tax
situations. Further, partner capital accounts may differ from amounts reported
in the Partnership's federal income tax returns because of differences in
accounting policies adopted for financial and tax reporting purposes.
Other Assets
- ------------
Other assets consist of inventory, prepaids and deferred financing costs.
Inventory is valued at the lower of cost or replacement value using the
first-in, first-out method. Deferred financing costs of $94,555, incurred to
secure the mortgage note payable, are being amortized using the straight-line
method over 60 months, which approximates the effective interest method.
Amortization expense is included in interest expense and totaled $18,911 for
fiscal year 1996.
Restricted Cash
- ---------------
Restricted cash consists of amounts set aside pursuant to the hotel's management
agreement for renovations to the hotel property.
Impairment of Long-Lived Assets
- -------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
established the recognition and measurement standards related to the impairment
of long-lived assets. Effective November 1995, the Partnership adopted SFAS No.
121. The adoption of this standard did not have a material effect on the
Partnership's financial position or results of operations.
3. MORTGAGE NOTE PAYABLE:
----------------------
On May 27, 1994, the Partnership entered into a note agreement with an affiliate
of the limited partner for $3,420,000. The note payable is secured by a
mortgage, a deed of trust and an assignment of leases and rents on the hotel
site. Recourse under the note agreement is limited to the secured property. The
note bears interest at 7.5 percent for the first two years and 8.5 percent for
the remainder of the note with interest payable monthly through May 31, 1996.
Subsequently, principal and interest are payable in equal monthly installments
based on a 25-year amortization period, with a balloon payment due upon maturity
at June 1, 2004. Additionally, the Partnership is required to make a $50,000
principal payment on both June 1, 2002 and 2003. If the Partnership makes a
prepayment or defaults on the note during the first five years of the term, and
such default results in the acceleration of the debt, an acceleration premium
will be due to the lender equal to 10 percent of the then outstanding principal
balance of the note.
F-48
53
Annual principal payments on this note are as follows:
Year ending October 31-
1997 $ 44,227
1998 48,022
1999 52,132
2000 56,601
2001 61,451
Thereafter 3,143,614
-----------
$ 3,406,047
===========
4. EQUIPMENT LEASE:
----------------
In December 1995, the Partnership entered into an equipment leasing arrangement
with a 60-month term and an effective interest rate of 15 percent. The lease has
been reflected in other liabilities in the accompanying financial statements.
Future principal payments under this capital lease obligation as of October 31,
1996, are as follows:
Year ending October 31-
1997 $ 22,993
1998 22,993
1999 22,993
2000 22,993
2001 3,832
---------
Total payments 95,804
Amounts related to interest (24,635)
---------
Capital lease liability at
October 31, 1996 $ 71,169
=========
5. HOTEL MANAGEMENT AGREEMENT:
---------------------------
The Partnership has an agreement with Westmont Hospitality Group, Inc. (the
Manager), an affiliate of the general partner, which provides for the Manager to
control and manage all matters relating to the hotel and its operations
including, but not limited to, providing for all the personnel, marketing,
administration and insurance requirements of the hotel.
All reasonable costs and expenses incurred by the Manager, other than those
specifically identified in the agreement as for the account of the Manager, and
approved by the partnership in its annual budget are considered operating
expenses of the hotel. The Manager receives a fee equal to 4 percent of the
hotel's gross revenues for its services. Accrued management fees at October 31,
1996, were $12,908.
This agreement expires May 2004, unless terminated earlier upon the occurrence
of certain events. The management agreement also provides that, if the agreement
is terminated due to the default of the Partnership, and in certain other
circumstances provided in the agreement, the Manager shall be entitled to
liquidating damages equal to the average monthly management fees, as defined,
multiplied by the number of months remaining in the originally anticipated term
of the management agreement, excluding optional extensions.
F-49
54
6. LICENSE AGREEMENT:
------------------
The Partnership's license agreement with Hawthorn Suites Associates (Hawthorn)
provides for the Partnership to operate the hotel as a "Hawthorn Suites" hotel
and licensee and for Hawthorn to provide consultation on operating and marketing
issues concerning the hotel, certain management training and operating manuals.
For services provided, the Partnership pays franchise fees to Hawthorn based on
a percentage of gross room revenues, which is limited to 4 percent of annual
gross room revenues. Additionally, the Partnership pays 2.5 percent of gross
room revenues to reimburse Hawthorn for costs incurred to provide reservation
system and advertising services. Total expenses pursuant to this agreement
during fiscal year 1996 were $221,122 and accrued franchise fees included in
accounts payable as of October 31, 1996, were $60,883.
Under the license agreement, the Partnership is obligated to pay certain amounts
to conform the hotel's image and operations to that of a Hawthorn Suites.
Pursuant to the license agreement, Hawthorn may require that the Partnership
upgrade the hotel once, during years six through 10 of the license agreement,
for a cost not to exceed 25 percent of the gross room revenues for the full
fiscal year preceding the upgrade request.
The agreement expires in October 2009, with an option to extend the agreement
for an additional 10 years. The Partnership may terminate the license agreement
at any time upon 120 days' notice and payment of an $80,000 termination fee, or
upon 60 days' notice prior to October 20, 1997, with a termination fee of
$40,000. The franchise agreement also provides for liquidating damages of
$80,000 to be paid by the Partnership upon the breach of certain provisions in
the license agreements by the Partnership.
7. CONTINGENCIES:
--------------
The Partnership is subject to claims arising in the ordinary course of business.
Management believes it has adequate insurance coverage for such exposure.
8. SUBSEQUENT EVENTS (UNAUDITED):
------------------------------
Sale of Property
- ----------------
The Partnership sold the property and related assets to Sunstone Hotel
Investors, L.P., in March 1997 for $13,600,000 and the assumption of all
related debt. As a result of the sale, the management agreement will be
terminated. The liquidating damages owning by the Partnership under this
agreement have not yet been determined.
Partner Distributions
- ---------------------
Subsequent to October 31, 1996, the partners received distributions totaling
$10,246,252, which included the distributions related to the sale of the
property.
F-50
55
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Kahler Realty Corporation:
We have audited the accompanying consolidated balance sheet of Kahler Realty
Corporation and subsidiaries as of December 29, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period from August 13, 1996 to December 29, 1996 (Successor Period), and
the period from January 1, 1996, to August 12, 1996 (Predecessor Period). 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kahler
Realty Corporation and subsidiaries as of December 29, 1996, and the results
of their operations and their cash flows for the Successor and Predecessor
Periods in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
August 13, 1996, an investor group as described in Note 1, acquired all of the
outstanding stock of Kahler Realty Corporation in a business combination
accounted for as a purchase. As a result of the acquisition, the consolidated
financial information for the periods after the acquisition is presented on a
different cost basis than that for the periods before the acquisition and,
therefore, is not comparable.
/s/ KPMG PEAT MARWICK LLP
---------------------------
KPMG Peat Marwick LLP
Chicago, Illinois
August 15, 1997
F-51
56
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands)
(Note 1) (Note 1) Six Months Ended
Predecessor Successor Year Ended -----------------------
1/1/96 to 8/13/96 to December 29, June 30, June 29,
8/12/96 12/29/96 1996 1996 1997
----------- ---------- ------------ -------- --------
(unaudited)
REVENUES
Revenue of owned operations $ 76,860 $ 47,794 $ 124,654 $ 62,363 $ 66,712
Other properties managed and/or
partially owned 12,017 7,096 19,113 9,526 8,715
-------- -------- --------- -------- --------
Total revenues $ 88,877 $ 54,890 $ 143,767 $ 71,889 $ 75,427
======== ======== ========= ======== ========
REVENUE OF OWNED OPERATIONS
Lodging - rooms $ 43,167 $ 26,603 $ 69,770 $ 35,260 $ 38,199
- food and beverage 20,853 14,505 35,358 17,393 18,942
- other 8,262 3,867 12,129 5,978 6,227
Laundry & other 4,388 2,715 7,103 3,568 3,206
Interest income 190 104 294 164 138
-------- -------- --------- -------- --------
Total revenue of owned operations 76,860 47,794 124,654 62,363 66,712
-------- -------- --------- -------- --------
OPERATING COSTS AND EXPENSES
Lodging - rooms 10,564 6,446 17,010 8,427 9,036
- food and beverage 16,530 10,835 27,365 13,640 14,361
- other 26,347 16,643 42,990 21,041 22,279
Laundry & other 3,264 1,899 5,163 2,708 1,904
Corporate expenses 2,687 1,505 4,192 1,946 1,475
Depreciation and amortization 5,290 3,823 9,113 4,329 5,277
Non-recurring expenses (Note 8) 3,050 -- 3,050 542 998
-------- -------- --------- -------- --------
Total operating costs and expenses 67,732 41,151 108,883 52,633 55,330
