<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 31, 1997
CRESCENT OPERATING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 333-25223 75-2701931
(STATE OF ORGANIZATION) (COMMISSION FILE NUMBER)(IRS EMPLOYER IDENTIFICATION NUMBER)
</TABLE>
306 WEST 7TH STREET
SUITE 1025
FORT WORTH, TEXAS 76102
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(817) 339-1020
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
<PAGE> 2
On September 15, 1997, Crescent Operating, Inc. (the "Company" or "Crescent
Operating") filed a Form 8-K dated August 31, 1997, containing a description of
a series of transactions (the "RoseStar Transactions"), pursuant to which the
Company acquired for $2 million in cash the following assets: (i) 100% of the
membership interests in RoseStar Management LLC ("RoseStar") and (ii) all of the
common stock, .01 par value, of each of RSSW Corp. ("RSSW") and RSCR Arizona
Corporation ("RSCR"), affiliates of RoseStar in Item 2. This Form 8-K/A amends
the previously filed Form 8-K to include the financial statements and pro forma
disclosure required by Item 7 of Form 8-K.
The RoseStar Transactions result in audited financial statement requirements,
pursuant to Rule 3.05 of Regulation S-X, for two fiscal years when applying the
tests under Rule 1.02(w). Certain properties were acquired by RoseStar during
the two year period ended December 31, 1996. Separate audited financial
statements have been provided for each predecessor entity for periods in which
the operations were not included in the historical consolidated financial
statements of RoseStar.
<PAGE> 3
Page 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS UNDER RULE 3-05 OF REGULATION S-X
RoseStar Management LLC Consolidated Financial Statements For The
Years Ended December 31, 1996 and 1995, Together With Report of
Independent Public Accountants.
Hyatt Regency Albuquerque Accounts Maintained by Hyatt Corporation, For
The Years Ended December 31, 1995 and 1994, Together with Report of
Independent Accountants.
Hyatt Regency Beaver Creek Accounts Maintained by Hyatt Corporation,
Financial Statements As of December 31, 1995, Together With Report of
Independent Public Accountants.
Marriott Denver City Center, Accounts Maintained by Marriott
International, Inc., Financial Statements as of June 30, 1995, Together
With Report of Independent Public Accountants.
Wine Country Hotel, LLC Financial Statements For The Period From
Inception (October 29, 1996) Through December 31, 1996, Together With
Report of Independent Public Accountants.
Rahn Sonoma, Ltd., Financial Statements for the Period from January 1,
1996 through November 17, 1996, Together With Report of Independent
Public Accountants.
Rahn Sonoma, Ltd., Financial Statements as of December 31, 1995 and
December 25, 1994, Together With Auditor's Report.
Canyon Ranch in the Berkshires, Financial Statements For The Year Ended
December 31, 1996, Together With Report of Independent Public
Accountants.
Canyon Ranch - Bellefontaine Associates Limited Partnership d/b/a
Canyon Ranch in the Berkshires, Audited Financial Statements For The
Years Ended December 31, 1995 and 1994, with Report of Independent
Auditors.
Canyon Ranch in Tucson (As Defined in Note 1) and Canyon Ranch, Inc.
Financial Statements For The Periods From January 1, 1996, Through July
25, 1996, And July 26, 1996 Through December 31, 1996, Together With
Report of Independent Public Accountants.
Canyon Ranch, Inc., Audited Financial Statements For The Years Ended
December 31, 1995 and 1994, With Report of Independent Auditors.
(b) PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Pro Forma Consolidated Statement of Operations For The Year Ended
December 31, 1996 and Notes Thereto.
Pro Forma Consolidated Statement of Operations For The Nine Months
Ended September 30, 1997 and Notes Thereto.
(c) EXHIBITS
The following is a list of all exhibits filed as a part of this Form
8-K/A
<PAGE> 4
Page 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: November, 14, 1997
CRESCENT OPERATING, INC.
By: /s/ JEFFREY L. STEVENS
--------------------------------
Jeffrey L. Stevens
Treasurer, Chief Financial Officer
and Secretary
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Historical Financial Statements
<S> <C>
RoseStar Management LLC Consolidated Financial Statements For The Years Ended
December 31, 1996 and 1995, Together With Report of Independent Public Accountants........ F-2
Hyatt Regency Albuquerque Accounts Maintained by Hyatt Corporation, For The Years Ended
December 31, 1995 and 1994, Together With Report of Independent Accountants............... F-11
Hyatt Regency Beaver Creek Accounts Maintained by Hyatt Corporation, Financial
Statements As of December 31, 1995, Together With Report of Independent Public
Accountants............................................................................... F-18
Marriott Denver City Center, Accounts Maintained by Marriott International, Inc.,
Financial Statements as of June 30, 1995, Together With Report of Independent Public
Accountants............................................................................... F-25
Wine Country Hotel, LLC Financial Statements For The Period From Inception
(October 29, 1996) Through December 31, 1996, Together With Report of Independent
Public Accountants........................................................................ F-30
Rahn Sonoma, Ltd., Financial Statements for the Period from January 1, 1996 through
November 17, 1996, Together With Report of Independent Public Accountants................. F-38
Rahn Sonoma, Ltd., Financial Statements as of December 31, 1995 and December 25, 1994
Together With Auditor's Report............................................................ F-45
Canyon Ranch in the Berkshires Financial Statements For The Year Ended December 31, 1996,
Together With Report of Independent Public Accountants.................................... F-55
Canyon Ranch - Bellefontaine Associates Limited Partnership d/b/a Canyon Ranch in the
Berkshires, Audited Financial Statements For The Years Ended December 31, 1995 and 1994
With Report of Independent Auditors....................................................... F-63
Canyon Ranch in Tucson (As Defined in Note 1) and Canyon Ranch, Inc. Financial
Statements For The Periods From January 1, 1996, Through July 25, 1996, and
July 26, 1996, Through December 31, 1996, Together With Report of Independent
Public Accountants........................................................................ F-77
Canyon Ranch, Inc., Audited Financial Statements For The Years Ended December 31, 1995
and 1994, With Report of Independent Auditors............................................. F-85
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1996 and notes thereto....................................................... F-97
Pro Forma Consolidated Statement of Operations for the Nine Months Ended
September 30, 1997 and notes thereto...................................................... F-100
</TABLE>
F-1
<PAGE> 6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of RoseStar Management L.L.C.:
We have audited the accompanying consolidated balance sheets of RoseStar
Management L.L.C. (a limited liability company) as of December 31, 1996 and
1995, and the related consolidated statements of operations, members' capital,
and cash flows for the years then 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 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 opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rosestar Management, L.L.C. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
November 13, 1997
F-2
<PAGE> 7
ROSESTAR MANAGEMENT L.L.C.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
July 31, ---------------------------
ASSETS 1997 1996 1995
------------ ----------- ----------
(unaudited) (audited)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 5,776,751 $ 6,728,061 $1,281,383
ACCOUNTS RECEIVABLE:
Trade and other 6,603,721 3,850,494 548,834
Furniture, fixtures, and equipment reimbursement -- 484,524 51,931
Due from Marriott -- -- 352,453
Affiliated -- 394,831 --
------------ ----------- ----------
Total accounts receivable 6,603,721 4,729,849 953,218
INVENTORIES 1,191,127 261,194 636,012
PREPAIDS AND OTHER 332,655 272,353 85,068
------------ ----------- ----------
Total current assets 13,904,254 11,991,457 2,955,681
FURNITURE, FIXTURES, AND EQUIPMENT, net 2,600,882 162,090 42,321
------------ ----------- ----------
Total assets $ 16,505,136 $12,153,547 $2,998,002
============ =========== ==========
LIABILITIES AND MEMBERS' CAPITAL
ACCOUNTS PAYABLE:
Trade and other $ 5,928,482 $ 2,265,342 $ 239,391
Accrued hotel base rent 1,093,774 958,333 475,867
Accrued hotel percentage rent 488,030 979,099 80,207
Affiliated -- 57,880 --
Management fee -- 461,460 --
------------ ----------- ----------
Total accounts payable 7,510,286 4,722,114 795,465
ACCRUED EXPENSES 2,765,163 2,563,381 904,371
ADVANCE DEPOSITS 2,200,867 2,085,040 28,402
MINORITY INTEREST -- 16,204 --
LONG-TERM DEBT 2,745,595 -- --
------------ ----------- ----------
Total liabilities 15,221,911 9,386,739 1,728,238
MEMBERS' CAPITAL 1,283,225 2,766,808 1,269,764
------------ ----------- ----------
Total liabilities and members' capital $ 16,505,136 $12,153,547 $2,998,002
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE> 8
ROSESTAR MANAGEMENT L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Seven Months Ended For the Year Ended
July 31, December 31,
------------------------------ -------------------------------
1997 1996 1996 1995
------------ ----------- ------------ -----------
(unaudited) (audited)
<S> <C> <C> <C> <C>
REVENUES:
Rooms $ 28,690,957 $26,656,100 $ 44,551,529 $ 8,266,721
Resort 21,686,009 -- -- --
Food and beverage 13,798,600 13,031,468 22,798,685 3,896,498
Telephone 1,064,071 1,029,940 1,729,348 339,559
Other 1,021,150 1,049,027 2,061,724 369,729
------------ ----------- ------------ -----------
Total revenues 66,260,787 41,766,535 71,141,286 12,872,507
------------ ----------- ------------ -----------
OPERATING COSTS AND EXPENSES:
Departmental expenses-
Rooms 5,500,700 4,940,053 8,704,741 1,875,597
Resort 14,924,299 -- -- --
Food and beverage 10,057,825 9,958,801 17,450,761 3,069,050
Telephone 591,990 637,544 1,062,252 152,120
Other 593,410 665,616 1,193,261 212,910
Unallocated operating expenses-
Hotel base rent expense 9,420,180 6,708,331 11,499,996 2,267,532
Hotel percentage rent expense 3,618,212 2,652,791 4,282,816 821,437
Management fees 4,538,430 2,861,095 5,201,399 998,570
Administrative and general 2,590,773 2,472,945 4,504,504 1,002,751
Marketing 3,582,173 3,435,397 5,740,725 810,872
Energy costs 1,172,117 1,105,595 1,949,210 354,835
Property operation and maintenance 1,495,589 1,467,524 2,638,052 505,354
Common area expenses 235,741 212,852 257,385 --
Depreciation and amortization 490,000 -- -- --
Property taxes 1,069,988 784,846 1,479,067 351,475
Association fees -- -- 691,560 --
Other 1,611,495 1,876,467 1,854,031 527,942
------------ ----------- ------------ -----------
Total expenses 61,492,921 39,779,857 68,509,760 12,950,445
MINORITY INTEREST -- -- (16,204) --
OTHER INCOME (EXPENSE):
Interest income 162,334 58,348 134,046 13,563
Interest expense -- -- -- --
------------ ----------- ------------ -----------
Total other income (expense) 162,334 58,348 134,046 13,562
------------ ----------- ------------ -----------
NET INCOME (LOSS) $ 4,930,200 $ 2,045,026 $ 2,749,368 $ (64,375)
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 9
ROSESTAR MANAGEMENT L.L.C.
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C>
BALANCE, January 1, 1995 (inception) $ --
Assets contributed in excess of liabilities 1,120,733
Net loss (64,375)
Member contributions 213,406
-----------
BALANCE, December 31, 1995 1,269,764
Assets contributed in excess of liabilities 10,659
Net income 2,749,368
Member contributions 605,245
Member distributions (1,868,228)
-----------
BALANCE, December 31, 1996 $ 2,766,808
===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 10
ROSESTAR MANAGEMENT L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Seven Months Ended For the Year Ended
July 31, December 31,
------------------------- ------------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(unaudited) (audited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,930,200 $ 2,045,026 $2,749,368 $ (64,375)
Minority interest (16,204) -- 16,204 --
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 490,000 -- -- --
(Increase) decrease in accounts receivable (2,331,776) (5,389,368) (3,301,660) 613,249
Increase in receivable from affiliate 394,831 -- (394,831) --
Decrease in receivable from Marriott
Corporation -- 352,453 352,453 --
Decrease (increase) in unreimbursed capital
expenditures 63,073 51,931 (432,593) (94,251)
Decrease (increase) in inventory (929,933) (163,314) 374,818 (46,477)
Increase in prepaid and other (60,302) (275,259) (187,285) (1,522)
Increase in hotel operations payable -- (141,080)
Increase in management fee payable (461,460) -- 461,460 --
Increase in payable to affiliate (57,880) -- 57,880 --
Increase in trade and other payables 3,663,140 2,843,972 2,025,951 49,443
Increase (decrease) in accrued expenses 201,782 2,021,511 1,659,010 (33,058)
Increase in due to Marriott Corporation -- -- -- 212,929
Increase (decrease) in advance deposits 115,827 (28,402) 2,056,638 (5,566)
Increase in accrued hotel base rent 135,441 482,466 482,466 475,867
Increase in accrued hotel percentage rent (491,069) 323,461 898,892 80,207
----------- ----------- ----------- -----------
Net cash provided by operations 5,645,670 2,264,477 6,818,771 1,045,366
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures, and equipment (183,197) (119,769) (109,110) --
----------- ----------- ----------- -----------
Net cash used in financing activities (183,197) (119,769) (109,110) --
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from members -- -- 605,245 213,406
Distributions to members (6,413,783) (112,221) (1,868,228) --
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (6,413,783) (112,221) (1,262,983) 213,406
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (951,310) 2,032,487 5,446,678 1,258,772
CASH, beginning of period 6,728,061 1,281,383 1,281,383 22,611
----------- ----------- ----------- -----------
CASH, end of period $ 5,776,751 $ 3,313,870 $ 6,728,061 $ 1,281,383
=========== =========== =========== ===========
SCHEDULE OF NONCASH TRANSACTIONS:
Cash paid for interest $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Cash paid for taxes $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Assets acquired in excess of liabilities assumed $ -- $ -- $ 10,659 $ 1,120,733
=========== =========== =========== ===========
Assets acquired through debt obligations $ 2,745,595 $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 11
ROSESTAR MANAGEMENT L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
RoseStar Management L.L.C. ("RoseStar Management") is a limited liability
company which was formed for the purpose of leasing under a long-term lease the
Marriott Denver City Center (the "Marriott") from Crescent Real Estate Equities
Company ("Crescent") and to lease other hotel properties as determined by
RoseStar Management. The Company was originally owned by Sanjay Varma, Gerald
Haddock, and John Goff (the "Members") with respective ownership percentages of
91%, 4.5%, and 4.5%. Mr. Haddock and Mr. Goff are officers of Crescent (see
Note 4).
