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1—BASIS OF CONSOLIDATION
It is the policy of the Company to include in the consolidated
financial statements the accounts of its subsidiaries all of which,
except for one majority-owned subsidiary, were wholly-owned
at December 31, 1957, and to reflect in consolidated income
subsidiary operations from dates of acquisition of control. Consolidated earned surplus at December 31, 1957 included
$6,095,297 representing the combined undistributed net earnings of consolidated subsidiaries, less depreciation and amortization on a $5,368,356 excess of cost of securities acquired over
net assets thus acquired of the consolidated subsidiaries, which
excess has been applied as additional cost of fixed assets in
Installment sales contract and other notes received by the
Company in connection with sales of various properties since
1952 were, with the exception of a promissory note in the
amount of $828,943 at December 31, 1957, secured by either
first, second, chattel or real estate leasehold mortgages. These
notes require various periodic payments and their maturities
range from March 1, 1960 to July 1, 1976. As at December 31,
1957, the required payments receivable for the next five years
approximated $2,587,363, 1958; $2,610,989, 1959; $2,975,627,
1960; $1,735,938, 1961; and $1,757,125, 1962.
It is the Company's policy to defer the profit on those sales
that qualify as installment sales under Treasury regulations,
taking into income that portion of the profit as applies to payments received on the installment sales contract in the year in
which such payments are received. At December 31, 1957,
$17,150,348 of such profit was deferred, and, accordingly, during
the next five years as the aforementioned payments are received,
there will be included in income (taxable at the then effective
long-term capital gains rate) the following: $1,612,481, 1958;
$1,625,168, 1959; $1,954,840, 1960; $1,271,014, 1961; and
As of March 1, 1958 the Company entered into a 5%,
$13,000,000 bank loan agreement maturing April 2, 1963 with
right to extend maturity to October 1, 1963. Payments against
this loan are to equal payments received from installment sales
contract and other notes which were deposited with the lender
for purposes of collection and application of proceeds from
such notes under the terms of the loan.
The Company carries in investments a minority interest of
250,000 shares of common stock of another hotel company
which were received as part consideration in connection with a
property sale in 1956 and the value ascribed to such shares was
$1,500,000. The total market value, computed on the basis of
the closing stock exchange price per share at December 31,
1957, was $750,000.
Substantially, all of these assets are pledged to secure mortgages or other long-term debt of the consolidated companies.
Furniture, furnishings and equipment owned by the Company
in "Statler Hilton Hotels" under lease from an affiiliate, Statler
Hotels Delaware Corporation, are pledged as additional security under a mortgage of that Company. Fixed assets were
carried at cost, or were carried over from predecessor companies
together with related depreciation reserves at predecessor's
basis, plus additions at cost.
Options to acquire land costing approximately $2,750,000
were held by a wholly-owned subsidiary at December 31, 1957.
On February 7, 1958 the Company advanced $1,311,583 to
its subsidiary for purposes of exercising certain of these options.
5—FEDERAL TAXES ON INCOME
Federal income tax returns of the Company for the years 1951
and 1952 were examined by the Internal Revenue Service and
proposed additional assessments totaling $567,112 have been
made which the Company is protesting. Returns of the Company, its subsidiaries and predecessor companies are either
under or subject to examination for 1953 and subsequent years.
The trust indenture securing the 4J^% fifteen-year convertible
debentures (conversion privilege to common stock expires
January 2, 1958) requires annual sinking fund payments on
January 15 of each year in an amount sufficient to redeem at
the principal amount without premium, 3% for each of the
years through 1962 and 4% for each of the years thereafter.
The Company has complied with this provision.
The aggregate annual sinking fund and maturity requirements on the total long-term debt at December 31, 1957 together with payments required in connection with indebtedness
committed, during the first part of 1958, for each of the next
five years ending December 31, follows: 1958, $6,863,876;
1959, $7,094,998; 1960, $7,640,781; 1961, $6,006,107; and