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EXHIBIT 99.1
RFS HOTEL INVESTORS, INC.
GUS HOTELS
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
RFS Hotel Investors, Inc.
We have audited the accompanying combined balance sheet for certain hotel
properties (the "GUS Hotels") described in Note 1 to the financial statements as
of December 31, 1995 and the related combined statements of operations,
partners' equity and cash flows for the year then ended. These financial
statements are the responsibility of the management of the GUS Hotels. 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 GUS Hotels as of December
31, 1995 and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Memphis, Tennessee
October 30, 1996
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GUS HOTELS
COMBINED BALANCE SHEETS
(in thousands)
DECEMBER 31, SEPTEMBER 30,
1995 1996
ASSETS (UNAUDITED)
Investment in Hotel properties:
Land $ 8,651 $ 8,651
Buildings and improvements 40,432 40,432
Furniture and equipment 11,728 13,396
---------- ----------
60,811 62,479
Accumulated depreciation (15,932) (17,568)
---------- ----------
Net investment in Hotel properties 44,879 44,911
Cash and cash 1,614 2,972
Accounts receivable, net 408 655
Prepaids and other assets 455 362
Deferred costs 62 58
---------- ----------
$ 47,418 $ 48,958
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $ 2,252 $ 2,501
Notes payable 38,215 32,697
Capitalized lease obligations 241 183
---------- ----------
Total liabilities 40,708 35,381
Commitments and contingencies
Partners' equity 6,710 13,577
---------- ----------
$ 47,418 $ 48,958
========== ==========
The accompanying notes are an integral part of these combined financial
statements.
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GUS HOTELS
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
FOR THE
YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
(UNAUDITED) (UNAUDITED)
Gross operating revenue:
Room $ 17,274 $ 13,268 $ 15,074
Food and conference 4,543 3,494 1,461
Beverage 1,127 845 234
Telephone 889 697 697
Other 1,151 907 762
--------- --------- ---------
Gross operating revenue 24,984 19,211 18,228
--------- --------- ---------
Departmental expenses:
Rooms 4,220 3,207 3,406
Food and conference 3,946 3,041 1,174
Beverage 763 584 163
Telephone 347 229 249
Other 392 302 303
--------- --------- ---------
Departmental profit 15,316 11,848 12,933
--------- --------- ---------
Unallocated operating expenses:
General and administrative 2,915 2,032 2,136
Franchise fees 779 631 583
Advertising and promotions 1,088 798 925
Utilities 983 757 573
Repairs and maintenance 956 713 667
Real estate and personal property taxes and insurance 1,001 778 846
Management fees 1,451 877 865
Interest 3,897 2,848 2,285
Depreciation and amortization 1,982 1,467 1,636
--------- --------- ---------
Total unallocated operating expenses 15,052 10,901 10,516
--------- --------- ---------
Net income $ 264 $ 947 $ 2,417
========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
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GUS HOTELS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
for the year ended December 31, 1995 and the nine months ended September 30,
1996 (in thousands)
Balance at December 31, 1994 $ 2,310
Contributions 5,010
Distributions (874)
Net income 264
--------
Balance at December 31, 1995 6,710
Contributions (unaudited) 4,950
Distributions (unaudited) (500)
Net income (unaudited) 2,417
--------
Balance at September 30, 1996 (unaudited) $ 13,577
========
The accompanying notes are an integral part of these combined financial
statements.
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GUS HOTELS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE
YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
(UNAUDITED) (UNAUDITED)
------- ------- -------
Cash flows from operating activities:
Net income $ 264 $ 947 $ 2,417
Adjustments to econcile net income to net cash provided by
operating activities:
Depreciation 1,863 1,421 1,590
Amortization 119 46 46
Changes in assets and liabilities:
Accounts receivable (121) (314) (247)
Prepaid and other assets 201 199 93
Accounts payable and accrued expenses 253 470 29
------- ------- -------
Net cash provided by operating activities 2,579 2,769 4,148
------- ------- -------
Cash flows from investing activities:
Additional investments in hotel properties (2,074) (1,051) (1,662)
------- ------- -------
Net cash used by investing activities (2,074) (1,051) (1,662)
------- ------- -------
Cash flows from financing activities:
Payment of loan fees (7) (2)
Contributions from partners 5,010 2,809 4,950
Distributions to partners (874) (459) (500)
Proceeds from issuance of debt 3,977
Principal payments on debt (8,173) (2,990) (5,518)
Principal payments on capital lease obligations (143) (107) (58)
------- ------- -------
Net cash used by financing activities (210) (747) (1,128)
------- ------- -------
Net increase in cash and cash equivalents 295 971 1,358
Cash and cash equivalents:
Beginning of periods 1,319 1,319 1,614
------- ------- -------
End of periods $ 1,614 $ 2,290 $ 2,972
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest in 1995 was $3,774.