RoseStar Management owns a 99% nonmanaging interest in RoseStar Southwest,
L.L.C., ("RoseStar Southwest") a limited liability company which was formed for
the purpose of leasing under long-term leases the Hyatt Regency Beaver Creek
("Hyatt Beaver Creek") and the Hyatt Regency Albuquerque ("Hyatt Albuquerque")
from Crescent. The 1% managing interest in RoseStar Southwest is held by the
Owners in the same percentage as they hold in RoseStar Management. RoseStar
Southwest has been consolidated with RoseStar Management (collectively, the
"Company") in the accompanying financial statements. Accordingly, all
intercompany transactions have been eliminated. The 1% managing interest is
reflected in the accompanying consolidated financial statements as minority
interest.
RoseStar Management's lease of the Marriott commenced June 30, 1995, and expires
on June 30, 2005. RoseStar Southwest's leases of Hyatt Beaver Creek and Hyatt
Albuquerque commenced January 1, 1995, (as successors to prior lessees) and
expire on December 31, 2004, and December 31, 2005, respectively. For the period
from January 1, 1995, through February 9, 1996, Hyatt Beaver Creek was leased to
Mogul Management, L.L.C. which merged into RoseStar Southwest on February 9,
1996. The leases are accounted for as operating leases. Hyatt Albuquerque was
acquired by Crescent on December 18, 1995, and, therefore, RoseStar Southwest
did not assume the lease until such time.
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 amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all instruments purchased with a maturity of three months
or less to be cash equivalents.
Inventories
Inventories, consisting primarily of food and beverage, are stated at the lower
of cost or market. Cost is determined generally by the first-in, first-out
method.
F-7
<PAGE> 12
Furniture, Fixtures, and Equipment
In conjunction with Crescent's acquisition of Canyon Ranch, a resort in Tucson,
Arizona, during 1996, a note receivable from Canyon Ranch leasing to RoseStar
Management due July 26, 1996, was forgiven in exchange for underlying
collateral (furniture, fixtures, and equipment of the property ("FF&E").
Accordingly, such assets are included in the accompanying financial statements
as furniture, fixtures, and equipment.
Advance Deposits and Revenue Recognition
Advance deposits for facility and room rentals are recognized as revenue when
services are provided.
Income Taxes
No provision for income taxes has been included in the accompanying financial
statements as the liability for the income taxes is the responsibility of the
members on their individual tax returns.
2. MANAGEMENT AGREEMENTS AND RELATED-PARTY TRANSACTIONS:
RoseStar Management and RoseStar Southwest
Pursuant to asset management agreements entered into on May 1, 1996, and
expiring on April 30, 2006, the asset manager is The Varma Group (the "Asset
Manager"), a company with related ownership to RoseStar Management and RoseStar
Southwest. RoseStar Management and RoseStar Southwest pay monthly asset
management fees to The Varma Group of $10,417 and $20,883, respectively for the
first year of the agreement and adjusted for each subsequent year based upon
the increase in the Consumer Price Index. Asset management fees expensed during
1996 approximated $83,000 and $166,000, respectively, and are included in
management fees in the accompanying consolidated financial statements.
Additionally, pursuant to a consultant agreement dated January 13, 1995, and
expiring on January 2, 2000, a management fee of 1% of gross hotel revenues of
Hyatt Beaver Creek is due monthly to East West Resorts, LLC ("East West"), a
company with related ownership to RoseStar Management and RoseStar Southwest.
Management fees of approximately $241,000 were expensed during 1996 and
included in fees to asset managers in the accompanying consolidated financial
statements. No management fees were incurred in 1995.
Pursuant to an agreement entered into December 1989, Vail Associates pays Hyatt
Beaver Creek an annual fee of $3.40 for each paid room night, as defined,
through the year 2001, as reimbursement to Hyatt Beaver Creek for providing
lodging in the area. During 1996, RoseStar Southwest recognized income of
$209,831 from Vail Associates which is included in other income in the
accompanying consolidated financial statements. No income was recognized from
Vail Associates in 1995 as the Hyatt Beaver Creek was not leased to RoseStar
until 1996.
Hyatt Albuquerque
The management fee is computed in accordance with the terms of the management
agreement, dated October 11, 1988, between Hyatt Corporation ("Hyatt") and the
Crescent. Crescent appointed the Company to manage its interests under the
management agreement. The management agreement is for a period commencing with
the opening of the hotel facility on August 1, 1990, and expiring on December
31, 2020, with two, ten-year renewal periods. The management fee consists of a
basic fee of 4% of gross receipts, as defined, and an incentive fee equal to
25% of available cash flow, as defined.
F-8
<PAGE> 13
For the year ended December 31, 1996, management fees of $674,743 were expensed
pursuant to the terms of the Management Agreement and included in management
fees in the accompanying consolidated statement of operations. As the Hyatt
Albuquerque was not leased to RoseStar Southwest until December 1995, no
management fees were expensed in 1995.
No incentive management fees were earned for the year ended December 31, 1996.
Hyatt Beaver Creek
The management fee is based on the terms of the management agreement dated
December 11, 1987, as amended, (the "Management Agreement") between Crescent
and Hyatt. Crescent appointed the Company to manage its interests under the
Management Agreement. The Management Agreement commenced in December 1989, and
expires on December 31, 2017, with Hyatt's option to extend the term for two
successive ten-year periods subject to the provisions of the Management
Agreement. Management fees are comprised of a basic fee, an incentive fee, and
an additional incentive fee. The basic fee is equal to 3% of gross receipts, as
defined. The incentive fee is equal to 10% of profit, as defined, through
December 31, 1998, 15% for the period January 1, 1999, through December 31,
2003, and 12.5% thereafter. In addition, an additional incentive fee equal to
15% of profit, as defined, less basic and incentive fees, in excess of $4
million, is payable annually. As of December 31, 1996, $371,718 is due to Hyatt
for current year management fees and other reimbursements.
For the year ended December 31, 1996, the management fees pursuant to the terms
of the Management Agreement were $723,564, $620,763, and $129,496,
respectively, and are included in management fees in the accompanying
consolidated financial statements. No management fees were incurred in 1995 as
the Hyatt Beaver Creek was not leased to RoseStar Southwest until 1996.
Denver Marriott
The management fee is computed in accordance with the terms of a management
agreement (the "Management Agreement") Crescent appointed the Company to
management its interests under the management agreement dated January 10, 1979,
as amended, between Crescent and Denver Marriott. The Management Agreement is
for a period commencing January 1982, and expiring on December 31, 2006, with
Marriott's option to extend the term for two successive ten-year periods and
four successive five year periods thereafter subject to the provisions of the
Management Agreement. However, the Management Agreement may be terminated by
Crescent if the hotel's net income from operations for any fiscal year is not
at least equal to Crescent's priority amount, as defined, calculated at
$3,534,300 ("Base Amount") plus the annual FF&E funding requirement, 3.5% of
gross revenues or $1,047,473 for the year ended December 31 1996. The Base
Amount is increased to $5,400,000 upon extension of the Management Agreement.
If termination is elected by Crescent, Marriott has the ability to cancel
Crescent's termination right by paying Crescent that amount by which the
Crescent's priority exceeds net income from operations. Such deficiency payment
is refundable to Marriott from any future hotel net income in excess of the
applicable Crescent's priority, subject to certain restrictions. If Marriott is
allowed to avoid termination for three periods (which need not be consecutive)
of two consecutive fiscal years, then the Base Amount is increased by
$1,200,000. As of December 31, 1996, the Base Amount is $3,534,300, and no
notice of termination of the Management Agreement has been provided since the
commencement of the Management Agreement.
F-9
<PAGE> 14
Management fees are comprised of a basic fee and an incentive fee. The basic
fee is equal to 3% of gross revenues, as defined. The incentive fee is equal to
20% of net income from operations, reduced by any amount by which net income is
less than Crescent's priority. However, any such reductions to incentive fees
("Contingent Incentive Fees") are recoverable by Denver Marriott from future
periods whereby net income exceeds Crescent's priority, subject to Crescent
obtaining certain minimum returns on its original investment and cost
recoveries. As of January 3, 1997, Marriott is not entitled to any earned but
unpaid Contingent Incentive Fees.
For the year ended December 31, 1996, management fees of $2,541,644, pursuant
to the terms of the Management Agreement were expensed and included in
management fees in the accompanying consolidated financial statements. For the
year ended December 31, 1995, management fees of $998,570 were expensed.
3. RENTAL EXPENSE:
Pursuant to the terms of a lease agreement dated June 30, 1995, and expiring
June 30, 2005, between Crescent and RoseStar Management, RoseStar Management is
to remit monthly base rentals and percentage rentals for Denver Marriott, as
defined. Denver Marriott's base rental expense for the years ended December 31,
1996 and 1995, were $4,599,996 and $2,149,998, respectively. Percentage rentals
for the years ended December 31, 1996 and 1995, were $2,320,441 and $821,437,
respectively.
Pursuant to a lease agreement dated January 1, 1995, and expiring December 31,
2004, between Crescent and RoseStar Southwest, as successor to prior lessee
effective February 9, 1996, the Company is to remit base rentals and percentage
rentals for the Hyatt Beaver Creek. Base rentals and percentage rentals for the
year ended December 31, 1996, were $3,600,000 and $1,115,878, respectively. No
rental expense was recorded in 1995 as the Hyatt Beaver Creek was not leased to
Rosestar until 1996.
Pursuant to a lease agreement dated January 1, 1995, and expiring December 31,
2000, between Crescent and RoseStar Southwest, the Company is to remit base
rentals and percentage rentals for Hyatt Albuquerque. Base rentals for the
years ended December 31, 1996 and 1995, were $3,300,000 and $117,534,
respectively. Percentage rentals for 1996 and 1995 were $846,497 and $1,094,
respectively.
4. SUBSEQUENT EVENT:
During 1997, the Company acquired Wine Country Hotel, L.L.C.. Wine Country
Hotel, L.L.C. held the leasehold interest in Canyon Ranch in the Berkshires,
Sonoma Mission Inn, and Canyon Ranch in Tucson as a successor to Vintage
Resorts, L.L.C.. On August 31, 1997, and effective as of July 31, 1997, the
Company was acquired by Crescent Operating, Inc.
F-10
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
Rosestar Management L.L.C.
We have audited the statements of assets and liabilities of the accounts
maintained by Hyatt Corporation for Hyatt Regency Albuquerque (a hotel leased
by Rosestar Management L.L.C.) as of December 31, 1995 and 1994, and the related
statements of revenues and expenses and cash flows as represented by such
accounts for the years then ended. These financial statements are the
responsibility of the Hotel'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 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 opinion.
The accompanying financial statements were prepared for the purpose of
complying with the Management Agreement between Rosestar Management L.L.C. and
Hyatt Corporation, as described in Note 1, and are not intended to be a
presentation in conformity with generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets and liabilities of the accounts maintained by
Hyatt Corporation for Hyatt Regency Albuquerque as of December 31, 1995 and
1994, and its revenues and expenses and cash flows as represented by such
accounts for the years then ended, on the basis of accounting described in Note
1.
COOPERS & LYBRAND L.L.P.
El Paso, Texas
January 30, 1996
F-11
<PAGE> 16
HYATT REGENCY ALBUQUERQUE
ACCOUNTS MAINTAINED BY HYATT CORPORATION
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 295,268 $ 87,358
Accounts receivable, less allowance for doubtful accounts
of $21,523 in 1995 and $21,412 in 1994 823,646 708,407
Inventories 43,266 50,033
Other current assets 40,888 22,021
----------- -----------
Total assets (all current) $ 1,203,068 $ 867,819
=========== ===========
LIABILITIES AND CONTROL
Current liabilities:
Accounts payable $ 282,695 $ 288,445
Accrued expenses 432,123 510,225
Accrued taxes 99,185 132,684
Due to Hyatt Corporation 61,424 79,957
----------- -----------
Total liabilities (all current) 875,427 1,011,311
Control 327,641 (143,492)
----------- -----------
Total liabilities and control $ 1,203,068 $ 867,819
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 17
HYATT REGENCY ALBUQUERQUE
ACCOUNTS MAINTAINED BY HYATT CORPORATION
STATEMENTS OF REVENUES AND EXPENSES
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net sales:
Rooms $ 9,203,708 $ 8,966,343
Food and beverage 5,667,204 4,878,326
Telephone rental income 207,803 229,380
Other 357,559 352,092
----------- -----------
15,436,274 14,426,141
----------- -----------
Departmental expenses:
Cost of sales 1,885,731 1,709,819
Payroll and related expenses 3,488,832 3,396,036
Other 1,011,238 1,031,395
----------- -----------
6,385,801 6,137,250
----------- -----------
Gross operating income 9,050,473 8,288,891
----------- -----------
Unallocated operating expenses:
Administrative and general 961,085 962,045
Marketing 1,310,166 1,315,547
Energy costs 646,921 684,903
Property operating and maintenance 508,270 487,347
Other 356,734 363,022
----------- -----------
3,783,176 3,812,864
----------- -----------
Income before recorded fixed charges 5,267,297 4,476,027
----------- -----------
Recorded fixed charges:
Management fee 608,977 567,748
Common area expenses 288,022 388,967
Provision for replacement of furniture, fixtures and equipment 456,733 425,811
----------- -----------
1,353,732 1,382,526
----------- -----------
Income from operations $ 3,913,565 $ 3,093,501
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE> 18
HYATT REGENCY ALBUQUERQUE
ACCOUNTS MAINTAINED BY HYATT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Income from operations $ 3,913,565 $ 3,093,501
Adjustments to reconcile income from operations to net cash
provided by operating activities:
Energy costs and other expenses paid by owner and/or lessee 857,568 1,036,561
Telephone rental income received by Albuquerque Plaza Partners -- (94,622)
Changes in assets and liabilities:
Accounts receivable (115,239) (310,455)
Inventories 6,767 9,888
Other current assets (18,867) 9,955
Accounts payable (5,750) 10,005
Accrued expenses (78,102) 7,951
Accrued taxes (33,499) (9,655)
Due to Hyatt Corporation (18,533) 22,424
----------- -----------
Net cash provided by operating activities 4,507,910 3,775,553
Cash flows from financing activities:
Cash distributions to owner and/or lessee (4,300,000) (3,800,000)
----------- -----------
Net increase (decrease) in cash 207,910 (24,447)
Cash, beginning of year 87,358 111,805
----------- -----------
Cash, end of year $ 295,268 $ 87,358
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE> 19
HYATT REGENCY ALBUQUERQUE
ACCOUNTS MAINTAINED BY HYATT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF FINANCIAL STATEMENTS:
The accompanying financial statements have been prepared pursuant to the
provisions of a Management Agreement between Hyatt Corporation and the
owner (see "Owner/Lessee") of Hyatt Regency Albuquerque (the "Hotel").
