1
Exhibit 7.1
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth selected unaudited pro forma condensed
consolidated financial information for RRf for the year ended January 31, 1997,
and for the nine-month period ended October 31, 1997.
The Pro Forma Condensed Consolidated Balance Sheet of RRF (i) is
presented as if the Formation Transactions had occurred on October 31, 1997;
and (ii) combines the historical balance sheet of RRF as of October 31, 1997
with the historical combined balance sheet of the various hotel companies as of
September 30, 1997. The Pro Forma Condensed Consolidated Statements of Income
for RRF for the year ended January 31, 1997 and for the nine-month period ended
October 31, 1997 (i) are presented as if the Formation Transactions, the sale
of the Carbon and Carbide building and the beginning of the relevant lease year
had occurred on February 1, 1996, and therefore incorporates certain
assumptions that are included in the Notes to the Pro Forma Condensed
Consolidated Statements of Income; and (ii) combines the historical operating
results of RRF for the year ended January 31, 1997 and the nine-month period
ended October 31, 1997 with the combined operating results of the various hotel
companies for the year ended December 31, 1996 and the nine-month period ended
September 30, 1997, respectively. In the opinion of the Trustees, the effect of
non-conforming period ends on the unaudited pro forma information is not
material.
2
REALTY REFUND TRUST
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1997
(Unaudited, Dollar Amounts in Thousands)
HISTORICAL PRO FORMA
-------------------- ADJUSTMENTS
REALTY ---------------------------
REFUND CONTRIBUTED FORMATION OTHER PRO
TRUST HOTELS TRANSACTIONS TRANSACTIONS FORMA
------ ----------- ------------ ------------ -------
ASSETS
INVESTMENTS IN HOTEL PROPERTIES, net......... $ -- $26,885 $ 16,850 (A) $43,735
CASH AND CASH EQUIVALENTS.................... 2,683 826 (950) (B) 172
259 (C)
$ (113)(D)
(675) (E)
(175)(F)
(1,500)(I)
(183) (H)
ACCOUNTS RECEIVABLE, net..................... -- 489 (489) (C) --
INVENTORIES.................................. -- 401 (401) (C) --
DEFERRED COSTS, net.......................... -- 527 (46) (G) 656
175(F)
INTEREST RECEIVABLE AND OTHER ASSETS......... 47 1,350 (1,178) (C) 402
183 (H)
------ ------- ------- ------- -------
TOTAL ASSETS................................. $2,730 $30,478 $ 13,370 $ (1,613) $44,965
====== ======= ======= ======= =======
LIABILITIES AND EQUITY
MORTGAGE NOTES PAYABLE....................... $ -- $17,963 $ (4,750)(G) $13,213
LINE OF CREDIT............................... -- 90 (90)(D) 3,250
4,750(G)
(1,500)(I)
OTHER NOTES PAYABLE.......................... -- 2,699 (23)(D) 2,676
ADVANCES PAYABLE TO AFFILIATES............... -- 946 946
ACCOUNTS PAYABLE AND ACCRUED EXPENSES........ 18 1,198 $ (1,052) (C) 164
MINORITY INTEREST IN PARTNERSHIP............. -- -- 18,627 (J) 18,627
EQUITY:
COMBINED ACCUMULATED EQUITY................ -- 7,582 (950) (B) --
(6,632) (K)
SHARES OF BENEFICIAL INTEREST
(unlimited authorized; 1,020,586 issued
and outstanding prior to Formation
Transactions, 1,731,527 issued and
outstanding upon consummation of
Formation Transactions)................. 2,712 -- 3,377 (A) 6,089
------ ------- ------- ------- -------
TOTAL EQUITY....................... 2,712 7,582 (4,205) -- 6,089
------ ------- ------- ------- -------
TOTAL LIABILITIES AND EQUITY....... $2,730 $30,478 $ 13,370 $ (1,613) $44,965
====== ======= ======= ======= =======
See Notes to Pro Forma Condensed Consolidated Balance Sheet.
3
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1997
(Unaudited, Dollar Amounts in Thousands)
(A) Increase in investment in hotel properties attributable to the application
of purchase accounting to the extent of (1) the Trust's acquisition of a
13.1% general partnership interest in RRF-LP, (2) the exchange transactions
with limited partners other than Wirth, and (3) the Trust's acquisition of
100% of the stock of BPI through the issuance of Shares having an aggregate
value of $3,377 (711 Shares at $4.75 per Share).
BPI OTHER HOTELS TOTAL
------ ------------ -------
Value of Units issued.................................... $ -- $ 32,231
Value of Common Shares issued............................ 3,377 --
Historical adjusted deficit (equity) of interests
purchased by the Trust or RRF-LP, as applicable........ 1,758(a) (8,390)(b)
------ -------
Excess of purchase consideration over historical net book
values................................................. 5,135 23,841
Allowable writeup based on change in percentage ownership
interests.............................................. 100% 49%
------ -------
Allowable writeup based on change in percentage ownership
interests.............................................. 5,135 11,673(c) $16,808
Trust's cash purchase price for 13.1% interest in
RRF-LP................................................. -- 2,175(d) 2,175
The Trust's 13.1% interest in the net assets of RRF-LP... -- (2,808)(e) (2,808)
Transfer costs and commissions (See (E))................. 68 607 675
------ ------- -------
Purchase accounting writeup.............................. $5,203 $ 11,647 $16,850
====== ======= =======
The exchanges of ownership interests by Mr. Wirth do not result in adjustments to historical
basis as such transactions are between entities under common control.
