1
Exhibit 3
MARRIOTT'S HUNT VALLEY INN
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND JUNE 30, 1997
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Boykin Lodging Company:
We have audited the accompanying balance sheet of Marriott's Hunt Valley Inn as
of December 31, 1996, and the related statements of income (loss), owner's
equity 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 the Marriott's Hunt Valley Inn
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.
Rhea & Ivy, P.L.C.
Memphis, Tennessee
March 6, 1997, except for Note 3 as to
which the date is July 23, 1997
3
MARRIOTT'S HUNT VALLEY INN
--------------------------
BALANCE SHEETS
--------------
ASSETS December 31, 1996 June 30, 1997
------ ----------------- -------------
(Unaudited)
INVESTMENT IN HOTEL PROPERTY, at cost:
Land $ 2,123,484 $ 2,123,484
Building and improvements 8,913,465 8,913,465
Furniture and equipment 2,723,351 2,909,796
------------ ------------
13,760,300 13,946,745
Less - Accumulated depreciation (1,210,253) (1,703,852)
------------ ------------
Net investment in hotel property 12,550,047 12,242,893
CASH AND CASH EQUIVALENTS 446,659 417,236
ACCOUNTS RECEIVABLE 496,753 890,293
INVENTORIES 75,379 55,203
PREPAIDS AND OTHER ASSETS 18,581 20,223
DEFERRED MAINTENANCE 154,543 243,043
DEFERRED EXPENSES, net 184,661 158,280
------------ ------------
$ 13,926,623 $ 14,027,171
============ ============
LIABILITIES AND OWNER'S EQUITY
------------------------------
MORTGAGE NOTE PAYABLE $ 10,395,226 $ 10,265,649
CAPITAL LEASE 33,636 1,996
ACCOUNTS PAYABLE, trade 260,210 305,823
ACCRUED EXPENSES AND OTHER LIABILITIES 535,720 466,444
------------ ------------
11,224,792 11,039,912
OWNER'S EQUITY 2,701,831 2,987,259
------------ ------------
$ 13,926,623 $ 14,027,171
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
4
MARRIOTT'S HUNT VALLEY INN
--------------------------
STATEMENTS OF INCOME (LOSS)
---------------------------
For the Six Months
Ended June 30,
For the Year Ended ---------------------------------
December 31, 1996 1996 1997
------------------ ------------ ------------
(Unaudited)
HOTEL REVENUES:
Room $ 7,230,001 $ 3,493,224 $ 3,873,755
Food and beverage 6,305,046 3,129,174 3,264,948
Other 578,893 294,651 280,448
------------ ------------ ------------
Total revenues 14,113,940 6,917,049 7,419,151
------------ ------------ ------------
EXPENSES:
Departmental expenses:
Rooms 2,118,045 961,981 1,061,539
Food and beverage 4,118,284 1,970,905 2,004,976
Other 386,605 186,201 191,406
General and administrative 1,324,572 683,050 698,975
Advertising and promotion 835,664 403,425 418,488
Utilities 725,592 330,512 310,201
Management fees to related party 423,414 207,577 222,593
Franchisor royalties and
other charges 597,653 291,381 314,062
Repairs and maintenance 802,522 400,353 393,775
Taxes and insurance 325,179 180,607 185,210
Interest 1,097,167 533,465 537,500
Depreciation and amortization 1,032,408 467,230 519,980
Other (32,144) 1,538 4,878
Renovations 386,045 384,235 --
------------ ------------ ------------
Total expenses 14,141,006 7,002,460 6,863,583
------------ ------------ ------------
NET INCOME (LOSS) $ (27,066) $ (85,411) $ 555,568
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
5
MARRIOTT'S HUNT VALLEY INN
--------------------------
STATEMENTS OF OWNER'S EQUITY
----------------------------
BALANCE, DECEMBER 31, 1995 $ 3,155,770
Net loss (27,066)
Distributions (426,873)
-----------
BALANCE, DECEMBER 31, 1996 2,701,831
Net income (unaudited) 555,568
Distributions (unaudited) (270,140)
-----------
BALANCE, JUNE 30, 1997, (unaudited) $ 2,987,259
===========
The accompanying notes to financial statements
are an integral part of these statements.
