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EXHIBIT 99.7
Report of Independent Auditors
The Partners
Valdosta C.I. Associates, L.P.
We have audited the accompanying balance sheet of Valdosta C.I. Associates,
L.P., a Kansas limited partnership, as of December 31, 1994, and the related
statements of operations, changes in partners' deficit, 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 Valdosta C.I. Associates, L.P.
as of December 31, 1994, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young L.L.P.
Kansas City, Missouri
September 9, 1997
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Valdosta C.I. Associates, L.P.
Balance Sheet
December 31, 1994
ASSETS
Current assets:
Cash $ 188,325
Accounts receivable 31,602
Prepaid expenses and other current assets 38,809
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Total current assets 258,736
Property and equipment, net 3,434,990
Intangible assets, net 44,334
Repair and replacement fund 200,087
Other assets 1,200
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Total assets $ 3,939,347
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LIABILITIES
Current liabilities:
Accounts payable $ 25,783
Due to affiliates 13,589
Accrued interest 195,516
Accrued expenses 87,400
Current portion of long-term debt 87,670
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Total current liabilities 409,958
Long-term debt 3,677,780
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Total liabilities 4,087,738
PARTNERS' DEFICIT (148,391)
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Total liabilities and partners' deficit $ 3,939,347
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See accompanying notes.
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Valdosta C.I. Associates, L.P.
Statement of Operations
Year ended December 31, 1994
REVENUES
Hotel room revenues $ 1,772,676
Other hotel revenues 73,311
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Total revenues 1,845,987
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OPERATING COSTS AND EXPENSES
Hotel room expenses 462,836
Hotel room expenses - affiliate 14,881
Other hotel expenses 33,971
Administrative and general 164,060
Management and accounting fees 73,467
Royalty fees 70,907
Marketing expenses - affiliate 24,950
Other marketing expenses 99,248
Property operations and maintenance 228,151
Property taxes and insurance 36,275
Depreciation and amortization 385,275
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Total operating expenses 1,594,021
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Income from operations 251,966
OTHER INCOME (EXPENSE)
Interest income 15,392
Interest expense (305,123)
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Total other expense (289,731)
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Net loss $ (37,765)
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See accompanying notes
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Valdosta C.I. Associates, L.P.
Statement of Changes in Partners' Deficit
Balance, December 31, 1993 $ (41,406)
Distributions (69,220)
Net loss (37,765)
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Balance, December 31, 1994 $(148,391)
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See accompanying notes.
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Valdosta C.I. Associates, L.P.
Statement of Cash Flows
Year ended December 31, 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (37,765)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 385,275
Changes in operating assets and liabilities:
Accounts receivable 8,314
Prepaid expenses (27,830)
Accounts payable 8,827
Due to affiliates 1,646
Accrued expenses 26,788
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Net cash provided by operating activities 365,255
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (100,449)
Additions to repair and replacement fund (55,101)
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Net cash used in investing activities (155,550)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (363,748)
Deferred loan costs (44,261)
Distributions to partners (69,220)
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Net cash used in financing activities (477,229)
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Net decrease in cash (267,524)
Cash, beginning of year 455,849
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Cash, end of year $ 188,325
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For supplemental disclosures of cash flow information, see Note 4.
See accompanying notes.
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Valdosta C.I. Associates, L.P.
Notes to Financial Statements (continued)
December 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Valdosta C.I. Associates, L.P., a Kansas limited partnership, (the Partnership)
was formed for the purpose of constructing, owning and operating a 121-room
limited-service hotel, known as the "ClubHouse Inn," in Valdosta, Georgia.
ClubHouse Properties, Inc., a wholly owned subsidiary of ClubHouse Hotels, Inc.
(formerly known as ClubHouse Enterprises, Inc.) (CHI), is the managing general
partner and owner of 0.5% of the Partnership. Partnership revenues are
generated from hotel operations and related activities and are recognized when
earned.
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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed on the straight-line method over the
following estimated useful lives:
Building and improvements 15 - 40 years
Furniture and equipment 7 - 10 years
Financing costs Term of loan
Franchise costs Term of agreement
Organization costs 5 years
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising expense
for the year ended December 31, 1994 was $77,424.
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Valdosta C.I. Associates, L.P.
Notes to Financial Statements (continued)
December 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
No provision is included in these statements for income taxes since each
partner is individually responsible for reporting their respective share of the
Partnership net income or loss.
CASH
For purpose of the statements of cash flows, cash consists of cash on hand and
demand deposits with financial institutions.
REPAIR AND REPLACEMENT FUND
Under the terms of the Partnership's management agreement, the Partnership is
required to fund a reserve for repair and replacement of property and
equipment. The agreement calls for the Partnership to place 3% of monthly gross
revenues in this fund. Expenditures from this fund require the approval of CHI.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Partnership's cash and repair and replacement
reserves approximate fair value as of December 31, 1994. Using discounted cash
flow analysis based upon current market rates for similar debt issues, the
Partnership's carrying amount for its long-term debt approximates fair value.
2. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following:
Land $ 703,256
Building and improvements 3,273,361
Furniture and equipment 1,388,128
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Total cost 5,364,745
Accumulated depreciation 1,929,755
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Net property and equipment $ 3,434,990
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Valdosta C.I. Associates, L.P.
Notes to Financial Statements (continued)
3. INTANGIBLE ASSETS
Intangible assets are recorded at cost and consist of the following:
Financing costs $ 44,261
Franchise costs 25,000
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Total cost 69,261
Accumulated amortization (24,927)
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Net intangible assets $ 44,334
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4. LONG-TERM DEBT
On June 1, 1992, the Partnership's mortgage note was assigned by the Resolution
Trust Corporation to the current lender. Effective July 1, 1992, the mortgage
note was modified to reduce the interest rate to 8% and to extend the maturity
date. In connection with the modification, quarterly payments of 25% of net
cash flow, as defined, are applied to interest accrued during the period from
July 1, 1992 to February 28, 1993. At December 31, 1994, such accrued interest
amounted to $195,515. Monthly principal and interest payments of $32,811 are
payable through and including March 1, 2000, at which time all outstanding
amounts due under the note become due and payable in full. The mortgage note is
collateralized by substantially all of the Partnership's property and
equipment.
Cash paid for interest in 1994 was $305,123.
Principal maturities for long-term debt are as follows:
YEAR ENDING DECEMBER 31
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1995 $ 87,670
1996 103,240
1997 111,809
1998 121,089
1999 131,139
Thereafter 3,210,503
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Total $ 3,765,450
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Valdosta C.I. Associates, L.P.
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
There is a management agreement with ClubHouse Inns of America, Inc. (CIA), an
affiliate of one of the general partners and a wholly owned subsidiary of CHI,
to manage the Partnership's hotel and to provide accounting services.
In addition, the Partnership is obligated under a franchise agreement with CIA
to pay franchise and marketing fees along with its share of the costs of the
ClubHouse Inn's central reservation system. The Partnership may purchase goods
at cost through CIA's centralized purchasing service.
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