(B) Reflects the purchase by the Hotel Partnerships and Hotel Companies of
200,000 Common Shares currently held by Alan Krause and certain other
shareholders for a purchase price of $4.75 per share and the distribution
of such Common Shares to the respective partners of the Hotel Partnerships
and the owners of the Hotel Companies.
(C) Reflects the sale of certain non-real estate assets, net of the Lessee's
assumption of certain non-real estate liabilities. Units issued by RRF-LP
in exchange for the Flagstaff Hotel will be used by Hulsey Hotels
Corporation to acquire a preferred stock interest in the Lessee. Upon
receipt of the Units, the Lessee will exchange a portion of the Units to
acquire the non-real estate assets and assume the non-real estate related
liabilities of RRF-LP. RRF-LP will then distribute the Units so received to
its respective limited partners.
BPI OTHER HOTELS TOTALS
------ ------------ -------
Accounts receivable...................................... $ 39 $ 450 $ 489
Inventories.............................................. 62 339 401
Other assets............................................. 1,063 115 1,178
Accounts payable and accrued expenses.................... (905) (147) (1,052)
------ ------- -------
Consideration to be received............................. $ 259 $ 757(f) $ 1,016
====== ======= =======
(D) Reflects the retirement of certain line of credit indebtedness and capital
lease obligations of the Hotel Corporations and the Hotel Partnerships.
(E) Reflects the cash payments of transaction costs and commissions to be made
by the Hotel Partnerships and the Hotel Corporations. See (A) above.
(F) Reflects the payment of deferred financing costs related to the new
revolving credit agreement.
4
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1997 (CONTINUED)
(G) Represents the refinancing of existing mortgage indebtedness of BPI and the
Flagstaff Hotel with borrowings against the new credit facility and the
writeoff of unamortized deferred financing costs associated with the
mortgages.
(H) Represents the initial deposit posted by RRF-LP to the Capital Expenditures
Fund held for the benefit of Lessee.
(I) Represents the paydown of borrowings against the new revolving credit
facility with available cash.
(J) Represents the recognition of minority interest in RRF-LP that will not be
owned by the Trust. The calculation of minority interest is as follows:
Trust contribution for general partnership interest........................ $ 2,175(d)
Historical equity of Hotel Partnerships.................................... 9,340(g)
Distributions by the Hotel Partnerships of Common Shares purchased per
(B)...................................................................... (950)(h)
Value of Units received and distributed as discussed in (C)................ (757)(f)
Writeoff of deferred financing costs associated with the mortgage
refinanced in (G)........................................................ (46)
Allowable writeup based on change in percentage ownership interests........ 11,673(c)
-------
Total equity of RRF-LP..................................................... 21,435
Minority interest percentage............................................... 86.9%
-------
$18,627
=======
Minority interest in RRF-LP................................................ $18,627
Trust's interest in RRF-LP................................................. 2,808(e)
-------
Total equity of RRF-LP................................................... $21,435
=======
The Units received and issued in adjustment (C) have been considered in the
determination of the minority interest percentage.
(K) Elimination of the adjusted historical equity accounts of:
Hotel Company that owns the Flagstaff Hotel and the Hotel Partnerships
Historical equity........................................ (9,340)(g)
Less distribution discussed in (B)....................... 950(h)
------
Adjusted historical equity............................... (8,390)(b)
BPI
Historical equity........................................ 1,758(a)
------
$(6,632)
======
5
REALTY REFUND TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1997
(Unaudited, Dollar Amounts in Thousands except for Per Share Data)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
PERCENTAGE LEASE REVENUE............................... $ -- $ 7,376(A) $ 7,376
OTHER RENTAL REVENUE................................... 2,278 (2,278)(B) --
INTEREST INCOME........................................ 1,638 -- 1,638
------ ------ ------
TOTAL REVENUES............................... 3,916 5,098 9,014
------ ------ ------
PROVISION FOR WRITEDOWN OF LOAN RECEIVABLE............. 111 -- 111
PROVISION FOR WRITEDOWN OF REAL ESTATE HELD FOR SALE... 1,085 (1,085)(B) --
INTEREST ON LOANS UNDERLYING WRAP MORTGAGES............ 239 -- 239
INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE... 714 58(I) 1,929
(332)(C)
1,489(D)
ADVISORY FEE TO RELATED PARTY ADVISOR.................. 170 406(E) 576
OPERATING EXPENSES OF REAL ESTATE HELD FOR SALE........ 2,086 (2,086)(B) --
DEPRECIATION AND AMORTIZATION.......................... 43 1,334(F) 1,377
GENERAL AND ADMINISTRATIVE............................. 355 223(G) 578
REAL ESTATE AND PERSONAL PROPERTY TAXES AND CASUALTY
INSURANCE AND GROUND RENT............................ -- 942(H) 942
MINORITY INTEREST...................................... -- 1,790(J) 1,790
------ ------ ------
TOTAL EXPENSES AND MINORITY INTEREST......... 4,803 2,739 7,542
------ ------ ------
NET INCOME (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL
INTEREST............................................. $ (887) $ 2,359 $ 1,472
====== ====== ======
NET INCOME (LOSS) PER SHARE............................ $ (0.87) $ .85
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 1,020,586 710,941 1,731,427
See notes to pro forma condensed consolidated statements of income.
