EXHIBIT 99.10
INDEPENDENT AUDITORS' REPORT
Partners and Board of Directors
Westchase Holdings, Ltd.
dba Westchase Hilton Hotel and Towers
GAR Holdings, Inc.
Houston, Texas
We have audited the accompanying combined balance sheet of Westchase
Holdings, Ltd. (a Texas limited partnership) dba Westchase Hilton Hotel and
Towers and GAR Holdings, Inc. as of December 27, 1996, and the related combined
statements of income, owners' deficit and cash flows for the year then ended.
These combined financial statements are the responsibility of management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Westchase
Holdings, Ltd. dba Westchase Hilton Hotel and Towers and GAR Holdings, Inc. at
December 27, 1996 and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Mann Frankfort Stein & Lipp, P.C.
Houston, Texas
February 11, 1997
1
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
COMBINED BALANCE SHEET
DECEMBER 27, 1996
ASSETS
Current assets
Cash and cash equivalents.................................................... $1,116,006
Accounts receivable, less allowance for doubtful accounts of $4,213.......... 456,339
Inventories.................................................................. 57,172
Federal income tax receivable................................................ 12,164
Prepaid expenses............................................................. 13,575
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Total current assets........................................................... 1,655,256
Property and equipment
Land......................................................................... 2,046,000
Building..................................................................... 12,451,161
Furnishings, fixtures and equipment.......................................... 4,594,999
Automobiles.................................................................. 19,928
----------
19,112,088
Less: accumulated depreciation............................................... (6,167,818)
----------
Net property and equipment..................................................... 12,944,270
Other assets
Restricted cash.............................................................. 281,389
License fee, less accumulated amortization of $15,750........................ 6,757
Loan origination fees, less accumulated amortization of $95,975.............. 543,861
Service warranties, less accumulated amortization of $3,600.................. 4,400
Deposits..................................................................... 112,171
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Total other assets............................................................. 948,578
----------
Total assets................................................................... $15,548,104
----------
----------
LIABILITIES AND OWNERS' DEFICIT
Current liabilities
Accounts payable............................................................. $ 286,069
Accrued expenses............................................................. 600,154
Current portion of long-term debt............................................ 567,125
----------
Total current liabilities...................................................... 1,453,348
Long-term debt, less current portion........................................... 15,061,302
----------
Total liabilities.............................................................. 16,514,650
Commitments and contingencies.................................................. --
Owners' deficit................................................................ (966,546)
----------
Total liabilities and owners' deficit.......................................... $15,548,104
----------
----------
See notes to combined financial statements.
2
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 27, 1996
Revenues
Rooms........................................................................ $7,558,419
Food and beverage............................................................ 2,360,609
Other........................................................................ 676,291
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Total Revenues................................................................. 10,595,319
Departmental Expenses
Rooms........................................................................ 1,645,524
Food and beverage............................................................ 1,493,485
Other........................................................................ 188,445
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Total Departmental Expenses.................................................... 3,327,454
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Gross Operating Income......................................................... 7,267,865
Undistributed Expenses
Administrative and general................................................... 1,240,749
Marketing.................................................................... 1,204,528
Energy costs................................................................. 540,489
Repairs and maintenance...................................................... 562,017
Management fees.............................................................. 249,996
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Total Undistributed Expenses................................................... 3,797,779
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Income Before Fixed Charges.................................................... 3,470,086
Fixed Charges
Interest..................................................................... 1,294,344
Depreciation and amortization................................................ 1,174,261
Property taxes............................................................... 344,135
Insurance.................................................................... 84,553
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Total Fixed Charges............................................................ 2,897,293
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Income Before Federal Income Taxes............................................. 572,793
Federal Income Taxes........................................................... 845
----------
Net Income..................................................................... $ 571,948
----------
----------
See notes to combined financial statements.
3
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
COMBINED STATEMENT OF OWNER'S DEFICIT
YEAR ENDED DECEMBER 27, 1996
ADDITIONAL
COMMON PAID-IN RETAINED PARTNERS'
STOCK CAPITAL EARNINGS CAPITAL TOTAL
------------- ------------- --------- ------------- -------------
Balance, December 30, 1995........................ $ 10 $ 990 $ 52,580 $ 3,524,114 $ 3,577,694
Distributions..................................... -- -- -- (5,116,188) (5,116,188)
Net income........................................ -- -- 23,853 548,095 571,948
--- ----- --------- ------------- -------------
Balance, December 27, 1996........................ $ 10 $ 990 $ 76,433 $ (1,043,979) $ (966,546)
------------- ------------- --------- ------------- -------------
------------- ------------- --------- ------------- -------------
See notes to combined financial statements.