No amounts were paid for income taxes in 1995.
The accompanying notes are an integral part of these combined financial
statements.
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GUS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
The GUS Hotels (the "Company") consist of the following full service
hotels designed for the business or leisure traveler:
NUMBER OF
OWNING PARTNERSHIP HOTEL LOCATION ROOMS
GUS Enterprises VIII d.b.a. Sheraton Inn Sunnyvale Sunnyvale, California 174
GUS Enterprises X d.b.a. Sheraton Inn Bakersfield Bakersfield, California 197
GUS Enterprises XI d.b.a. Sheraton Inn Pleasanton Pleasanton, California 214
GUS Enterprises XII d.b.a. Sheraton San Jose Hotel San Jose, California 229
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF COMBINATION
The accompanying financial statements include the accounts of the
aforementioned limited partnerships. The limited partnerships are under
common control and substantially all of the net investment in hotel
properties and related assets are anticipated to be sold to RFS Hotel
Investors, Inc.
INVESTMENT IN HOTEL PROPERTIES
Hotel properties are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets of 40
years for buildings and improvements and 5 years for furniture, fixtures
and equipment. Major renewals, betterments and improvements are
capitalized. At each reporting period, the Company reviews the carrying
value of each hotel property to determine if facts and circumstances
exist which would suggest that the investment in the hotel property may
be impaired or that the depreciation period should be modified. If facts
or circumstances exist which indicate impairment is possible, the Company
will prepare a projection of the undiscounted future cash flows, without
interest charges, of the specific hotel property and determine if the
investment in hotel property is recoverable based on the undiscounted
future cash flows. If impairment is indicated, an adjustment will be made
to the carrying value of the hotel property based on the discounted
future cash flows. The Company does not believe that there are any
current facts or circumstances indicating impairment of any of its
investments in hotel properties at December 31, 1995 or September 30,
1996.
Expenditures for maintenance and repairs are charged against operations
as incurred. Upon disposition, both the asset and accumulated
depreciation accounts are relieved and the related gain or loss is
credited or charged to the income statement.
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GUS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CASH AND CASH EQUIVALENTS
All highly liquid debt investments with a maturity of three months or
less when purchased are considered to be cash equivalents.
DEFERRED COSTS
Deferred costs consist primarily of loan costs which are recorded at
cost. Amortization of loan costs is computed using the interest method
over the life of the related note payable. Accumulated amortization on
the deferred costs is $109,000 at December 31, 1995.
REVENUE RECOGNITION
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the
portion of accounts receivable which is estimated to be uncollectible.
Such losses have been within management's expectations.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
PROVISION FOR INCOME TAXES
The Company (which is comprised of four individual partnerships) is not a
taxable entity for income tax purposes, and thus, no income tax expense
has been recorded in the financial statements. Income from the Company is
taxed to the partners in their individual returns.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
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.
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GUS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INTERIM FINANCIAL INFORMATION
The accompanying unaudited interim financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation
of the interim financial statements. All such adjustments are of a normal
and recurring nature.
