ITEM 1. BUSINESS.
BUSINESS OF THE REGISTRANT
PSH Master L.P.I. (the Partnership) is a Delaware limited partnership formed in 1987 for the purpose of acquiring from PC Development Limited Partnership (the General Partner) three all-suite hotels located in Tampa, Florida, WALT DISNEY WORLD(R) Village in Lake Buena Vista, Florida and in the Research Triangle area near Raleigh/Durham, North Carolina. The Partnership's business is the operation of its all-suite hotels. The hotels have been developed to cater to commercial travelers and small business groups, as well as individuals and families traveling for pleasure. Each hotel is designed to have the ambiance of a first-class hotel, with prices in the upper-middle market range. The principal focus of each hotel is on comfort and convenience for the individual guest, rather than on such common amenities as specialty restaurants, entertainment lounges, and ballrooms. The three hotels include a total of 635 suites, most of which approximate 625 square feet. Each suite contains a working-living area suitable for small business meetings, a large separate bedroom and a separate dressing-bathing area and is equipped with a stocked, built-in refrigerator and a wet bar. The working-living area is furnished with a dining-conference table, a desk, a sleeper sofa and a large easy chair. Each suite also has three television sets, located in the living area, bedroom and bathroom. The Partnership's hotels are operated as DoubleTree Guest Suites.
OPERATION OF THE HOTELS AND CONVERSION TO DOUBLETREE GUEST SUITES
The Partnership is a party to a Management Agreement with DoubleTree Hotels Corporation (DoubleTree), to operate and manage the hotels. The Management Agreement expires on December 29, 2011 with two consecutive ten year renewal options.
DoubleTree is a national hotel chain formed by the December, 1993 merger of two regional hotel brands, Guest Quarters Suite Hotels and DoubleTree Hotels. The two brands were operated separately until February, 1995 when the two regional brands were united into one national brand known as DoubleTree. DoubleTree's November, 1996 acquisition of Red Lion Hotels added 56 hotels with nearly 15,000 rooms to their portfolio. DoubleTree currently operates 230 properties with more than 50,000 rooms in 36 states, the District of Columbia, Mexico and the Caribbean. They are the fifth largest U.S. lodging chain operating under one brand name in the upscale market segment. The DoubleTree portfolio consists of the following three company brands:
DOUBLETREE HOTELS are full service, first class, 4-star, all-suite hotels geographically located in major markets in the United States, Mexico and the Caribbean. They compete against all major first class brands including Marriott, Hyatt, Sheraton, Embassy, Hilton and Wyndham.
DOUBLETREE GUEST SUITES is the nation's second largest, full service, first class, 4-star, all-suite hotel brand. They are geographically located in major urban markets throughout the United States. DoubleTree Guest Suites compete against all major first class brands, and particularly all-suite brands including Embassy Suites, Marriott Suites and Sheraton Suites.
CLUB HOTELS BY DOUBLETREE are limited service, 3-star, mid-scale hotels geographically located in secondary and tertiary markets throughout the United States. Club Hotels compete against all major mid-scale brands including Radisson, Holiday Inn, Ramada, Courtyard by Marriott, and Four Points by ITT Sheraton.
Pursuant to the Management Agreement, DoubleTree operates each hotel in such a manner as is customary and usual in the operation of first-class hotels, and DoubleTree provides to each hotel the same services it provides to other hotels managed by it. Management services provided by DoubleTree include, without limitation, supervision of the day-to-day operations, determination and implementation of programs and policies for hotel operations, preparation of budgets and reports, maintenance of each hotel's books and records, negotiation of leases and other agreements on behalf of the Partnership, maintenance of hotel furniture and equipment (to the extent funds are available for that purpose) and coordination of hotel marketing and advertising. The Partnership has no employees. All hotel personnel, including the general manager for each hotel, are employed by DoubleTree.
The Hotels are included in regional and national advertising placed by DoubleTree. Each hotel's staff includes sales people who promote the hotel in the local market for both individual reservations and group meetings and national direct sales people who solicit business from major travel agencies and corporate travel departments in major cities throughout the United States. Prior to 1995, DoubleTree assessed the hotels up to three and one-half percent of total revenues for national advertising and central reservations. During 1995, DoubleTree assessed the hotels four percent of total room sales for centralized reservation services and national advertising expenses. This change resulted from the Guest Quarters hotels being integrated into the DoubleTree central reservation system. Beginning in 1996, DoubleTree assesses the hotels three and one-half percent of total room sales for national advertising and central reservation expenses.
All DoubleTree hotels, including the Partnership's hotels, are included in a nationwide, toll-free reservation system. In addition, the Disney hotel is included in the Disney reservation system. Travelers who call Walt Disney World(R) for recommendations on accommodations are referred to Walt Disney World(R) Hotels and then to other hotels within the Disney complex, on a rotating basis, including the Partnership's Disney hotel.