-------- -------- --------- -------- --------
GROSS OPERATING PROFIT 9,128 6,643 15,771 9,730 11,382
Interest expense (7,812) (6,146) (13,958) (6,205) (8,420)
Equity in earnings (loss)
of affiliates (Note 4) (112) 157 45 244 138
Gain (Loss) on sale of assets 10 (1) 9 1 (2)
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1,214 653 1,867 3,770 3,098
Provision for income taxes (Note 9) 486 263 749 1,171 1,240
-------- -------- --------- -------- --------
INCOME FROM CONTINUING OPERATIONS 728 390 1,118 2,599 1,858
DISCONTINUED OPERATIONS (NOTE 8)
Income from operations of Anderson's Formal
Wear (net of income tax of $168,
$15, $183, $129 and zero, respectively) 253 27 280 286 --
-------- -------- --------- -------- --------
NET INCOME $ 981 $ 417 $ 1,398 $ 2,885 $ 1,858
======== ======== ========= ======== ========
See Notes to Consolidated Financial Statements
F-52
57
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 29, June 29,
1996 1997
------------ -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,623 $ 2,633
Receivables:
Trade, less allowance for doubtful
accounts of $323 and $234, respectively 7,633 6,356
Current portion of notes receivable 470 450
Inventories 2,380 2,217
Prepaid expenses 1,209 684
--------- ----------
Total current assets 13,315 12,340
--------- ----------
OTHER ASSETS
Notes receivable, less allowance for doubtful
accounts of $219 and $219, respectively
(Note 2) 485 460
Investments in affiliates (Note 4) 8,581 8,467
Debt service escrow accounts (Note 6) 3,304 --
Intangibles 25 22
Other 321 336
--------- ----------
Total other assets 12,716 9,285
--------- ----------
PROPERTY AND EQUIPMENT
Land and improvements 38,581 37,919
Buildings 191,094 189,067
Equipment 29,655 30,958
Formal wear apparel (Note 8) 755 1,019
--------- ----------
Total 260,085 258,963
Less accumulated depreciation (3,924) (9,278)
--------- ----------
Total property and equipment 256,161 249,685
--------- ----------
TOTAL ASSETS $ 282,192 $ 271,310
========= ==========
See Notes to Consolidated Financial Statements
F-53
58
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 29, June 29,
1996 1997
------------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade (Note 8) $ 6,767 $ 5,226
Bank overdraft 4,152 3,471
Due to affiliates (Note 4) 850 1,134
Accrued liabilities:
Payroll and payroll related 3,046 3,138
Real estate taxes 2,784 2,951
Other taxes 1,560 1,368
Pension liability (Note 7) 1,284 1,279
Notes payable (Note 5) 8,200 7,550
Current portion of long-term debt (Note 5) 19,404 19,373
Current portion of subordinated debt (Note 5) 500 500
---------- ----------
Total current liabilities 48,547 45,990
---------- ----------
LONG-TERM DEBT (NOTE 5)
Obligations of Kahler Realty Corporation 89,275 87,592
Obligations of Subsidiaries - Non-Recourse
to Kahler Realty Corporation 25,501 23,374
Obligations to Westbrook (Note 10) 40,000 40,000
---------- ----------
Total long-term debt 154,776 150,966
---------- ----------
OTHER LIABILITIES
Deferred income taxes (Note 9) 30,607 30,607
Minority interest (Note 3) 2,548 196
Deferred revenue 106 80
Other (Note 6) 4,055 560
---------- ----------
Total other liabilities 37,316 31,443
---------- ----------
SUBORDINATED DEBT (NOTE 5) 500 --
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00
Authorized - 1,000 shares;
Issued and outstanding - 100 shares -- --
Additional paid-in capital 40,636 40,636
Retained earnings 417 2,275
---------- ----------
Total stockholders' equity 41,053 42,911
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 282,192 $ 271,310
========== ==========
See Notes to Consolidated Financial Statements
F-54
59
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Dollars in thousands)
Common Stock Minimum
------------------------- Additional Pension
For the Year Ended Number Paid-in Retained Liability
December 29, 1996 of Shares Amount Capital Earnings Adjustment Total
- ------------------- --------- ---------- ---------- ---------- ---------- ---------
BALANCES, December 31, 1995 4,293,473 $ 429 $ 13,846 $ 10,414 $ (516) $ 24,173
Predecessor:
Net income -- -- -- 981 -- 981
Dividends paid to common
stockholders ($0.08 per share) -- -- -- (348) -- (348)
Unrecognized gain on defined
benefit pension plan -- -- -- -- 7 7
Common stock issued from exercise
of employee stock options 105,393 11 645 -- -- 656
Tax benefit from exercise of
employee stock options -- -- 147 -- -- 147
Successor:
Common stock issued 100 -- 40,636 -- -- 40,636
Acquisition and retirement
of Predecessor common stock (4,398,866) (440) (14,638) (11,047) 509 (25,616)
Net income -- -- 417 417
---------- ---------- ---------- ---------- -------- --------
BALANCES, December 29, 1996 100 -- 40,636 417 -- 41,053
Net income -- -- -- 1,858 -- 1,858
---------- ---------- ---------- ---------- -------- --------
BALANCES, June 29, 1997 (unaudited) 100 $ -- $ 40,636 $ 2,275 $ -- $ 42,911
========== ========== ========== ========== ======== ========
See Notes to Consolidated Financial Statements
F-55
60
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Note 1) (Note 1) Six Months
Predecessor Successor Year Ended ended
1/1/96 to 8/13/96 to December 29, June 29,
8/12/96 12/29/96 1996 1997
----------- ---------- ------------ -----------
(unaudited)
CASH FLOWS FROM OPERATIONS:
Net income $ 981 $ 417 $ 1,398 $ 1,858
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation 5,290 3,823 9,113 5,277
Depreciation on discontinued operations 851 115 966 --
Equity in (earnings) loss of affiliates 112 (157) (45) (138)
Tax benefit from exercise of employee
stock options 147 -- 147 --
Common stock issued under employee
benefit plans 207 -- 207 --
Unrecognized gain on defined benefit
pension plan 7 -- 7 --
Loss (Gain) on sale of assets (10) 1 (9) 2
Change in current assets and liabilities:
Receivables (660) (1,698) (2,358) 1,277
Inventories (11) 229 218 163
Prepaid expenses (305) (581) (886) 525
Accounts payable 2,561 (1,640) 921 (1,938)
Accrued liabilities 4,055 (2,626) 1,429 62
-------- -------- -------- --------
Net cash provided (used) by
operating activities 13,225 (2,117) 11,108 7,088
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Property and equipment (14,550) (6,543) (21,093) (1,307)
Advances to affiliates (167) (50) (217) (28)
Intangible assets (23) (25) (48) --
Other assets (656) (649) (1,305) (295)
Proceeds from:
Sales of property and equipment 99 2 101 2,507
Intangible assets 33 -- 33 --
Sale of retail laundry customer list -- 810 810 --
Payments received on notes receivable 115 205 320 45
Distributions from affiliates 187 562 749 280
Other assets -- 354 354 280
-------- -------- -------- --------
Net cash provided (used) by
investing activities (14,962) (5,334) (20,296) 1,482
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 449 -- 449 --
Dividends paid to common shareholders (348) -- (348) --
Payments on subordinated debt (500) -- (500) (500)
Proceeds from long-term debt 8,836 -- 8,836 --
Debt service escrow accounts (54) (52) (106) 3,304
Principal payments on long-term debt (3,452) (958) (4,410) (3,841)
Net proceeds (payments) from notes payable
and lines of credit 1,775 1,725 3,500 (650)
Other liabilities 942 (209) 733 (5,873)
Proceeds from issuance of Successor
common stock -- 40,636 40,636 --
Acquisition of Predecessor common stock -- (74,781) (74,781) --
Proceeds from long-term debt to affiliate -- 40,000 40,000 --
Payment of merger costs -- (4,121) (4,121) --
-------- -------- -------- --------
Net cash provided (used) by
financing activities 7,648 2,240 9,888 (7,560)
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH 5,911 (5,211) 700 1,010
CASH AT BEGINNING OF THE PERIOD 923 6,834 923 1,623
-------- -------- -------- --------
CASH AT END OF THE PERIOD $ 6,834 $ 1,623 $ 1,623 $ 2,633
======== ======== ======== ========
See Notes to Consolidated Financial Statements
F-56
61
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands)
For the year ended December 29, 1996
NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of business
- -----------------------
The primary business of Kahler Realty Corporation and Subsidiaries (the Company)
is the operation and management of hotel properties in 11 states, primarily
Minnesota, Utah and Idaho. As an adjunct to its hotels, the Company operates
commercial laundries in Rochester and Salt Lake City which provide services to
the Company's hotels and other third parties in their respective locations. The
Company's other business activities also included operating a wholesale and
retail formal wear business. (See Note 8)
Organization
- ------------
On August 13, 1996, Tiger Real Estate Acquisition Corporation, a wholly owned
subsidiary of Westbrook Real Estate Fund I, L.P. and Westbrook Real Estate
Co-Investment Partnership I, L.P. (Westbrook) purchased the outstanding stock of
the Company and simultaneously merged with and into the Company with the Company
continuing as the surviving corporation. The aggregate purchase price of the
Company's stock was approximately $80,636, including acquisition costs, which
was financed in part by the issuance of a promissory note (Note 5). The purchase
price has been allocated to the accounts of the Company based on the relative
fair values of the assets acquired and liabilities assumed.
Basis of Accounting
- -------------------
The Company is referred to as "Predecessor" prior to the August 13, 1996
acquisition and is referred to as "Successor" thereafter. The transaction has
been accounted for under the purchase method of accounting. Successor has
recorded the assets and liabilities of the Predecessor at estimated fair market
values at the date of purchase. Because of these adjustments, the accompanying
consolidated financial statements of Successor are not directly comparable to
those of the Predecessor. The "Purchase Adjustments" column below represents the
adjustments made at August 13, 1996 to record the Company's assets, liabilities
and equity at fair market value.