3. NOTES PAYABLE
At December 31, 1995 and September 30, 1996, notes payable consist of the
following:
1995 1996
(IN THOUSANDS) (IN THOUSANDS,
UNAUDITED)
Mortgage note payable (San Jose) - monthly installments of
$162 due through August 15, 2011, including interest based on
a variable rate (which was 9% at December 31, 1995) $ 19,441 $ 14,653
Mortgage note payable (Pleasanton) - monthly
installments of $68 due through June 30, 2011, including
interest based on a variable rate (which was 10.5% at
December 31, 1995) (the variable rate is limited to a
maximum of 10.5%) 6,262 6,277
Mortgage note payable (Sunnyvale) - monthly
installments of $55 due through July 1, 2014, including
interest based on a variable rate (which was 9% at
December 31, 1995) 6,678 5,966
Mortgage note payable (Bakersfield) - monthly
installments of $41 on a principal balance (as of December
31, 1995) of $4,483 due through July 20, 2000, including
interest at a fixed rate of 10.0%; monthly installments of
$11 represent interest only on a balance of $1,351 due
through July 20, 2000 at which time the principal balance
outstanding is due in full 5,834 5,801
-------------------- -------------------
$ 38,215 $ 32,697
==================== ===================
Substantially all assets of the Company are pledged as collateral on the
notes payable.
Aggregate principal payments for the Company's notes payable as of
December 31, 1995 are as follows:
YEAR AMOUNT
(IN THOUSANDS)
1996 $ 548
1997 647
1998 708
1999 774
2000 2,198
Thereafter 33,340
----------------
$ 38,215
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GUS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
3. NOTES PAYABLE, CONTINUED
The Company made a payment of approximately $4,500,000 on the outstanding
San Jose mortgage note payable during 1996. This payment was not required
under the provisions of the debt agreement.
4. COMMITMENTS AND CONTINGENCIES
The Company leases various equipment under noncancelable capital lease
agreements expiring at varying intervals through 1998. The future minimum
rental payments required under these leases as of December 31, 1995 are
as follows:
YEAR AMOUNT
(IN THOUSANDS)
1996 $ 96
1997 99
1998 46
-------------------
$ 241
===================
Rental expense was approximately $66,000 for the year ended December 31,
1995.
The franchise licenses held by the Company require the payment of
certain franchise and marketing fees to the franchisor. Three of the four
hotels entered into new franchise agreements in 1995. The fees required
under the new agreements increase annually in 1% increments from 1% in
1995 to 5% in 1999. The fees are generally based on a percentage of room
revenue.
The Company's Pleasanton hotel is subject to a special tax assessment
related to certain interstate exchanges and other highway and road
improvements. The special tax assessment is used by the local taxing
authorities to pay a portion of its principal and interest payments on
the bonds used to finance the improvements. The special assessment for
the year ended December 31, 1995 was approximately $206,000.
The Company has two employee benefit plans with one participant in each
respective plan. One plan is a defined contribution plan and provides for
contributions by the Company based on a percentage of the participants'
annual earnings. The other plan provides for payments of $27,000 per year
through 2002.
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GUS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
5. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The carrying amount approximates fair value because of the short maturity
of those instruments.
NOTES PAYABLE
The fair value of the Company's notes payable is based on the current
rates offered to the Company for similar debt instruments of the same
remaining maturities.
The estimated fair value of the Company's financial instruments is as
follows:
DECEMBER 31, 1995
---------------------------------
CARRYING FAIR
AMOUNT VALUE
(IN THOUSANDS)
Cash and cash equivalents $ 1,614 $ 1,614
Notes payable 38,215 38,215
6. RELATED PARTY TRANSACTIONS
The Company has management agreements covering the operations of each
hotel with Tamalpa's Hotel Services Corporation ("THS") which expire in
1999. Certain partners of the Company are officers or shareholders of
THS. The management agreements provide for the payments of a fee based
upon a percentage of each hotel's total revenue. Management fees charged
to the Company by THS were $1,451,000 in 1995.
The mortgage note payable for the Bakersfield hotel is held by
Bakersfield Partners ("BP"). Certain partners of the Company are also
partners of BP. Included in accounts payable and accrued expenses at
December 31, 1995 is approximately $60,000 of accrued interest related to
the Bakersfield note. Interest charged on the Bakersfield note was
approximately $247,000 in 1995.
The mortgage notes payable on the Sunnyvale, Pleasanton and San Jose
properties are guaranteed by a partner of the Company.
During 1995, the Company leased one of its restaurants to a third party.
The lease term is 10 years and requires minimum payments to the Company
of $75,000 per year.
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GUS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
7. SUBSEQUENT EVENTS
During 1996, three of the four hotels entered into agreements to lease
their respective restaurants to third parties. The terms of the
agreements provide for the payment of base rents and additional rent
based on a percentage of restaurant revenue exceeding defined thresholds.
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