EXHIBIT 99.11
INDEPENDENT AUDITORS' REPORT
The Partners
EquiStar Hotel Investors, L.P.:
We have audited the accompanying balance sheets of Ballston Hotel Limited
Partnership (the "Partnership") as of June 30, 1996 and December 31, 1995 and
1994, and the related statements of operations, partners' deficit, and cash
flows for the six months ended June 30, 1996 and for the years ended December
31, 1995, 1994 and 1993. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ballston Hotel Limited
Partnership as of June 30, 1996 and December 31, 1995 and 1994, and the results
of its operations and its cash flows for the six months ended June 30, 1996 and
for the years ended December 31, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in note 4 to the
financial statements, the Partnership's note payable to a financial institution
is in default and may be called at any time. This raises substantial doubt about
the Partnership's ability to continue as a going concern. Management's plans in
regard to this matter are also described in note 4. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
Washington, D.C.
July 11, 1996
1
BALLSTON HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
1996 1995 1994
------------- ------------ ------------
ASSETS
Cash and cash equivalents............................................. $ 271,215 501,433 98,904
Certificate of deposit................................................ -- 101,833 250,000
Hotel inventory, at cost.............................................. 37,481 51,635 52,794
Accounts receivable:
Trade............................................................... 293,251 174,833 369,961
Affiliates (note 6)................................................. -- -- 757,624
------------- ------------ ------------
Total accounts receivable, net........................................ 293,251 174,833 1,127,585
------------- ------------ ------------
Hotel property (notes 4 and 7):
Land................................................................ 2,073,323 2,073,323 2,073,323
Building, net of accumulated depreciation of $2,192,347 in 1996,
$2,029,714 in 1995 and $1,704,449 in 1994......................... 10,818,285 10,980,918 11,306,183
Furniture, fixtures and equipment, net of accumulated depreciation
of $1,163,947 in 1996, $1,060,156 in 1995 and $854,609 in 1994.... 1,889,117 1,983,728 1,742,714
Initial hotel supplies, net of accumulated amortization of $197,924
in 1996, $183,187 in 1995 and $153,713 in 1994.................... 244,189 258,926 288,400
Conversion costs, net of accumulated amortization of $107,181 in
1996, $98,491 in 1995 and $81,111 in 1994......................... 153,533 162,223 179,603
------------- ------------ ------------
Total hotel property.................................................. 15,178,447 15,459,118 15,590,223
Investment in partnership (note 5).................................... 2,189,989 2,259,061 2,332,760
Other Assets.......................................................... 77,609 131,409 144,842
------------- ------------ ------------
$ 18,047,992 18,679,322 19,597,108
------------- ------------ ------------
------------- ------------ ------------
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses:
Affiliates (note 6)................................................. $ 2,283,784 2,163,011 1,855,114
Trade............................................................... 473,641 338,665 340,846
------------- ------------ ------------
Total accounts payable and accrued expenses........................... 2,757,425 2,501,676 2,195,960
Notes payable (notes 4 and 6):
Financial institution............................................... 17,079,121 17,079,121 17,201,202
Affiliates.......................................................... 1,468,891 2,437,377 3,340,277
------------- ------------ ------------
Total notes payable................................................... 18,548,012 19,516,498 20,541,479
------------- ------------ ------------
Total liabilities..................................................... 21,305,437 22,018,174 22,737,439
Partners' deficit (note 3)............................................ (3,257,445) (3,338,852) (3,140,331)
------------- ------------ ------------
Commitments (notes 4 and 7)...........................................
$ 18,047,992 18,679,322 19,597,108
------------- ------------ ------------
------------- ------------ ------------
See accompanying notes to financial statements.