Accordingly, the statements of assets and liabilities do not include all
of the assets and liabilities of the Owner and/or Lessee, but only those
assets and liabilities carried on the books and records of the Hotel which
are maintained by employees of Hyatt Corporation. Assets and liabilities
not reflected herein may include, but are not limited to, property,
building, furniture and equipment and mortgages payable. In addition, the
statements of revenues and expenses do not include charges for rent,
depreciation or interest expense in connection with the assets and
liabilities, any expenses paid directly by the Owner and/or Lessee, or any
provision for income taxes, since such taxes, if any, are the liabilities
of the Owner and/or Lessee. However, the statements of revenues and
expenses do include current charges for property taxes and the provision
for replacement of and additions to furniture, fixtures and equipment
calculated in accordance with the Management Agreement.
OWNER/LESSEE:
On December 18, 1995, Albuquerque Plaza Partners sold the Hotel to
Crescent Real Estate Equities Limited Partnership who simultaneously
leased the Hotel including its rights and obligations under the
Management Agreement to Rosestar Management L.L.C. (the "Lessee").
INVENTORIES:
Inventories, consisting primarily of food and beverage, are stated at the
lower of cost or market. Cost is determined generally by the first-in,
first-out method.
2. MANAGEMENT FEE:
The management fee is computed in accordance with the terms of the
Management Agreement, dated October 11, 1988, between Hyatt Corporation
and the Owner (see "Owner/Lessee"). The Management Agreement is for a
period commencing with the opening of the hotel facility on August 1,
1990 and expiring on December 31, 2020, with two ten-year renewal
periods. The management fee consists of a basic fee of 4% of gross
receipts, as defined, and an incentive fee equal to 25% of available cash
flow, as defined.
F-15
<PAGE> 20
HYATT REGENCY ALBUQUERQUE
ACCOUNTS MAINTAINED BY HYATT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
2. MANAGEMENT FEE, CONTINUED:
For the years ended December 31, 1995 and 1994, the management fees
pursuant to the terms of the Management Agreement are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Basic management fee:
Gross receipts, per statements of revenues
and expenses $ 15,436,274 $ 14,426,141
Less: Interest income (4,047) (3,052)
Telephone rental income (207,803) (229,380)
------------ ------------
15,224,424 14,193,709
Basic management fee percentage x4% x4%
------------ ------------
$ 608,977 $ 567,748
============ ============
</TABLE>
No incentive management fees were earned for the years ended December 31,
1995 and 1994.
3. FUND FOR REPLACEMENT OF AND ADDITIONS TO FURNITURE, FIXTURES AND
EQUIPMENT:
The Management Agreement requires that a fund for replacement of and
additions to furniture, fixtures and equipment be established. An
interest-bearing savings account, not recorded on the Hotel's records, is
maintained for this fund. A summary of activity in this account is as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Balance, beginning of year $ 1,025,717 $ 717,456
Provision for the year 456,733 425,811
Receipt of net amount owed to the fund from the prior year 30,212 23,202
Interest earned 46,675 28,503
Expenditures (453,062) (139,043)
Net amount owed from (to) the fund at the end
of the year 2,732 (30,212)
----------- -----------
$ 1,109,007 $ 1,025,717
=========== ===========
</TABLE>
The amount charged to operations is equal to 3% of gross receipts, as defined,
for 1992 through 1995; 4% for 1996 through 1998; and 5% thereafter.
F-16
<PAGE> 21
HYATT REGENCY ALBUQUERQUE
ACCOUNTS MAINTAINED BY HYATT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
4. CONTROL:
Activity in the Owner's and/or Lessee's control account for the years
ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Balance, beginning of year $ (143,492) $ (378,932)
Income from operations 3,913,565 3,093,501
Cash distributions to Owner and/or Lessee (4,300,000) (3,800,000)
Energy costs and other expenses paid by
Owner and/or Lessee 857,568 1,036,561
Telephone rental income received by Albuquerque
Plaza Partners -- (94,622)
----------- -----------
Balance, end of year $ 327,641 $ (143,492)
=========== ===========
</TABLE>
5. TELEPHONE RENTAL INCOME:
Under the terms of the Management Agreement, Albuquerque Plaza Partners
leased telephone equipment to Hyatt Corporation. Pursuant to the
provisions of the lease, rental income through December 18, 1995 is equal
to the sum of (i) $.80 per inter-state call (not to exceed 96% of
revenue for such calls) and (ii) 96% of revenue from intra-state calls.
Effective December 19, 1995, Crescent Real Estate Equities exercised its
option to terminate the phone lease. Accordingly, all subsequent revenues
generated by the telephone department of the Hotel are included in the
operations of the Hotel.
During 1994, Albuquerque Plaza Partners received a refund of
approximately $407,000 as a result of a change in the method of reporting
certain telephone revenues. The 1994 portion of the refund of
approximately $95,000 is reflected as telephone lease income in the
accompanying statements of revenues and expenses. The balance of the
refund is recorded on the books and records of Albuquerque Plaza
Partners.
F-17
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Mogul Management, LLC:
We have audited the accompanying statement of assets and liabilities and project
equity (deficit) of ACCOUNTS MAINTAINED BY HYATT CORPORATION for the HYATT
REGENCY BEAVER CREEK as of December 31, 1995, and the related statements of
operations and cash flows for the year then ended. These financial statements
are the responsibility of the management of the Hotel. 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 Accounts Maintained by Hyatt
Corporation for the Hyatt Regency Beaver Creek as of December 31, 1995, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 23, 1996
F-18
<PAGE> 23
HYATT REGENCY BEAVER CREEK
ACCOUNTS MAINTAINED BY HYATT CORPORATION
STATEMENT OF ASSETS AND LIABILITIES AND PROJECT EQUITY (DEFICIT)
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS 1995
-----------
<S> <C>
CURRENT ASSETS:
Cash $ 2,246,129
Accounts receivable, net of allowance for doubtful accounts
of $44,000 1,678,670
Unreimbursed furniture fixtures & equipment expenditures 21,758
Inventories 100,581
Prepaids and other 336,477
-----------
Total current assets $ 4,383,615
===========
LIABILITIES AND PROJECT EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,108,038
Accrued expenses 1,109,238
Advance deposits 2,022,426
Due to Hyatt Corporation, net (Note 2) 370,155
-----------
Total current liabilities 4,609,857
PROJECT EQUITY (DEFICIT) (Note 3) (226,242)
-----------
Total liabilities and project equity (deficit) $ 4,383,615
===========
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-19
<PAGE> 24
HYATT REGENCY BEAVER CREEK
ACCOUNTS MAINTAINED BY HYATT CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
REVENUES:
Rooms $14,408,806
Food and beverage 7,446,087
Telephone 449,911
Other 729,760
-----------
Total revenues 23,034,564
-----------
OPERATING COSTS AND EXPENSES:
Departmental expenses-
Rooms 2,794,319
Food and beverage 6,303,623
Telephone 381,785
Other 358,296
Unallocated operating expenses-
Management fee (Note 2) 1,329,566
Property taxes (Note 1) 848,976
Association fees 533,025
Administrative and general 1,301,310
Marketing 2,332,641
Energy costs 715,186
Property operation and maintenance 789,152
Other 411,653
-----------
Total operating costs and expenses 18,099,532
-----------
OPERATING INCOME 4,935,032
-----------
OTHER EXPENSES 43,917
-----------
NET INCOME $ 4,891,115
===========
PRO-FORMA (Note 5)
Lease expense 4,221,193
-----------
Pro-forma net income $ 669,922
===========
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-20
<PAGE> 25
HYATT REGENCY BEAVER CREEK
ACCOUNTS MAINTAINED BY HYATT CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from operations $ 4,891,115
Adjustments to reconcile net income from operations
to net cash provided by operating activities-
Increase (decrease) in cash attributable to changes in
assets and liabilities-
Accounts receivable, net (85,385)
Unreimbursed FF&E expenditures 317,426
Inventories 66,165
Prepaids and other 68,461
Accounts payable (432,559)
Accrued expenses (433,773)
Advance deposits (733,582)
Due to Hyatt Corporation, net (103,672)
-----------
Net cash provided by operating activities 3,554,196
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions to fund provision for replacement of FF&E (Note 4) (478,129)
-----------
Net cash used in investing activities (478,129)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributed to lessee (4,575,000)
Cash received from East West 608,328
-----------
Net cash used in financing activities (3,966,672)
-----------
NET DECREASE in cash (890,605)
CASH, at beginning of year 3,136,734
-----------
CASH, at end of year $ 2,246,129
===========
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-21
<PAGE> 26
HYATT REGENCY BEAVER CREEK
ACCOUNTS MAINTAINED BY HYATT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements
The Hyatt Regency Beaver Creek (the "Hotel") is a 295 room hotel located in
Beaver Creek, Colorado. The statements of assets and liabilities and project
equity (deficit) included herein include only those assets and liabilities and
project equity (deficit) carried on the books and records of the Hotel which are
maintained by employees of Hyatt Corporation ("Hyatt"). They do not include the
assets and liabilities of Mogul Management, LLC ("Mogul"), or Crescent Real
Estate Funding II, L.P. ("Crescent"). Mogul leases the Hotel from Crescent, the
owner of the Hotel, under an operating lease (the "Lease") which commenced
January 1, 1995 and expires on December 31, 2004. The accompanying financial
statements present the amounts applicable to the accounts maintained by Hyatt
on behalf of Mogul for the year ended December 31, 1995. Assets and liabilities
not reflected herein may include, but are not limited to, property, plant and
equipment, and notes payable. In addition, the statement of operations does not
include charges for depreciation, interest expense, rent, any other expenses
paid directly by Mogul or Crescent, or a provision for income taxes, if any,
since such taxes are the liability of the members of Mogul or the partners of
Crescent, as applicable. The statement of operations includes charge for
property taxes.
Effective January 1, 1995, East West Properties, LTD ("East West") sold the
Hotel to Crescent, who simultaneously leased the Hotel, including the rights and
obligations under the Management Agreement (Note 2), to Mogul. In connection
with the sale of the Hotel, Crescent assumed the Deferred Incentive Fee (Note 2)
balance with accrued interest of $1,286,016. Mogul has not assumed this
obligation in connection with the Lease. The Deferred Incentive Fee obligation
balance of $1,286,016 was transferred to the books and records of Crescent
through the control account during 1995.
F-22
<PAGE> 27
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Statements of Cash Flows
Effective January 1, 1995, the Deferred Incentive Fee liability of $1,286,016
was eliminated against the project equity (deficit) account since such
obligation was transferred to Crescent in connection with the sale of the Hotel.
Inventories
Inventories, consisting primarily of food and beverage items, are stated at the
lower of cost or market. Cost is determined generally by the first-in, first-out
method.
Property Taxes
Property taxes relate to Hotel real and personal property.
(2) MANAGEMENT FEE/DUE TO HYATT CORPORATION
The management fee is based on the terms of the management agreement dated
December 11, 1987, as amended, (the "Management Agreement") between Crescent and
Hyatt. The Management Agreement commenced in December 1989, and expires on
December 31, 2017, with Hyatt's option to extend the term for two successive ten
year periods subject to the provisions of the Management Agreement. Management
fees are comprised of a basic fee, an incentive fee and an additional incentive
fee. The basic fee is equal to 3% of gross receipts, as defined. The incentive
fee is equal to 10% of profit, as defined, through December 31, 1998, 15% for
the period January 1, 1999 through December 31, 2003, and 12.5% thereafter. In
addition, an additional incentive fee equal to 15% of profit, as defined, less
basic and incentive fees, in excess of $4 million, is payable annually. As of
December 31, 1995, $370,155 is due to Hyatt for current year management fees and
other reimbursements. All incentive fees prior to January 1, 1994 (" Deferred
Incentive Fees") have been deferred with interest at prime. Under the provisions
of the Management Agreement, payment of the Deferred Incentive Fees earned
through December 31, 1993 and related interest thereon, will be waived by Hyatt
on October 1, 2004, if the Management Agreement is not terminated for any reason
other than a default by Hyatt. However, the Deferred Incentive Fees are payable
upon any sale, transfer or assignment (as defined) of the owner's interest in
the Management Agreement, excluding the Lease with Mogul. As discussed in Note
1, upon purchasing the Hotel, Crescent assumed the Deferred Incentive Fee
liability, and Mogul has not assumed such liability in connection with the
Lease. Accordingly, the related liability and accrued interest were transferred
to the books and records of Crescent through the project equity (deficit)
account.
F-23
<PAGE> 28
For the year ended December 31, 1995, the management fees pursuant to the terms
of the Management Agreement, are as follows:
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Management fees-
Basic $ 691,037
Incentive 571,142
Additional incentive 67,387
-----------
Total management fee $ 1,329,566
===========
</TABLE>
(3) PROJECT EQUITY (DEFICIT)
Activity in the project equity (deficit) for the year ended December 31, 1995 is
as follows:
<TABLE>
<S> <C>
BALANCE, beginning year $(1,958,572)
Net income 4,891,115
Distributions to lessee (4,575,000)
Cash received from East West to fund Hotel deficit 608,328
Transfer of Deferred Incentive obligation to Crescent 1,286,016
Distributions to fund provision for replacement of FF&E (Note 4) (478,129)
------------
BALANCE, end of year $ (226,242)
============
</TABLE>
(4) FUND FOR REPLACEMENT OF FURNITURE, FIXTURES AND EQUIPMENT (FF&E)
Under the provisions of the Management Agreement, Mogul is required to fund a
bank account maintained by Crescent for future expenditures for the replacement
of Hotel FF&E. Funding is required at 2% of gross receipts, as defined, through
September 30, 1995, with funding increasing to 3% thereafter. Related funding
for fiscal 1995 was $478,129, including $59,610 of funding related to fiscal
1994 and excluding $90,740 unfunded for fiscal 1995. Funding of the account is
charged to the project equity (deficit) and presented as an investing cash flow
activity.