Purchase
Assets Predecessor Adjustments Successor
- ------ ----------- ----------- ---------
Cash, receivables, inventories
and prepaid expenses $ 11,885 $ 5,855 $ 17,740
Notes receivable 1,378 (218) 1,160
Investment in affiliates 4,963 3,973 8,936
Intangibles 608 202 810
Debt service escrow fund 3,252 -- 3,252
Other assets 2,676 (2,636) 40
Land and improvements 18,742 11,747 30,489
Buildings 153,751 36,186 189,937
Equipment 54,054 (26,983) 27,071
Formal wear apparel 5,530 (4,830) 700
Accumulated depreciation (66,933) 66,933 --
-------- -------- --------
$189,906 $ 90,229 $280,135
======== ======== ========
F-57
(continued)
62
Liabilities and Stockholders' Equity
Accounts payable $ 9,288 $ 4,121 $ 13,409
Accrued liabilities 10,669 631 11,300
Notes payable, current and long-term
debt and subordinated debt 142,613 -- 142,613
Obligations to Westbrook -- 40,000 40,000
Other deferred liabilities 1,720 1,813 3,533
Deferred taxes -- 28,644 28,644
Stockholders' equity 25,616 15,020 40,636
--------- --------- ---------
$ 189,906 $ 90,229 $ 280,135
========= ========= =========
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
subsidiaries in which it has a controlling interest. Investments in owned
affiliates in which the Company possesses significant influence are accounted
for under the equity method. The Company owns 24% of a partnership which owns
the University Park Hotel (the Hotel) and a $4,620, 9% mortgage note with an
option to convert the note into an additional equity interest in the partnership
which owns the Hotel in 1998. Should the Company exercise its option, the
Company would own 69.6% of the Hotel. The Company consolidates the assets and
liabilities of the Hotel which approximated $15,772 and $9,085 at December 29,
1996. All material intercompany amounts have been eliminated in consolidation.
Revenues
- --------
Revenues of the Company are classified into two components. The Company uses
this presentation to show the total scope of the Company's operations. The
components of revenue are:
o Revenue of owned operations include revenues from lodging properties in
which the Company consolidates its ownership interest, management fees
generated from non-consolidated properties and properties owned by others.
Also included are revenues from Textile Care Services and interest income.
o Other properties managed and/or partially owned includes all revenue of
non-consolidated properties and the properties managed for others. Under
generally accepted accounting principles, this revenue is not included in
revenue of owned operations and the Company's interest in non-consolidated
properties is reflected in the Consolidated Statements of Operations as
equity in earnings of affiliates.
Cash and cash equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. The Company
includes the current portion of debt service escrow accounts in cash and cash
equivalents. The balance in this account at December 29, 1996 was $701, and will
be used to pay accrued interest on certain of the hotel mortgages.
Inventories
- -----------
Inventories are stated primarily at the lower of average cost or market.
F-58
(continued)
63
Notes receivable
- ----------------
Notes receivable are carried at their unpaid balance less an allowance for
doubtful accounts and net of unamortized contract discounts. The Company
evaluates the collectibility of its notes receivable (including accrued
interest) by estimating the probability of loss utilizing projections of loan
and property performance, factors related to the borrower, terms of the notes,
other supply and demand factors and overall economic conditions.
Fair value of financial instruments
- -----------------------------------
Management has determined that fair values of the Company's financial
instruments approximates the carrying values of those instruments except for
notes receivable and long-term debt as discussed in Notes 2 and 5, respectively.
Property and equipment
- ----------------------
Property and equipment was recorded at cost in the Predecessor period. Property
and equipment are recorded at their allocated purchase price in the Successor
period. Depreciation of property and equipment is computed on the straight-line
method over their estimated useful lives. The estimated useful lives are:
Land improvements 5 to 25 years
Buildings 20 to 50 years
Equipment 5 to 20 years
The Company records a provision for impairment of the carrying value of its real
estate investments whenever the estimated future cash flows from a property's
operations and projected sale are less than the property's net carrying value.
Management believes that the estimates and assumptions used are appropriate in
evaluating the carrying value of the Company's properties presented currently in
the consolidated balance sheet, however, changes in market conditions and
circumstances could occur in the near term which could cause these estimates to
change.
Measurement of impairment losses on long-lived assets are based on the estimated
fair value of the assets. Properties held for sale under SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed
Of", (SFAS 121), will be reflected at the lower of historical cost or estimated
fair value less anticipated selling costs. No adjustment of the carrying values
of the Company's long-lived assets was required at December 29, 1996 pursuant to
the provisions of SFAS 121.
Income taxes
- ------------
The Company accounts for income taxes in accordance with SFAS 109, "Accounting
for Income Taxes", which, among other things, requires an asset and liability
approach in accounting for deferred income taxes. (See Note 9)
Intangibles
- -----------
Intangibles represent franchise rights and organization costs. The cost of these
intangible assets are as follows:
December 29,
1996 Expected Life
------------ -------------
Organization costs $ 15 5 years
Franchise rights 10 10 years
---------
$ 25
=========
F-59
(continued)
64
Use of estimates
- ----------------
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts of certain assets and
liabilities and the disclosure of contingent liabilities at the balance sheet
date and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fiscal year
- -----------
The Company's fiscal year ends on the Sunday closest to December 31.
The balance sheet as of June 29, 1997 and the statements of operations, changes
in stockholders' equity and cash flows for the six-month period then ended are
unaudited. However, in the opinion of management, these financial statements
include all adjustments, which consist only of normal recurring adjustments,
necessary for fair presentation of the Company's financial position. The results
and operations for the unaudited six-month period ended June 29, 1997 are not
necessarily indicative of the results which may be expected for the entire year.
NOTE 2. NOTES RECEIVABLE
Notes receivable consist of contracts for deeds and first mortgages bearing
interest at rates ranging from 8% to 10%. Two loans aggregating $535 at December
29, 1996 are considered impaired under the provisions of SFAS 114, "Accounting
For By Creditors of Impairment of a Loan". Accordingly, no interest income has
been recognized on these loans during the period from January 1, 1996 to
December 29, 1996. The Company has determined an allowance for doubtful accounts
of $219 was necessary for one of the notes receivable at December 29, 1996.
The fair values of the non-current portion of notes receivable at December 29,
1996 approximated their carrying value. The fair value of the non-current
portion of notes receivable is determined by discounting the scheduled loan
payments to maturity using current market rates commensurate with the risks and
terms to maturity of those instruments.
Total maturities of notes receivable for each of the next five years are
approximately $520, $125, $125, $111 and $50, respectively.
NOTE 3. ACQUISITION
The Company acquired 64% of the outstanding shares of GMX Corporation (GMX) on
November 1, 1996 for $4,496. This acquisition has been accounted for using the
purchase method of accounting. GMX's principal asset is the land under the
Company's Salt Lake Hilton Hotel. The Company consolidated the assets and
liabilities of GMX in its December 29, 1996 consolidated balance sheet and the
results of its operations for the period from November 1, 1996 to December 29,
1996. All material intercompany transactions have been eliminated in
consolidation. This amount has been recorded as a minority interest in the
December 29, 1996 consolidated balance sheet. During the first half of 1997
F-60
(continued)
65
the Company acquired an additional 33.4% of the outstanding shares of GMX
Corporation for $2,352. The Company intends to acquire the remaining 2.8% of GMX
in the second half of 1997 for $196.
On April 1, 1996, the Company acquired the 149 room full service Colonial Park
Hotel in Helena, Montana. The purchase was financed with a first mortgage of
$4.5 million, a note payable to the seller of $1.0 million and $3.7 million from
available cash and lines of credit.
NOTE 4. INVESTMENTS IN AFFILIATES
As of December 29, 1996 the Company's investment in affiliates, accounted for
under the equity method of accounting, is as follows:
Ownership Dec. 29,
Interest 1996
--------- --------
Provo Park Hotel and Residence
Inn, Provo, UT 50.0% $ 8,581
Kahler Park Hotel, Hibbing, MN 25.0% --
Quality Hotel Plaza One,
Rock Island, IL 26.6% --
-------
$ 8,581
=======
The Company or its subsidiaries typically have an interest in an affiliated
partnership or limited liability company and operate the hotels under long-term
management contracts. The Company also held a note receivable (Note 2)
from an affiliate of $274 at December 29, 1996.
The Provo Park Hotel and Residence Inn, using funds from a $16,000 non-recourse
loan commitment and a $1,000 federal grant, is constructing a 96 suite expansion
and 17,000 square foot conference center and has constructed a 114 suite
Residence Inn by Marriott in Provo, Utah. The Residence Inn was completed in
December 1996 and the expansion of the Provo Park Hotel was completed in early
1997.
The Company's income from affiliates before taxes is as follows:
Management fees $ 584
Equity in earnings 45
--------
$ 629
========
Combined summarized balance sheet information for the Company's affiliates is as
follows:
December 29,
1996
------------
Current assets $ 1,508
Noncurrent assets 27,375
Current liabilities 3,007
Long-term debt, principally mortgages 19,099
Other long-term liabilities 1,352
Owners' equity 5,425
F-61
(continued)
66
Combined summarized operating results reported by these affiliates are as
follows:
Revenues $14,798
Net income 358
NOTE 5. FINANCING
Notes payable consist of $4,300 drawn on various lines of credit with a maximum
available of $8,000 at December 29, 1996 and short-term notes of $3,900. The
lines of credit and notes payable carry an interest rate of prime plus 1%,
mature at various dates throughout 1997 and are secured by property and
equipment, inventory and accounts receivable. The Company anticipates the
extension of all its lines of credit. The prime rate at December 29, 1996 was
8.25%.
Outstanding long-term debt, which is secured by substantially all property and
equipment, is summarized as follows:
OBLIGATIONS OF KAHLER REALTY CORPORATION
Security/Secured Dec. 29,
Property Interest Rate Maturity 1996
- ---------------- ------------- -------- --------
Mortgages
Kahler Plaza Hotel 10.0% plus 2.0% of room sales Nov 1997 $ 15,130
Clinic View Inn 9.75% plus 2.0% of room sales May 2000 14,307
San Marcos Tax-exempt variable rate
of 6.75% Dec 2015 13,120
Kahler Hotel Prime plus 1.0% Dec 2003 11,608
Mortgages under
$10 million - secured
by ten hotel properties
and a commercial Ranging from Ranging from
laundry prime to 12.0% 2000 to 2014 52,614
Notes payable Prime On demand 408
Capitalized leases 12.2% to 12.93% June 2000 710
--------
Subtotal 107,897
Less current maturities 18,622
--------
$ 89,275
========
OBLIGATIONS OF SUBSIDIARIES - NONRECOURSE TO KAHLER REALTY CORPORATION
Security/Secured Dec. 29,
Property Interest Rate Maturity 1996
- ---------------- ------------- -------- --------
Mortgages under $10 Tax-exempt variable
million - secured rate of 5.5% to Ranging from
by six hotel prime plus 0.5% 2009 to 2015 26,169
properties
Special assessments 7.5% to 12.0% December 1997 59
Capitalized leases 12.2% to 12.54% April 1997
to June 1998 55
--------
Subtotal 26,283
Less current maturities 782
--------
25,501
Obligation to Westbrook, 10%, matures August 2003 40,000
--------
Total indebtedness 174,180
Less current maturities 19,404
--------
$154,776
========
F-62
(continued)
67
Under certain financial debt covenants, the Company is required to maintain
certain levels of net worth, debt to equity, cash flow and other ratios. The
Company obtained a waiver for one of its debt covenants at December 29, 1996
which expires December 31, 1997.