2
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993
------------ ---------- ---------- ----------
Hotel operating revenue:
Room rental................................................ $ 3,173,738 5,820,170 5,408,935 5,116,700
Food and beverage sales.................................... 950,778 2,000,110 2,045,750 1,792,965
Telephone and other........................................ 128,037 303,194 260,190 269,030
------------ ---------- ---------- ----------
Total hotel operating revenue................................ 4,252,553 8,123,474 7,714,875 7,178,695
------------ ---------- ---------- ----------
Hotel operating expenses:
Department expenses........................................ 1,538,843 3,140,757 3,100,077 2,810,690
Energy and engineering..................................... 351,538 602,512 574,578 518,924
Sales and marketing........................................ 327,356 659,284 604,457 629,567
General and administrative (note 6)........................ 458,119 981,849 927,024 907,215
Management fee (note 7).................................... 127,547 243,704 231,446 215,359
Other...................................................... 99,892 138,551 84,534 66,640
------------ ---------- ---------- ----------
Total hotel operating expenses............................... 2,903,295 5,766,657 5,522,116 5,148,395
------------ ---------- ---------- ----------
Income from hotel operations................................. 1,349,258 2,356,817 2,192,759 2,030,300
------------ ---------- ---------- ----------
Fixed charges:
Financial costs (note 6)................................... 739,867 1,571,261 1,438,463 1,327,641
Depreciation and amortization.............................. 290,467 611,645 700,566 723,020
Property insurance and taxes............................... 146,248 266,115 249,394 251,608
Parking costs.............................................. 42,733 99,093 103,057 106,833
------------ ---------- ---------- ----------
Total fixed charges.......................................... 1,219,315 2,548,114 2,491,480 2,409,102
------------ ---------- ---------- ----------
Other income (expense):
Interest income............................................ 8,153 40,169 15,010 12,228
Equity in income of partnership (note 5)................... 15,355 36,510 41,105 31,309
Other...................................................... (72,044) (83,903) (6,908) (80)
------------ ---------- ---------- ----------
Total other income (expense), net............................ (48,536) (7,224) 49,207 43,457
------------ ---------- ---------- ----------
Net income (loss)............................................ $ 81,407 (198,521) (249,514) (335,345)
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
See accompanying notes to financial statements.
3
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
GENERAL LIMITED
TOTAL PARTNER PARTNERS
------------- --------- -----------
Balance at December 31, 1992............................................... $ (2,555,472) (46,288) (2,509,184)
Net loss................................................................. (335,345) (3,353) (331,992)
------------- --------- -----------
Balance at December 31, 1993............................................... (2,890,817) (49,641) (2,841,176)
Net loss................................................................. (249,514) (2,495) (247,019)
------------- --------- -----------
Balance at December 31, 1994............................................... (3,140,331) (52,136) (3,088,195)
Net loss................................................................. (198,521) (1,985) (196,536)
------------- --------- -----------
Balance at December 31, 1995............................................... (3,338,852) (54,121) (3,284,731)
Net income............................................................... 81,407 8,141 73,266
------------- --------- -----------
Balance at June 30, 1996................................................... $ (3,257,445) (45,980) (3,211,465)
------------- --------- -----------
------------- --------- -----------
See accompanying notes to financial statements.
4
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1996 1995 1994 1993
----------- ----------- ---------- ----------
Cash flows from operating activities:
Net income (loss)............................................ $ 81,407 (198,521) (249,514) (335,345)
Adjustments to reconcile net income (loss) to cash provided
(used) by operating activities:
Depreciation and amortization............................ 290,467 611,645 700,566 723,020
Increase (decrease) in provision for doubtful accounts... 397 (8,072) 11,323 (1,375)
Decrease in certificates of deposit...................... 101,833 148,167 -- --
Equity in income of partnership.......................... (15,355) (36,510) (41,105) (31,309)
Decrease (increase) in accounts receivable............... (118,815) 960,824 (789,828) (87,582)
Decrease (increase) in hotel inventory................... 14,154 1,159 (930) (9,997)
Decrease (increase) in other assets...................... 53,800 (20,258) (58,614) 42,031
Increase in accounts payable and accrued expenses........ 255,749 305,716 375,580 320,816
----------- ----------- ---------- ----------
Total adjustments............................................ 582,230 1,962,671 196,992 955,604
----------- ----------- ---------- ----------
Net cash provided (used) by operating activities............... 663,637 1,764,150 (52,522) 620,259
----------- ----------- ---------- ----------
Cash flows from investing activities:
Additions to hotel property.................................. (9,796) (446,849) (133,901) (195,323)
Distributions from investee partnership...................... 84,427 110,209 120,694 204,761
----------- ----------- ---------- ----------
Net cash provided (used) by investing activities............... 74,631 (336,640) (13,207) 9,438
----------- ----------- ---------- ----------
Cash flows from financing activities:
Principal payments on notes payable.......................... (968,486) (1,024,981) (110,072) (818,644)
Borrowings on notes payable.................................. -- -- -- 20,000
----------- ----------- ---------- ----------
Net cash used by financing activities.......................... (968,486) (1,024,981) (110,072) (798,644)
----------- ----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........... (230,218) 402,529 (175,801) (168,947)
Cash and cash equivalents at beginning of period............... 501,433 98,904 274,705 443,652
----------- ----------- ---------- ----------
Cash and cash equivalents at end of period..................... $ 271,215 501,433 98,904 274,705
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest....................................... $ 619,094 1,263,364 1,135,123 1,120,853
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
See accompanying notes to financial statements.
5
BALLSTON HOTEL LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1996 and December 31, 1995 and 1994
(1) ORGANIZATION
Ballston Hotel Limited Partnership (the "Partnership") was formed on January
1, 1988 pursuant to the Commonwealth of Virginia Uniform Limited Partnership
Act. The principal business activity of the Partnership is the development and
operation of a hotel complex as part of the mixed-use Ballston Metro Center
project (the "Project") located in Arlington, Virginia. Ballston Condo Limited
Partnership ("BCLP") and Ballston Office Limited Partnership ("BOLP"),
affiliates of the Partnership, constructed the condominium and office building
components of the Project, respectively.