HOSPITALITY INDUSTRY AND ALL-SUITE HOTELS
An all-suite hotel is a lodging facility that caters to transient guests and guests visiting the facility to conduct small group meetings. It is distinguished from traditional hotels in that all of its guest rooms are suites of two or more rooms, with physically separate functional areas for sleeping, bathing, dressing, dining, meeting and lounging. Most all-suite facilities have small common areas and limited or no food service facilities. The business goal of all-suite hotels is to create a superior price/value relationship for the traveler compared with traditional hotels featuring rooms in the same price category, while achieving a higher gross operating profit margin.
COMPETITION AND SEASONALITY
Each hotel experiences significant competition in its market from other hotels, some of which are affiliated with national and regional chains with greater financial and other resources than the Partnership or the General Partner. The hotels compete by offering first-class accommodations at prices in the upper-middle market range.
The hotels' occupancies are seasonal by nature. The occupancy of the Disney hotel has been strongest from late February through August. The Tampa Hotel caters primarily to business travelers and has experienced its highest occupancy during January through May, October, and November. The Durham hotel has recorded its highest occupancies from February through June and from August through November.
Of the three markets in which the Partnership's hotels compete, the Disney market has faced the most competition in terms of increases in the supply of hotel rooms. The Walt Disney organization has followed a very aggressive growth strategy in the development of new hotels within the Disney parks and plans to continue this pattern into the future. In addition to the hotels developed by the Walt Disney organization, numerous other hotels have been opened or are in development. Nearly 3,900 hotel rooms have or are expected to open between June, 1996 and September, 1997 in and around the Walt Disney World(R) grounds. One of the new properties is an all-suite hotel. These supply additions are expected to place increased pressure on revenues and profits at the Partnership's Disney hotel.
In the Tampa and Raleigh/Durham markets, additions to supply have been negligible in recent years, although some development activity has been announced or is under way. A new office building, scheduled to open next to the Tampa Bay hotel in October, 1997, should have a positive impact on the hotel's occupancy. In Tampa, city council has announced its support for the development of a Sheraton hotel near the downtown convention center. Due to its downtown location, this development is not expected to have a significant impact on the Partnership's hotel. In August, 1997 Embassy Suites is scheduled to open a 250 suite hotel with considerable meeting space in Cary, North Carolina, close to Raleigh. Announcements of plans for up to 30 new hotels in the Raleigh/Durham area, primarily in the limited service and full-service categories, have been made. It is unclear at this time which of these will be built or when. Overall, the opening of additional hotels is not expected to have a significant impact since there is great depth in the demand for hotel rooms now and there is expected growth in future demand from numerous commercial expansion projects.
ITEM 2.
ITEM 2. PROPERTIES.
The Tampa hotel is situated on Rocky Point Harbor in the Rocky Point development in the West Shore area of Tampa, Florida. The Disney hotel is located within the boundaries of the WALT DISNEY WORLD(R) Village. The Durham hotel is in the Research Triangle near Raleigh/Durham, North Carolina. The Tampa and Durham hotels each contain 203 suites and the Disney hotel has 229 suites. Construction was completed and the Tampa hotel opened in April, 1986 and the Disney and Durham hotels were completed and opened in March and December of 1987, respectively.
For the fiscal year ended December 31, 1996 the occupancy and average rates of these hotels were as follows:
The Tampa and Disney hotels were purchased by the Partnership in July, 1987, and the Raleigh/Durham hotel was purchased in December, 1987. The Partnership owns the Tampa and Durham hotels in fee title. The Disney hotel is subject to a ground lease from Lake Buena Vista Communities, Inc. The initial term of the lease expires on March 11, 2032 with a renewal option for an additional period of 25 years. The hotels are subject to first mortgage notes. For a further description of the terms of the Disney ground lease and the mortgage notes, see Notes 6 and 7 to the Financial Statements included in Item 8. Financial Statements and Supplementary Data.
In addition to the ongoing replacement of furniture, fixtures and equipment, which is funded with replacement reserves (see also Item 7), in March, 1997 the Registrant has completed the waterproofing and painting of the exterior of the Tampa hotel. This work was completed at the Disney and Raleigh/Durham hotels in previous years. In the past three years all three hotels have installed new On Command(R) video movie services and have upgraded their telephone and restaurant computer systems. Additionally, the parking lots have been patched, resealed and painted at the Disney and Raleigh properties and the landscaping has been upgraded at the Disney and Tampa hotels.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant was not a party to any material pending legal proceedings as of March 28, 1997.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS.