The fair value of long-term debt at December 29, 1996 was approximately $153,684
as compared to a carrying value of $154,776. The fair values of long-term debt
were determined by discounting the scheduled loan payments to maturity using
borrowing rates currently available to the Company for bank loans of similar
term and maturity.
Total maturities of long-term debt, excluding capital lease obligations, in each
of the next five years are approximately $19,404, $3,964, $8,493, $20,564 and
$15,705, respectively.
At December 29, 1996 the Company has arranged for the issuance of a letter of
credit aggregating $1,000 as additional collateral for one of the nonrecourse
obligations listed above.
The laundry facility in Rochester Minnesota was financed with a $10,000 loan. In
the event of default by the Company on this loan the lender can require a
non-affiliate to purchase the loan at its outstanding balance.
The subordinated note requires annual principal payments of $500, matures in
1998 and carries an interest rate of prime plus 1%. As of December 29, 1996 the
balance was $1,000. The Company made its $500 scheduled payment in April, 1997.
The Company has the right to repay the note in cash or with common stock equal
to 120% of the subordinated note at any time.
The Company intends to refinance the mortgage secured by the Kahler Plaza Hotel
upon its maturity in November, 1997. In July, 1997 the Company refinanced the
mortgage secured by the San Marcos property which reduced the interest rate by
1%.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company had recorded an estimate of a loss that could have resulted from the
unfavorable resolution of a lawsuit regarding the proper interpretation of the
calculation of added interest on one of its mortgages prior to December 29,
1996. While the Company believed it had a meritorious case in appeal, the
ultimate resolution of the matter, could have resulted in a loss greater or less
than what was accrued. A trustee held $3,038 in escrow accounts at December 29,
1996, pending resolution of the litigation which is included in debt service
escrow accounts in the accompanying consolidated balance sheets. In June 1997
the Company settled this litigation for $3,250, which had no material impact on
the Company's 1997 consolidated statement of operations.
F-63
(continued)
68
Additionally, the Company is involved in various litigation in the normal course
of business. The Company does not expect the outcome of these matters to have a
material adverse effect on the Company's consolidated financial statements.
Operating leases
- ----------------
The Company leases warehouse and retail store facilities for its formal wear
operations and land for two of its hotels under various operating lease
agreements which call for minimum lease payments and contingent rents based upon
percentages of revenues. Rent expense under these leases was $1,312, including
contingent rentals of $195, for the year ended December 29, 1996.
Future minimum lease payments under operating leases total $4,859 with annual
payments of $996, $685, $476, $312 and $224 due in each of the next five years,
respectively.
Telephone service agreements
- ----------------------------
In March, 1990 the Company sold all telephone switches and related equipment at
ten of its hotels to a telecommunications company. Each of these hotels
subsequently entered into telephone service agreements with the same
telecommunications company which call for contingent payments based upon
telephone usage. These agreements expire in June, 2000. Expenses incurred
pursuant to these service agreements was $2,475 for 1996.
NOTE 7. RETIREMENT PLANS
The Company has a defined benefit plan (the Plan) covering union employees at
properties located in Rochester, Minnesota. Pension contributions and expenses
for this plan are determined based on the actuarial cost of current service.
Net periodic pension cost for the Plan included the following components for the
year ended December 29, 1996:
Service costs-benefits earned during the period $ 124
Interest cost on projected benefit obligation 229
Return on assets-actual (227)
Net amortization and deferral 112
-------
Net periodic pension cost $ 238
=======
The following table sets forth the Plan's funded status at December 29, 1996:
December 29,
1996
-----------
Actuarial present value of vested
benefit obligation $ 3,219
=========
Accumulated benefit obligation $ 3,304
=========
Projected benefit obligation $ 3,304
Fair market value of plan assets* 2,164
---------
Unfunded projected benefit obligation 1,140
Unrecognized net gain 144
---------
Unfunded pension liability $ 1,284
=========
- ------------
* Plan assets consist primarily of equity and fixed income securities.
F-64
(continued)
69
The Company has recognized a liability as the accumulated benefit obligation
exceeded the fair value of the plan assets.
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.25%. The expected long-term rate
of return on assets was 8%.
The Company has a defined contribution plan covering substantially all other
employees.
Total expense for both plans was $682 for 1996.
The Company provides postretirement health benefits to a fixed number of retired
employees relating to service provided prior to 1992. At December 29, 1996 the
estimated liability was $150.
The Company has employment agreements with certain key executives. In 1997 three
executives resigned.
NOTE 8. SEGMENTS
The Company's principal business activity is the operation and management of
hotel properties. Fees from managed properties are primarily based on a percent
of revenues of the managed property. The Company's other business activities
include institutional laundries. Intersegment transactions including laundry
revenues of $2,045 for the period ended December 29, 1996 have been eliminated
from the table below. Operating income represents revenues less operating
expenses, excluding general corporate expenses. Identifiable assets are those
used in the operation of each segment. Corporate and other assets consist
primarily of cash, notes and other investments.
F-65
(continued)
70
The following table summarizes the Company's segment information:
REVENUE OF OWNED OPERATIONS
Lodging $ 117,257
Laundry 6,332
Other 771
Interest income 294
---------
$ 124,654
=========
OPERATING INCOME
Lodging $ 21,650
Laundry 1,042
Other 113
Non-recurring charges (3,050)
Corporate expenses (4,278)
Interest income 294
---------
GROSS OPERATING PROFIT 15,771
Interest expense (13,958)
Equity in earnings of affiliates 45
Gain(Loss) on sale of assets 9
---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ 1,867
=========
IDENTIFIABLE ASSETS
Lodging $ 243,470
Laundry 14,798
Formal Wear 2,286
Corporate and other 21,638
---------
$ 282,192
=========
CAPITAL EXPENDITURES
Lodging $ 19,462
Laundry 156
Formal Wear 1,394
Corporate and other 81
---------
$ 21,093
=========
DEPRECIATION AND AMORTIZATION
Lodging $ 8,242
Laundry 772
Corporate and other 99
---------
$ 9,113
=========
On June 30, 1997 the Company completed the sale of its formal wear operations.
The Company received cash of approximately $2.1 million and a note receivable of
$230,000 with an annual interest rate of 12%. All operating activity for the
first half of 1997 reverted to the purchaser in accordance with the sales
agreement. All operating activity for prior periods has been reclassed as income
from discontinued operations.
The non-recurring charges incurred during 1996 relate to noncapitalizable costs
incurred in the merger described in Note 1.
NOTE 9. PROVISION FOR INCOME TAXES
Provision for income taxes consists of the following:
Federal tax, paid or currently payable $ 789
State tax, paid or currently payable 147
Net deferred credits (prepaid charges) (4)
---------
Tax provision $ 932
=========
F-66
(continued)
71
The difference between the federal statutory rate and the effective tax rate is
as follows for the year ended December 29, 1996:
Statutory tax rate 34.0%
Generation of general business credits (.2)
Other permanent differences 2.0
State taxes, before valuation allowance and
net of federal income tax benefit 4.2
----
Effective tax rate 40.0%
====
Deferred tax assets and liabilities are classified as current and noncurrent on
the basis of the classification of the related asset or liability for financial
reporting. Prepaid and deferred taxes are recorded for temporary differences
between the book value of assets and liabilities for financial reporting
purposes and tax purposes.
Temporary differences comprising the net deferred tax liability on the
Consolidated Balance Sheet at December 29, 1996 are as follows:
December 29, 1996
------------------------------------
Temporary Differences Assets Liabilities Total
- --------------------- -------- ----------- --------
Allowance for doubtful accounts $ 95 $ -- $ 95
Accrued employee benefits 554 -- 554
Other -- (3) (3)
-------- -------- --------
Current 649 (3) 646
-------- -------- --------
Depreciation and amortization 710 (34,900) (34,190)
Deferred revenues 1,581 (89) 1,492
Installment gains -- (289) (289)
Property valuation allowances 412 -- 412
Joint ventures 2,015 (1,559) 456
Accrued employee benefits 634 -- 634
Interest 528 -- 528
-------- -------- --------
Noncurrent 5,880 (36,837) (30,957)
-------- -------- --------
Other Components
Alternative minimum tax credits 1,656 -- 1,656
General business credits 243 -- 243
Valuation allowance (2,195) -- (2,195)
-------- -------- --------
(296) -- (296)
-------- -------- --------
Net deferred tax liability $ 6,233 $(36,840) $(30,607)
======== ======== ========
The total valuation allowance at December 29, 1996 is $2,195. There was no net
change in the total valuation allowance for the year ended December 29, 1996. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the net deferred tax
assets will not be realized. Also, management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. In order to fully realize the net deferred
tax asset, the Company will need to generate future regular tax. Based upon the
levels of historical taxable income and projections for future taxable income,
management believes it is more likely than not the Company will realize the
benefits of the net deferred tax asset, net of the existing valuation allowance
at December 29, 1996. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of taxable
income during future periods are reduced.
F-67
(continued)
72
NOTE 10. RELATED PARTY TRANSACTIONS
Westbrook is owed $40,000 under an unsecured promissory note due August, 2003
(Note 5). Interest expense on the promissory note was $1,556 for 1996.