(5) PRO-FORMA INFORMATION
As discussed in Note 1, effective January 1, 1995, Crescent acquired the Hotel
and leased it to Mogul. Income from operation of the property is remitted to
Mogul, who in turn pays the required lease payments to Crescent. In order to
reflect the results of operations of the project, the lease payments not paid by
Hyatt are reflected as a pro-forma adjustment in the accompanying statement of
operations.
(6) SUBSEQUENT EVENT
Effective February 9, 1996, Mogul merged with RoseStar Southwest, LLC, a Texas
limited liability company.
F-24
<PAGE> 29
\
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of RoseStar Management LLC:
We have audited the accompanying statement of operations of Accounts Maintained
by Marriott International, Inc. for the Marriott Denver City Center as of June
30, 1995, and the related statements of cash flows for the six months then
ended. These financial statements are the responsibility of the management of
the Hotel. 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 Accounts Maintained by Marriott
International, Inc. for the Marriott Denver City Center as of June 30, 1995, and
the results of its cash flows for the six months then ended in conformity with
generally accepted accounting principles.
Dallas, Texas, Arthur Andersen LLP
November 10, 1997
F-25
<PAGE> 30
MARRIOTT DENVER CITY CENTER
ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<S> <C>
REVENUES:
Rooms $ 8,610,655
Food and beverage 3,993,346
Telephone 328,422
Other 369,315
-----------
Total revenues 13,301,738
-----------
OPERATING COSTS AND EXPENSES:
Departmental expenses-
Rooms 1,758,282
Food and beverage 3,101,106
Telephone 145,923
Other 196,156
Unallocated operating expenses-
Management fee (Note 2) 1,097,046
Property taxes (Note 1) 330,017
Administrative and general 975,959
Marketing 836,104
Energy costs 350,296
Property operation and maintenance 550,730
Other 253,541
-----------
Total operating costs and expenses 9,595,160
-----------
OPERATING INCOME 3,706,578
-----------
OTHER EXPENSES:
Other 111,919
-----------
NET INCOME $ 3,594,659
===========
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-26
<PAGE> 31
MARRIOTT DENVER CITY CENTER
ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from operations $ 3,594,659
Adjustments to reconcile net income from operations
to net cash provided by operating activities-
Increase (decrease) in cash attributable to changes in
assets and liabilities-
Accounts receivable, net (680,147)
Unreimbursed furniture, fixtures, & equipment,
expenditures 67,540
Inventories 56,549
Prepaids and other 16,492
Accounts payable (120,001)
Accrued expenses (198,407)
Advance deposits (22,898)
Due to Marriott International, Inc., net 383,647
-----------
Net cash provided by operating activities 3,097,434
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributed to lessee (2,567,711)
Cash paid to fund for renovation costs (864,430)
-----------
Net cash used in financing activities (3,432,141)
-----------
NET DECREASE IN CASH (334,707)
CASH, at beginning of year 439,565
-----------
CASH, at end of year $ 104,858
===========
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-27
<PAGE> 32
MARRIOTT DENVER CITY CENTER
ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Statements
The Marriott Denver City Center (the "Hotel" or the "Project") is a 613 room
full-service hotel located in the central business district of Denver, Colorado.
The books and records of the Hotel are maintained by employees of Marriott
International, Inc. ("Marriott") and do not include the assets and liabilities
of Prudential Insurance Company of America ("Prudential") the owner of the Hotel
as of June 30, 1995. The statement of operations does not include charges for
depreciation, interest expense, any other expenses paid directly by Prudential
or a provision for income taxes, if any, since such taxes are the liability of
Prudential.
The project equity changed as follows for the six months ended June 30, 1995:
<TABLE>
<S> <C>
BALANCE, December 30, 1994 $ 912,674
Net income from operations 3,594,659
Distributions to lessee (2,567,711)
Distributions to fund for renovation costs (802,685)
-----------
BALANCE, June 30, 1995 $ 1,136,937
===========
</TABLE>
As the renovations and improvements are funded by Prudential, and title to such
renovations and improvements remains with Prudential, such expenditures have
been reflected as a distribution from project equity.
Pursuant to the provisions of the Management Agreement distributions to
Prudential are limited to net income from operations. Monthly distributions are
made based on the previous month's operating results.
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-28
<PAGE> 33
Inventories
Inventories, consisting primarily of food and beverage and gift shop
merchandise, are stated at the lower of cost or market. Cost is determined
generally by the first-in, first-out method.
Advance Deposits and Revenue Recognition
Advance deposits for facility and room rentals are recognized as revenue when
services are provided.
Property Taxes
Property taxes for the six months ended June 30, 1995, are related to Hotel real
and personal property.
2. MANAGEMENT FEE/DUE TO MARRIOTT:
The management fee is computed in accordance with the terms of a management
agreement (the "Management Agreement") dated January 10, 1979, between
Prudential and Marriott. The Management Agreement is for a period commencing
January 1982, and expiring on December 31, 2006, with Marriott's option to
extend the term for two successive ten-year periods and four successive
five-year periods thereafter subject to the provisions of the Management
Agreement.
Upon sale of the Hotel to Crescent Real Estate Equities Funding II, L.P.
("Crescent"), Crescent assumed the obligations of Prudential under the
Management Agreement.
Management fees are comprised of a basic fee and an incentive fee. The basic fee
is equal to 3% of gross revenues and the incentive fee is equal to 20% of net
income from operations, as defined.
For the six months ended June 30, 1995, the management fees pursuant to the
terms of the Management Agreement are as follows:
<TABLE>
<S> <C>
Management fees-
Basic $ 399,052
Incentive 697,994
-----------
Total management fee $ 1,097,046
===========
</TABLE>
3. SUBSEQUENT EVENT:
Effective June 30, 1995, Crescent acquired the Hotel from Prudential. In
conjunction with the acquisition, Crescent subsequently leased the Hotel to
Rosestar Management, L.L.C. under a lease commencing June 30, 1995, and expiring
on June 30, 2005.
F-29
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Wine Country Hotel, L.L.C.:
We have audited the accompanying balance sheet of Wine Country Hotel, L.L.C. (a
limited liability company) as of December 31, 1996, and the related statements
of operations, members' deficit, and cash flows for the period from inception
(October 29, 1996) through December 31, 1996. 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 Wine Country Hotel, L.L.C. as
of December 31, 1996, and the results of its operations and its cash flows for
the period from inception (October 29, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
November 13, 1997
F-30
<PAGE> 35
WINE COUNTRY HOTEL, L.L.C.
BALANCE SHEET--DECEMBER 31, 1996
<TABLE>
ASSETS
<S> <C>
CASH $ 1,280,136
ACCOUNTS RECEIVABLE:
Hotel operations, net 985,950
Furniture, fixtures, and equipment reimbursement 270,570
-----------
Total accounts receivable 1,256,520
INVENTORY 642,589
PREPAIDS AND OTHER 119,430
INTANGIBLE ASSET, net of accumulated amortization of $15,000 1,293,279
-----------
Total assets $ 4,591,954
===========
LIABILITIES AND MEMBERS' DEFICIT
ACCOUNTS PAYABLE:
Accrued hotel base rent $ 265,332
Accrued hotel percentage rent 10,812
Payable to Crescent 687,501
Trade and other 628,996
Affiliated 12,546
-----------
Total accounts payable 1,605,187
ACCRUED EXPENSES 1,362,293
ADVANCE DEPOSITS 1,811,732
-----------
Total liabilities 4,779,212
-----------
MEMBERS' DEFICIT (187,258)
-----------
Total liabilities and members' deficit $ 4,591,954
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-31
<PAGE> 36
WINE COUNTRY HOTEL, L.L.C.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUES:
Rooms $ 861,058
Food and beverage 571,293
Telephone 29,148
Spa 545,716
Other 258,030
-----------
Total revenues 2,265,245
OPERATING COSTS AND EXPENSES:
Departmental expenses-
Rooms 279,237
Food and beverage 547,941
Telephone 16,179
Spa 320,817
Other 168,051
Unallocated operating expenses-
Administrative and general 193,599
Marketing 167,119
Hotel base rent expense 415,699
Hotel percentage rent expense 10,812
Management fees 9,603
Common area expenses 45,377
Property taxes 36,005
Energy costs 43,606
Property operation and maintenance 87,903
Amortization expense 15,000
Other 95,555
-----------
Total expenses 2,452,503
-----------
NET LOSS $ (187,258)
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-32
<PAGE> 37
WINE COUNTRY HOTEL, L.L.C.
STATEMENT OF MEMBERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
BALANCE, Inception $ --
Net Loss (187,258)
---------
BALANCE, December 31, 1996 $(187,258)
=========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-33
<PAGE> 38
WINE COUNTRY HOTEL, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from operations $ (187,258)
Amortization expense 15,000
Adjustments to reconcile net income from operations to net
cash provided by operating activities-
Cash transfer to replenish the previous owner's cash account
for payroll fund (237,983)
Increase (decrease) in cash attributable to changes in
assets and liabilities-
Decrease in hotel operations, net 199,914
Increase in unreimbursed FF&E expenditures on behalf of owner (178,147)
Increase in inventories (4,970)
Increase in prepaids and other 19,970
Increase in payables to affiliated
Increase in trade and other payables 185,796
Increase in payable to Crescent 500,000
Increase in accrued hotel base rent 265,332
Increase in accrued hotel percentage rent 10,812
Increase in accrued expenses 176,615
Increase in advance deposits 467,055
-----------
Net cash provided by operating activities 1,232,136
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,232,136
CASH AND CASH EQUIVALENTS, at beginning of year 48,000
-----------
CASH AND CASH EQUIVALENTS, at end of year $ 1,280,136
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-34
<PAGE> 39
WINE COUNTRY HOTEL, L.L.C.
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Wine Country Hotel, L.L.C. (the "Company" or "Wine Country") is a limited
liability company which was formed on October 29, 1996, for the purpose of
leasing under long-term leases, the Canyon Ranch in the Berkshires in Lenox,
Massachusetts ("Lenox"), the Sonoma Mission Inn and Spa in Sonoma, California
("Sonoma"), and such other hotels, resorts, and lodging facilities as the
managers determine. The Company is owned by Harry Frampton III, Gerald Haddock,
and John Goff (the "Members") with respective ownership percentages of 91%, 4.5%
and 4.5%. Mr. Haddock and Mr. Goff are officers of Crescent Real Estate Equities
Company ("Crescent") the lessor of Lenox and Sonoma.
Wine Country's lease of Lenox commenced on December 11, 1996, and expires on
December 31, 2006. The lease of Sonoma commenced on November 18, 1996, and
expires on October 31, 2006.
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 amount of assets and liabilities and disclosure of
contingent 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.
Inventories
Inventories are stated at average cost or market and consist of the following at
December 31, 1996:
<TABLE>
<S> <C>
Food and beverage $248,649
Retail merchandise 393,940
--------
$642,589
========
</TABLE>
Advanced Deposits and Revenue Recognition
Advanced deposits and revenues for facility, sleeping room rentals, and spa
services are recognized as revenue when services are provided.
Income Taxes
No provision for income taxes has been included in the accompanying financial
statements as the liability for income taxes is the responsibility of the
Members on their individual tax returns.
2. FUND FOR REPLACEMENT OF FURNITURE, FIXTURES, AND EQUIPMENT:
A replacement reserve recorded on Crescent's records as of December 31, 1996,
and not recorded on the Company's records, is maintained for the replacement of
furniture, fixtures, and equipment at Sonoma and Lenox. Upon acquisition, these
assets are owned by Crescent and utilized by Sonoma and Lenox pursuant to their
respective lease agreements.
F-35
<PAGE> 40
3. MANAGEMENT AGREEMENTS AND RELATED-PARTY TRANSACTIONS:
The Sonoma management fee is computed in accordance with the terms of the
management agreement, dated November 18, 1996, between Crescent and the Sonoma
Manager. The management agreement expires December 31, 1999. The management fee
consists of a fee equal to 2% of gross receipts, as defined subject to receipt
of an annual return on owner's investment, as defined, of not less than 10% per
year. If the annual return on owner's investment is not met for any year, no
management fee is payable for that year. Management fees of $45,377 were
recorded for the period from inception (October 29, 1996) through December 31,
1996.
The Lenox management fee is computed in accordance with the terms of the
management agreement between Canyon Ranch-Bellefontaine Associates L.P. and
Lenox, dated December 11, 1996, and expiring December 31, 2026, with two
successive renewal options of ten years each. The management fee consists of a
basic fee of the lessor of $700,000 or the excess of profit, as defined, over
the basic fee base, as defined, and an incentive fee of 50% of the excess of
profit, as defined, over the incentive fee base as defined. No management fees
were incurred under this agreement for the period from inception (October 29
,1996) through December 31, 1996.
4. RENTAL EXPENSE:
Pursuant to the terms of a lease agreement dated October 29, 1996, and expiring
October 31, 2006, between Crescent and Wine Country, Wine Country is to remit
monthly base rentals and percentage rentals for Sonoma, as defined. Sonoma's
base rental expense for the period from inception (October 29, 1996) through
December 31, 1996, was $286,607. No percentage rentals were recorded.
Pursuant to the terms of a lease agreement dated December 11, 1996, between
Crescent and the Company as successor to Vintage Resorts, L.L.C., Wine Country
is to remit monthly base and percentage rentals for Lenox, as defined. Base and
percentage rentals of $129,032 and $10,812, respectively, were recorded for the
period from inception (October 29, 1996) through December 31, 1996.
5. SUBSEQUENT EVENT:
During 1997, Wine Country Hotel, L.L.C. was acquired by Rosestar Management,
L.L.C. which was subsequently sold to Crescent Operating, Inc.
F-36
<PAGE> 41
Intentionally Left Blank
F-37
<PAGE> 42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Rahn Sonoma, Ltd.:
We have audited the accompanying statements of operations, partners' capital
and cash flows of Rahn Sonoma, Ltd. (a Florida limited partnership) for the
period from January 1, 1996, to November 17, 1996. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Rahn Sonoma,
Ltd. for the period from January 1, 1996, to November 17, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
November 11, 1997
F-38
<PAGE> 43
RAHN SONOMA, LTD.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996, TO NOVEMBER 17, 1996
<TABLE>
<S> <C>
REVENUES:
Guest and ancillary services $19,057,716
Other 2,152,006
-----------
Total revenues 21,209,722
-----------
OPERATING COSTS AND EXPENSES:
Salaries, wages, benefits and commissions 8,783,393
General and administrative 270,622
Depreciation and amortization 910,566
Sales and marketing 509,332
Repairs and maintenance 343,540
Food and beverage 1,573,290
Utilities 359,435
Other operating expenses 3,122,966
Management fee (see Note 2) 4,614,316
-----------
Total operating costs and expenses 20,487,460
-----------
NET INCOME FROM OPERATIONS 722,262
OTHER EXPENSES: Interest expense (see Note 3) 2,273,220
-----------
NET LOSS BEFORE GAIN ON SALE OF REAL PROPERTY (1,550,958)
GAIN ON SALE OF REAL PROPERTY (see Note 1) 32,731,176
-----------
NET INCOME $31,180,218
-----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 44
RAHN SONOMA, LTD.