The Registrant submitted no matters to a vote of Unitholders during the fiscal year ended December 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND DEPOSITORY RECEIPTS THEREFOR AND RELATED UNITHOLDER MATTERS.
a) MARKET INFORMATION
The Registrant's units of limited partner interest and depository receipts therefor (the "Units") were previously listed in the Quotations List of the National Association of Securities Dealers, Inc. (NASD) under the symbol PSHPZ. The Partnership was removed from the automated quotation system of the NASD on December 18, 1991 as a result of its failure to meet the capital and surplus requirements of the NASD. The Partnership's units are now traded through the NASD's "OTC Bulletin Board", an electronic, screened-based market.
The following table summarizes the high and low bid information for the Registrant's Units information as reported on the OTC Bulletin Board.
The above bid quotations do not necessarily represent actual transactions as they may reflect inter-dealer prices, without retail mark-up, mark-down or commission.
(b) HOLDERS
On December 31, 1996, there were 2,257 holders of record of the Registrant's Units.
(c) DISTRIBUTIONS
The General Partner had previously guaranteed that the Partnership would make annual cash distributions to Unitholders through 1990 in the amount of $1.10 per unit. The General Partner did not make the cash payments to the Partnership to fund the cash distributions for the third and fourth quarters of 1990, and no subsequent cash distributions have been made (see Note 10 to Item 8. Financial Statements and Supplementary Data).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
(1) Includes $41,300,000 at December 31, 1992 classified as current due to mortgage notes being in default at that time.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Partnership has incurred cumulative net losses since its inception and the General Partner has not paid cash to the Partnership to cover these shortfalls in full pursuant to the Performance and Break-even Guaranty. The final payment on the Partnership's real estate mortgage notes due on August 1, 1997 (see Note 7 to the financial statements), the Partners' accumulated deficits and the uncertainty of the Partnership's ability to refinance the first mortgage debt on maturity (see Notes 1 and 7), raise substantial doubt about the Partnership's ability to continue as a going concern for a reasonable period of time. Because of the possible material effects of this uncertainty the independent auditors did not express an opinion on the financial statements. However, as disclosed in the auditors' report, the financial statements do not include any adjustments relating to the recoverability and classification of recorded asset or liability amounts that might be necessary should the Partnership be unable to continue as a going concern.
In 1996 and 1995, the Partnership made monthly payments of principal and interest based upon a 30-year amortization schedule at the contract rate of 10.25%, in accordance with the restructured loans. Cash from operations, after required replacement reserves, exceeded the required debt service by $1,367,688 and $460,426, respectively. These excess amounts have served to significantly improve the Partnership's working capital and current ratio positions. Based upon anticipated revenue levels, Management believes that cash from operations will be sufficient to meet expected cash requirements during the next twelve months with the exception of the required balloon payment on the existing first mortgage debt.
Hotel operations are the Partnership's primary and on-going source of cash to pay its operating expenses, to meet its reserve requirements and to make cash distributions to its partners. Hotel occupancy is seasonal by nature. Cash flows track this seasonality closely due to the nature of trade receivables. Other trade receivables include wholesale and travel agent accounts, and corporate and group billings, the majority of which are collected within 30 days. The Partnership earns interest income from its various operating cash accounts including the balances held in the Replacement Reserve Funds.
In addition to its hotel operations, the Partnership will receive annual payments in 1996 and 1997 on its unsecured claim against the General Partner, which in 1991 filed for protection against its creditors under Chapter 11 of the U.S. Bankruptcy Code. The Partnership expects to receive total payments of approximately $2,000,000, including $757,870 received through 1996, in satisfaction of its claim.
The Partnership is required by its Management Agreement to maintain Replacement Reserve Fund balances of specified amounts to facilitate operating the Hotels as "first-class" suite accommodations. Separate Replacement Reserve Funds have been established for replacements, substitutions and additions to furniture and equipment and must be funded each accounting period.
The Partnership's mortgage obligations mature on August 1, 1997, requiring a balloon payment of approximately $45,500,000. In addition, the lender will receive 25% of the net proceeds, as defined, at the sale of the hotels, or 25% of the net proceeds based upon market value if the hotels are not sold prior to the maturity of the loan, as appreciation interest. The General Partner is presently in discussion with potential buyers of all three hotels. Although purchase and sale agreements have not been executed with any buyer, the General Partner believes that the hotels can be sold or refinanced prior to the maturity of the existing first mortgage debt. To sell all three hotels within a twelve-month period, the General Partner must seek the approval from the holders of a majority of the Units of Limited Partnership Interest.
RESULTS OF OPERATIONS
The Tampa and Disney hotels opened in April, 1986 and March, 1987, respectively, and the Durham hotel opened in December, 1987. The following table summarizes combined operating information for the hotels:
Tracking the macro trends of the hospitality industry, the Partnership's hotels have achieved significant revenue gains during the last three years, driven by improvements in occupancy and average daily rate and in food and beverage sales volumes. Year-over-year increases in total revenues were 5.0%, 5.3%, and 12.8% during the years 1994 through 1996. These revenue gains resulted in profit improvements which allowed the Partnership to meet the required payments of its restructured debt obligations in the three year period.