6
REALTY REFUND TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 31, 1997
(Unaudited, Dollar Amounts in Thousands Except for Per Share Data)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
PERCENTAGE LEASE REVENUE............................... $ -- $ 5,997(A) $ 5,997
OTHER RENTAL REVENUE................................... 1,367 (1,367)(B) --
INTEREST INCOME........................................ -- --
------ ------ ------
TOTAL REVENUES............................... 1,367 4,630 5,997
------ ------ ------
LOSS ON SALE OF REAL ESTATE............................ 36 (36)(B) --
INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE... 118 44(I) 1,258
(118)(C)
1,214(D)
ADVISORY FEE TO RELATED PARTY ADVISOR.................. -- 432(E) 432
OPERATING EXPENSES OF REAL ESTATE HELD FOR SALE........ 1,404 (1,404)(B) --
DEPRECIATION AND AMORTIZATION.......................... 22 1,001(F) 1,023
GENERAL AND ADMINISTRATIVE............................. 174 260(G) 434
REAL ESTATE AND PERSONAL PROPERTY TAXES AND CASUALTY
INSURANCE AND GROUND RENT............................ -- 611(H) 611
MINORITY INTEREST...................................... -- 1,844(J) 1,844
------ ------ ------
TOTAL EXPENSES AND MINORITY INTEREST......... 1,754 3,848 5,602
------ ------ ------
NET INCOME (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL
INTEREST............................................. $ (387) $ 782 $ 395
====== ====== ======
NET INCOME (LOSS) PER SHARE............................ $ (0.38) $ .23
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 1,020,586 710,941 1,731,427
See notes to pro forma condensed consolidated statements of income.
7
REALTY REFUND TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (Dollars in Thousands Except for Per Share Data)
(A) Consolidated percentage rent from RRF-LP and BPI as calculated pursuant to
the terms of the Percentage Leases.
(B) Assumes the sale of the Carbon and Carbide Building as of February 1, 1996.
The building was sold on September 4, 1997 for $6,000.
(C) Interest expense on $2,300 loan from related party which was retired with
proceeds from the sale of the Carbon and Carbide Building.
(D) Reflects interest expense on (i) existing mortgage indebtedness of the Hotel
Companies to be assumed by RRF-LP ($1,164 for the year ended January 31,
1997 and $970 for the nine months ended October 31, 1997) and (ii) new
borrowings against the revolving line of credit ($325 for the year ended
January 31, 1997 and $244 for the nine months ended October 31, 1997). The
interest rates on the mortgage debt range from 8.0% to 9.25%.
(E) Reflects increase in advisory fee to MARA (equal to 1% of the Trust's
invested assets) related to increase in assets under management having a
total appraised value of $57,565.
(F) Represents (i) the elimination of historical amortization of the Trust
related to the real estate held for sale, and (ii) depreciation of the
Hotel properties. Depreciation is computed using the straight-line method
and is based upon the estimated useful lives of 40 years for buildings and
improvements and 7 years for furniture and equipment. These estimated
useful lives are based on management's knowledge of the properties and the
hotel industry in general.
The Trust's pro forma investment in hotel properties, at cost, consists of
the following:
HOTEL
COMPANIES
---------
Land.................................................. $ 3,440
Buildings and improvements............................ 37,195
Furniture, fixtures and equipment..................... 3,100
-------
$43,735
=======
(G) Reflects increase in consolidated G & A for RRF-LP, Scottsdale, and the
Trust. Pro forma G&A expense is comprised of the following:
FULL YEAR NINE MONTHS
--------- -----------
Salaries and wages.................................... $ 130 $ 98
Professional fees..................................... 170 127
Directors' and officers' insurance.................... 50 38
Directors' fees and expenses.......................... 58 43
Other operating expenses.............................. 170 128
---- ------
$ 578 $ 434
==== ======
(H) Represents real estate and personal property taxes, property and casualty
insurance and ground rent expense to be paid by RRF-LP. Such amounts were
derived from historical amounts paid by the Hotels.
(I) Reflects amortization of $175 of deferred loan fees and costs over the
3-year term of the Line of Credit.
8
REALTY REFUND TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
OF INCOME -- CONTINUED
(Unaudited) (Dollars in Thousands Except for Per Share Data)
(J) Represents 86.9% of Net Income of RRF-LP attributable to Minority Interest
holders, who will hold 6,785,564 limited partnership units. The Trust will
hold 1,020,586 units or 13.1% of the total.