NOTE 11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH
INVESTING ACTIVITIES
1996
--------
Interest paid $ 13,874
Interest received (393)
Income taxes (24)
The GMX acquisition increased property and equipment, minority interest and
deferred income taxes by $5,348, $2,548 and $2,800, respectively.
NOTE 12. SUBSEQUENT EVENTS
On August 4, 1997 Westbrook entered into an agreement to sell 100% of the
outstanding common stock of the Company to Sunstone Hotel Investors, Inc.,
("Sunstone"). Westbrook will receive from Sunstone a combination of cash, common
stock, and convertible preferred stock. The transaction is subject to third
party approvals and other customary conditions.
F-68
(continued)
73
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Kahler Realty Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Kahler Realty
Corporation and Subsidiaries as of December 31, 1995 and January 1, 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the two-year period ended December 31,
1995. These consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kahler
Realty Corporation and Subsidiaries as of December 31, 1995 and January 1, 1995,
and the results of their operations and their cash flows for each of the years
in the two-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
----------------------
KPMG Peat Marwick LLP
Chicago, Illinois
February 16, 1996
F-69
74
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
For Years Ended December 31, 1995 and January 1, 1995
1995 1994
-------- --------
REVENUES
Revenue of owned operations $121,772 $109,910
Other properties managed and/or
partially owned 18,113 17,490
-------- --------
Total revenues $139,885 $127,400
======== ========
REVENUE OF OWNED OPERATIONS
Lodging - rooms $ 61,249 $ 54,108
- food and beverage 32,554 29,339
- other 11,553 9,796
Formal wear, laundry & other 15,912 15,894
Interest income 504 773
-------- --------
Total revenue of owned operations 121,772 109,910
-------- --------
OPERATING COSTS AND EXPENSES
Lodging - rooms 15,180 13,523
- food and beverage 25,697 23,221
- other 38,441 34,053
Formal wear, laundry & other 12,801 13,487
Corporate expenses 3,901 3,257
Depreciation and amortization (Note 9) 8,919 8,477
Non-recurring charges (Note 9) 526 1,811
-------- --------
Total operating costs and expenses 105,465 97,829
-------- --------
GROSS OPERATING PROFIT 16,307 12,081
Interest expense (13,115) (11,207)
Equity in earnings of affiliates (Note 4) 533 193
Gain (Loss) on sale of assets (11) 20
-------- --------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 3,714 1,087
Provision for income taxes 697 323
-------- --------
NET INCOME $ 3,017 $ 764
======== ========
PER COMMON SHARE DATA
Primary income per common share $ .70 $ .14
======== ========
Fully diluted income per common share $ .69 $ .14
======== ========
See Notes to Consolidated Financial Statements
F-70
75
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 31, 1995 and January 1, 1995
1995 1994
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 923 $ 1,110
Receivables:
Trade, less allowance for doubtful
accounts of $251 and $252, respectively 5,275 5,333
Current portion of notes receivable 132 150
Inventories 2,598 2,498
Prepaid expenses 323 265
--------- ---------
Total current assets 9,251 9,356
--------- ---------
OTHER ASSETS
Notes receivable (Notes 2 and 4) 1,361 1,423
Investments in affiliates (Note 4) 5,095 3,279
Debt service escrow accounts (Notes 5 and 7) 3,198 1,650
Intangibles 654 791
Other 2,224 1,823
--------- ---------
Total other assets 12,532 8,966
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 17,065 16,349
Buildings 141,965 136,967
Equipment 50,660 46,977
Formal wear apparel 4,381 4,735
--------- ---------
Total 214,071 205,028
Less accumulated depreciation 61,118 54,281
--------- ---------
152,953 150,747
Construction in progress (Note 5) 3,631 --
--------- ---------
Total property and equipment 156,584 150,747
--------- ---------
TOTAL ASSETS $ 178,367 $ 169,069
========= =========
See Notes to Consolidated Financial Statements
F-71
76
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31, 1995 and January 1, 1995
1995 1994
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Notes 7 and 9) $ 10,110 $ 8,392
Due to affiliates (Note 4) 738 167
Accrued liabilities:
Payroll and payroll related 3,131 2,473
Real estate taxes 1,954 1,996
Other taxes 520 806
Notes payable (Note 5) 4,700 5,300
Current portion of long-term debt (Note 5) 3,739 2,767
Current portion of subordinated debt
to affiliate (Note 6) 500 500
--------- ---------
Total current liabilities 25,392 22,401
--------- ---------
LONG-TERM DEBT (Note 5)
Obligations of Kahler Realty Corporation 99,754 95,842
Obligations of Subsidiaries - Nonrecourse
to Kahler Realty Corporation 26,261 26,517
--------- ---------
Total long-term debt 126,015 122,359
--------- ---------
OTHER LIABILITIES
Pension liability (Note 8) 1,009 734
Deferred revenue 160 137
Other 618 667
--------- ---------
Total other liabilities 1,787 1,538
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 7)
SUBORDINATED DEBT TO AFFILIATE (Note 6) 1,000 1,500
--------- ---------
STOCKHOLDERS' EQUITY (Note 6)
Common stock, par value $.10
Authorized - 70,000,000 shares;
Issued and outstanding - 4,293,473 and
4,167,598 shares, respectively 429 417
Additional paid-in capital 13,846 13,030
Retained earnings 10,414 7,991
Minimum pension liability adjustment (Note 8) (516) (167)
--------- ---------
Total stockholders' equity 24,173 21,271
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,367 $ 169,069
========= =========
See Notes to Consolidated Financial Statements
F-72
77
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share amounts)
For Years Ended December 31, 1995 and January 1, 1995
Common Stock Minimum
------------------- Additional Pension
Number Paid-in Retained Liability
of Shares Amount Capital Earnings Adjustment Total
---------- ------- ---------- -------- ---------- --------
BALANCES, January 2, 1994 3,425,798 $ 343 $ 8,450 $ 7,800 $(227) $16,366
Net income 764 764
Dividends paid to preferred stockholders (224) (224)
Dividends paid to common
stockholders ($0.09 per share) (349) (349)
Unrecognized gain on defined
benefit pension plan 60 60
Common stock issued 741,800 74 4,580 4,654
--------- ----- ------- ------- ----- -------
BALANCES, January 1, 1995 4,167,598 417 13,030 7,991 (167) 21,271
Net income 3,017 3,017
Dividends paid to common
stockholders ($0.14 per share) (594) (594)
Unrecognized loss on defined
benefit pension plan (349) (349)
Common stock issued (Note 6) 125,875 12 816 828
--------- ----- ------- ------- ----- -------
BALANCES, December 31, 1995 4,293,473 $ 429 $13,846 $10,414 $(516) $24,173
========= ===== ======= ======= ===== =======
See Notes to Consolidated Financial Statements
F-73
78
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
For Years Ended December 31, 1995 and January 1, 1995
1995 1994
-------- --------
OPERATIONS:
Net income $ 3,017 $ 764
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,919 8,477
Common stock issued under employee
benefit plans 303 6
Unrecognized gain (loss) on defined
benefit pension plan (349) 60
Equity in earnings of affiliates (533) (193)
(Gain) Loss on sale of assets 11 (20)
Change in current assets and liabilities:
Receivables 58 (962)
Inventories (100) (144)
Prepaid expenses (58) (32)
Accounts payable 1,673 1,493
Accrued liabilities 330 (15)
-------- --------
Net cash provided by operating activities 13,271 9,434
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (14,540) (13,523)
Proceeds from sale of property and equipment 34 125
Payments received on notes receivable 79 250
Investment in affiliates (Note 4) (1,856) -
Distributions received from affiliates 574 374
Decrease (Increase) in intangible assets 40 (374)
Increase in other assets (565) (108)
-------- --------
Net cash used by investing activities (16,234) (13,256)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 525 1,352
Purchase of common stock - -
Dividends paid to common shareholders (594) (349)
Dividends paid to preferred shareholders - (224)
Payments on subordinated debt due to affiliate (500) -
Construction payables 616 -
Increase in debt service escrow accounts (1,548) (900)
Proceeds from long-term debt and notes payable 6,943 3,833
Principal payments on long-term debt (2,315) (2,692)
Net borrowings (payments) on lines of credit
and notes payable (600) 2,850
Increase (Decrease) in other liabilities 249 78
-------- --------
Net cash provided by financing activities 2,776 3,948
-------- --------
INCREASE (DECREASE) IN CASH (187) 126
CASH AT BEGINNING OF THE PERIOD 1,110 984
-------- --------
CASH AT END OF THE PERIOD $ 923 $ 1,110
======== ========
See Notes to Consolidated Financial Statements
F-74
79
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Years Ended December 31, 1995 and January 1, 1995
Note 1. Business and Significant Accounting Policies
- -----------------------------------------------------
Description of business
- -----------------------
The primary business of Kahler Realty Corporation (the Company) is the operation
and management of hotel properties in 11 states, primarily Minnesota, Utah and
Idaho. As an adjunct to its hotels, the Company operates commercial laundries in
Rochester and Salt Lake City which provide services to the Company's hotels and
other third parties in their respective locations. The Company's other business
activities include operating a wholesale and retail formal wear business.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Investments of 50% or less in owned affiliates in
which the Company possesses significant influence are accounted for under the
equity method. The Company owns 24% of a partnership which owns the University
Park Hotel and a $4,620, 9% mortgage note with an option to convert the note
into additional equity interest in the hotel in 1998. Should the Company
exercise its option to convert, the Company would own 69.6% of the hotel. The
Company consolidates the assets and liabilities of the hotel which approximated
$10,391 and $9,412 at December 31, 1995, and $10,714 and $9,463 at January 1,
1995, respectively. All material intercompany transactions and balances have
been eliminated.
Reclassifications
- -----------------
The consolidated financial statements for prior years reflect certain
reclassifications to conform with classifications adopted in 1995. These
reclassifications have no effect on net income or stockholders' equity as
previously reported.