1996 compared to 1995
Total revenues increased 12.8% from 1995, based upon a 10.1% increase in average daily rate and a 3.2% increase in occupancy. Average daily rate increases were achieved at all three hotels. Occupancy remained strong at Disney, while Tampa and Raleigh/Durham experienced slight decreases in volume. Overall, occupancy increased to 77.8% from 75.3% one year earlier. Based on the increases in average daily rate and occupancy, suites revenues increased 13.9% from $16,917,194 in 1995 to $19,271,365 in 1996. Food, beverage and other revenues increased 8.9% from 1995, based upon higher volumes and price increases. Rents and concessions income increased due to the addition of meeting space and a sundries shop at the Disney hotel. Other revenue increases include higher movie rentals and vending income.
Suites operating expenses decreased slightly as a percent of revenues, compared to 1995, reflecting steady cost controls by DoubleTree. Rooms commissions, guest supplies, laundry, cleaning supplies and linen expenses increased as a direct result of increased volume. Those same expenses remained constant as a percent of room revenues, totaling approximately 5.4% of rooms revenues each year. Payroll and DoubleTree's cookie program expense increases were partially offset by decreases in reservations expense, contracted services, guest transportation and stationery.
Other direct operating expenses increased $307,801 or 8.7% of which $38,303 represents a credit against workers' compensation expense in 1995. Of the remaining amount, $60,420 reflects higher movie rental expenses associated with higher volumes. Food and beverage cost of sales increased $25,560 or 2.4% due to higher volumes. Food and beverage payroll also increased due to higher volumes, growing by $131,276 or 8.2%.
The variance in sales, general and administrative expenses, up $388,715, or 8.2%, reflects a signage rebate of $117,119 recorded in the second quarter of 1995 and a credit of $31,607 against workers' compensation expense in the third quarter of 1995. Adjusted for these one-time rebates, sales, general and administrative expenses increased $239,989 or 5.1%. This increase reflects higher payroll expenses of $247,687 associated with staffing additions in the sales departments of each hotel and increases in revenue-driven expenses, including management fees and credit-card commissions, which increased $133,028 and $36,176, respectively. Offsetting these higher expenses were reductions in recruiting and relocation costs of $15,515, a reduction in central marketing expenses of $176,009 and lower bad debt expense of $61,105. Cost control measures also helped reduce general expense levels in the current year.
Energy and maintenance costs increased $145,357 or 7.3% due in part to increased labor costs associated with increased staffing levels. Energy costs increased $99,209 or 10.1% due to higher usage at the Florida hotels. The reduction of the use of maintenance contracts partially offset staffing additions in 1996.
Rents, taxes and other expenses increased $162,313 or 9.0% in 1996, due primarily to an increase in Disney land rent of $129,908, driven by revenue and volume increases. Equipment rental, storage space rental and association dues also increased. These increases were partially offset by reductions in primary umbrella insurance of $11,445 and Disney transportation costs of $6,748.
Partnership administrative expenses consist primarily of quarterly and annual report costs, tax processing and transfer agent charges and legal and audit fees.
1995 compared to 1994
Year to date, revenues increased 5.3% from 1994, based upon a 2.6% increase in average daily rate and a 2.1% increase in occupancy. Average daily rate increases were achieved at the Tampa and Raleigh/Durham hotels while the Disney hotel experienced a slight rate decline. Occupancy remained strong for Disney and Raleigh/Durham with a slight decline at the Tampa hotel. Suite revenues increased $775,600 or 4.8% from 1994 to 1995. Food, beverage and other revenues increased 7.1% from 1994, based upon higher volumes and price increases. Other revenue increases include higher telephone and vending income.
Direct operating expenses increased as a percent of revenues, compared to 1994, reflecting higher labor-related costs in 1995. Costs in the suites department increased $329,968 or 9.8% which includes a credit against workers' compensation expense in the third quarter of 1995 of $52,567. Of the increase, $169,874 reflects higher payroll levels to meet volume and service needs and $90,267 reflects increases in guest supplies, laundry, linen, and room commissions due to increased volume.
Other direct operating expenses increased $167,545 or 5.0% which includes $38,303 as a credit against workers' compensation expense in 1995. Food and beverage cost of sales increased $52,435 due to higher volumes. Food and beverage payroll also increased due to higher volumes, growing by $42,326 or 2.7%. There were also increases in laundry and linen costs in the food and beverage department and payroll in the telephone department associated with higher volumes.