4
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 27, 1996
Cash flows from operating activities
Net income...................................................................... $ 571,948
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................. 1,174,261
Provision for bad debts....................................................... 21,537
Gain from disposal of property and equipment.................................. (1,695)
Changes in assets and liabilities:
Accounts receivable........................................................... (82,492)
Inventories................................................................... (4,442)
Federal income taxes receivable............................................... (11,384)
Prepaid expenses.............................................................. 76,414
Other assets.................................................................. 33,730
Accounts payable.............................................................. (144,494)
Accrued expenses.............................................................. (721,385)
---------
340,050
---------
Net cash provided by operating activities....................................... 911,998
Cash flows from investing activities
Cash paid for property and equipment.......................................... (134,589)
Proceeds from the sale of property and equipment.............................. 7,542
Decrease in advances to affiliates, net....................................... 5,160
Other intangible assets....................................................... (639,837)
---------
Net cash used in investing activities........................................... (761,724)
Cash flows from financing activities
Principal payments on debt.................................................... (12,434,464)
Proceeds from debt............................................................ 16,000,000
Distributions................................................................. (5,116,188)
---------
Net cash used in financing activities........................................... (1,550,652)
---------
Net decrease in cash and cash equivalents....................................... (1,400,378)
Cash and cash equivalents at beginning of period................................ 2,797,773
---------
Cash and cash equivalents at end of period...................................... $1,397,395
---------
---------
Supplemental cash flow information
Interest paid................................................................. $1,590,129
---------
---------
Taxes paid.................................................................... $ 12,229
---------
---------
Cash equivalents reconciliation
Cash and cash equivalents..................................................... $1,116,006
Restricted cash............................................................... 281,389
---------
$1,397,395
---------
---------
See notes to combined financial statements.
5
WESTCHASE HOLDINGS, LTD.
dba WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
Notes to Combined Financial Statements
December 27, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING: The accompanying combined financial statements include
the accounts of the following entities (collectively, the "Companies"):
FORM OF ENTITY
----------------------
Westchase Holdings, Ltd. ("Partnership")
dba Westchase Hilton Hotel and Towers................................ Limited Partnership
GAR Holdings, Inc. ("GAR")............................................ Corporation
Significant intercompany transactions and balances have been eliminated in
combination.
Beverage operations are managed by GAR. The Partnership acts as agent for
GAR with respect to sales and beverage taxes and has paid all deposits required
by the Texas Alcoholic Beverage Commission on behalf of GAR.
NATURE OF OPERATIONS: The Companies provide hotel, restaurant and banquet
facilities to the general public in Houston, Texas. The Companies' revenues are
derived primarily from room rentals. Secondary sources of revenues are generated
from restaurant services, banquet facilities and customer support services
provided to guests within the Hotel. The Companies extend credit to businesses
in Houston area and throughout the United States.
ACCOUNTING PERIOD: The Companies' fiscal year is based on a 52-53 week
year.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: Earnings are charged with a provision for
doubtful accounts based on a current review of the collectibility of accounts.
Accounts deemed uncollectible are applied against the allowance for doubtful
accounts.
INVENTORIES: Food and beverage inventories are valued at the lower of cost
(first-in, first-out method) or market.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets (five to thirty-nine years). Maintenance and
repairs are charged to expense as incurred; major renewals and betterments are
capitalized.
OTHER ASSETS: Other assets include the following: (1) license fees paid to
Hilton Inns, Inc., which are being amortized on a straight-line basis over a
thirteen year period through November, 2000; (2) loan origination fees paid to a
finance company which are being amortized on a straight-line basis over a five
year period through March, 2001; and (3) extended warranties paid to a vendor
which are being amortized on a straight-line basis over a five year period
through September, 1999.
FEDERAL INCOME TAXES: No provision for Federal income taxes has been made
for the Partnership as these taxes are the responsibility of the partners.
Federal income taxes, current and deferred, for the Corporation are not
significant.
NET INCOME (LOSS) ALLOCATION: Net income or loss of the Partnership is
allocated to the partners in accordance with the terms set forth in the
Partnership Agreement.
6
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Such allocations will include a 10% return on cash funds invested, to the
extent of any positive balance in the partners' investment account, as defined
by the Partnership Agreement.
CASH EQUIVALENTS: For purposes of the Statement of Cash Flows, cash
equivalents include all highly liquid investments with original maturities of
three months or less.
USE OF ESTIMATES: The preparation of combined financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the combined financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
(2) CASH
Under the mortgage note payable agreement, the Partnership is required to
make quarterly deposits amounting to either $118,750 or 4% of revenues,
whichever is greater. At December 27, 1996, $281,389 of cash was restricted for
that purpose.
At December 27, 1996, the Partnership had monies deposited in certain banks
which were in excess of the federally insured limits. The Partnership monitors
the financial condition of the banks and has experienced no losses associated
with its accounts.