STATEMENT OF PARTNERS' CAPITAL
FOR THE PERIOD FROM JANUARY 1, 1996, TO NOVEMBER 17, 1996
<TABLE>
<S> <C>
PARTNERS' DEFICIT, DECEMBER 31, 1995 $(12,027,867)
Net income 31,180,218
------------
PARTNERS' CAPITAL, NOVEMBER 17, 1996 $ 19,152,351
============
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE> 45
RAHN SONOMA, LTD.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1996, TO NOVEMBER 17, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,180,218
Gain on sale of property (32,731,176)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 910,566
Gain on retirement of equipment (8,175)
Changes in operating assets and liabilities:
Accounts receivable, net (907,075)
Inventories 149,537
Prepaid expenses and supplies (290,028)
Other receivables and assets 24,794
Accounts payable 51,301
Accrued liabilities 360,656
Advance deposits/gift certificates 273,002
Accrued interest payable (73,371)
Management fees payable 3,675,307
-----------
Net cash provided by operating activities 2,615,556
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (1,582,373)
Proceeds from retirement of equipment 8,175
-----------
Net cash used by investing activities (1,574,198)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (934,065)
-----------
NET INCREASE IN CASH 107,293
CASH AT BEGINNING OF PERIOD 665,573
-----------
CASH AT END OF PERIOD $ 772,866
-----------
SUPPLEMENTAL NON CASH DISCLOSURES:
Investment in Crescent Partnership Units $25,000,000
===========
Assumption of Note payable by Crescent $30,900,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE> 46
RAHN SONOMA, LTD.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 17, 1996
1. ORGANIZATION AND BUSINESS:
ORGANIZATION
Rahn Sonoma, Ltd. (the Partnership) is a Florida limited partnership formed on
April 22, 1985, between Rahn Hotels, Ltd., a Florida limited partnership, as
general partner having a 51 percent interest, and a trust as a limited partner
having a 49 percent interest. Three beneficiaries of the trust are also
limited partners of Rahn Hotels, Ltd. The purpose of the Partnership was to
own and operate the real and personal property known as the Sonoma Mission Inn
and Spa (SMI) located in Boyes Hot Springs, Sonoma County, California, which
was acquired by the Partnership on May 6, 1985. SMI is a 168-room hotel and
spa that includes two restaurants, three bars and banquet facilities. Rahn
Properties, Inc. is a related party that performs certain managerial and
bookkeeping functions for the Partnership without charge. The shareholders of
Rahn Properties, Inc. are two of the limited partners of Rahn Hotels, Ltd.
Ordinary net income and losses, as well as capital losses, are allocated to the
partners in accordance with their respective percentage interests. Capital
gains are allocated on a different basis as defined in the partnership
agreement.
Effective November 18, 1996, the Partnership sold SMI to Crescent Real Estate
Limited Partnership (Crescent). Crescent purchased approximately $24.0 million
of SMI assets and assumed approximately $30.9 million of SMI liabilities. In
exchange for these assets and liabilities, the Partnership received $25.2
million of Crescent operating partnership units and $652,000 of cash. This
transaction resulted in a $32.7 million gain on sale for the Partnership for
financial reporting purposes. For income tax purposes, this transaction was
recorded by SMI as a tax free exchange. In addition, as a result of the
transaction, the Partnership reinstated $4.6 million of management fees payable
(see Note 2).
Also on November 18, 1996, Crescent leased SMI, including rights and
obligations under the management agreement, to Wine Country Hotels, LLC. The
lease expires on October 31, 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
DEPRECIATION AND AMORTIZATION
Property and equipment were recorded at cost and were depreciated over the
following estimated useful lives using the straight-line method:
F-42
<PAGE> 47
<TABLE>
<CAPTION>
Property and Equipment Category Life
------------------------------- ----
<S> <C>
Building and improvements 20 to 40
years
Furniture, fixtures and equipment 5 to 8 years
</TABLE>
The excess of the consideration paid by the Partnership over the fair values at
the date of acquisition of the assets acquired of SMI was $1.6 million. This
amount was being amortized by charges to income on a straight-line basis over
40 years.
Loan fees paid by the Partnership to acquire financing for the acquisition of
the assets of SMI were being amortized over the term of the loan.
MANAGEMENT FEES PAYABLE
Management fees payable represent amounts due to the previous owners of the
Partnership relating to hotel management services provided from 1990 through
1996. These fees payable had been previously forgiven but were retroactively
reinstated in November 1996 as a result of the transaction with Crescent. The
Partnership paid these fees to the previous owners of the Partnership in
December 1996 in Crescent partnership units.
INCOME TAXES
Federal and state income tax regulations provide that a partnership pay no
income tax. Rather, each partner's allocable share of the partnership's profit
or loss is reported in the separate income tax return of the individual
partner. Accordingly, income taxes are not provided for in the accompanying
financial statements.
3. INTEREST EXPENSE:
MORTGAGE LOAN
As of November 17, 1996, the mortgage loan was assumed by Crescent. The loan
had a 30-year amortization period and a balloon payment at maturity. The
interest rate adjusted monthly and varied at 2.75 percent over the Federal Home
Loan Bank cost of funds index for the Eleventh District. The interest rate was
7.91 percent (the minimum allowable rate) during the period from January 1,
1996, to November 17, 1996.
LOAN PAYABLE TO AFFILIATES
At November 17, 1996, the loan payable to affiliates is recorded on the
Partnership's balance sheet. This loan was not assumed by Crescent. The loan
is unsecured and is due on demand. This loan is payable to two of the limited
partners of Rahn Hotels, Ltd. The interest rate resets monthly and is set at
2.0 percent over the prime rate. The interest rate was 10.5 percent during the
period from January 1, 1996, to November 17, 1996.
F-43
<PAGE> 48
PROMISSORY NOTES PAYABLE TO BANK
During 1992, the Partnership signed a $125,807 promissory note payable to a
bank for the purchase of telephone equipment. The interest rate on the note
was 10.0 percent during the period from January 1, 1996, to November 17, 1996.
During 1995, the Partnership signed a $350,000 promissory note payable to a
bank for the development of a laundry facility. Interest on the note was
charged at 10.5 percent during the period from January 1, 1996, to November 17,
1996.
Also during 1995, the Partnership signed a $414,400 promissory note payable to
a bank for the purchase of a parcel of land adjacent to the hotel. Interest was
due monthly at an annual rate of prime plus 1.5 percent. Each of the
aforementioned notes payable was assumed by Crescent at November 17, 1996.
OTHER LONG-TERM LIABILITIES
A liability payable to the County of Sonoma for a geothermal well drilled by
the County on SMI property had interest payable at 4.25 percent during the
period from January 1, 1996, to November 17, 1996.
4. COMMITMENTS AND CONTINGENCY:
The Partnership is involved in litigation arising in the normal course of
business. Management's opinion is that the ultimate outcome of this litigation
will not have a material adverse effect on the Partnership's operations or
financial position.
F-44
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Rahn Sonoma, Ltd.:
We have audited the accompanying balance sheets of Rahn Sonoma, Ltd. (a Florida
limited partnership) as of December 31, 1995, and December 25, 1994, and the
related statements of operations, partners' deficit and cash flows for the
fiscal years then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our 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 opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rahn Sonoma, Ltd. as of
December 31, 1995, and December 25, 1994, and the results of its operations and
its cash flows for the fiscal years then ended, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
April 18, 1996
F-45
<PAGE> 50
RAHN SONOMA, LTD.
BALANCE SHEETS--DECEMBER 31, 1995, AND DECEMBER 25, 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 665,573 $ 787,164
Accounts receivable, less allowance for doubtful accounts of $20,000
715,232 702,065
Inventories 787,156 804,317
Prepaid expenses and other assets 150,184 194,089
------------ ------------
Total current assets 2,318,145 2,487,635
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $8,537,542 in
1995 and $7,845,758 in 1994
20,497,199 19,569,857
DEFERRED COSTS, net of accumulated amortization of $363,858 in 1995 and
$329,749 in 1994 196,143 236,751
EXCESS OF PURCHASE PRICE OVER ASSETS ACQUIRED, less accumulated amortization of
$438,498 in 1995 and $397,890 in 1994
1,185,555 1,226,162
OTHER ASSETS 24,794 104,426
------------ ------------
Total assets $ 24,221,836 $ 23,624,831
============ ============
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 404,445 $ 512,015
Accrued liabilities 899,579 1,117,645
Advance deposits/gift certificates 1,412,186 1,419,895
Current maturities of long-term debt 2,758,147 517,945
Accrued interest payable 178,610 181,856
Management fees payable 939,009 --
------------ ------------
Total current liabilities 6,591,976 3,749,356
MANAGEMENT FEES PAYABLE -- 1,183,649
LONG-TERM DEBT 29,657,727 32,581,376
------------ ------------
Total liabilities 36,249,703 37,514,381
PARTNERS' DEFICIT (12,027,867) (13,889,550)
------------ ------------
Total liabilities and partners' deficit $ 24,221,836 $ 23,624,831
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE> 51
RAHN SONOMA, LTD.
STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995, AND DECEMBER 25, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
REVENUES:
Rooms $ 9,152,434 $ 8,748,892
Food and beverage 5,389,692 5,159,908
Spa 4,570,121 4,292,949
Retail 1,778,612 1,772,187
Other 770,522 644,264
----------- -----------
Total revenues 21,661,381 20,618,200
----------- -----------
OPERATING EXPENSES:
Rooms 2,354,559 2,420,137
Food and beverage 4,789,873 4,488,794
Spa 2,948,271 2,958,670
Retail 1,324,778 1,473,028
Other 163,555 183,510
----------- -----------
11,581,036 11,524,139
----------- -----------
Gross operating income 10,080,345 9,094,061
----------- -----------
GENERAL AND UNALLOCATED EXPENSES:
Administrative and general 1,888,092 1,847,962
Sales and marketing 993,157 1,138,524
Maintenance and grounds 759,980 733,443
Utilities 439,777 414,812
----------- -----------
4,081,006 4,134,741
----------- -----------
Net operating income 5,999,339 4,959,320
----------- -----------
OTHER EXPENSES:
Property insurance 14,423 17,283
Property taxes 281,138 264,309
Equipment and building leases 57,903 65,397
Loss due to retirement of equipment -- 7,415
Other 184,087 100,036
----------- -----------
537,551 454,440
----------- -----------
Income before interest, depreciation and amortization
5,461,788 4,504,880
INTEREST, net 2,651,000 2,627,379
DEPRECIATION AND AMORTIZATION 949,105 936,139
----------- -----------
Net income $ 1,861,683 $ 941,362
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE> 52
RAHN SONOMA, LTD.
STATEMENTS OF PARTNERS' DEFICIT
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995, AND DECEMBER 25, 1994
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------ ------------ ------------
<S> <C> <C> <C>
PARTNERS' DEFICIT, DECEMBER 26, 1993 $ (6,326,249) $ (8,504,663) $(14,830,912)
Net income 480,095 461,267 941,362
------------ ------------ ------------
PARTNERS' DEFICIT, DECEMBER 25, 1994 (5,846,154) (8,043,396) (13,889,550)
Net income 949,458 912,225 1,861,683
------------ ------------ ------------
PARTNERS' DEFICIT, DECEMBER 31, 1995 $ (4,896,696) $ (7,131,171) $(12,027,867)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE> 53
RAHN SONOMA, LTD.
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995, AND DECEMBER 25, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,861,683 $ 941,362
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 949,105 936,139
Loss on retirement of equipment 1,120 7,415
Write-off of deferred costs -- 10,920
Interest expense included in long-term debt -- 407,988
Changes in operating assets and liabilities-
Accounts receivable, net (13,167) (255,416)
Inventories 17,161 (238,903)
Prepaid expenses and supplies 43,905 (10,921)
Other receivables and assets 79,632 686
Accounts payable (107,570) 49,937
Accrued liabilities (218,066) 606,614
Advance deposits/gift certificates (7,709) (62,668)
Accrued interest payable (3,246) (2,926)
Management fees payable (244,640) --
----------- -----------
Net cash provided by operating activities 2,358,208 2,390,227
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (1,807,998) (644,276)
Proceeds from retirement of equipment 11,646 16,287
----------- -----------
Net cash used by investing activities (1,796,352) (627,989)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 764,400 --
Payments of long-term debt (1,447,847) (1,609,641)
----------- -----------
Net cash used by financing activities (683,447) (1,609,641)
----------- -----------
NET INCREASE (DECREASE) IN CASH (121,591) 152,597
CASH AT BEGINNING OF YEAR 787,164 634,567
----------- -----------
CASH AT END OF YEAR $ 665,573 $ 787,164
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-
Cash paid during the year for interest $ 2,654,246 $ 2,221,200
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE> 54
RAHN SONOMA, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, AND DECEMBER 25, 1994
1. ORGANIZATION AND BUSINESS:
Rahn Sonoma, Ltd. (the Partnership) is a Florida limited partnership formed on
April 22, 1985, between Rahn Hotels, Ltd., a Florida limited partnership, as
general partner having a 51 percent interest, and a trust as a limited partner
having a 49 percent interest. Three beneficiaries of the trust are also limited
partners of Rahn Hotels, Ltd. The purpose of the Partnership is to own and
operate the real and personal property known as the Sonoma Mission Inn and Spa
(SMI) located in Boyes Hot Springs, Sonoma County, California, which was
acquired by the Partnership on May 6, 1985. SMI is a 170-room hotel and spa that
includes two restaurants, three bars and banquet facilities. Rahn Properties,
Inc. is a related party that performs certain managerial and bookkeeping
functions for the Partnership without charge. The shareholders of Rahn
Properties, Inc. are two of the limited partners of Rahn Hotels, Ltd.