Sales, general and administrative expenses, up $206,656, or 4.6%, includes a credit of $31,607 against workers' compensation expense, recorded in the third quarter of 1995. Adjusted for this one-time credit, sales, general and administrative expenses reflect a net increase of $238,263 or 5.3%. This increase reflects higher payroll expenses of $6,406, and revenue-driven management fees expense, which increased $51,422. Increases were also incurred in central accounting services, security costs, relocation costs, and credit card commissions. Offsetting these higher expense levels in 1995 were reductions in office expenses and advertising and promotional expenses.
Energy and maintenance costs increased $84,894, or 4.4% from 1994 to 1995. Property maintenance labor increased $27,271 or 8.7% from 1994 levels. The cost of air conditioning and refrigeration repairs increased $11,688, while grounds maintenance and landscaping increased by $13,909. The cost of operating supplies for the maintenance department increased $11,844.
Rents, taxes and other expenses declined $111,724 or 5.8%. Of this amount $117,529 was due to cost reductions in real estate and property taxes from lower assessed values achieved at the properties. The tax decreases were partially offset by increased rental of furniture and equipment.
Partnership administrative expenses consist primarily of quarterly and annual report costs, tax processing and transfer agent charges, legal and audit fees, and, amortization of start-up costs. The increase of $16,340 consists of increases in legal, data processing and Unitholder report costs.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PSH MASTER L.P.I
INDEX
PSH MASTER L.P.I BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
PSH MASTER L.P.I BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
PSH MASTER L.P.I STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
PSH MASTER L.P.I STATEMENTS OF PARTNERS' DEFICIT
The accompanying notes are an integral part of these financial statements.
PSH MASTER L.P.I STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS For The Years Ended 1996, 1995, and 1994
(1) BASIS OF PRESENTATION
The accompanying financial statements of PSH Master L.P. I (the Partnership) have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Partnership incurred net losses from inception through 1995. However, in 1996 the Partnership realized net income of $434,196. Net losses for the years 1995 and 1994 were ($770,442) and ($1,073,093), respectively. The Partnership had a partners' deficit of ($8,579,925) at December 31, 1996.
The final payment on the Partnership's real estate mortgage notes due on August 1, 1997 (see Note 7), the accumulated Partners' deficits and the uncertainty of the Partnership's ability to refinance the first mortgage debt on maturity, raise substantial doubt about the Partnership's ability to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Partnership be unable to continue as a going concern. The General Partner is presently in discussion with potential buyers of all three hotels. Although purchase and sale agreements have not been executed with any buyer, the General Partner believes that the hotels can be sold or refinanced prior to the maturity of the existing first mortgage debt. To sell all three hotels within a twelve-month period, the General Partner must seek the approval from the holders of a majority of the Units of Limited Partnership Interest.
(2) BANKRUPTCY OF GENERAL PARTNER
On February 1, 1991, PC Development Limited Partnership, the General Partner, along with one of its general partners and two affiliated corporations, filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. On December 30, 1991, the debtors filed a Joint Plan of Reorganization and Disclosure Statement and, on April 19, 1992, the court confirmed the Plan.
An unsecured claim in the amount of $5,038,658 was filed in the bankruptcy case on behalf of the Partnership due to the General Partner's default under the Performance and Break-even Guaranty (the Guaranty Agreement). Total payments received to date by the Partnership against its unsecured claim total $757,870. The Partnership expects to receive total payments of approximately $2,000,000, including amounts previously received. This amount includes operating profits and sale proceeds from a hotel owned by the General Partner. Due to the remaining variables in the Plan, however, there are no assurances as to the actual amount to be received. The Plan also provides that PC Development Limited Partnership will continue as the General Partner of the Partnership.
(3) ORGANIZATION AND BUSINESS
The Partnership is a Delaware limited partnership formed on April 3, 1987. The Partnership will continue in existence until the close of Partnership business on December 31, 2037, or until its earlier termination in accordance with the provisions of the Amended and Restated Agreement of Limited Partnership (the Partnership Agreement).
On July 23, 1987, the Partnership received the net proceeds of an initial public offering of 3,110,000 Units of Limited Partner Interest representing gross offering proceeds of $31,100,000. On July 30, 1987, the Partnership purchased from its General Partner the Tampa hotel and the Disney hotel. On December 15, 1987, the Partnership purchased and opened the Raleigh/Durham hotel.
The Partnership is a party to a Management Agreement with DoubleTree to operate and manage the hotels. The Management Agreement expires on December 29, 2011 with two consecutive ten year renewal options. The Partnership pays a base management fee of 4.75% of hotel revenues. DoubleTree assessed the properties three and one-half percent of total departmental revenues for national advertising during 1994 and four percent of room revenues for national advertising and centralized reservation services in 1995. Effective January 1, 1996, DoubleTree assessed the properties three and one-half percent of room revenues for national advertising and centralized reservation services. Other centralized services such as accounting are provided by DoubleTree to the Partnership's properties based upon each hotel's share of such costs.