6
MARRIOTT'S HUNT VALLEY INN
--------------------------
STATEMENTS OF CASH FLOWS
------------------------
For the Six Months
Ended June 30,
For the Year Ended -------------------------------
December 31, 1996 1996 1997
----------------- ----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (27,066) $ (85,411) $ 555,568
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization 1,032,408 467,230 519,980
Changes in assets and liabilities:
Accounts receivable 538,260 260,108 (393,540)
Inventories (15,675) 6,990 20,176
Prepaids and other assets 90,161 69,656 (1,642)
Accounts payable, accrued expenses
and other liabilities (400,431) (169,647) (23,663)
----------- ----------- -----------
Net cash provided by operating activities 1,217,657 548,926 676,879
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements and additions to hotel properties, net (1,111,162) (662,473) (186,445)
Renovation escrow funds released 173,866 -- --
Deposits to deferred maintenance escrow account (154,543) -- (88,500)
----------- ----------- -----------
Net cash used for investing activities (1,091,839) (662,473) (274,945)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under mortgage note payable 1,152,822 973,788 --
Principal payments on mortgage note payable (479,774) (250,000) (129,577)
Principal payment on capital lease (46,275) (22,916) (31,640)
Distributions to partners (426,873) (193,685) (270,140)
Proceeds from promissory note 150,000 150,000 --
Repayment of promissory note (150,000) -- --
----------- ----------- -----------
Net cash provided by (used for)
financing activities 199,900 657,187 (431,357)
----------- ----------- -----------
NET CHANGE IN CASH 325,718 543,640 (29,423)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 120,941 120,941 446,659
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 446,659 $ 664,581 $ 417,236
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 1,076,475 $ 533,997 $ 630,096
The accompanying notes to financial statements
are an integral part of these statements.
7
MARRIOTT'S HUNT VALLEY INN
--------------------------
Notes to Financial Statements
-----------------------------
(Amounts and disclosures as of June 30, 1997 and
for the six months ended June 30, 1997 and 1996 are unaudited)
================================================================================
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------------
Organization and Nature of Business
- -----------------------------------
Marriott's Hunt Valley Inn (Hotel) in Hunt Valley, Maryland is owned by Shawan
Road Hotel Limited Partnership (Shawan), a Maryland limited partnership. The
partnership was organized on June 29, 1995 to acquire and operate the 392 room
Hotel. The Hotel was acquired and began operations on June 29, 1995.
Basis of Presentation
- ---------------------
The accompanying financial statements are prepared on the accrual basis of
accounting and include the accounts of the Hotel using historical cost basis.
The accompanying balance sheet as of June 30, 1997, and the statements of income
(loss), owner's equity and cash flows for the six month periods ended June 30,
1996 and 1997 are unaudited. In the opinion of management, such financial
statements include all adjustments consisting solely of normal recurring
adjustments, necessary for a fair presentation of results of these interim
periods. The results of the six month period ended June 30, 1997 are not
necessarily indicative of results to be expected for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Estimates
- ---------
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash, money market funds and other highly
liquid investments with maturities of three months or less.
Shawan had bank deposits in excess of regulatory insurance limits.
Inventories
- -----------
Inventories consist primarily of food and alcoholic beverages and are stated at
the lower of cost, determined by the first-in, first-out method, or market.
8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
Investment in Hotel
- -------------------
The Hotel property is stated at cost and depreciated over the estimated useful
lives of the assets using straight-line and accelerated methods. Repairs and
maintenance, which are not considered betterments and do not extend the useful
life of the property are charged to expense as incurred.
The major assets classifications and their estimated useful lives are as
follows:
Buildings 39 years
Furniture and equipment 5 - 7 years
Deferred Expenses
- -----------------
The Partnership incurred certain costs associated with obtaining financing and a
restaurant franchise. The costs are being amortized as follows:
Amortization Original Amortization Accumulated
Period Charge Expense Amortization
------------ -------- ------------ ------------
Financing costs 5 years $ 257,800 $ 51,560 $ 77,339
Franchise fees 5 years 6,000 1,200 1,800
----------- ----------
$ 52,760 $ 79,139
=========== ==========
Revenue Recognition
- -------------------
Revenue is recognized as earned. Ongoing credit evaluations are performed and an
allowance for potential credit loss is provided against the portion of accounts
receivable which is estimated to be uncollectible.