Ordinary net income and losses, as well as capital losses, are allocated to the
partners in accordance with their respective percentage interests. Capital gains
are allocated on a different basis as defined in the partnership agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost or market
and consist of the following at December 31, 1995, and December 25, 1994,
respectively:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Food and beverage $241,937 $242,400
Retail merchandise 545,219 561,917
-------- --------
$787,156 $804,317
======== ========
</TABLE>
F-50
<PAGE> 55
Long-Lived Assets
In 1995, the Partnership adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Under certain circumstances, this statement requires
entities to evaluate the carrying amounts of certain long-lived assets and
long-lived assets to be disposed of. The adoption of this statement did not have
a material impact on the Partnership's financial position or results of
operations.
Depreciation and Amortization
Property and equipment are recorded at cost and are depreciated over the
following estimated useful lives using the straight-line method:
<TABLE>
<CAPTION>
Property and Equipment Category Life
- -------------------------------- ---------------
<S> <C>
Building and improvements 20 to 40 years
Furniture, fixtures and equipment 5 to 8 years
</TABLE>
The excess of the consideration paid over the fair values at the date of
acquisition of the assets acquired was $1,624,052. This amount is being
amortized by charges to income on a straight-line basis over 40 years.
Loan fees paid to acquire financing for the acquisition of the assets are being
amortized over the term of the loan.
Management Fees Payable and Due to Affiliates
Management fees payable represent amounts due to Rahn Management of Sonoma, Inc.
(whose shareholders are two of the limited partners of Rahn Hotels, Ltd.)
relating to hotel management services provided in 1987, 1988 and 1989 under a
management agreement that was terminated in December 1993. The Partnership
expects to pay these fees in fiscal year 1996; therefore, at December 31, 1995,
these fees were reclassified as a current liability.
Income Taxes
Federal and state income tax regulations provide that a partnership pay no
income tax. Rather, each partner's allocable share of the partnership's profit
or loss is reported in the separate income tax return of the individual partner.
Accordingly, income taxes are not provided for in the accompanying financial
statements.
Reclassifications
Certain amounts in the 1994 financial statements have been reclassified to
conform to the current year presentation.
F-51
<PAGE> 56
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of:
<TABLE>
<CAPTION>
December 31, December 25,
1995 1994
------------ ------------
<S> <C> <C>
Land $ 3,439,201 $ 2,800,000
Building and improvements 19,969,754 19,647,729
Furniture, fixtures and equipment 5,625,786 4,967,886
------------ ------------
29,034,741 27,415,615
Less- Accumulated depreciation (8,537,542) (7,845,758)
------------ ------------
$ 20,497,199 $ 19,569,857
============ ============
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 25,
1995 1994
----------- -----------
<S> <C> <C>
Mortgage loan payable to bank $27,096,326 $27,588,732
Loan payable to affiliates 4,460,669 5,378,023
Promissory notes to bank-
Telephone equipment 55,756 80,843
Laundry facility 350,000 --
Land for expansion 414,400 --
Other long-term liabilities 38,723 51,723
----------- -----------
32,415,874 33,099,321
Less- Current maturities 2,758,147 517,945
----------- -----------
Total long-term debt $29,657,727 $32,581,376
=========== ===========
</TABLE>
Mortgage Loan
The term of the mortgage loan is from November 1, 1986, to October 1, 2001, with
a 30-year amortization period and a balloon payment at maturity. The interest
rate adjusts monthly and varies at 2.75 percent over the Federal Home Loan Bank
cost of funds index for the Eleventh District. The interest rate was 7.91
percent (the minimum allowable rate) at December 31, 1995, and December 25,
1994.
In February 1993, the terms of the mortgage loan were modified for two years to
better match the hotel's operating cash flows with the payments to the lender.
Pursuant to the modification, the Partnership paid monthly installments equal to
the Minimum Monthly Installment as defined. The modification provided that the
maximum differential between the required monthly installment which would
otherwise be due under the terms of the note and the Modified Monthly
Installment schedule would not exceed $500,000 at any one time. The modification
did not change the total annual loan payment and was valid through December 1,
1994. Subsequent to December 1, 1994, monthly installments are payable in
accordance with the original agreement.
The mortgage loan has been guaranteed by the limited partners of Rahn Hotels,
Ltd.
F-52
<PAGE> 57
Loan Payable to Affiliates
The loan payable to affiliates is unsecured and is due on demand. This loan is
payable to two of the limited partners of Rahn Hotels, Ltd. Included in the 1994
balance is $917,354 of accrued interest (none at December 31, 1995). The
Partnership did not incur interest on the accrued interest balance. The interest
rate resets monthly and is set at 2.0 percent over the prime rate. The interest
rate was 10.5 percent at December 31, 1995, and December 25, 1994.
Promissory Notes Payable to Bank
During 1992, the Partnership signed a $125,807 promissory note payable to a bank
for the purchase of telephone equipment. The term of the promissory note is from
November 20, 1992, to November 20, 1997. The promissory note is secured by the
related telephone equipment, and the interest rate on the note is 10.0 percent.
During 1995, the Partnership signed a $350,000 promissory note payable to a bank
for the development of a laundry facility. The note is secured by the related
laundry equipment, and the term is from February 27, 1995, to May 27, 2000, with
principal and interest payments due monthly. Interest on the note is charged at
10.5 percent.
Also during 1995, the Partnership signed a $414,400 promissory note payable to a
bank for the purchase of a parcel of land adjacent to the hotel. The term of the
note is from April 5, 1995, to April 5, 1998, and is secured by the related
land. The principal is due at maturity, and interest is due monthly at an annual
rate of prime plus 1.5 percent, which at December 31, 1995, was 10.0 percent.
Other Long-term Liabilities
Other long-term liabilities include a liability payable to the County of Sonoma
for a geothermal well drilled by the County on SMI property. The liability is
payable in semiannual installments through 1998, with interest payable at 4.25
percent.
Based upon the borrowing rates currently available to the Partnership, the
carrying value of long-term debt approximates fair value.
5. COMMITMENTS AND CONTINGENCY:
Lease Commitments
The Partnership and an affiliate lease certain equipment and buildings under
operating leases that expire at various dates through 1998. Future minimum
payments under these leases are as follows:
<TABLE>
<CAPTION>
Equipment
---------
<S> <C>
1996 $ 72,030
1997 61,255
1998 50,400
1999 48,000
2000 6,000
--------
$165,655
========
</TABLE>
Equipment lease expense in 1995 and 1994 was $15,465 and $17,757, respectively.
The minimum building lease payments are subject to increase based on various
consumer price indices. Total rent paid on these building leases was $42,438 and
$68,665 in 1995 and 1994, respectively.
F-53
<PAGE> 58
Other
The Partnership is involved in litigation arising in the normal course of
business. Management's opinion is that the ultimate outcome of this litigation
will not have a material adverse effect on the Partnership's operations or
financial position.
F-54
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management of
VINTAGE RESORTS, L.L.C.:
We have audited the accompanying statement of assets, liabilities and project
deficit of Canyon Ranch in the Berkshires, a Vintage Resorts, L.L.C. property
managed by Canyon Ranch Management, L.L.C. as of December 31, 1996, and the
related statements of operations, changes in project equity (deficit), and
cash flows for the year then ended. These financial statements are the
responsibility of Canyon Ranch's management. Our responsibility is to express
an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the project accounts maintained
by Canyon Ranch Management, L.L.C. for Canyon Ranch in the Berkshires at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
November 13, 1997
F-55
<PAGE> 60
CANYON RANCH IN THE BERKSHIRES
(Project Accounts Maintained by
Canyon Ranch Management, L.L.C.)
STATEMENT OF ASSETS, LIABILITIES AND PROJECT DEFICIT--DECEMBER 31, 1996
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 992,090
Restricted cash 1,708,377
Accounts receivable, less allowance of $5,000
for doubtful accounts 418,857
Supplies 567,677
Prepaid expenses 412,835
Current portion of notes receivable 295,992
-----------
Total current assets 4,395,828
OTHER ASSETS:
Notes receivable, less current portion 219,145
Deposits and other assets 12,275
-----------
Total other assets 231,420
-----------
Total assets $ 4,627,248
===========
LIABILITIES AND PROJECT DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,086,823
Accrued expenses 1,110,154
Advances from affiliates 987,309
Customer deposits and gift certificates 1,695,562
Obligations under barter agreements, net 10,107
-----------
Total current liabilities 4,889,955
DEFERRED MEMBER REVENUE 80,100
-----------
Total liabilities 4,970,055
PROJECT DEFICIT (342,807)
-----------
Total liabilities and project deficit $ 4,627,248
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-56
<PAGE> 61
CANYON RANCH IN THE BERKSHIRES
(Project Accounts Maintained by
Canyon Ranch Management, L.L.C.)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
DEPARTMENTAL REVENUES:
Rooms $ 14,944,257
Spa services 6,660,194
Food 57,633
Other revenues 3,752,842
------------
Total departmental revenues 25,414,926
OPERATING COSTS AND EXPENSES:
Departmental expenses-
Rooms 2,591,951
Spa services 7,306,756
Food 3,596,197
Other departmental expenses 200,457
Unallocated operating expenses-
General and administrative 2,217,538
Sales and marketing 1,817,220
Depreciation and amortization 1,524,860
Building and grounds 1,369,272
Management fees 729,893
Utilities 714,003
Insurance 291,289
Property taxes 268,141
Leased equipment 117,052
Other unallocated operating expenses 50,000
------------
Total operating costs and expenses 22,794,629
------------
INCOME BEFORE LOSS ON SALE OF PROPERTY AND OTHER EXPENSES 2,620,297
LOSS ON SALE OF REAL PROPERTY (SEE NOTE 3) (2,972,973)
OTHER EXPENSES:
Interest 818,801
------------
NET LOSS $ (1,171,477)
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-57
<PAGE> 62
CANYON RANCH IN THE BERKSHIRES
(Project Accounts Maintained by
Canyon Ranch Management, L.L.C.)
STATEMENT OF PROJECT EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
PROJECT EQUITY, December 31, 1995 $ 18,786,398
Return on operating deficit funding (230,959)
Contributed capital 89,710
Distributions for nonrevenue enhancing repairs and maintenance (36,579)
Allocation of assets, net of liabilities assumed (see Note 1) (17,779,900)
Net loss (1,171,477)
------------
PROJECT DEFICIT, December 31, 1996 $ (342,807)
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-58
<PAGE> 63
CANYON RANCH IN THE BERKSHIRES
(Project Accounts Maintained by
Canyon Ranch Management, L.L.C.)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,171,477)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Loss on sale of real property 2,972,973
Depreciation and amortization 1,524,860
Changes in operating assets and liabilities-
Restricted cash 180,914
Accounts receivable (163,761)
Supplies (174,070)
Accounts payable and accrued expenses 306,621
Customer deposits and gift certificates 242,990
Advances from affiliates (706,124)
Other (435,431)
------------
Net cash provided by operating activities 2,577,495
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,144,720)
Collection of notes receivable 104,384
------------
Net cash used in investing activities (1,040,336)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on long-term debt (87,597)
Return on operating deficit funding (230,959)
Contribution of capital 89,710
Net cash retained by partnership (504,206)
------------
Net cash used in financing activities (733,052)
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 804,107
CASH AND CASH EQUIVALENTS, at beginning of year 187,983
------------
CASH AND CASH EQUIVALENTS, at end of year $ 992,090
============
SUPPLEMENTAL CASH FLOW INFORMATION:
Assumption of note payable $ 8,779,430
============
Noncash allocation of assets, net of liabilities assumed $ 17,312,273
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-59
<PAGE> 64
CANYON RANCH IN THE BERKSHIRES
(Project Accounts Maintained by
Canyon Ranch Management, L.L.C.)
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION:
Canyon Ranch in the Berkshires ("Canyon Ranch" or the "Project") is a luxury
health and fitness resort. Prior to December 11, 1996, Canyon Ranch was owned
by Canyon Ranch - Bellefontaine Associates Limited Partnership (the
"Partnership"). On December 11, 1996, the Partnership entered into an agreement
with Canyon Ranch Management, L.L.C. (the "Manager"), owned by affiliates of
the general partner of the Partnership, to manage the Project under an
exclusive thirty-year contract with two ten-year renewal options. The
Partnership then leased the real and personal property of Canyon Ranch, except
for the tradenames and trademarks of Canyon Ranch (the "Rights"), to Vintage
Resorts, L.L.C.(succeeded by Wine Country Hotel, L.L.C.) under a ten-year lease
agreement. The management and lease agreements are collectively referred to
hereafter as the "Agreements."
The Partnership then (a) sold the leased assets, the supplies inventories and
certain other assets of the Project to Crescent Real Estate Equities Limited
Partnership ("Crescent," see Note 3), (b) transferred all of its rights and
title under the Agreements to Crescent, and (c) granted to Crescent a
nonexclusive license to use the Rights solely as they relate to the operations
of the Project.
The accompanying financial statements include the Project accounts maintained by
the Manager as of December 31, 1996, and the net income of the Project for the
year then ended. Project equity at December 31, 1995, represents equity of the
Partnership at such date. Upon sale to Crescent, at December 11, 1996, certain
assets acquired by Crescent and liabilities assumed by Crescent were transferred
to the books of Crescent and Project equity was reduced for the net amount.
Amounts reported in the accompanying statement of operations are consistent with
net income of the Partnership, since results of operations for the period from
December 11, 1996, through December 31, 1996, are not material to Wine Country
Hotel, L.L.C.
The sale of the assets by the Partnership to Crescent required Crescent to
purchase certain noncash operating assets and liabilities of the Project (guest
receivables, trade accounts payable, etc.). Crescent contributed these accounts,
along with Canyon Ranch's supplies inventories and certain operating funds, to
the Project. Property and equipment and assumed indebtedness were not
contributed and are therefore excluded from the statement of assets, liabilities
and project equity at December 31, 1996.
2. SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Revenues from room, food and spa services are recognized at the time the
services are rendered. Cash received for room deposits and gift certificates are
deferred until services are rendered. Memberships were recognized over three
years at a rate of 50% in year one and 25% of the original balance each year
over the following two years.
F-60
<PAGE> 65
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
Canyon Ranch considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Restricted Cash
Canyon Ranch is required to maintain various reserves and escrows under a
long-term note arrangement which was previously an obligation of the Partnership
and was assumed by Crescent through its acquisition of Canyon Ranch.
Concentration of Credit Risk
Financial instruments which potentially subject Canyon Ranch to concentrations
of credit risk consist principally of cash. Canyon Ranch places its cash with
high-credit-quality financial institutions and has not experienced losses in
these transactions; however, at times, the bank deposits exceed the FDIC
insurance limits.
