EXHIBIT 99.5
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Capstar Hotel Company:
We have audited the accompanying balance sheet of the Embassy Suites
Philadelphia (the Hotel) as of December 31, 1996 and the related statements of
operations, owners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Hotel'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 Embassy Suites
Philadelphia 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.
KPMG Peat Marwick LLP
Washington D.C.
July 18, 1997
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EMBASSY SUITES PHILADELPHIA
BALANCE SHEETS
JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
JUNE 30, DECEMBER
1997 31,
Assets (UNAUDITED) 1996
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Property and equipment:
Land............................................................. $4,500,000 4,500,000
Building......................................................... 26,245,588 28,827,175
Furniture, fixtures and equipment................................ 2,045,498 3,020,315
Construction in process.......................................... 238,863 144,734
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33,029,949 36,492,224
Less accumulated depreciation.................................... (197,000) (3,928,199)
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Property and equipment, net........................................ 32,832,949 32,564,025
Cash and cash equivalents.......................................... 862,186 26,351
Accounts receivable, net........................................... 504,712 322,308
Due from affiliate................................................. -- 192,922
Inventory.......................................................... -- 87,438
Prepaid expenses and other assets.................................. 550,617 91,923
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$34,750,464 33,284,967
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Liabilities and Owners' Equity
Accounts payable and accrued expenses.............................. $ 829,146 1,504,958
Advances from affiliate (note 3)................................... 559,288 24,939,117
Note payable to third party (note 4)............................... 23,000,00 --
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Total liabilities.................................................. 24,388,434 26,444,075
Owners' equity..................................................... 10,362,030 6,840,892
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Total liabilities and owners' equity............................... $34,750,464 33,284,967
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See accompanying notes to financial statements.
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EMBASSY SUITES PHILADELPHIA
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND
THE YEAR ENDED DECEMBER 31, 1996
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
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Revenue:
Rooms.............................................................................. $ 4,953,275 9,634,531
Other operating departments........................................................ 822,808 1,467,755
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Total revenue........................................................................ 5,776,083 11,102,286
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Operating costs and expenses:
Rooms.............................................................................. 1,401,079 2,416,043
Other operating departments........................................................ 384,655 1,021,408
Undistributed expenses:
Administrative and general......................................................... 663,744 1,388,861
Sales and marketing................................................................ 230,487 622,431
Management and franchise fees...................................................... 308,570 593,580
Property operating costs........................................................... 819,698 1,646,788
Property taxes, insurance and other................................................ 246,455 489,742
Depreciation and amortization...................................................... 580,559 1,130,157
Interest expense (note 3).......................................................... 1,177,588 2,605,637
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Total expenses....................................................................... 5,812,835 11,914,647
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Net loss............................................................................. $ (36,752) (812,361)
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See accompanying notes to financial statements.
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EMBASSY SUITES PHILADELPHIA
STATEMENTS OF OWNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
Balance at January 1, 1996..................................................... $7,606,554
Contributions................................................................ 46,699
Net loss..................................................................... (812,361)
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Balance at December 31, 1996................................................... 6,840,892
Contributions (unaudited).................................................... 2,801,259
Cost basis adjustment due to change in ownership (unaudited)................. 756,631
Net loss (unaudited)......................................................... (36,752)
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Balance at June 30, 1997 (unaudited)........................................... $10,362,030
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See accompanying notes to financial statements.
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EMBASSY SUITES PHILADELPHIA
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
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Cash Flows from operating activities:
Net loss........................................................................ $ (36,752) (812,361)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................. 580,559 1,130,157
Decrease (increase) in accounts receivable.................................... (182,404) 96,794
Decrease (increase) in due from affiliate..................................... 192,922 (192,922)
Increase in prepaid expenses and other assets................................. (458,694) (38,711)
Decrease (increase) in inventory.............................................. 87,438 (5,624)
Increase (decrease) in accounts payable and accrued expenses.................. (116,524) 678,395
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Total adjustments............................................................... 103,297 1,668,089
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Net cash provided by operating activities......................................... 66,545 855,728
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Cash flows from investing activities--additions to property and equipment......... (92,852) (895,718)
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Cash flows from financing activities
Cash contributed by owner....................................................... 2,801,259 46,699
Advances (repayments on advances) from affiliate, net........................... (24,939,117) 19,642
Proceeds from note payable to affiliate......................................... 23,000,000 --
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Net cash provided by financing activities......................................... 862,142 66,341
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Net increase in cash and cash equivalents......................................... 835,835 26,351
Cash and cash equivalents at the beginning of the period.......................... 26,351 --
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Cash and cash equivalents at the end of the period................................ $ 862,186 26,351
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................................ $ 1,177,588 2,605,637
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See accompanying notes to financial statements.