(4) SIGNIFICANT ACCOUNTING POLICIES
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 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. The Partnership's significant accounting policies are as follows:
Inventories:
Inventories, consisting principally of food and beverages, are valued at the lower of cost (first-in, first-out) or market.
Property and equipment:
The initial purchase price allocation to land, leasehold interest in land, hotels, and furniture, fixtures and equipment was based upon independent appraisals obtained in connection with the public offering. Any cash payments made by the General Partner pursuant to its Guaranty Agreement (see Notes 2, 9, and 10) are recorded as a reduction in the purchase price originally allocated to the hotels. Depreciation and amortization are provided using the straight-line method over the estimated useful lives or lease terms, as follows:
Leasehold interest in land--initial lease life of 45 years; hotels--45 years; furniture, fixtures and equipment--3, 5, and 10 years.
China, glass, linen and silver:
A portion of the initial purchase price was allocated to china, glass, linen and silver for the amounts on-hand on the date of acquisition. The base stock method of accounting is used whereby the cost of maintaining and replenishing the base stock is expensed as incurred.
Deferred financing fees and organization costs:
Deferred financing fees are amortized over the life of the related loans and credit agreements using the straight-line method. Organization costs are amortized over five years using the straight-line method. Such fees and costs are net of accumulated amortization of $1,570,798 and $1,380,640 at December 31, 1996 and December 31, 1995, respectively.
Self-Insurance Program:
The Partnership uses a retrospective self-insurance plan for workers' compensation. A provision has been made in the financial statements, based on information currently available, which represents the expected future payments based on the estimated ultimate cost for incidents incurred prior to the balance sheet dates. Encompassed in this provision are refundable workers' compensation deposits which result from deposit payments made in excess of the estimated ultimate cost expected to be incurred.
Cash and cash equivalents:
The Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash is primarily held in one bank.
(5) REPLACEMENT RESERVE FUND
As required under current debt agreements the Partnership funded replacement reserves based upon revenue percentages of 2% for the Tampa and Raleigh/Durham hotels and 3% for the Disney hotel during 1995, and 1994. Beginning in 1996 replacement reserves were calculated at 4% of revenues at all three hotels. During the years ended December 31, 1996, 1995, and 1994, $990,026, $526,745 and $503,104, respectively, were reserved to fund capital improvements.
(6) LEASES
The land for the Disney hotel is leased by the Partnership under an operating lease, the initial term of which expires March 11, 2032, with a renewal option for an additional period of 25 years. The Partnership pays annual rent based upon specified percentages of suite, food and beverage, and other hotel revenues, subject to a $100,000 minimum annual rent. Rent is computed and paid quarterly. Rent expense under this lease was $726,177 in 1996, $596,269 in 1995, and $592,453 in 1994.
(7) REAL ESTATE MORTGAGE NOTES
The nonrecourse notes in the original aggregate amount of $43,300,000 are secured by the first mortgages on the hotels, including the ground lease at the Disney hotel. In February, 1991, the lender applied $2,000,000 of the General Partner's funds, previously held in escrow, against the principal balance of the notes. On May 26, 1993, the Partnership modified certain terms of the mortgage loan documents. Accordingly, during 1993 unpaid interest accruing in the aggregate amount of $4,876,267 was added to the principal balance of the mortgage computed at the contract rate of 10.25%. Additionally, the Partnership borrowed $219,000 during 1993 to pay for closing costs incurred with the modifications. Beginning in February, 1994 interest was payable at an annual rate of 10.25% of $41,300,000 (original loan balance). During 1994, 1995 and 1996, the Partnership made monthly payments of principal and interest on the outstanding principal of $46,395,267 based upon a 30-year amortization schedule. A final payment, which will include principal of $45,502,185 and interest, is due on August 1, 1997. The lender will also receive 25% of the net proceeds, as defined, at the sale of the hotels, or 25% of the net proceeds based upon market value if the hotels are not sold prior to the maturity of the loan, as appreciation interest.
The Partnership is subject to prepayment penalties at all times except on the interest adjustment date and during the last three months of the loan term. Any future subordinate financing to be secured by all or any of the hotels is subject to the lender's prior consent.
Due to the Partnership's current financial condition and excessive cost, assessment of the fair value was determined to be impracticable.
(8) NOTE PAYABLE
On October 26, 1994, the Partnership borrowed $500,000 from DoubleTree for capital improvements. This nonrecourse note is secured by second mortgages on the hotels and is due at the termination of the management agreement with DoubleTree (see Note 3). Interest is computed at 10.25% payable monthly in arrears and payment is equal to the lesser of the monthly computed interest due or monthly available cash flow from the Partnership.