Supplies
Supplies, consisting primarily of food, beverages, promotional materials and
linens, are stated at cost.
Income Taxes
All items of income, expense and available tax credits were passed through to
the partners or the Lessee, as appropriate. Accordingly, there is no provision
for income taxes in the accompanying financial statements.
Deficit Funding
The Managing General Partner ("MGP") of the Partnership was obligated to make
additional capital contributions to fund Operating Deficits during the 36 months
subsequent to the opening of the facility (October 1989), not to exceed
$3,000,000. The MGP contributed $3,000,000 of deficit funding in 1990. Such
deficit funding, including interest at prime rate, is refundable to the MGP out
of future operating cash flow, subject to restrictions as defined in the
Partnership agreement.
3. LOSS ON SALE OF REAL PROPERTY:
As discussed in Note 1, on December 11, 1996, the Partnership sold certain real
and personal property of the Project to Crescent. Assets sold to Crescent had
the following net book values recorded on the books of the Partnership at the
date of sale:
<TABLE>
<S> <C>
Deferred financing costs, net $ 589,398
Property and equipment, net 31,753,479
Inventory 512,523
Other 117,573
-----------
$32,972,973
===========
</TABLE>
F-61
<PAGE> 66
In exchange for these assets, Crescent paid $21,220,570 in cash and assumed the
$8,779,430 indebtedness of the project (total purchase price of $30,000,000).
For financial reporting purposes, the Project recognized a loss on the sale of
$2,972,973.
4. RELATED-PARTY TRANSACTIONS:
Advances from affiliates totaling approximately $1 million represent the net
cash transfers and other transactions from the various affiliates of the
Manager. The advances do not bear interest and have no stated repayment terms.
Certain costs (particularly advertising, postage, and other services provided)
are allocated among certain of the affiliated entities, while others are direct
costs paid on behalf of Canyon Ranch.
5. MANAGEMENT FEE:
Management fees of $729,892, representing 3% of gross revenues, were charged to
Canyon Ranch in 1996 under the management agreement dated May 5, 1988 with a
previous manager.
Pursuant to a management agreement with the Manager, the management fee for 1997
and thereafter consists of a basic fee and incentive fee. The basic fee is
computed as the lesser of $700,000 or the Excess of Profit, as defined, over the
Basic Fee Base, as defined. The incentive fee is 50% of the Excess of Profit, as
defined, over the Incentive Fee Base, as defined.
6. LEASE AGREEMENT:
Effective December 11, 1996, the Partnership entered into a ten-year lease
agreement with the Lessee for the real property of Canyon Ranch. The agreement
requires the Lessee to make payments of base rent of $200,000 per month, as well
as periodic payments of percentage rent based on Gross Receipts, as defined,
subject to certain floors and ceilings. The lease expires December 31, 2006.
F-62
<PAGE> 67
Report of Independent Auditors
Partners
Canyon Ranch-Bellefontaine Associates
Limited Partnership
We have audited the accompanying balance sheets of Canyon Ranch-Bellefontaine
Associates Limited Partnership (the Partnership) as of December 31, 1995 and
1994, and the related statements of operations, changes in partners' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our 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 opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Canyon Ranch-Bellefontaine
Associates Limited Partnership at December 31, 1995 and 1994, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
March 8, 1996
F-63
<PAGE> 68
Canyon Ranch-Bellefontaine Associates Limited Partnership
d/b/a Canyon Ranch in the Berkshires
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 187,983 $ 996,397
Restricted cash 1,354,927 --
Accounts receivable, less allowance of $5,000 for doubtful
accounts in 1995 and 1994 255,096 195,918
Supplies 393,607 376,560
Prepaid expenses, deposits and other assets 280,818 350,594
Current portion of notes receivable, less allowance of $80,000 in
1995 and 1994 354,820 441,568
----------- -----------
Total current assets 2,827,251 2,361,037
Other assets:
Restricted cash 534,364 336,249
Deferred financing costs, less accumulated amortization of $15,820 390,966 --
Notes receivable, less current portion 264,701 152,769
Construction in progress 353,718 304,732
Deposits and other assets 26,439 596,985
----------- -----------
Total other assets 1,570,188 1,390,735
Property and equipment:
Land 3,676,579 3,676,579
Land improvements 492,304 438,524
Buildings 31,429,810 31,380,367
Furniture, fixtures and equipment 4,847,506 4,413,125
----------- -----------
40,446,199 39,908,595
Less accumulated depreciation 8,654,578 7,246,713
----------- -----------
Net property and equipment 31,791,621 32,661,882
----------- -----------
$36,189,060 $36,413,654
=========== ===========
</TABLE>
F-64
<PAGE> 69
Canyon Ranch-Bellefontaine Associates Limited Partnership
d\b\a Canyon Ranch in the Berkshires
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
------------ ------------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 684,822 $ 863,941
Accrued expenses 1,161,986 1,349,550
Advances from affiliates 2,534,133 2,348,221
Customer deposits and gift certificates 1,452,572 1,282,058
Obligations under barter agreements, net 65,095 93,823
Current portion of unearned charter member revenues 786,033 826,712
Current portion of capital lease obligation -- 38,670
Current portion of long-term debt 87,597 --
Long-term debt in default -- 28,574,121
------------ ------------
Total current liabilities 6,772,238 35,377,096
Noncurrent liabilities:
Long-term debt 8,771,791 --
Accrued interest on the Managing General Partner's
deficit funding 1,328,136 1,059,636
Unearned charter member revenues, less current portion 530,497 541,814
------------ ------------
Total noncurrent liabilities 10,630,424 1,601,450
Partners' equity (deficit):
General partners 10,758,949 (95,864)
Limited partners 8,027,449 (469,028)
------------ ------------
Total partners' equity (deficit) 18,786,398 (564,892)
------------ ------------
$ 36,189,060 $ 36,413,654
============ ============
</TABLE>
See accompanying notes.
Certain amounts reclassified in 1994 to permit comparison.
F-65
<PAGE> 70
Canyon Ranch-Bellefontaine Associates Limited Partnership
d/b/a Canyon Ranch in the Berkshires
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
------------ ------------
<S> <C> <C>
Revenues:
Room and food revenues $ 13,721,757 $ 12,800,982
Spa services 5,805,640 5,434,954
Life enhancement programs revenues 93,160
Other revenues 3,385,280 3,257,758
------------ ------------
Total revenues 22,912,677 21,586,854
Departmental expenses:
Rooms 2,410,628 2,861,199
Food 3,366,916 3,241,709
Spa services 6,468,125 6,371,347
Life enhancement programs expenses 19,315 82,778
Other expenses 193,812 203,079
------------ ------------
Total departmental expenses 12,458,796 12,760,112
Undistributed expenses:
General and administrative 2,010,235 2,179,373
Sales and marketing 1,950,150 1,949,296
Building and grounds 1,452,502 1,097,518
Utilities 667,956 659,213
------------ ------------
Total undistributed expenses 6,080,843 5,885,400
------------ ------------
Gross operating income 4,373,038 2,941,342
Management fees 687,380 647,606
------------ ------------
Adjusted gross operating income 3,685,658 2,293,736
Fixed expenses:
Insurance 268,439 251,897
Property taxes 285,740 304,477
Leased equipment 105,773 97,245
Other 50,000 50,000
------------ ------------
Total fixed expenses 709,952 703,619
------------ ------------
Profit before interest, depreciation, amortization and
extraordinary item 2,975,706 1,590,117
Interest (including penalties in 1994) 931,935 2,611,807
Depreciation 1,407,865 1,451,069
Amortization 15,820 305,253
------------ ------------
Income (loss) before extraordinary item 620,086 (2,778,012)
Extraordinary item - Gain on forgiveness of long-term debt 18,999,704 --
------------ ------------
Net income (loss) $ 19,619,790 $ (2,778,012)
============ ============
</TABLE>
See accompanying notes.
F-66
<PAGE> 71
Canyon Ranch-Bellefontaine Associates Limited Partnership
d/b/a Canyon Ranch in the Berkshires
Statements of Partners' Equity (Deficit)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
------------------------------------------
<S> <C> <C> <C>
Partners' equity at December 31, 1993 $ 592,931 $ 1,837,547 $ 2,430,478
Return on Operating Deficit Funding (217,358) (217,358)
Allocation of net loss (471,437) (2,306,575) (2,778,012)
----------- ----------- -----------
Partners' deficit at December 31, 1994 (95,864) (469,028) (564,892)
Return on Operating Deficit Funding (268,500) (268,500)
Allocation of net income 11,123,313 8,496,477 19,619,790
----------- ----------- -----------
Partner's equity at December 31, 1995 $10,758,949 $ 8,027,449 $18,786,398
=========== =========== ===========
</TABLE>
See accompanying notes.
Certain amounts reclassified in 1994 to permit comparison.
F-67
<PAGE> 72
Canyon Ranch-Bellefontaine Associates Limited Partnership
d/b/a Canyon Ranch in the Berkshires
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 19,619,790 $ (2,778,012)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 1,423,685 1,756,322
Provision for losses on accounts and notes receivable 50,000
Gain on forgiveness of long-term debt (18,999,704)
Changes in operating assets and liabilities:
Accounts and notes receivable (84,362) 172,695
Supplies (17,047) 7,884
Prepaid expenses, deposits and other assets 20,790 (161,789)
Deferred financing costs (406,786)
Accounts payable (179,119) 268,758
Accrued expenses (187,564) 479,477
Accrued interest and penalties on long-term debt in default -- 2,185,383
Other liabilities 89,790 133,925
Restricted cash (1,553,042) (336,249)
------------ ------------
Net cash provided by (used in) operating activities (273,569) 1,778,394
FINANCING ACTIVITIES
Net increase (decrease) in advances from affiliates 185,912 (136,345)
Proceeds from long-term debt 8,900,000 --
Payment of long-term debt in default (8,800,000) --
Payment of long-term debt (40,612) --
Repayments on capital lease obligations (38,670) (123,982)
Payment of FDIC fees and other costs in settlement of long-term debt
in default (774,417) --
(Increase) decrease in deposits and other assets 570,546 (552,646)
------------ ------------
Net cash provided by (used in) financing activities 2,759 (812,973)
INVESTING ACTIVITY
Additions to property and equipment (537,604) (332,773)
------------ ------------
Net cash used in investing activity (537,604) (332,773)
------------ ------------
Increase (decrease) in cash and cash equivalents (808,414) 632,648
Cash and cash equivalents at beginning of year 996,397 363,749
------------ ------------
Cash and cash equivalents at end of year $ 187,983 $ 996,397
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Noncash financing activities:
Deferred interest on deficit funding $ 268,500 $ 217,358
============ ============
</TABLE>
See accompanying notes.
Certain amounts reclassified in 1994 to permit comparison.
F-68
<PAGE> 73
CANYON RANCH-BELLEFONTAINE ASSOCIATES LIMITED PARTNERSHIP
d/b/a CANYON RANCH IN THE BERKSHIRES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Canyon Ranch-Bellefontaine Associates Limited Partnership (the Partnership),
d/b/a Canyon Ranch in the Berkshires, operates a luxury health and fitness
resort. Construction of the buildings commenced in December 1987, and the resort
opened for operations in October 1989. The Partnership caters to affluent
individuals who seek rejuvenation through relaxation, physical activity,
educational classes and traditional spa services including massage, herbal wraps
and skin care.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from room, food and spa services are recognized at the time the
services are rendered. Cash received for room deposits and gift certificates are
deferred until services are rendered. Charter Memberships are recognized over
three years at a rate of 50% in year one and 25% of the original balance each
year over the following two years. (see Note 6).
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Partnership to
concentrations of credit risk consist principally of cash. The Partnership
places its cash with high-credit-quality financial institutions and has not
experienced losses in these transactions; however, at times, the bank deposits
exceed the FDIC insurance limits.
SUPPLIES
Supplies, consisting primarily of food, beverages, promotional materials and
linens, are stated at cost.
DEFERRED FINANCING COSTS
Deferred financing costs consist primarily of costs incurred in 1995 relating to
the refinancing of the Partnership's existing mortgage indebtedness. The Company
amortizes these costs on a straight-line basis over 15 years, which represents
the term of the loan assuming the loan is paid at an optional prepayment date.
CONSTRUCTION IN PROGRESS
Construction in progress at December 31, 1995 consists primarily of capitalized
architectural fees and the cost of the promotional materials associated with the
development of condominiums to be built on the premises. Construction has not
yet begun as management has decided to postpone further development until market
conditions are more favorable. The Partnership fully intends to develop this
project or, alternatively, recover its costs through the sale of the land.
F-69
<PAGE> 74
CANYON RANCH-BELLEFONTAINE ASSOCIATES LIMITED PARTNERSHIP
d/b/a CANYON RANCH IN THE BERKSHIRES
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the related assets as
follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Land improvements 15
Buildings 40
Furniture, fixtures and equipment 7
</TABLE>
NONMONETARY TRANSACTIONS
The Partnership provides free guest stays primarily in exchange for advertising.
The Partnership records the advertising as an asset and the services to be
provided as a liability at the fair value of either the advertising or the
services, whichever is more readily determinable. Revenue is recognized as guest
stays are provided; costs are recorded as the advertising is used. The
Partnership recognized revenue of $39,105 and $151,753, as well as expense of
$67,832 and $92,510 in 1995 and 1994, respectively, under these agreements.
INCOME TAXES
All items of income, expense and available tax credits are passed through to the
Partners. Accordingly, there is no provision for income taxes in the
accompanying financial statements.
F-70
<PAGE> 75
CANYON RANCH-BELLEFONTAINE ASSOCIATES LIMITED PARTNERSHIP
d/b/a CANYON RANCH IN THE BERKSHIRES
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long Lived Assets to Be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flow estimated to be generated by those assets are less than assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The Company will adopt Statement 121 in the
first quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
3. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Sales and other taxes $ 323,484 $ 783,159
Salaries, wages and payroll taxes 301,168 355,568
Vacation 203,153 175,000
Professional fees (including $221,448 in 1995
relating to FDIC fees and other costs in
settlement of long-term debt in default) 221,448 4,730
Principal and interest on long-term debt 81,314 --
Other 31,419 31,093
---------- ----------
$1,161,986 $1,349,550
========== ==========
</TABLE>
4. LONG-TERM DEBT AND LONG-TERM DEBT IN DEFAULT
Long-Term Debt
On June 28, 1995, in conjunction the settlement of long-term debt in default,
the Partnership entered into an $8,900,000 mortgage note with a financial
institution. Under this new agreement, the note, including all outstanding
principal with accrued and unpaid interest, matures on July 1, 2020, although
the Partnership has the option to fully pay off all outstanding principal and
interest on a prepayment date of July 1, 2010. The note bears interest at a rate
of 10.07% per annum through July 1, 2010 and at a rate equal to the greater of
15.07% per annum or the treasury rate plus 5% per annum through July 1, 2020.