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EMBASSY SUITES PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS
JUNE 30,1997 (UNAUDITED) AND DECEMBER 31, 1996
(1) ORGANIZATION
The Embassy Suites Philadelphia ("the Hotel") is located in downtown
Philadelphia, Pennsylvania. The Hotel commenced operations in May of 1993 and
has 288 suites. The Hotel offers dining, meeting and banquet and recreational
facilities. The Hotel's business is generated from both business travelers and
tourists due to its proximity to the Pennsylvania convention center and numerous
tourist attractions.
The Hotel is owned by BA Parkway Associates II, a general partnership. BA
Parkway Associates II was ultimately owned by Bell Atlantic Investments, Inc.
until April 30, 1997, when AAP Hotel Co. and LFREI Sub One, Inc., affiliates of
Atlantic American Properties, purchased the partnership interests.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounts of the Hotel are included in the financial records of BA
Parkway Associates II. The accompanying financial statements include the
accounts of the Hotel only, as if it was a separate legal entity, and have been
prepared using the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Hotel considers all highly liquid instruments with an original maturity
date of three months or less to be cash equivalents.
INVENTORY
Inventory, consisting primarily of linens and various other items, is stated
at cost, using the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The carrying value of the Hotel
was adjusted upon the purchase of the partnership interests by Atlantic American
Properties (see Note 1) to the purchase price of $33,000,000.
Depreciation is computed on the building using the straight-line method over
its useful life of 40 years. Furniture, fixtures and equipment are depreciated
using the straight-line method over 10 years.
Management periodically evaluates potential permanent impairment of the net
carrying value of the Hotel. If the net carrying value of the Hotel exceeds its
fair value, the excess is charged to operations. No impairment losses were
recorded in 1997 or 1996.
BAD DEBT EXPENSE
Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write offs occur when
management deems a receivable uncollectible.
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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE
Revenue is earned through the operations of the Hotel and recognized when
earned.
INCOME TAXES
The financial statements contain no provision for federal income taxes as
the Hotel is owned by a partnership and, therefore, all of the partnership's
income, losses, deductions, and credits for tax purposes are reported on the
income tax returns of the partners.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and revenues and expenses and the disclosure
of contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(3) RELATED-PARTY TRANSACTIONS
Certain subsidiaries of Bell Atlantic Investments, Inc. advanced amounts to
the Hotel. The Hotel was charged interest at an effective rate of 10.4 percent
on the advances. The advances had no stated maturity date. The outstanding
balance of these advances was $24,939,117 at December 31, 1996. These advances
were repaid upon the purchase of the partnership interests on April 30, 1997.
Interest charged to the Hotel on these advances was $863,485 (unaudited) for the
six months ended June 30, 1997 and $2,605,637 in 1996.
Subsequent to April 30, 1997, an affiliate of Atlantic American Properties
advanced amounts to the Hotel. These advances did not bear interest. These
advances amounted to $559,288 (unaudited) at June 30, 1997.
Room revenue earned through related parties was approximately $313,000
(unaudited) for the six months ended June 30, 1997 and approximately $762,000 in
1996.
(4) NOTE PAYABLE TO THIRD PARTY
BA Parkway Associates II entered into a $23,000,000 promissory note with
Goldman Sachs Mortgage Company on April 30, 1997. The note bears interest at the
one-month London Interbank Offered Rate plus 175 basis points and has a maturity
date of April 30, 1998. Interest incurred on this note was $314,103 (unaudited)
for the six months ended June 30, 1997. The note is secured by the Hotel and
related assets.
(5) COMMITMENTS
For the six months ended June 30, 1997 and the year ended December 31, 1996,
the Hotel earned rental income of $225,000 (unaudited) and $450,000
respectively, under a non-cancelable operating lease with a tenant that
maintains a restaurant on the premises. The lease, which expires in May 2000,
provides for minimum rent and requires the tenant to pay its pro rata share of
certain building operating expenses, as defined in the lease.
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(5) COMMITMENTS (CONTINUED)
Future minimum lease payments under the non-cancelable operating lease as of
December 31, 1996 is as follows:
1997............................................................ $ 450,000
1998............................................................ 450,000
1999............................................................ 450,000
2000............................................................ 187,500
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Total future minimum lease payments............................. $1,537,500
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(6) SUBSEQUENT EVENT
On August 12, 1997, the partnership interests in BA Parkway Associates II
were purchased by certain affiliates of CapStar Hotel Company for $33,600,000.
Concurrent with the purchase, the note payable to third party was repaid.
8