Due to the Partnership's current financial condition and excessive cost, assessment of the fair value was determined to be impracticable.
(9) RELATED PARTIES
The General Partner, an affiliate, is generally empowered by the Partnership Agreement to conduct, direct and exercise full control over all activities of the Partnership.
Total fees charged by DoubleTree to the Partnership for management, advertising, reservation and accounting services were $2,151,820, $1,793,723, and $1,919,253 during 1996, 1995, and 1994, respectively. Nuho Company, a successor to PH Management Company (a previous management company) pursuant to the bankruptcy plan, received residual management fees of $579,078, $515,669, and $487,783 during 1996, 1995, and 1994, respectively. These fees were used by Nuho Company to fund required payments to the creditors in the bankruptcy, including the Partnership.
(10) PARTNERSHIP DISTRIBUTIONS AND ALLOCATIONS
Pursuant to the terms of the renegotiated debt, the Partnership is precluded from making cash distributions to the partners until such time as the interest capitalized by the lender (see Note 7) has been repaid. This is not expected to occur prior to the maturity of the first mortgage loans on August 1, 1997.
Cash flow available for distribution will be distributed 99 percent to the Unitholders and 1 percent to the General Partner until the Unitholders have received cash distributions sufficient to provide a 10 percent (11 percent for the fiscal years 1987 through 1990) non-compounded, cumulative return on the weighted average balances of the net invested capital (originally $31,100,000 in the aggregate) outstanding during such year. Any remaining cash flow available for distribution in excess of the foregoing amounts will be distributed 15 percent to the General Partner and 85 percent to the Unitholders, until the General Partner has received an amount equal to 10 percent of all cash flow available for distribution which has been distributed and, thereafter, 90 percent to the Unitholders and 10 percent to the General Partner.
Sale or refinancing proceeds, net of any appreciation interest due the lender (see Note 7), will be distributed 99 percent to the Unitholders and 1 percent to the General Partner until the Unitholders have received (from all prior distributions of cash, regardless of source) a 10 percent non-compounded cumulative return on their weighted average net invested capital and a return of their net invested capital balances. Any remaining sale or refinancing proceeds will be distributed 70 percent to the Unitholders and 30 percent to the General Partner.
Distributions resulting from a liquidation of the Partnership will be paid to the Partners in accordance with their positive capital account balances after such balances have been adjusted to reflect allocations of taxable income and taxable loss.
For federal income tax purposes, taxable income, whether from operations or the sale of a hotel, is allocated first to restore any deficit balances of the General Partner and Unitholders on a proportionate basis. Unitholders and the General Partner are then allocated taxable income 99 percent and 1 percent, respectively, (to the extent of cash distributions in this ratio) until the Unitholders have been allocated an amount equal to their net invested capital plus a 10 percent (11 percent for fiscal years 1987 through 1990) non-compounded, cumulative return on the weighted average balances of the net invested capital outstanding plus all prior distributions to the Unitholders of sale or refinancing proceeds. Thereafter, taxable income is allocated in the same proportions as and to the extent of distributions of cash.
For federal income tax purposes, taxable loss, whether from operations or the sale of a hotel, is allocated first to the extent of previously allocated taxable income in excess of distributions of cash and, thereafter, 99 percent to the Unitholders and one percent to the General Partner, except that the General Partner shall receive a special loss allocation to the extent of its cash payments pursuant to the Guaranty Agreement. Unitholders of record on the last day of each month will be allocated the proportionate share of income or loss for that entire month.
Cash payments made by the General Partner pursuant to its Guaranty Agreement have been recorded as a reduction of the purchase price of the hotels. Accordingly, net property and equipment has been reduced by $10,469,829, reflecting $12,477,870 in payments by the General Partner net of accumulated depreciation of $2,008,041, through December 31, 1996. The equity accounts of the Limited Partners and the General Partner reflect a 99 percent and 1 percent allocation, respectively, of cumulative losses through December 31, 1996.
(11) INCOME TAXES
Partnership taxable income or loss is allocated to the Partners according to the Partnership Agreement for inclusion in the determination of their taxable income. Accordingly, the accompanying financial statements include no provision for income taxes. The Partnership has considered statement of Financial Accounting Standard Number 109 "Accounting for Income Taxes" and, given the cumulative operating losses, has concluded that this standard has no impact on the Partnership's current financial statements.
The net income for 1996, as reported on the Partnership's federal tax return was $535,339. The net losses for 1995 and 1994, as reported on the Partnership's federal tax return were ($701,970) and ($1,934,790), respectively, and differ from the net losses as reported in the accompanying financial statements primarily due to the difference between tax and book depreciation charges. This difference is due principally to cash payments made by the General Partner pursuant to its Guaranty Agreement (See Note 2) being recorded as a capital contribution for tax purposes versus a reduction in net property and equipment for financial reporting purposes and different depreciation lives for tax and book purposes. The net income/(losses) for tax purposes allocable to the Unitholders during 1996, 1995, and 1994 were $331,167 or $.11 per unit, ($653,778) or ($.21) per unit, and ($1,862,502) or ($.60) per unit, respectively.