NINE MONTHS
ENDED
YEAR ENDED OCTOBER 31,
JANUARY 31, -----------------
1997 1996 1997
----------- ------ ------
Pro Forma Income before Minority Interest:
Trust....................................................... $ 907 $ 953 $ --
Scottsdale.................................................. 295 123 117
RRF-LP...................................................... 2,060 1,735 2,112
------ ------ ------
3,262 2,811 2,239
Minority Interest in Pro Forma Income of RRF-LP at 86.9%...... 1,790 1,508 1,844
------ ------ ------
Pro Forma Consolidated Net Income............................. $ 1,472 $1,303 $ 395
====== ====== ======
9
MICHAEL MAASTRICHT, C.P.A.
---------------
CERTIFIED PUBLIC ACCOUNTANT
10640 North 28th. Drive, Suite C-209 (602) 375-2926 -- ofc
Phoenix, Arizona 85029 (602) 375-2926 -- fax
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InnSuites International Hotels, Inc.:
We have audited the accompanying combined balance sheets of the InnSuites
Hotels as defined in Note 1 to the combined financial statements, as of December
31, 1995 and 1996, and the related combined statements of operations, cash flows
and equity for each of the three years in the period ended December 31, 1996.
These combined financial statements are the responsibility of the Company'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 audits 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 combined financial position of the InnSuites
Hotels as of December 31, 1995 and 1996, and the combined results of their
operations, cash flows and equity for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Michael Maastricht
MICHAEL MAASTRICHT, CPA
Phoenix, Arizona
April 28, 1997
MEMBER
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
ARIZONA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
10
INNSUITES HOTELS
COMBINED BALANCE SHEETS
DECEMBER 31, SEPTEMBER
--------------------------- 30,
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
INVESTMENT IN HOTEL PROPERTIES, at cost:
Land $ 3,339,738 $ 3,439,738 $ 3,439,738
Buildings and improvements 23,649,746 24,831,670 24,842,546
Furniture and equipment 8,181,756 9,175,834 9,370,072
Purchases of partners' interests 0 0 1,018,872
- ----------------------------------------------------------------------------------------------------------
35,171,240 37,447,242 38,671,228
Less-Accumulated depreciation 9,861,945 10,958,581 11,786,398
- ----------------------------------------------------------------------------------------------------------
Net investment in hotel properties 25,309,295 26,488,661 26,884,830
CASH AND CASH EQUIVALENTS 1,165,145 628,797 826,625
ACCOUNTS RECEIVABLE 401,313 344,882 490,396
INVENTORIES 329,660 347,252 400,852
OTHER ASSETS 460,817 638,265 1,001,137
CASH HELD IN ESCROW 232,801 253,056 347,337
DEFERRED EXPENSES, net 499,050 513,610 527,071
=========== =========== ===========
$28,398,081 $29,214,523 $30,478,248
=========== =========== ===========
LIABILITIES AND COMBINED EQUITY
MORTGAGE NOTES PAYABLE $17,028,836 $16,405,945 $17,963,129
ACCOUNTS PAYABLE:
Trade 404,213 357,089 549,808
Affiliates 179,392 582,145 946,000
Bank overdraft 57,725 149,372 96,987
Participation investors contingent liability 2,695,035 2,646,627 2,646,626
LINE OF CREDIT 48,728 100,000 90,000
CAPITAL LEASE OBLIGATIONS 103,742 71,707 51,525
LAND LEASE PAYABLE 70,689 75,842 41,362
ACCRUED EXPENSES AND OTHER LIABILITIES 982,319 418,596 511,253
- ----------------------------------------------------------------------------------------------------------
21,570,679 20,807,323 22,896,690
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY: 6,827,402 8,407,200 7,581,558
- ----------------------------------------------------------------------------------------------------------
$28,398,081 $29,214,523 $30,478,248
=========== =========== ===========
The accompanying notes are an integral part of these combined financial
statements.
11
INNSUITES HOTELS
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------
1994 1995 1996 1996 1997
- --------------------------------------------------------------------------------------------------------------
(UNAUDITED)
REVENUES FROM HOTEL OPERATIONS:
Room revenue $13,572,350 $15,366,788 $17,613,618 $13,313,370 $14,165,017
Food and beverage revenue 91,400 130,708 197,064 261,817 319,603
Other revenue 384,764 445,761 513,143 446,290 509,552
- --------------------------------------------------------------------------------------------------------------
Total revenues 14,048,514 15,943,257 18,323,825 14,021,477 14,994,172
EXPENSES:
Departmental expenses:
Rooms 3,601,000 3,934,009 4,439,142 3,650,204 3,720,441
Food and beverage 202,545 349,981 487,367 378,352 395,503
General and administrative 2,482,659 3,134,257 3,500,161 2,147,021 2,476,370
Advertising and promotion 666,359 706,372 724,887 538,701 604,120
Utilities 789,196 765,721 894,121 672,625 685,497
Repairs and maintenance 2,207,888 1,938,523 2,621,472 1,744,810 2,071,050
Real estate, personal property
taxes, and insurance 592,788 656,544 876,816 569,000 593,164
Interest expense 1,460,552 1,990,762 1,569,850 1,300,833 1,291,519
Depreciation 1,163,865 1,058,931 1,147,326 802,772 823,279
Other 148,797 259,038 190,510 -- --
- --------------------------------------------------------------------------------------------------------------
Total expenses 13,315,649 14,794,138 16,451,652 11,804,318 12,660,943
- --------------------------------------------------------------------------------------------------------------
Income before extraordinary items 732,865 1,149,119 1,872,173 2,217,159 2,333,229
EXTRAORDINARY ITEMS
Gain on early extinguishment of
debt 133,075 6,465,305 307,000 307,000 --
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 865,940 $ 7,614,424 $ 2,179,173 $ 2,524,159 $ 2,333,229
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these combined financial
statements.
