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Exhibit 7.1
MICHAEL MAASTRICHT, C.P.A.
Certified Public Accountant
10640 North 28th Drive, Suite C-209 (602) 375-2926 - ofc
Phoenix, Arizona 85029 (602) 375-2761 - fax
Independent Auditor's Report
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The Members
Tucson Saint Mary's Suite Hospitality, LLC:
We have audited the accompanying balance sheet of Tucson Saint Mary's Suite
Hospitality, LLC (An Arizona Limited Liability Company) as of December 31, 1997,
and the related statements of operations and members' deficit and cash flows for
the year ended. These financial statements are the responsibility of the
Company'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 Tucson Saint Mary's Suite
Hospitality, LLC as of December 31, 1997, and the results of its operations and
cash flows for the year ended in conformity with generally accepted accounting
principles.
February 27, 1998 Michael Maastricht, C.P.A.
Phoenix, Arizona
Member
American Institute of Certified Public Accountants
Arizona Society of Certified Public Accountants
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TUCSON SAINT MARY'S SUITE HOSPITALITY, LLC
Balance Sheet
December 31, 1997
ASSETS
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Cash $ 16,617
Accounts receivable 51,999
Inventory 95,643
Land 900,000
Buildings and equipment pledged, at cost, net of
accumulated depreciation 5,415,062
Deferred loan fees, net of accumulated amortization 85,000
Cash held in escrow 90,452
Other assets 11,277
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$ 6,666,050
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LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
Accounts payable $ 391,484
Accrued expenses 298,403
Deed of trust 6,000,000
Line of credit 50,000
Advances from affiliates 1,140,428
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7,880,315
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Members' deficit:
Members' capital 25,000
Distributions to prior owners (788,256)
Accumulated losses (451,009)
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(1,214,265)
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$ 6,666,050
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See accompanying notes to financial statements
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TUCSON SAINT MARY'S SUITE HOSPITALITY, LLC
Statements of Operations and Members' Deficit
For the year ended December 31, 1997
Revenues:
Room rentals $2,562,155
Restaurant and banquet 813,651
Telephone 100,698
Other 65,144
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3,541,648
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Department costs:
Wages and salaries:
Salaries 206,457
Front desk 139,182
Housekeeping 224,374
Laundry and houseman 85,297
Maintenance and other 146,069
Taxes and benefits 129,684
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931,063
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Rooms department:
Guest supplies 60,305
Complimentary items 92,692
Telephone 65,824
Cleaning supplies 36,776
Office and desk supplies 11,707
Linen 18,952
Travel agent commissions 25,217
Reservations 4,147
Other rooms department 18,357
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334,157
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Other operating expenses:
Administrative and general:
Professional services 83,054
Licenses, dues and subscriptions 12,274
Bank charges and credit card discount 51,045
Management fees 58,372
Trademark license fees 100,414
Other administrative 21,767
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326,926
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Advertising and sales promotion:
Travel and promotion 18,434
Advertising trust fees 14,189
Publications and newspapers 48,458
Billboards 18,949
Guest mail and postage 6,685
Supplies and sales printing 13,608
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120,323
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(continued)
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TUCSON SAINT MARY'S SUITE HOSPITALITY, LLC
Statements of Operations and Members' Deficit
For the year ended December 31, 1997
Repairs and maintenance:
Landscaping and pool $ 55,229
Mechanical and electrical 42,611
Supplies 31,544
Refurbishing 181,658
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311,042
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Restaurant and banquet:
Food and beverage 224,016
Wages 292,261
Benefits and taxes 51,500
Supplies 28,893
Other 14,404
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611,074
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Utilities:
Electric 242,926
Gas 35,433
Water and sewer 71,940
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350,299
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Other fixed charges:
Property insurance 35,165
Property taxes 168,872
Depreciation 247,548
Interest 556,188
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1,007,773
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Total expenses $ 3,992,657
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Net loss (451,009)
Members' capital contributions 25,000
Distributions to prior owners (788,256)
Members' deficit, beginning of year --
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Members' deficit, end of year $(1,214,265)
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See accompanying notes to financial statements.