The hotel opened on October 5, 1989 and operated as the Arlington
Renaissance Hotel at Ballston Metro Center (the "Hotel"). Management intends to
operate the hotel under a franchise agreement with Hilton Inns, Inc. to be
entered into in August 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING RECORDS AND INCOME TAXES
The Partnership maintains its accounting records on the accrual basis for
both financial statement and federal income tax reporting purposes. Federal and
state income taxes accrue to the individual partners; accordingly, no federal
and state income taxes have been provided in the accompanying financial
statements.
BUILDING AND LAND
Contributed land is recorded at the fair value at the date of contribution
as agreed to by the partners. Purchased land and building costs are recorded at
cost. The building is depreciated over 40 years using the straight-line method.
HOTEL FURNITURE, FIXTURES AND EQUIPMENT
Hotel furniture, fixtures and equipment are recorded at cost and are
depreciated over their estimated useful lives using the straight-line method.
INITIAL HOTEL SUPPLIES
Initial hotel supplies required for the Hotel's operations, such as linens,
china, silverware and other expendable supplies, are recorded at cost and are
being amortized over 15 years using the straight-line method. Additional
purchases of linens, china, silverware and other expendable supplies are
expensed when purchased.
CONVERSION COSTS
Conversion costs were incurred to convert the Ramada Hotel into a
Renaissance Hotel. These costs are recorded at cost and are being amortized over
15 years using the straight-line method.
INVESTMENT IN PARTNERSHIP
Investment in partnership is accounted for under the equity method.
Accordingly, the investment is stated at cost and adjusted for the Partnership's
share of earnings or loss and distributions of the investee partnership.
6
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
CASH EQUIVALENTS
For financial statement purposes, the Partnership considers investments with
an original maturity date of three months or less to be cash equivalents.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosures of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
(3) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES
All profits and losses are allocated in proportion to each partner's
respective percentage interest in the Partnership as follows:
General partner...................................................... 1.0%
Limited partners..................................................... 99.0
---------
100.0%
---------
---------
(4) NOTES PAYABLE
Notes payable at June 30, 1996 and December 31, 1995 and 1994 consist of the
following:
1996 1995 1994
------------- ------------- -------------
Financial institution--prime rate plus 1% or a LIBOR/CD rate option
note, secured by a first deed of trust on land and improvements of
hotel complex and the shared improvements of the condominium
constructed by BCLP and an assignment of existing and future
revenue derived from the collateral; interest only payable
monthly, principal payable annually, based on 30-year
amortization, with remaining principal and interest due October 5,
1995.............................................................. $ 17,079,121 17,079,121 17,201,202
Limited partner--prime rate plus 2% unsecured note.................. 1,468,891 2,437,377 3,340,277
------------- ------------- -------------
$ 18,548,012 19,516,498 20,541,479
------------- ------------- -------------
------------- ------------- -------------
Ballston Hotel, Inc., the general partner, and IDI, L.C. (formerly IDI
Associates), IDI Financial Associates and Ballston Realty, Inc., affiliates of
the Partnership, jointly and severally guarantee the financial institution note
payable.
The note payable to the financial institution, which matured on October 5,
1995, is in default. The Partnership has been unable thus far to refinance the
note but continues to make the regular monthly interest payments.
Given the status of the note payable with the financial institution and the
nature of the terms of the note payable to the limited partner, management is
unable to determine the fair value of the notes payable.
7
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INVESTMENT IN PARTNERSHIP
FINANCIAL STATEMENT SUMMARY
The following is a summary of the assets, liabilities and equity of the
unconsolidated partnership, Ballston Parking Associates ("BPA") as of June 30,
1996 and December 31, 1995 and 1994, and the results of its operations for the
six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993. The unconsolidated partnership was formed primarily to operate the hotel
and office building parking garage of the Project. The Partnership's interest in
the unconsolidated partnership was 35.02%, 35.48% and 35.60% as of June 30, 1996
and December 31, 1995 and 1994, respectively. The percentage of the Partnership
interest in BPA will decrease in accordance with BPA's partnership agreement
based upon the number of parking space easements sold.