12
INNSUITES HOTELS
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 865,940 $ 7,614,424 $ 2,179,173 $ 2,524,159 $ 2,333,229
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,163,865 1,084,325 1,175,804 837,720 858,227
Gain on early extinguishment of debt (133,075) (6,465,305) (307,000) (307,000) --
(Increase) decrease in:
Accounts receivable (107,053) (113) 56,431 (186,360) (145,514)
Inventories (4,449) (53,014) (17,610) (7,562) (53,600)
Other assets (42,134) (376,921) (231,090) 93,642 (457,153)
Receivable from affiliate (106,665) -- -- -- --
Increase (decrease) in:
Accounts payable 60,601 (191,596) 38,764 214,922 192,719
Land lease payable (4,738) (6,166) (5,153) (12,663) (34,480)
Accrued expenses (256,950) 502,406 (264,756) 60,710 (9,728)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 1,435,342 2,108,040 2,624,563 3,217,598 2,683,700
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (112,856) (406,289) (753,741) (579,584) (205,114)
Acquisition of land, building and
equipment -- -- (1,250,000) (1,250,000) --
Purchases of partners' interests -- -- -- -- (1,018,872)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (112,856) (406,289) (2,003,741) (1,829,584) (1,223,986)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in loans from
affiliates -- (91,500) (87,500) (1,331,776) 363,855
Payment of mortgage notes payable (929,462) (2,185,926) (1,612,687) -- (2,342,817)
Increase in loans to affiliates 100,845 -- 587,853 -- --
Increase of mortgage notes payable -- -- 990,000 -- 3,900,000
Partner contributions -- 266,000 -- -- --
Partner distributions -- (120,000) (969,375) (650,578) (3,158,871)
Line of Credit -- -- 50,000 50,000 40,000
Loan fees -- (139,279) (251,711) -- (43,871)
Other -- 275,584 (31,715) -- --
Capital lease obligations -- 103,742 (32,035) (7,311) (20,182)
Capitalization of common stock -- -- 200,000 -- --
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (828,617) (1,891,379) (1,157,170) (1,939,665) (1,261,886)
- --------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 493,869 (189,628) (536,348) (551,651) 197,828
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 860,904 1,354,773 1,165,145 1,165,145 628,797
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,354,773 $ 1,165,145 $ 628,797 $ 613,494 $ 826,625
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these combined financial
statements.
13
INNSUITES HOTELS
COMBINED STATEMENTS OF EQUITY
GENERAL LIMITED
PARTNERS' PARTNERS' COMMON RETAINED COMBINED
CAPITAL CAPITAL STOCK EARNINGS EQUITY
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1993 $(620,076) $ (902,623) $ 500 $ (281,263) $(1,803,462)
NET INCOME 53,657 1,019,476 -- (207,193) 865,940
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 (566,419) 116,853 500 (488,456) (937,522)
NET INCOME 353,394 6,714,479 -- 546,551 7,614,424
PARTNERSHIP CONTRIBUTIONS 210,500 55,500 -- -- 266,000
ISSUANCE OF COMMON STOCK -- -- 4,500 -- 4,500
PARTNERSHIP DISTRIBUTIONS -- (120,000) -- -- (120,000)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 (2,525) 6,766,832 5,000 58,095 6,827,402
NET INCOME 107,025 2,033,509 -- 38,639 2,179,173
PARTNERSHIP CONTRIBUTIONS -- 170,000 -- -- 170,000
ISSUANCE OF COMMON STOCK -- -- 200,000 -- 200,000
PARTNERSHIP DISTRIBUTIONS (48,468) (920,907) -- -- (969,375)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 56,032 8,049,434 205,000 96,734 8,407,200
NET INCOME, (Unaudited) 140,555 2,562,418 -- (369,744) 2,333,229
PARTNERSHIP DISTRIBUTIONS, (Unaudited) (62,861) (1,146,010) -- (1,950,000) (3,158,871)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 (Unaudited) $ 133,726 $ 9,465,842 $205,000 $ (273,010) $ 7,581,558
========= =========== ======== =========== ===========
<FN>
Hulsey Hotels Corporation -- Common stock, no par value, 1,000,000 shares
authorized, 1,000,000 issued and outstanding
Buenaventura Properties, Inc. -- Common stock, no par value, 10,000,000 shares
authorized, 1,000,000 issued and outstanding
The accompanying notes are an integral part of these combined financial
statements.