Revenues
- --------
Revenues of the Company are classified into two components. The Company uses
this presentation to show the total scope of the Company's operations.
The components of revenue are:
Revenue of owned operations include revenues from lodging properties in
which the Company has an interest greater than 50%, management fees
generated from properties partially-owned (50% or less) and properties
owned by others. Also included are revenues from Anderson's Formal Wear,
Textile Care Services and interest income.
Other properties managed and/or partially-owned includes all revenue of
properties partially-owned (50% or less) by the Company and the properties
managed for others. Under generally accepted accounting principles, this
revenue is not included in revenue of owned operations and the Company's
interest in partially-owned properties is reflected in the Consolidated
Statements of Operations as equity in earnings of affiliates.
F-75
80
Cash and cash equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. The Company
includes the current portion of debt service escrow accounts in cash and cash
equivalents. Amounts in these accounts were $336 and $416 at December 31, 1995
and January 1, 1995, respectively, and will be used to pay accrued interest on
certain of the hotel mortgages.
Inventories
- -----------
Inventories are stated primarily at the lower of average cost or market.
Notes receivable
- ----------------
Notes receivable are carried at their unpaid balance net of unamortized contract
discounts. The Company evaluates the collectibility of its notes receivable
(including accrued interest) by estimating the probability of loss utilizing
projections of loan and property performance, factors related to the borrower,
terms of the notes, other supply and demand factors and overall economic
conditions.
On January 2, 1995 the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) 114, "Accounting by Creditors for Impairment of a
Loan". The Company also adopted the provisions of SFAS 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures". The
adoption of SFAS 114 and 118 had no effect on the Company's financial position
or results of operations as of or for the year ended December 31, 1995.
Fair value of financial instruments
- -----------------------------------
On December 31, 1995 the Company adopted the provisions of SFAS 107 "Disclosures
about Fair Value of Financial Instruments". Management has determined that fair
values of the Company's financial instruments approximate the carrying values of
those instruments except for notes receivable and long-term debt as discussed in
Notes 2 and 5, respectively.
Property and equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation of property, equipment
and formal wear apparel is computed on the straight-line method over their
estimated useful lives. Depreciation expense was $8,658 and $8,197 for
the years 1995 and 1994, respectively. Interest of $76 related to certain
hotels under construction has been capitalized and is included in property and
equipment at December 31, 1995.
The estimated useful lives are:
Land improvements 5 to 25 years
Buildings 20 to 50 years
Equipment 5 to 20 years
Formal wear apparel 4 years
The Company records a provision for impairment of the carrying value of its real
estate investments whenever the estimated future cash flows from a property's
operations and projected sale are less than the property's net carrying value.
Management believes that the estimates and assumptions used are appropriate in
evaluating the carrying value of the Company's properties presented currently in
the balance sheet, however, changes in market conditions and circumstances could
occur in the near term which will cause these estimates to change.
F-76
81
On January 1, 1996, the Company adopted the provisions of SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". Measurement of impairment losses on long-lived assets are based on the
estimated fair value of the assets. Properties held for sale under SFAS 121 will
continue to be reflected at the lower of historical cost or estimated fair value
less anticipated selling costs. No adjustment of the carrying values of the
Company's long-lived assets was required at January 1, 1996 as a result of
adopting the provisions of SFAS 121.
Deferred financing costs
- ------------------------
Deferred financing costs were $1,425 and $1,309, net of accumulated
amortization, at December 31, 1995 and January 1, 1995, respectively. These
amounts are included in other assets and amortized over the life of the
respective loans.
Income taxes
- ------------
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes", which, among other things, requires an asset
and liability approach in accounting for deferred income taxes. (See Note
10)
Intangibles
- -----------
Intangibles represent pre-opening costs, organization costs, franchise rights
and an intangible pension asset relating to the Company's defined benefit plan.
Pre-opening costs include certain costs incurred during the property's break-in
period which consist of marketing, employee training and the excess of expenses
over revenues. The cost of these intangible assets are as follows:
1995 1994 Expected Life
-------- ------- -------------
Pre-opening costs $ 57 $ 163 3 years
Organization costs 145 132 5 years
Franchise rights 125 139 8 to 20 years
------- -------
327 434
Accumulated amortization (166) (210)
------- -------
161 224
Intangible pension asset 493 567
------- -------
$ 654 $ 791
======= =======
Income per common share
- -----------------------
For 1995 and 1994, income per share is computed on a primary share basis
using the weighted average number of outstanding common shares and equivalents
(arising from employee stock plans, deferred stock compensation and a warrant)
aggregating 4,329,000 and 3,956,000, respectively.
Income per share is computed on a fully diluted basis using the weighted average
number of outstanding common shares plus stock equivalents aggregating 4,355,000
for 1995. In 1994 the effect is the same as on a primary share basis.
Use of estimates
- ----------------
Preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities, 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.
Fiscal year
- -----------
The Company's fiscal year ends on the Sunday closest to December 31.
F-77
82
Note 2. Notes Receivable
- -------------------------
Notes receivable consist of contracts for deeds and first mortgages bearing
interest at rates ranging from 8% to 10%. One loan aggregating $454 is
considered impaired under provisions of SFAS 118 at December 31, 1995.
Accordingly, no interest income has been recognized on this loan during 1995.
The Company has determined no reserve for impairment is necessary for its notes
receivable at December 31, 1995 under provisions of SFAS 114.
The fair value of the non-current portion of notes receivable at December 31,
1995 approximated carrying value. The fair value of the non-current portion of
notes receivable are determined by discounting the scheduled loan payments to
maturity using current market rates commensurate with the risks and terms to
maturity of those instruments.
Total maturities of notes receivable for each of the next five years are
approximately $132, $467, $385, $31 and $478, respectively.
Note 3. Acquisitions
- ---------------------
On August 1, 1995 the Company acquired the Best Western Canyon Springs Park
Hotel, a 112 room full service property in Twin Falls, Idaho, for $5,750. The
purchase was financed with new long term-debt of $3,750, a note payable to the
seller of $400 and $1,600 from available cash and lines of credit.
On July 1, 1995 the Company paid $600 for a 32.9% equity interest in the 150
room full service Best Western Copper King Park Hotel in Butte, Montana. The
Company, which accounts for this investment under the equity method of
accounting, used internally generated funds to make this investment. The Company
subsequently entered into a management contract with the property.
On December 31, 1994 the Company acquired the Green Oaks Inn and Conference
Center, a 284 room hotel property in Fort Worth, Texas which it has managed
since 1990 and had owned prior to that year. At the time of acquisition the
Company held a mortgage receivable of $2,783 net of deferred revenue of $522.
The Company purchased this property for $438 in cash, the cancellation of the
mortgage receivable and related accrued interest receivable of $136 and the
assumption of negative working capital and a capital lease.
In March 1994, the Company acquired the Quality Inn Pocatello Park, a 152 room
full service hotel property in Pocatello, Idaho for $5,224. This purchase was
financed with new long-term debt of $3,700. The Company's lines of credit and
internally generated funds were utilized to finance the balance of the purchase
price.
The pro forma results listed below are unaudited and reflect the impact of the
purchase price accounting adjustments on the Company's Consolidated Statements
of Operations assuming the aforementioned acquisitions occurred at the beginning
of each year presented.
1995 1994
-------- --------
Revenue of owned operations $123,628 $118,077
Net income 3,277 1,196
Income per common share:
Primary .76 .25
Fully diluted .75 .25
F-78
83
Note 4. Investment in Affiliates
- ---------------------------------
As of December 31, 1995 and January 1, 1995 the Company's investment in
affiliates, accounted for under the equity method of accounting, are as follows:
Ownership
Interest 1995 1994
--------- ------ ------
Provo Park Hotel, Provo, UT 50.0% $4,450 $3,165
Best Western Copper King Park Hotel,
Butte, MT (Note 3) 32.9% 560 -
Kahler Park Hotel, Hibbing, MN 25.0% 85 114
Quality Hotel Plaza One,
Rock Island, IL 26.6% - -
------ ------
$5,095 $3,279
====== ======
The Company or its subsidiaries typically have an interest in an affiliated
partnership or limited liability company and operate the hotels under long-term
management contracts. The Company also held notes receivable from affiliates of
$572 and $574 at December 31, 1995 and January 1, 1995, respectively.
The Company contributed $1,200 to the Provo Park Hotel during 1995, which along
with funds from a $16,000 non-recourse loan commitment and a $1,000 federal
grant will be used to construct a 96 suite expansion and 17,000 square foot
conference center as well as a 114 suite Residence Inn by Marriott in Provo,
Utah. The Company's partner in this venture contributed land and cash valued at
$1,200. Construction of the Residence Inn and the expansion of the Provo Park
Hotel is scheduled to be completed in late 1996 and early 1997, respectively.
The Company's income from affiliates before taxes is as follows:
1995 1994
------ ------
Management fees $ 540 $ 381
Equity in earnings 533 193
------ ------
$1,073 $ 574
====== ======
Combined summarized balance sheet information for the Company's affiliates is as
follows:
1995 1994
------- -------
Current assets $ 1,431 $ 654
Noncurrent assets 20,710 15,629
Current liabilities 2,194 1,595
Long-term debt, principally mortgages 12,076 9,162
Other long-term liabilities 1,663 1,273
Owners' equity 6,208 4,253
Combined summarized operating results reported by these affiliates are as
follows:
1995 1994
------- -------
Revenues $13,782 $11,099
Net income (loss) 422 (87)
F-79
84
Note 5. Financing
- ------------------
Notes payable consists of $4,100 drawn on various lines of credit with a maximum
available of $5,000 at December 31, 1995 and a short-term note payable of $600.
The lines of credit and note payable carry an interest rate of prime plus 1%,
mature at various dates throughout 1996 and are secured by property and
equipment, inventory and accounts receivable. The Company anticipates the
extension of all its lines of credit. The prime rate at December 31, 1995 and
January 1, 1995 was 8.75% and 8.5%, respectively.