CONDENSED BALANCE SHEETS
1996 1995 1994
--------- --------- ---------
ASSETS
Cash..................................................... $ 1,267 4,263 3,055
Accounts receivable...................................... 29,250 31,200 27,080
Garage property, net of accumulated depreciation......... 4,125,801 4,224,801 4,359,801
Other assets............................................. 4,521 4,521 4,203
--------- --------- ---------
$4,160,839 4,264,785 4,394,139
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND EQUITY
Total accounts payable and accrued liabilities........... $ -- 6,121 7,000
Equity:
The Partnership........................................ 1,443,210 1,501,136 1,552,543
Other partners......................................... 2,717,629 2,757,528 2,834,596
--------- --------- ---------
$4,160,839 4,264,785 4,394,139
--------- --------- ---------
--------- --------- ---------
CONDENSED STATEMENTS OF OPERATIONS
1996 1995 1994 1993
--------- --------- --------- ---------
Parking revenue........................................ $ 288,562 538,898 520,479 538,047
Loss on sales of parking spaces........................ (9,080) (7,000) (3,329) (20,149)
--------- --------- --------- ---------
Total income........................................... 279,482 531,898 517,150 517,898
Operating expenses..................................... 187,642 353,490 333,542 333,149
--------- --------- --------- ---------
Net income............................................. $ 91,840 178,408 183,608 184,749
--------- --------- --------- ---------
--------- --------- --------- ---------
Equity in net income:
The Partnership...................................... $ 26,501 58,802 63,397 53,601
Other partners....................................... 65,339 119,606 120,211 131,148
--------- --------- --------- ---------
$ 91,840 178,408 183,608 184,749
--------- --------- --------- ---------
--------- --------- --------- ---------
NOTE TO CONDENSED FINANCIAL STATEMENTS
Contributed property is recorded at fair value at the date of contribution
as agreed to by the partners.
8
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INVESTMENT IN PARTNERSHIP--(CONTINUED)
RECONCILIATION OF INVESTMENT IN PARTNERSHIP AND EQUITY IN INCOME
The following is a reconciliation of the Partnership's investment in
partnership as of June 30, 1996 and December 31, 1995 and 1994 and equity in
income for the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, as indicated above, to the amounts reported in the
accompanying financial statements.
INVESTMENT IN PARTNERSHIP EQUITY IN INCOME
------------------------------------ ------------------------------------------
1996 1995 1994 1996 1995 1994 1993
------------ ---------- ---------- --------- --------- --------- ---------
Balance per condensed financial
statements............................. $ 1,443,210 1,501,136 1,552,543 26,501 58,802 63,397 53,601
Adjustment for costs incurred in excess
of agreed-upon basis in property....... 746,779 757,925 780,217 (11,146) (22,292) (22,292) (22,292)
------------ ---------- ---------- --------- --------- --------- ---------
$ 2,189,989 2,259,061 2,332,760 15,355 36,510 41,105 31,309
------------ ---------- ---------- --------- --------- --------- ---------
------------ ---------- ---------- --------- --------- --------- ---------
(6) RELATED-PARTY TRANSACTIONS
Interest expense of approximately $121,000 in 1996, $308,000 in 1995,
$303,000 in 1994 and $294,000 in 1993 was incurred on note payable to BPA, L.P.,
the limited partner, and are included in financial costs in the accompanying
financial statements. Accrued interest payable of $2,283,784, $2,163,011 and
$1,855,114 as of June 30, 1996 and December 31, 1995 and 1994, respectively, is
recorded as accounts payable to affiliates in the accompanying financial
statements.
The Partnership entered into an agreement with IDI Management, Inc., an
affiliate of the Partnership, to perform administrative services for the Hotel
effective January 1, 1991. The administrative fee is based on 0.5% of the gross
revenues of the Partnership except for any distributions from BPA related to
parking. The Partnership incurred administrative fees of $21,257 in 1996,
$41,952 in 1995, $39,771 in 1994 and $37,103 in 1993. These fees are included in
general and administrative expenses in the accompanying financial statements.
The Partnership has advanced funds to affiliates. Advances outstanding were
$757,624 at December 31, 1994.
(7) COMMITMENTS
HOTEL MANAGEMENT AGREEMENT
The Partnership has entered into a 20-year agreement with Renaissance Hotel
Operating Company ("Renaissance") for the management of the Hotel. The
Partnership has committed to pay the following management fees:
(1) base management fee equal to 3% of the Hotel's gross revenue, as
defined in the agreement, payable monthly;
(2) reservation and advertising fees equal to 4.5% of the Hotel's gross
room revenue, as defined in the agreement, payable monthly; and
9
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS--(CONTINUED)
(3) incentive management fee equal to 10% of the Hotel's gross operating
profit, as defined in the agreement, earned and payable annually if certain
cash flow requirements are met.
Base management fees of $127,547 in 1996, $243,704 in 1995, $231,446 in 1994
and $215,359 in 1993 and reservation and advertising fees of $142,818 in 1996,
$261,908 in 1995, $243,402 in 1994 and $230,252 in 1993 were incurred by the
Partnership. No incentive management fees were incurred since none of the cash
flow requirements were met.
10