14
INNSUITES HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
The InnSuites Hotels consist of the following full-service hotels:
NUMBER OF
PROPERTY NAME LOCATION ROOMS
- -----------------------------------------------------------------------------------------------------------
InnSuites Phoenix Best Western ("Phoenix") Phoenix, Arizona 123
InnSuites Tempe/Airport ("Tempe") Tempe, Arizona 170
InnSuites Tucson Best Western ("Tucson") Tucson, Arizona 159
InnSuites Yuma Best Western ("Yuma") Yuma, Arizona 166
Holiday Inn Airport InnSuites Ontario ("Ontario") Ontario, California 150
InnSuites Flagstaff Grand Canyon ("Flagstaff") Flagstaff, Arizona 134
InnSuites Scottsdale ("Scottsdale") Scottsdale, Arizona 134
InnSuites International Hotels, Inc., ("InnSuites") and its affiliates,
officers and employees were involved in the development of each of the above
hotels, except Flagstaff which was purchased January 1, 1996, and has managed
all of the InnSuites Hotels since their respective inceptions. The hotels with
two exceptions, are owned by partnerships ("InnSuites Partnerships") in which
the shareholders of InnSuites and certain officers of InnSuites (collectively,
InnSuites Affiliates) have significant direct and indirect ownership interests.
Flagstaff and Scottsdale are owned by corporations controlled by principals of
InnSuites. The partnerships and corporations are referred to collectively as the
InnSuites Entities.
As of December 31, 1996, the InnSuites Entities are owned as follows:
ENTITY INTEREST
-----------------------
INNSUITES THIRD
AFFILIATES PARTY
- ----------------------------------------------------------------------------------------------------------
InnSuites Phoenix Best Western 96% 4%
InnSuites Tempe/Airport/South Mountain 46% 54%
InnSuites Tucson Catalina Foothills 28% 72%
InnSuites Yuma Best Western 33% 67%
Holiday Inn Airport InnSuites Ontario 100% 0%
InnSuites Flagstaff Grand Canyon 100% 0%
InnSuites Scottsdale 100% 0%
Realty ReFund Trust is an unincorporated Ohio real estate investment trust
("REIT") which seeks to acquire equity interests in existing hotel properties
and to consider selectively the purchase or development of additional hotels.
The REIT will acquire the general partnership interest, representing a 13.1%
equity interest, in RRF Limited Partnership, a Delaware limited partnership (the
Partnership). It is proposed that the partners and shareholders of the entities
owning the InnSuites Hotels will contribute their respective partnership and
corporate interests to the Partnership, or a subsidiary of the REIT in exchange
for cash, partnership interests or REIT stock. All of the InnSuites Hotels will
be leased to Realty Hotel Lessee Corporation (the InnSuites Lessee) pursuant to
operating leases which contain provisions for rent based on the revenues of the
InnSuites Hotels. The InnSuites Lessee is an affiliate of InnSuites.
Management believes that these combined financial statements result in a more
meaningful presentation of the InnSuites Hotel businesses to be acquired by the
Partnership or REIT and thus appropriately reflect the historical financial
position and results of operations of the predecessor of the InnSuites Lessee.
All significant intercompany balances and transactions have been eliminated
Interim Unaudited Financial Information
The combined financial statements as of and for the nine months ended September
30, 1996 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
15
fair representation of the combined financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
2. Summary of Significant Accounting Policies:
Accounting Periods
For annual reporting purposes, all of the InnSuites Entities have been included
in the accompanying combined financial statements based on a December 31
year-end.
Hotel Properties
Hotel properties are stated at cost. Depreciation is computed using primarily
the straight-line method based upon the following estimated useful lives:
Buildings and improvements 40 years
Furniture and equipment 7 years
For the year ended December 31, 1995, the InnSuites Partnerships adopted
Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, the partners and management of the InnSuites Entities review
the hotel properties for impairment when events or changes in circumstances
indicate the carrying amounts of the hotel properties may not be recoverable.
When such conditions exist, management estimates the future cash flows from
operations and disposition of the hotel properties. If the estimated
undiscounted future cash flows are less than the carrying amount of the asset,
an adjustment to reduce the carrying amount to the related hotel property's
estimated fair market value would be recorded and an impairment loss would be
recognized. No such impairment losses were recognized in connection with the
adoption of SFAS No. 121.
Maintenance and repairs are charged to operations as incurred; major renewals
and betterments are capitalized. Upon the sale or disposition of a fixed asset,
the asset and related accumulated depreciation are removed from the accounts,
and the gain or loss is included in the determination of net income or loss.
Advertising and Promotion
The InnSuites Entities expense the cost of advertising and promotion as incurred
which approximates the time such advertising takes place. There are no
capitalized advertising costs.
Cash and Cash Equivalents
All highly liquid investments with an original maturity date of three months or
less when purchased are considered to be cash equivalents. Management estimates
that the fair value of cash equivalents approximates carrying value due to the
relatively short maturity of these instruments.
Inventories
Inventories consisting primarily of linen, food, and beverages and gift store
merchandise are stated at the lower of first-in, first-out cost or market.
Cash Held in Escrow
Cash held in escrow consists of amounts for real estate taxes and property
insurance remitted to the lenders which hold the mortgages on the hotel
facilities and amounts deposited for the replacement of hotel real and personal
property pursuant to the terms of certain mortgage and franchise agreements.