Outstanding long-term debt, which is secured by substantially all property and
equipment, is summarized as follows:
Obligations of Kahler Realty Corporation
Security/Secured
Property
Mortgages Interest Rate Maturity 1995 1994
- ---------------- ------------- -------- ---- ----
Kahler Plaza Hotel 10.0% plus 2.0%
of room sales Nov 1997 $ 15,300 $ 15,455
Clinic View Inn 9.75% plus 2.0%
of room sales May 2000 14,531 14,654
San Marcos 7.5% plus added
interest* Dec 2000 13,600 13,600
Kahler Hotel Prime plus 1.0% Dec 2003 12,038 12,421
Mortgages under $10
million - secured
by ten hotel
properties and a Ranging from Ranging from
commercial laundry prime to 12.0% 1996 to 2014 46,937 41,441
Notes payable Prime to 11.0% Various dates
through Sept
1997 291 290
Capitalized leases 12.2% to 12.93% May 1997 26 46
-------- --------
Subtotal 102,723 97,907
Less current maturities 2,969 2,065
-------- --------
$ 99,754 $ 95,842
======== ========
Obligations of Subsidiaries - Nonrecourse to Kahler Realty Corporation
Security/Secured
Property
Mortgages Interest Rate Maturity 1995 1994
- ---------------- ------------- -------- ---- ----
Mortgages under $10 Tax-exempt variable
million - secured by rate of 3.55% to
Ranging from
six hotel properties prime plus 0.5% 2003 to 2015 $ 26,813 $ 26,908
Special assessments 7.5% to 12.0% December 1997 111 158
Capitalized leases 0.0% to 14.3% August 1994
to June 1998 107 153
-------- --------
Subtotal 27,031 27,219
Less current maturities 770 702
-------- --------
26,261 26,517
-------- --------
Total indebtedness 129,754 125,126
Less current maturities 3,739 2,767
-------- --------
$126,015 $122,359
======== ========
* Added interest is defined as approximately 67% of Excess Cash Flow as defined.
(See Note 7)
F-80
85
The fair value of long-term debt at December 31, 1995 was approximately $122,744
as compared to a carrying value of $126,015. The fair values of long-term debt
were determined by discounting the scheduled loan payments to maturity using
borrowing rates currently available to the Company for bank loans of similar
term and maturity.
Total maturities of long-term debt, excluding capital lease obligations, in each
of the next five years are approximately $3,668, $18,619, $3,808, $8,325 and
$20,512, respectively.
At December 31, 1995 the Company has arranged for the issuance of a letter of
credit aggregating $1,000 as additional collateral for one of the nonrecourse
obligations listed above.
Under certain financial debt covenants, the Company is required to maintain
certain levels of net worth, debt to equity, cash flow and other ratios. Waivers
of certain covenants have been obtained as of December 31, 1995 and January 1,
1995.
The laundry facility in Rochester Minnesota was financed with a $10,000 loan. In
the event of default by the Company on this loan the lender can require the
Company's largest shareholder to purchase the loan at its outstanding balance.
On January 19, 1996, the Company refinanced the San Marcos mortgage in the
amount of $13,600. The initial variable tax-exempt interest rate, including a
credit enhancement fee, was approximately 6.0%. To facilitate this refinancing,
the Company placed $1,548 in escrow with the trustee of the present mortgage in
November, 1995. These funds will be held by the trustee pending resolution of
the litigation discussed in Note 7.
Note 6. Stockholders' Equity
- -----------------------------
Preferred stock
- ---------------
The Company has 10,000,000 shares authorized and no shares outstanding as of
December 31, 1995 and January 1, 1995. The Board of Directors is authorized to
determine the series and number of preferred shares to be issued and any related
designations, powers, preferences, rights, qualifications, limitations or
restrictions.
Common stock
- ------------
Common stock has been issued under deferred compensation, incentive stock
option, employee retirement and stock purchase plans and upon conversion of
preferred stock, and a common stock warrant.
Stock option plans
- ------------------
Under certain stock option plans, incentive stock options may be granted to key
employees or non-employee directors at not less than 100% of the fair market
value of the Company's stock on the date of grant and options not qualifying as
incentive stock options may be granted to non-employees providing valuable
services to the Company at not less than 50% of the fair market value of the
Company's stock on the date of grant. None of these shares have been granted at
less than market value. Total number of shares authorized under these plans are
931,350. Key employee options expire five years after the date of grant and vest
25% per year commencing one year after the date of grant. Non-employee director
options expire ten years after the date of grant and vest after one year.
Activity under the plans is summarized below:
F-81
86
Number Option Price
of Shares Per Share
--------- ---------------
Balance, January 2, 1994 495,300 $ 2.88 - $ 7.50
Granted 113,700 8.50 - 11.75
Exercised (186,075) 2.88 - 7.50
Canceled (5,000) 3.00 - 7.50
--------
Balance, January 1, 1995 417,925 2.88 - 11.75
Granted 125,000 7.88 - 12.88
Exercised (105,500) 2.88 - 11.75
Canceled (5,875) 3.00 - 11.75
-------- ---------------
Balance, December 31, 1995 431,550 $ 3.00 - $12.88
======== ===============
At December 31, 1995 178,744 options were exercisable and 499,800 shares were
available for grant.
Subordinated debt to affiliate
- ------------------------------
In January 1992, the Company issued a $2,000 subordinated note to the Company's
largest shareholder. The subordinated note requires annual principal payments of
$500 per year each April 21, matures in 1998 and carries an interest rate of
prime plus 1%. As of December 31, 1995 the balance was $1,500. The Company has
the right to repay the note in cash or with common stock equal to 120% of the
subordinated note at any time.
Note 7. Commitments and Contingencies
- --------------------------------------
The Company believes it is in the final stages of negotiating a settlement with
a telecommunications company related to disputed unremitted telephone revenue
and fees at ten of its hotels (the Hotels). Proposed terms of this settlement
provide for the lease by the Company of $1,500 of new telephone switches and
equipment from the telecommunications company over the remaining term of the
amended existing telephone service agreements. The Company would have the option
to acquire all telephone switches and equipment in the Hotels at the end of the
telephone service agreement term. However, while this settlement has been agreed
to in principle by the parties, it has not yet been executed. If completed, this
settlement is not expected to have a material adverse impact on the Company's
Consolidated Financial Statements.
In December 1994 the Company received notice of default relating to bond
indebtedness on one of it's wholly-owned hotels. In January 1995 the Company
brought suit against the bondholders. The Company is seeking declaratory
judgment regarding the proper interpretation of the calculation of added
interest. In January, 1996 the Superior Court of Arizona (the Court) ruled
against the Company. The Company plans to vigorously appeal the Court's
decision. The appellate court will hear the Company's suit in its entirety and
is not restricted in any way by the Court's decision. If the bondholders are
found judicially correct, the Company would owe $267, $618 and $884 for 1993,
1994 and 1995, respectively, and certain other costs as determined by the Court.
The Company has recorded an estimate of the loss that could result from the
unfavorable resolution of this uncertainty. While the Company believes it has a
meritorious case in appeal, the ultimate resolution of the matter, which is
expected to take longer than one year, could result in a loss greater or less
than what is presently accrued. The Company refinanced this mortgage in January,
1996 as discussed in Note 5.
F-82
87
Additionally, the Company is involved in various litigation in the normal course
of business. The Company does not expect the outcome of the matters described
above to have a material adverse effect on the Company's consolidated financial
statements.
Operating leases
- ----------------
The Company leases warehouse and retail store facilities for its formal wear
operations and land for three of its hotels under various operating lease
agreements which call for minimum lease payments and contingent rents based upon
percentages of revenues. Operating lease expense was $1,629 and $1,550,
including contingent rentals of $516 and $486 for 1995 and 1994, respectively.
Future minimum lease payments under operating leases total $6,651 with annual
payments of $997, $681, $409, $234 and $190 due in each of the next five years,
respectively.
Capital leases
- --------------
The Company leases furniture and equipment under capital leases. Future minimum
lease payments under these capital leases total $171 with annual payments of
$100, $54, $17, $0 and $0 due in each of the next five years, respectively. Of
the $171 of total minimum lease payments, $38 represents interest.
The following is an analysis of property under capital leases:
1995 1994
------- -------
Furniture & equipment $ 465 $ 465
Less accumulated amortization (239) (164)
------- -------
$ 226 $ 301
======= =======
Amortization of leased equipment is classified with depreciation expense.
Telephone service agreements
- ----------------------------
In March, 1990 the Company sold all telephone switches and related equipment at
the Hotels to a telecommunications company. Each of the Hotels subsequently
entered into telephone service agreements with the same telecommunications
company which call for contingent payments based upon telephone usage. Expenses
incurred pursuant to these service agreements were $2,316 and $1,766 in
1995 and 1994, respectively. These agreements expire in February, 2000.
Other
- -----
The Company plans on opening a 108 suite expansion to its hotel in Boise, Idaho,
in early 1996. At December 31, 1995, the Company had a $2,455 loan commitment
which is expected to fund a substantial portion of the remaining expansion costs
to be paid.
In January, 1996 the Company entered into an agreement to purchase the 149 room
full service Colonial Inn Hotel in Helena, Montana at a cost of $9,200. This
acquisition will be financed through a mortgage note payable to a bank, a note
payable to the seller and internally generated funds.
F-83
88
Note 8. Retirement Plans
- -------------------------
The Company has a defined benefit plan covering union employees at properties
located in Rochester, Minnesota. Pension contributions and expenses for this
plan are determined based on the actuarial cost of current service and
amortization of prior service costs over a 20-year period.