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TUCSON SAINT MARY'S SUITE HOSPITALITY, LLC
Statements of Operations and Members' Deficit
For the year ended December 31, 1997
Cash flows from operating activities:
Net income $ (451,009)
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 247,548
Amortization 35,000
(Increase) decrease in:
Accounts receivable (51,999)
Inventories (95,643)
Cash held in escrow (90,452)
Other assets (11,277)
Increase (decrease) in:
Accounts payable 391,484
Accrued expenses 298,403
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Net cash provided by operating activities 272,055
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Cash flows from investing activities:
Acquisition of land, buildings and equipment (6,562,610)
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Net cash used by investing activities (6,562,610)
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Cash flows from financing activities:
Deferred loan fees (120,000)
Increase in line of credit 50,000
Increase in advances from affiliates 1,140,428
Addition of deed of trust: payable 6,000,000
Members' capital contributions 25,000
Distributions to prior owners (788,256)
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Net cash provided by financing activities 6,307,172
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Net increase in cash 16,617
Cash, beginning of period --
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Cash, end of period $ 16,617
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See accompanying notes to financial statements.
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Notes to Financial Statements
Year ended December 31, 1997
1. Operations and Summary of Significant Policies.
Tucson Saint Mary's Suite Hospitality, LLC ("The Company") (An Arizona
Limited Liability Company) was organized in May 1997 to purchase and
operate a hotel property in Tucson, Arizona. The financial statements
are presented for the purpose of presenting the property's operations
for a full year and include operations of the prior owners for the
period January 1 to May 20, 1997. The property is operated under the
InnSuites trademark ("InnSuites") of Hospitality Corporation
International ("Hospitality"). An affiliate, InnSuites Hotels, LLC
provides management services to the Company. The property is located in
a developed area that includes other hotel properties some of which may
have greater financial resources than the Company.
Significant accounting policies of the Company follow:
Property and Equipment.
Buildings and equipment are stated at cost. Depreciation is provided
principally using the straight-line method for financial reporting and
income tax purposes over the estimated useful lives of the assets which
range from 7 years for equipment to 40 years for the buildings.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense including regular guest
room refurbishing. Loan fees are amortized over the term of the note.
Property accounts consist of the following:
Buildings $ 3,780,087
Equipment and furnishings 1,882,523
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5,662,610
Accumulated depreciation 247,548
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$ 5,415,062
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Management of the Company reviews the hotel property 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 property. If the estimated undiscounted future
cash flows from operations and disposition of the hotel property 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 have been recognized.
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.
Cash Held in Escrow.
Cash held in escrow consists of amounts for real estate taxes remitted
to the lender which holds the deed of trust on the hotel property and
amounts deposited for the replacement of hotel real and personal
property pursuant to the terms of the loan agreement.
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Notes to Financial Statements
Year ended December 31, 1997
Deferred Loan Fees.
Deferred loan fees are amortized over the terms of the related loan
agreement. Amortization expense of $35,000 for the period ended
December 31, 1997 is included in interest expense in the accompanying
statements of operations. Accumulated amortization of deferred expenses
was $35,000 at December 31, 1997.
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.
Inventories.
Inventories, which consist primarily of linen, operating supplies, and
food and beverage, are stated at the lower of cost or market. Cost is
determined by the first in, first out method.
Income Taxes.
All income and expense is passed through the Company for tax purposes
and reported on the income tax returns of the individual members.
Accordingly, the financial statements include no provision or
liabilities for income taxes.
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 revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
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Notes to Financial Statements
Year ended December 31, 1997
2. Related Party Transactions
The Company, Hospitality and its affiliates are related through common
ownership and management. The Company accrued fees to Hospitality or
its affiliates during 1997 for services rendered as follows (fees in
excess of these amounts were paid by the property to the prior
management company and trademark owner):
Management fees (2.5% of total revenues) $ 35,472
Trademark license fees (2.5% of total revenues) 35,472
InnSuites Trust - advertising (1% of total revenues) 14,189
Advances from affiliates are as follows:
Hospitality Corporation International $ 825,000
Rare Earth Development Company 52,500
Managing member 262,928
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$1,140,428
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Advances from affiliates are working capital advances generally
advanced during slower periods and repaid by the property during the
busy season and advances connected with guest room refurbishing and
improvements. There are no terms or covenants connected with the
advances.
3. Deed of Trust
The deed of trust payable matures in May of 1999. Monthly payments of
interest only of $70,000 are at a rate of 14%. The note is secured by
all property and equipment of the Company and collateral assignment of
all operating agreements. Interest paid in 1997 was $521,188. Annual
principal payment requirements of the mortgage are as follows:
1998 $ --
1999 6,000,000
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$ 6,000,000
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