Deferred Expenses
Deferred expenses consist principally of deferred loan costs and initial
franchise fees. Amortization of initial franchise fees is computed on a
straightline basis over the terms of the franchise agreements while deferred
loan costs are amortized over the terms of the related loan agreements. The
amortization of deferred loan costs of $67,519, $51,377, and $42,187, and
$32,314
16
and $33,854 for the years ended December 31, 1994, 1995 and 1996, and the nine
month periods ended September 30, 1996 and 1997 is included in interest expense
in the accompanying combined statements of operations. Accumulated amortization
of deferred expenses was $362,565 and $473,454 at December 31, 1995 and 1996,
respectively, and $507,308 at September 30, 1997.
Concentration of Credit Risk
Financial instruments which potentially subject the InnSuites Entities to credit
risk consist primarily of trade receivables. Credit evaluations of guest's
accounts are performed regularly. The receivables are unsecured.
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed and
credit losses are charged off when deemed to be uncollectible. Such losses have
been minimal and within management's expectations.
Income Taxes
The InnSuites Partnerships and Scottsdale, an S-Corporation, are not subject to
federal or state income taxes; however, they must file informational income tax
returns and the partners and stockholders must take income or loss of the
InnSuites Partnerships and S-Corporation into consideration when filing their
respective tax returns. Flagstaff, a C-Corporation, operated only in 1996 and
had no income tax liability for year ended December 31, 1996.
Management's Use of Estimates in the Preparation of Financial Statements
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 financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. It is reasonably possible that the
InnSuites Entities recorded estimate of its obligations may change in the near
term.
3. Mortgage Notes Payable:
Mortgage notes payable consisted of the following:
SEPTEMBER
DECEMBER 31, 30,
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $33,779 at rate of
8% adjustable by .25% annually; the unpaid principal is due
May 1998; collateralized by real and personal property having
a net book value of $2,870,366 at December 31, 1996. $ 3,299,221 $ 3,152,590 $ 3,036,929
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a bank in aggregate installments of
principal and interest of $27,572 at a rate of 8.5%; the
unpaid principal is due January 2006; collateralized by real
and personal property having a net book value of $3,240,818
at December 31, 1996. 2,800,000 2,711,786 2,634,340
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a bank, paid in full in 1996 800,625 -- --
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a finance company in aggregate
monthly installments of principal and interest of $41,168 at
a rate of 9.25%; the unpaid principal is due August 2011;
collateralized by real and personal property having a net
book value of $3,167,675 at December 31, 1996. 4,606,618 3,958,182 3,848,936
- ----------------------------------------------------------------------------------------------------------
17
SEPTEMBER
DECEMBER 31, 30,
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $33,581 at a rate
of 8.75%; the unpaid principal due March 2011, collateralized
by real and personal property having a net book value of
$7,164,133 at December 31, 1996; requires an escrow reserve
of 4% of revenues for the replacement or refurbishing of
furniture, fixtures and equipment. 3,618,000 3,739,308 3,692,759
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $12,919 at a rate
of 9.75%; the unpaid principal due June 2001; collateralized
by real and personal property having a net book value of
$1,707,885 at December 31, 1996. -- 956,612 866,415
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a finance company in aggregate
monthly installments of principal and interest of $16,250 at
a rate of 9%; the unpaid principal due February 1998;
collateralized by real and personal property having a net
book value of $1,752,594 at December 31, 1996. 1,904,372 1,887,467 3,883,750
- ----------------------------------------------------------------------------------------------------------
$17,028,836 $16,405,945 $17,963,129
=========== =========== ===========
Aggregate scheduled annual principal payments for the above mortgage notes
payable at December 31, 1996 are as follows:
YEAR AMOUNT
----------------------------------------------------------------- -----------
1997 $ 587,395
1998 3,425,539
1999 501,644
2000 554,405
2001 2,830,753
Thereafter 8,506,209
-----------
$16,405,945
==========
Debt Extinguishment
In 1994 Tempe realized an extraordinary gain of $133,075 on the extinguishment
of previously accrued interest. In 1995 Tempe and Ontario realized net
extraordinary gains of $5,994,473 on early extinguishment of debt and Scottsdale
realized an extraordinary gain related to the forgiveness of principal on debt
of $470,832 due to a related party. In 1996 Flagstaff refinanced its existing
mortgage indebtedness, realizing a net extraordinary gain of $112,780 and an
extraordinary gain related to the forgiveness of debt of $194,220 due to a
related party.
4. Related Party Transactions:
A substantial portion of the hotels' management functions are performed by two
InnSuites management companies for a fee computed as specified in each hotel's
management agreement. The management fee is based on a percentage of hotel
revenues of 4.5%.
In addition, InnSuites has trademark license agreements with the hotels,
excluding Ontario which operates under licensing with Holiday Inns, for which
the fees are .5% of revenues. InnSuites also operates an advertising trust to
which the hotels contribute 1% of revenues (1.9% at certain properties through a
portion of 1997). All agreements expire in 2000. The payable to affiliates
represents amounts due primarily for working capital advances. There are no
terms or covenants connected with the advances.