Under the Revenue Act of 1987, the Partnership's interest income is taxable to its Partners in the current year as portfolio income while the loss from operations for tax purposes is suspended. This suspended loss can only be used to offset future taxable income of the Partnership or can be recognized by a partner upon a complete disposition of his interest in the Partnership. The provision of the Revenue Act of 1987 which taxes publicly traded partnerships as corporations does not apply to PSH Master L.P.I. until 1998.
The Revenue Act of 1987 included a provision which will treat publicly-traded partnerships, such as the Partnership, as corporations for Federal income tax purposes beginning January 1, 1998. The effect of treating publicly-traded partnerships as corporations will be to tax the income of the partnership at the entity level and reflect distributions to partners as dividends. Additional costs to the Partnership for such taxes would reduce the amount available for distribution to the partners.
INDEPENDENT AUDITORS' REPORT
To the Partners of PSH Master L.P.I:
We have audited the accompanying balance sheets of PSH Master L.P.I (the "Partnership") as of December 31, 1996, and 1995, and the related statements of operations, partners' deficit, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express (or disclaim) 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 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 audits provide a reasonable basis for our report.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 1 to the financial statements, the Partners' accumulated deficits and uncertainty regarding the Partnership's ability to make the final payment on the mortgage loan on August 1, 1997 or refinance the debt raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Because of the possible material effects of the uncertainty referred to in the preceding paragraph, we are unable to express, and we do not express, an opinion on the accompanying financial statements.
/s/ - - -------------------------- DELOITTE & TOUCHE LLP
Columbus, Ohio February 14, 1997
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant has no directors or executive officers. Management functions of the Registrant are performed by the General Partner. The following information is provided regarding the officers and directors of PH Management Company, the corporate general partner of the Registrant's general partner.
Mr. Pickett has been the Chairman of the Board of Directors of PH Management Company since its formation in 1984. Mr. Pickett serves as the Managing Director of the real estate investment group of Banc One Capital Corporation and also serves on the Board of Directors of Wendy's International, Inc., The Fishel Company, Metatec Corporation, and Karrington Health, Inc.
Mr. Denz has served as controller, secretary, treasurer and director since 1987 of various companies controlled by Mr. Pickett.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Registrant has no executive officers or other employees. The General Partner receives no compensation for its services.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
James V. Pickett, Chairman and President of PH Management Company, the general partner of the Partnership's general partner - PC Development Limited Partnership, purchased 200,000 units in November, 1995 and an additional 200,000 units in June, 1996 which, in total, represents approximately 12.9% of the outstanding units, bringing the total units owned by Mr. Pickett, both directly and indirectly to 425,000 units, or approximately 13.7% of the outstanding units.
McDonald & Company Securities, Inc., 800 Superior Avenue, Cleveland, Ohio 44114, is the beneficial owner of 565,575 Limited Partnership Units which represents 18.18% of the total outstanding units.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
* Previously filed with the Securities and Exchange Commission in connection with the Registration Statement on Form S-1 of Pickett Suite Hotel Master L.P.I, Registration No. 33-13961, dated July 15, 1987.
** Previously filed with the Securities and Exchange Commission Form 8-K, dated December 15, 1987.
*** Previously filed with the Securities and Exchange Commission Form 8-K, dated December 8, 1988.
**** Previously filed with the Securities and Exchange Commission Form 10-K, dated December 31, 1987.
***** Previously filed with the Securities and Exchange Commission Form 8-K, dated December 6, 1989.
****** Previously filed with the Securities and Exchange Commission Form 8-K dated August 13, 1993.
(b) None.
(c) All required exhibits have previously been filed as described in Paragraph (a) of this Item 14.
(d) Financial Statement Schedules are omitted because of the absence of the condition under which they are required.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PSH MASTER L.P.I - - ---------------- (Registrant)
By: PC Development Limited Partnership, General Partner
By: PH Management Company, General Partner
/s/ JAMES V. PICKETT 3/28/97 ---------------------------- ------------- By: James V. Pickett Date Chairman and President
/s/ STEPHEN C. DENZ 3/28/97 ---------------------------- ------------- By: Stephen C. Denz Date Secretary and Controller (Principal Financial Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ JAMES V. PICKETT 3/28/97 ---------------------------- ------------- By: James V. Pickett Date Chairman and President of PH Management Company
No proxy statement, form of proxy or other proxy soliciting material has been sent to Unitholders prior to the filing of this annual report on Form 10-K.