Net periodic pension cost for the defined benefit plan included the following
components:
1995 1994
------ ------
Service costs-benefits earned during
the period $ 97 $ 80
Interest cost on projected benefit
obligation 219 179
Return on assets-actual (122) 8
Net amortization and deferral 53 (102)
------ ------
Net periodic pension cost $ 247 $ 165
====== ======
The following table sets forth the Plan's funded status at December 31, 1995 and
January 1, 1995:
1995 1994
------- -------
Actuarial present value of vested
benefit obligation $ 3,124 $ 2,503
======= =======
Accumulated benefit obligation $ 3,200 $ 2,564
======= =======
Projected benefit obligation $ 3,200 $ 2,564
Fair market value of plan assets* 1,795 1,498
------- -------
Unfunded projected benefit obligation 1,405 1,066
Unrecognized net liability at date of
initial application (34) (40)
Unrecognized prior service cost (459) (527)
Unrecognized net loss (516) (167)
Adjustment to recognize minimum liability 1,009 734
------- -------
Pension liability $ 1,405 $ 1,066
======= =======
*Plan assets consist primarily of equity and fixed income securities.
The Company has recognized an additional liability as the accumulated benefit
obligation exceeded the fair value of the plan assets. An intangible asset was
recognized up to the amount of unrecognized prior service cost. As of December
31, 1995 the additional liability exceeded the unrecognized prior service cost
and the unrecognized transition liability by $516. This amount has been recorded
as a reduction of stockholders' equity.
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.25% and 8.5% in 1995 and 1994,
respectively. The expected long-term rate of return on assets was 8%.
The Company has a defined contribution plan covering substantially all other
employees. The funding of the defined contribution plan is determined by the
Board of Directors.
Total expense for both plans was $497 and $215 for 1995 and 1994, respectively.
F-84
89
The Company provides postretirement benefits to a fixed number of retired
employees relating to service provided prior to 1992. At December 31, 1995 and
1994 the estimated liability was $175 and $200, respectively.
Note 9. Segments
- ----------------
The Company's principal business activity is the operation and management of
hotel properties. Fees from managed properties are primarily based on a percent
of revenues of the managed property. The Company's other business activities
include a wholesale and retail formal wear business and institutional laundries.
Intersegment transactions including laundry revenues of $2,050 and $1,857 in
1995 and 1994, respectively, have been eliminated from the table below.
Operating income represents revenue less operating expenses, excluding general
corporate expenses. Identifiable assets are those used in the operation of each
segment. Capital expenditures include non-cash lodging acquisitions of $2,783 in
1994. General corporate assets consist primarily of cash, notes and other
investments.
The following tables summarize the Company's segment information:
REVENUE OF OWNED OPERATIONS 1995 1994
-------- --------
Lodging $105,356 $ 93,243
Laundry 5,890 6,304
Formal Wear 9,373 8,924
Other 649 666
Interest income 504 773
-------- --------
$121,772 $109,910
======== ========
OPERATING INCOME
Lodging $ 19,316 $ 16,304
Laundry 584 (389)
Formal Wear 363 539
Other 12 11
Non-recurring charges (526) (1,811)
Corporate expenses (3,946) (3,346)
Interest income 504 773
-------- --------
GROSS OPERATING PROFIT 16,307 12,081
Interest expense (13,115) (11,207)
Equity in earnings of affiliates 533 193
Gain(Loss) on sale of assets (11) 20
-------- --------
INCOME FROM OPERATIONS BEFORE
INCOME TAXES $ 3,714 $ 1,087
======== ========
IDENTIFIABLE ASSETS
Lodging $155,479 $145 602
Laundry 14,155 14,703
Formal Wear 3,872 4,024
Other 1,613 1,634
Corporate 3,248 3,106
-------- --------
$178,367 $169,069
======== ========
F-85
90
CAPITAL EXPENDITURES
Lodging $ 13,024 $ 13,859
Laundry 140 846
Formal Wear 1,265 1,464
Other 38 74
Corporate 73 63
-------- --------
$ 14,540 $ 16,306
======== ========
DEPRECIATION AND AMORTIZATION
Lodging $ 6,722 $ 6,142
Laundry 759 736
Formal Wear 1,326 1,411
Other 67 99
Corporate 45 89
-------- --------
$ 8,919 $ 8,477
======== ========
During the fourth quarters of 1995 and 1994, the Company recorded non-recurring
charges of $526 and $1,811 related to expenses incurred in connection with
planned secondary offerings and conversion of the Company into a real estate
investment trust. Neither offering was completed as a result of general market
conditions.
The Company regularly furnishes laundry, hospitality and food services to the
Company's largest shareholder, the Mayo Foundation (Mayo), and its affiliates at
competitive prices. The Company purchases, at competitive prices, steam,
electricity, water and related utility services from a Mayo affiliate. These
activities are summarized below.
1995 1994
------- -------
Revenue
Laundry sales $ 3,576 $ 3,333
Food services 1,001 951
Operating costs and expenses
Utilities $ 1,497 $ 1,870
Interest 153 162
The consolidated balance sheet includes receivables and payables to Mayo
summarized as follows:
1995 1994
------- -------
Receivables $ 521 $ 424
Payables (including accrued interest) 182 209
Note 10. Provision for Income Taxes
Provision for income taxes consists of the following:
1995 1994
----- -----
Federal tax, paid or currently payable $ 622 $ 350
State tax, paid or currently payable 110 93
Net deferred credits (prepaid charges) (174) (120)
Tax benefit of stock options 139 -
----- -----
Tax provision $ 697 $ 323
===== =====
F-86
91
The difference between the U.S. Federal Statutory rate and the effective tax
rate is as follows:
1995 1994
------ ------
Statutory tax rate 34.0% 34.0%
Changes in the valuation allowance (12.4) (15.0)
Generation of general business credits (3.7) -
Other permanent differences (0.8) 5.4
State taxes, before valuation allowance
and net of federal income tax 1.7 5.3
----- -----
Effective tax rate 18.8% 29.7%
===== =====
Deferred tax assets and liabilities are classified as current and noncurrent on
the basis of the classification of the related asset or liability for financial
reporting. Prepaid and deferred taxes are recorded for temporary differences
between the book value of assets and liabilities for financial reporting
purposes and tax purposes.
Temporary differences comprising the net prepaid taxes included in other assets
on the Consolidated Balance Sheet at December 31, 1995 and January 1, 1995 are
as follows:
1995
Temporary Differences Assets Liabilities Total
- --------------------- -------- ----------- --------
Allowance for doubtful accounts $ 81 $ - $ 81
Accrued employee benefits 504 - 504
Other - (180) (180)
-------- -------- --------
Current - (180) 405
-------- -------- --------
Depreciation and amortization 6 (1,910) (1,904)
Deferred revenues 1,658 (105) 1,553
Installment gains - (399) (399)
Property valuation allowances - (70) (70)
Joint ventures 1,003 (142) 861
Accrued employee benefits 242 - 242
-------- -------- --------
Noncurrent 2,909 (2,626) 283
-------- -------- --------
Other Components
Alternative minimum tax credits 1,563 - 1,563
General business credits 631 - 631
Valuation allowance (2,195) - (2,195)
-------- -------- --------
(1) - (1)
-------- -------- --------
Net prepaid tax asset $ 3,493 $ (2,806) $ 687
======== ======== ========
1994
Temporary Differences Assets Liabilities Total
- --------------------- -------- ----------- --------
Allowance for doubtful accounts $ 75 $ - $ 75
Accrued employee benefits 360 - 360
Other 13 (129) (116)
-------- -------- --------
Current 448 (129) 319
-------- -------- --------
Depreciation and amortization - (775) (775)
Deferred revenues 1,596 (108) 1,488
Installment gains 8 (427) (419)
Property valuation allowances - (90) (90)
Joint ventures 589 (81) 508
Accrued employee benefits 264 - 264
-------- -------- --------
2,457 (1,481) $ 976
-------- -------- --------
F-87
92
Noncurrent
Other Components
Alternative minimum tax credits 1,068 - 1,068
General business credits 587 - 587
NOL carryforwards 218 - 218
Valuation allowance (2,655) - (2,655)
-------- -------- -------
(782) - (782)
-------- -------- -------
Net prepaid tax asset $ 2,123 $(1,610) $ 513
======== ======== =======
The Company has based the value of the net prepaid tax asset primarily on the
alternative minimum tax credits which, under current law, have no expiration
dates. The ultimate realization of the net prepaid tax asset is dependent upon
the offset of these credits against future federal tax payments if future
taxable income exceeded the alternative minimum tax levels.
The total valuation allowance at the end of 1995 was $2,195. The net change in
the total valuation allowance for the years ended 1995 and 1994 was a decrease
of $460 and an increase of $398, respectively. In assessing the realizability of
prepaid tax assets, management considers whether it is more likely than not that
some portion or all of the net prepaid tax assets will not be realized. Also,
management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. In order to fully realize the net prepaid tax asset, the Company
will need to generate future regular tax. Taxable income for the years ended
1995 (estimated) and 1994 was approximately $273 and $937, respectively. Based
upon the levels of historical taxable income and projections for future taxable
income, management believes it is more likely than not the Company will realize
the benefits of the net prepaid tax asset, net of the existing valuation
allowance at December 31, 1995. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of taxable
income during future periods are reduced.
Note 11. Supplemental disclosure of cash flow information and non-cash
- -----------------------------------------------------------------------
financing and investing activities
----------------------------------
1995 1994
-------- --------
Interest paid, net of amounts capitalized $ 12,354 $ 10,968
Interest received (444) (753)
Income taxes paid 1,083 520
The Company acquired certain hotel interests in 1995 and 1994 as described in
Note 3.
Note 12. Other Matters
- ------------------------
On November 24, 1995 the Company retained Montgomery Securities as financial
advisor to assist the Company's Board of Directors in exploring the strategic
alternatives available to enhance shareholder value. As one alternative, the
Company is presently considering a public sale of its shares simultaneously with
its conversion to a real estate investment trust. As other possible
alternatives, the Company with Montgomery's assistance, will also explore a
possible sale of part or all of its assets as well as the continued operation of
the Company in its present corporate form.
F-88