18
The InnSuites Entities paid fees to InnSuites for various services as follows:
NINE MONTHS
ENDED SEPTEMBER 30,
DECEMBER 31, (UNAUDITED)
1994 1995 1996 1996 1997
- --------------------------------------------------------------------------------------------------------------
Management fees
(4.5% of total revenues) $ 622,937 $ 611,421 $ 840,518 $ 35,467 $ 74,738
- --------------------------------------------------------------------------------------------------------------
Trademark license fees
(0.5% of total revenues) 66,766 66,246 80,596 70,608 74,971
- --------------------------------------------------------------------------------------------------------------
Advertising trust fees
(1% of total revenues) 220,731 232,023 189,231 141,215 149,942
- --------------------------------------------------------------------------------------------------------------
5. Changes in Ownership:
On January 1, 1996 the principals of InnSuites became sole shareholders of
Hulsey Hotels Corporation (Flagstaff) and purchased the hotel from a
sole-proprietorship for the assumption of $200,000 of outstanding debt, certain
other considerations plus the outstanding mortgage indebtedness. The property
was refinanced on June 19, 1996 in the amount of $1,004,000.
The purchase accounting adjustment recorded was an aggregate increase in the
carrying value of the investments in hotel property as follows:
Land, buildings and improvements $1,050,000
Furniture and equipment 200,000
-------------------------------------------------------------------------------
$1,250,000
=========
Following is unaudited pro forma data assuming that the purchase discussed above
and the related refinancing had occurred at the beginning of 1995. The pro forma
adjustments to historical operating results give effect to an increase in
depreciation expense and an increase in interest expense to reflect the terms of
the new mortgage debt and the amortization of related deferred financing costs.
Had the pro forma assumptions been in effect, 1995 operating results would have
been as follows:
YEAR ENDED
DECEMBER 31, 1995
(UNAUDITED)
---------------------------------------------------------------------------------
Total revenues $16,720,299
Net income 7,457,196
6. Commitments and Contingencies:
Claims and Legal Matters
Certain of the hotels are involved in claims and legal matters incidental to
their business. In the opinion of management, the ultimate resolution of these
matters will not have a material impact on the financial position or the results
of operations of the hotels.
Franchise Agreements
Under the terms of hotel franchise agreements, annual payments for franchise
royalties and reservation and advertising services are due from the hotels. For
six of the hotels, fees are computed based upon a percentage of total revenues.
At December 31, 1996, the franchise royalty fees are payable by the hotels at
.5% of revenues while the fees for advertising services are 1% of revenues. The
franchise agreements expire in 2000. The Best Western and Holiday Inn hotels
have additional franchise agreements in which fees are charged on a per room
basis and generally approximate 3% of revenues.
Other
The land on which the Tucson Hotel is located is leased under an operating lease
agreement expiring in 2010 which can be extended to 2051. The lease requires
minimum annual rentals of $70,000 for 1997-2000, $75,000 through 2002, plus
19
percentage rentals based on hotel revenues. Tucson is responsible for all taxes,
insurance and maintenance on the property. Rental expense charged to operations
for the land lease were as follows:
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------- ---------------------
1994 1995 1996 1996 1997
- -----------------------------------------------------------------------------------------------------------------
Minimum rent $ 60,000 $ 60,000 $ 70,000 $ 52,500 $ 52,500
Percentage rent 64,523 70,689 74,632 57,867 59,499
- -----------------------------------------------------------------------------------------------------------------
$124,523 $130,689 $144,632 $110,367 $111,999
------------------------------------------------------------
7. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value for all financial instruments, whether or not recognized for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1996. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts which could be realized on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Long-Term Debt
Management estimates that the fair values of mortgage and other long-term debt
approximate carrying values based upon the hotels' effective borrowing rate for
issuance of debt with similar terms and remaining maturities.
8. Participation Investors Contingent Liability
For the Ontario property, participation investors rights to repayment were
converted to the right to receive forty-five percent of the profits, from any
future sale of the hotel property, over a fixed base amount of approximately
$4,100,000, after payment of all outstanding liabilities. The contingent
liability approximates the participant's original investment plus certain
accrued interest and management's estimate of the potential liability upon a
future sale of the hotel property. The balance consists of the original
$1,950,000 of loan participation units subscribed to by investors, plus $745,035
of accrued but unpaid interest during the construction period, as defined.
During 1996 the Partnership purchased units from participation investors for
$48,408.
9. Lines of Credit
Flagstaff and Scottsdale each carried an unsecured line of credit of $50,000 at
December 31, 1996. Interest rates are 10% and 10.25%; and due dates are April
30, and March 1, 1997, respectively. Both lines are guaranteed by a principal of
Innsuites.
10. Capital Leases
Ontario and Scottsdale own equipment under capital lease arrangements
aggregating $148,556. The lease liabilities carry interest at rates ranging from
10.5% to 12.5% and are payable through dates from August 1997 to October 1999
with monthly payments aggregating $5,479. Future payments required by the leases
as of December 31, 1996 follow:
------------------------------------------------------------------------------
1997 $49,384
1998 14,438
1999 7,885
------------------------------------------------------------------------------
$71,707
=======
11. Purchases of Partners' Interests
Certain partners of entities owning the InnSuites Hotels are redeeming their
interests for cash in lieu of exchanging their interests for partnership
interests or REIT stock. Three properties purchased such interest during the
nine months ended September 30, 1997 aggregating $1,018,872.