3. ACQUISITION BY BOYKIN HUNT VALLEY, L.L.C.
-----------------------------------------
In July 1997, Boykin Hotel Properties, L.P. formed Boykin Hunt Valley, L.L.C.
which made a cash contribution of $27,300,000 to Shawan. Shawan retired the
outstanding mortgage note payable and redeemed the one percent (1%) ownership
interest of the general partner, Shawan Road Hotel, Inc., and ninety percent
(90%) of the Hunt Valley Associates, L.L.C. limited partnership interest.
Shawan leased the Hotel to Hunt Valley Associates, L.L.C.
4. MORTGAGE NOTE PAYABLE
---------------------
The mortgage note payable is collateralized by substantially all of the assets
of the Partnership. The note bears interest at variable rates based on the
London Inter-Bank Offer Rate (LIBOR) plus 4.75% (10.34% at December 31, 1996).
Quarterly principal payments of $125,000 are due through July 1, 1996 at which
time monthly installments of principal and interest shall be due through the
maturity date, June 29, 2000. The note agreement also provides for the
establishment of a replacement reserve to be funded monthly beginning August 1,
1996, based on 4% of gross revenues.
As indicated in Note 3, in connection with the capital contribution and
admission of Boykin Hunt Valley, L.L.C. as a partner, the outstanding balance of
the mortgage was retired.
9
5. COMMITMENTS
-----------
Franchise Agreement
Shawan has entered into a franchise agreement with Marriott International, Inc.
Under the terms of the agreement, which expires in 2010, Shawan has agreed to
pay a monthly percentage fee of 6% of gross room revenues and 3% of gross food
and beverage revenues.
In addition, Shawan agreed to pay an advertising fee of 1% of gross room
revenues.
Shawan also entered into a franchise agreement with Pizza Hut, Inc. Under the
terms of the agreement which expires in 2000, Shawan has agreed to a monthly
percentage fee of 8% of applicable gross food sales. In addition, Shawan has
agreed to expend each month an amount no less than 1% of the prior month's
applicable gross sales on marketing efforts.
6. RELATED PARTY TRANSACTIONS
--------------------------
Shawan entered into a fifteen (15) year management agreement with Davidson Hotel
Company (Davidson) to provide management and accounting services. Wilton D.
Hill, the sole stockholder of Shawan Road Hotel, Inc. (the general partner), a
limited partner, and a member of Hunt Valley Associates, L.L.C. (also a limited
partner) is the sole stockholder of Davidson Holdings, Inc., the parent company
of Davidson. Davidson manages the property for a basic management fee of 2% of
gross revenues, an additional fee of 1% of gross revenues which becomes a
subordinated management fee on January 1, 1997 plus an incentive management fee
of 2% of gross revenues provided the partners have received a specified yield on
their capital. The accounting services are provided at a monthly charge of
$3,500. The management and accounting fees amounted to $423,414 and $42,000,
respectively, for the year ended December 31, 1996, $222,593 and $21,000 for the
six months ended June 30, 1997, and $207,577 and $21,000 for the six months
ended June 30, 1996.
On January 15, 1996, the Partnership borrowed $150,000 from Davidson Hotel
Company. Pursuant to the terms of the promissory note, interest was payable
monthly at a rate of 10%. The entire note balance was paid as of December 31,
1996.
Shawan Road Hotel, Inc., the general partner, and Wilton D. Hill, a limited
partner, borrowed from a lender $4,651,000. The funds were contributed to
Shawan. This loan is collateralized by the partnership interests of each of the
respective parties. Hunt Valley Associates, L.L.C. subsequently entered into a
guarantee and pledge of partnership interest with Shawan Road Hotel, Inc. and
Wilton D. Hill for their pro-rata ownership percentage (23.4%) of the borrowed
funds. As a result of the acquisition as discussed in Note 3, the loan was
retired and the collateral and guarantee were released.
Davidson provides certain health care benefits to their employees. The expenses
incurred by Shawan represent allocations from the Davidson Hotel Company
Employees' Health Care Trust (the Trust) which includes other properties managed
by Davidson. Premiums paid to the Trust are determined by management of Davidson
and a third party administrator and based on historical claims. Expenses paid by
Shawan, net of refunds, amounted to $356,974 for the year ended December 31,
1996, and $183,814 and $185,564 for the periods ended June 30, 1997 and 1996.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Mortgage Payable
- ----------------
Management estimates that the fair value of the mortgage note payable
approximates carrying value based on the variable rate terms.