(3) RELATED PARTY TRANSACTIONS
The Partnership repaid a mortgage note payable of $2,275,400 to the
Companies' principal partner and stockholder. Interest applicable to the
promissory note of $328,341 was paid in 1996.
During 1996, an Affiliate charged the Companies $32,500 for overhead
expenses which are included in administrative and general expenses. In addition,
the Affiliate charged management fees of $249,996 in 1996 for managing the
Hotel.
The Companies are provided insurance coverage under a group policy covering
the Companies and other entities owned by the Companies' principal partner and
stockholder. The Companies reimbursed the Affiliate for its pro-rata share of
insurance expense. At December 27, 1996, the Companies, including another
Affiliate, had two unused letters of credit from a bank with a total amount
available of $268,816, payable with interest at 8.75%, expiring November 1996,
related to workers compensation insurance. The Partnership is also required to
maintain a certificate of deposit with a bank under the terms of the insurance
agreement. At December 27, 1996, $109,255 was restricted for that purpose and is
included in deposits.
During 1996, the Partnership refinanced all their bank debt and a mortgage
note payable to a related party with a finance company. In obtaining financing,
the Partnership paid a fee of $175,000 to the Affiliate.
Aggregate amounts payable to the Affiliate included in accounts payable and
accrued expenses are approximately $79,700 at December 27, 1996.
7
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1996
(3) RELATED PARTY TRANSACTIONS--(CONTINUED)
At December 27, 1996, the Partnership had $1,168,436 in cash deposits and
certificates of deposit with a bank owned by the Investor Limited Partner.
The Partnership leases restaurant facilities to an affiliated company under
an operating lease for a term of ten years expiring in 2002. Under the
agreement, the minimum monthly rent is to be equal to the tenant's net income
before specific deductions not to exceed $18,000 per month. Rental income for
1996 amounted to approximately $2,150. At December 27, 1996, the Partnership had
a payable of $11,350 with such affiliated company.
Total cost and accumulated depreciation at December 27, 1996 for property
and equipment under this operating lease are as follows:
Building and land............................................. $ 1,004,022
Furnishings, fixtures and equipment........................... 437,400
-----------
1,441,422
Less: accumulated depreciation............................... (379,795)
-----------
$ 1,061,627
-----------
-----------
(4) LONG-TERM DEBT
Long-term debt consists of:
Mortgage note payable to a finance company in monthly
installments of $166,881 including interest at 9.35%, secured
by first and second liens on the hotel property and assignment
of rents and leases, maturing March, 2001..................... $15,628,427
Less: current portion......................................... 567,125
----------
$15,061,302
----------
----------
The following are maturities of long-term debt for the next five years:
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
1997........................................................................... $ 567,125
1998........................................................................... 622,483
1999........................................................................... 683,246
2000........................................................................... 749,939
2001........................................................................... 13,005,634
-------------
$ 15,628,427
-------------
-------------
The Partnership also has a "junior" note with the finance company with
advances available up to $1,500,000. During 1996, the Partnership did not borrow
funds on this junior note.
8
WESTCHASE HOLDINGS, LTD.
DBA WESTCHASE HILTON HOTEL AND TOWERS
GAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1996
(5) BANK CREDIT AGREEMENTS, COMMITMENTS, AND CONTINGENCIES
In 1980, the previous owners of the Hotel entered into a 20-year license
agreement with Hilton Inns, Inc. permitting it to promote and advertise the
Hotel under the Hilton name. Under the terms of the agreement, the Partnership
is committed to pay a monthly license fee equal to 6.0% in 1996 of the gross
room sales of the Hotel. The Hotel is also committed to pay a monthly service
fee equal to 4.55% of gross room sales of customers who participate in the
Hilton Honors program. Total license and Honor fees were $596,234 in 1996.
During 1990, the Partnership entered into a month-to-month management
agreement with a hotel management company owned by the Companies' principal
partner and stockholder. The agreement provides for a management fee of $20,833
per month. The agreement continues on a monthly basis unless either party
terminates the agreement within the terms described in such agreement.
(6) COMMON STOCK
GAR Holdings, Inc. has authorized 100,000 shares of common stock and has
1,000 shares of $.01 par value common stock issued and outstanding.
(7) EMPLOYEE BENEFIT PLAN
The Companies participate in a multi-employer 401(k) employee benefit plan
sponsored by an affiliated company. The plan covers all employees who meet
certain age and service requirements. Employees may provide contributions to the
plan through salary deferrals. Additionally, the Companies are required to make
matching contributions of 50% of the first 6% of the employees contributions.
During 1996, the Companies contributed approximately $52,000 to the Plan.
(8) SUBSEQUENT EVENT
Subsequent to year end, the Partnership sold the hotel property to a third
party for $28,500,000. Upon completion of the sale, the third party assumed the
mortgage note payable.
9