Interest expense for the year ended December 31, 1995 totaled $452,250.
The agreement requires the Partnership to maintain restricted cash deposit
accounts for the purpose of debt obligations, real estate taxes, insurance and
capital expenditures. Restricted cash balances amounted to $1,889,291 at
December 31, 1995, of which $1,354,927 is classified as current.
Included in restricted cash and accrued expenses at December 31, 1995 is $81,314
relating to December 1995's payment of principal and interest on long-term debt.
The bank appropriately removed this amount from the Partnership's restricted
cash account on January 9, 1996.
Future maturities under this new agreement are as follows:
<TABLE>
<S> <C> <C>
1996 $ 87,597
1997 96,837
1998 107,051
1999 118,343
2000 130,826
Thereafter 8,318,734
----------
8,859,388
Less current portion 87,597
----------
$8,771,791
==========
</TABLE>
Substantially all assets of the Partnership are collateralized under this
mortgage agreement.
F-71
<PAGE> 76
CANYON RANCH-BELLEFONTAINE ASSOCIATES LIMITED PARTNERSHIP
d/b/a CANYON RANCH IN THE BERKSHIRES
NOTES TO FINANCIAL STATEMENTS
4. LONG-TERM DEBT AND LONG-TERM DEBT IN DEFAULT (CONTINUED)
Long-Term Debt in Default
The Partnership satisfied its settlement obligation (including principal,
interest and penalties) for $8,900,000 in June 1995. Pursuant to the debt
restructuring, the Partnership recognized an extraordinary gain of $18,999,704
representing forgiveness of the long-term debt, including principal, interest
and penalties, net of professional fees associated with the settlement.
Prior to this settlement, interest under the obligation was charged at the
default rate, equal to the greater of: (a) the prime rate plus 5% or (b) 12%. In
addition, penalties of 4% per annum accrued on the outstanding principal balance
from the date of default. Beginning on August 1, 1994, interest was charged at a
rate equal to 10% per annum of the then-estimated settlement obligation, or
$9,504,000. Interest expense associated with long-term debt in default for the
years ended December 31, 1995 and 1994 totaled $475,200 and $2,041,392,
respectively. Cash payments of interest totaled $475,200 and $397,875 for 1995
and 1994.
5. LEASES
Operating Leases
The Partnership leases certain equipment under operating leases with various
terms and renewal options. Future minimum commitments under all leases with
noncancelable terms of one year or more are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
------------------
<S> <C>
1996 $ 92,335
1997 54,061
--------
$146,396
========
</TABLE>
Rent expense was $113,689 and $104,442 for the years ended December 31, 1995 and
1994.
Capital Leases
Included in the Partnership's property and equipment are the following amounts
related to capital leases:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
--------- ---------
<S> <C> <C>
Leased equipment under capital leases $ 501,742 $ 501,742
Less accumulated amortization (501,742) (473,404)
--------- ---------
$ 0 $ 28,338
========= =========
</TABLE>
Amortization of assets recorded under capital leases is included in depreciation
expense.
6. UNEARNED CHARTER MEMBERSHIP REVENUES
The Partnership sells charter memberships which entitle members to twelve days
of free stay during the first year and a 50% discount off the nightly rates for
twelve days per year for the next nine years, subject to certain restrictions.
The Partnership amortizes the revenue from charter memberships over three years
at a rate of 50% in year one and 25% of the original balance each year over the
following two years. At December 31, 1995 and 1994, unearned revenue was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
---------- ----------
<S> <C> <C>
Unearned charter member revenues $1,316,530 $1,368,526
Less portion to be amortized over next twelve months 786,033 826,712
---------- ----------
Noncurrent portion $ 530,497 $ 541,814
========== ==========
</TABLE>
F-72
<PAGE> 77
CANYON RANCH-BELLEFONTAINE ASSOCIATES LIMITED PARTNERSHIP
d/b/a CANYON RANCH IN THE BERKSHIRES
NOTES TO FINANCIAL STATEMENTS
6. UNEARNED CHARTER MEMBERSHIP REVENUES (CONTINUED)
The Charter Membership agreement stipulates that memberships are cancelable, at
the members' option, up to 30 days following the first Charter Membership stay.
At December 31, 1995, four members, with membership fees totaling $65,000, were
eligible to exercise this option.
7. RELATED-PARTY TRANSACTIONS
Advances from affiliates represent the net cash transfers and other transactions
from the following entities:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------- -----------
<S> <C> <C>
Due from Canyon Ranch Associates $ (47,833) $ (47,833)
Due to General Partners 690,306 654,355
Due to Bellefontaine Management Associates 1,033,420 1,038,391
Due to Canyon Ranch Enterprises 550,425 496,993
Due to LCP Hotels 143,815 143,815
Due to Lepercq Capital Partners 164,000 62,500
----------- -----------
$ 2,534,133 $ 2,348,221
=========== ===========
</TABLE>
The advances at December 31, 1995 and 1994 do not bear interest and have no
stated repayment terms.
Canyon Ranch Associates, Bellefontaine Management Associates and Canyon Ranch
Enterprises are affiliates of the Managing General Partner. LCP Hotels and
Lepercq Capital Partners are affiliates of the Co-General Partner.
F-73
<PAGE> 78
CANYON RANCH-BELLEFONTAINE ASSOCIATES LIMITED PARTNERSHIP
d/b/a CANYON RANCH IN THE BERKSHIRES
NOTES TO FINANCIAL STATEMENTS
7. RELATED-PARTY TRANSACTIONS (CONTINUED)
A summary of costs paid on behalf of or allocated to the Partnership by these
affiliates for the years ended December 31, 1995 and 1994 is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
---------- ----------
<S> <C> <C>
Management fees $ 687,380 $ 647,606
Payroll and services provided 630,103 608,261
Interest on operating deficit funding 268,500 217,358
Advertising 119,426 138,427
Postage 157,778 133,620
Brokerage fees 89,000
Telephone 53,521 85,501
Travel 45,651 52,444
Reporting fees 50,000 50,000
Professional fees 33,951 36,559
Other 69,685 32,969
---------- ----------
$2,204,995 $2,002,745
========== ==========
</TABLE>
Certain costs (particularly advertising, postage and other services provided)
are allocated among certain of the affiliated entities, while others are direct
costs paid on behalf of the Partnership.
Management fees of $687,380 and $647,606, representing 3% of gross revenues,
were charged to the Partnership in 1995 and 1994, respectively. Under a
management agreement dated May 5, 1988, an affiliate of the Managing General
Partner was appointed manager of the resort. The initial term of the contract is
for 15 years.
F-74
<PAGE> 79
CANYON RANCH-BELLEFONTAINE ASSOCIATES LIMITED PARTNERSHIP
d/b/a CANYON RANCH IN THE BERKSHIRES
NOTES TO FINANCIAL STATEMENTS
8. PARTNERSHIP AGREEMENT
The Amended and Restated Partnership Agreement dated May 1988, contains, among
other things, the following provisions:
ALLOCATION OF INCOME AND LOSSES
Income is allocated to the Partners as follows:
1. First, to the Limited Partners to the extent of their negative
capital balances, and second, to the General Partners (to the extent
of the remainder) to the extent of their negative capital balances.
2. Second, to the Managing General Partner to the extent of Operating
Deficit Contributions.
3. Third, to the Partners to the extent of cash distributions, other
than guaranteed payments and certain other returns of capital as
described in the Partnership Agreement.
4. The remainder, 50% to the Limited Partners, 50% to the General
Partners.
Losses are allocated to the Partners as follows:
1. First, to the General Partners to the extent of Operating Deficit
Contributions.
2. Second, an amount equal to the aggregate positive balance of the
Partners Adjusted Capital Accounts.
3. The remainder to the General Partners.
F-75
<PAGE> 80
CANYON RANCH-BELLEFONTAINE ASSOCIATES LIMITED PARTNERSHIP
d/b/a CANYON RANCH IN THE BERKSHIRES
NOTES TO FINANCIAL STATEMENTS
8. PARTNERSHIP AGREEMENT (CONTINUED)
DEFICIT FUNDING
The Managing General Partner (MGP) was obligated to make additional capital
contributions to fund Operating Deficits during the 36 months subsequent to
the opening of the facility (October 1989), not to exceed $3,000,000. The
MGP contributed $3,000,000 of deficit funding in 1990. Such deficit
funding, including interest at the prime rate, is refundable to the MGP out
of future operating cash flow, subject to restrictions as defined in the
Partnership agreement. Interest related to this obligation, accrued but
unpaid at December 31, 1995 and 1994, totaled $1,328,136 and $1,059,636,
respectively.
PREFERRED RETURN TO LIMITED PARTNERS
In accordance with the Partnership Agreement, the Limited Partners were
paid interest at a rate of 10% on their respective capital balances for the
period from the date of their capital contribution to the close of the
construction loan (September 21, 1987). In addition, the agreement provides
that the Limited Partners are entitled to a preferred return on their
average unrecovered capital at a rate of 10% per annum through December 31,
1992, 11% thereafter through December 31, 1997 and 12% after January 1,
1998. No preferred return payments had been made through December 31, 1995.
9. 401(k) PLAN
The Company maintains a 401(k) plan covering all employees who meet certain
eligibility requirements. The plan is fully funded through employee
contributions. During 1995 and 1994, the Company incurred administrative
expenses of $13,734 and $13,066, respectively.
F-76
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management of
RoseStar Management, L.L.C.:
We have audited the accompanying statement of operating assets, liabilities and
project equity of Canyon Ranch in Tucson (as defined in Note 1) ("Canyon
Ranch"), a Canyon Ranch Leasing, L.L.C. operation, managed by Canyon Ranch
Management, L.L.C. ("Canyon Ranch Management"), as of December 31, 1996, and the
related statements of operations, changes in project equity, and cash flows for
the period from July 26, 1996, through December 31, 1996. We have also audited
the statements of operations, changes in equity, and cash flows of
Canyon Ranch, Inc. ("CRI") (the previous owner of Canyon Ranch) for the period
from January 1, 1996, through July 25, 1996. These financial statements are the
responsibility of Canyon Ranch'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 presents fairly, in
all material respects, the financial position of Canyon Ranch at December 31,
1996, and July 26, 1996, and the results of its operations and its cash flows
for the period from July 26, 1996, through December 31, 1996, and the operations
of CRI related to the accounts maintained at the property level for the period
from January 1, 1996, through July 25, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
November 13, 1997
F-77
<PAGE> 82
CANYON RANCH IN TUCSON
(As Defined In Note 1)
STATEMENT OF OPERATING ASSETS, LIABILITIES AND PROJECT EQUITY
AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $4,060,256
Accounts receivable 1,118,481
Receivable from Crescent 166,560
Inventories 926,367
Prepaid expenses and other 286,980
Advances to affiliates 366,885
----------
Total current assets 6,925,529
----------
Advances to affiliates for compensation 68,092
----------
Total assets $6,993,621
==========
LIABILITIES AND PROJECT EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $2,992,271
Deferred revenue 2,721,750
----------
Total current liabilities 5,714,021
ADVANCES FROM AFFILIATES 390,655
COMMITMENTS
PROJECT EQUITY 888,945
----------
Total liabilities and project equity $6,993,621
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-78
<PAGE> 83
CANYON RANCH IN TUCSON
(As Defined In Note 1)
and
CANYON RANCH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Canyon Ranch, Canyon Ranch
Inc. in Tucson
---------------- -----------------
January 1, 1996, July 26, 1996
through through
July 25, 1996 December 31, 1996
---------------- -----------------
<S> <C> <C>
REVENUES:
Guest and ancillary services $ 18,719,887 $ 12,388,731
Other 1,464,850 882,548
------------ ------------
20,184,737 13,271,279
OPERATING COSTS AND EXPENSES:
Salaries, wages, benefits, and commissions 9,402,771 6,796,500
General and administrative 984,116 724,764
Depreciation 782,742 --
Sales and marketing 599,892 589,551
Repairs and maintenance 308,096 156,456
Food and beverage 857,323 606,373
Utilities 308,671 243,115
Other operating expenses 1,757,199 1,353,510
Lease expense (see Note 1) -- 1,469,460
Management fee (see Note 1) -- 261,987
------------ ------------
15,000,810 12,201,716
------------ ------------
INCOME BEFORE GAIN ON SALE OF PROPERTY
AND OTHER EXPENSES 5,183,927 1,069,563
------------ ------------
GAIN ON SALE OF REAL PROPERTY (see Note 2) 35,197,934 --
------------ ------------
OTHER EXPENSES:
Interest expense (see Note 1) 1,545,663 --
Other, net (see Note 1) (198,970) --
------------ ------------
Total other expenses 1,346,693 --
------------ ------------
3,837,234 1,069,563
------------ ------------
NET INCOME $ 39,035,168 $ 1,069,563
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 84
CANYON RANCH IN TUCSON
(As Defined In Note 1)
and
CANYON RANCH, INC.
STATEMENT OF CHANGES IN PROJECT EQUITY
FOR THE PERIOD FROM JANUARY 1, 1996, THROUGH JULY 25, 1996,
AND JULY 26, 1996, THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
BALANCE, December 31, 1995 $ 409,062
Net income 39,035,168
------------
BALANCE, July 25, 1996 39,444,230
Predecessor equity (39,444,230)
Contribution of assets acquired, net of liabilities assumed 344,205
Net income 1,069,563
Distributions for nonrevenue enhancing repairs and maintenance (524,823)
------------
BALANCE, December 31, 1996 $ 888,945
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE> 85
CANYON RANCH IN TUCSON
(As Defined In Note 1)
and
CANYON RANCH, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Canyon Ranch, Canyon Ranch
Inc. in Tucson
---------------- -----------------
January 1, 1996, July 26, 1996
through through
July 25, 1996 December 31, 1996
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 39,035,168 $ 1,069,563
Adjustments to reconcile net income to net cash
provided by operating activities-
Gain on sale of property (see Note 2) (35,197,934) --
Depreciation 782,742 --
Changes in operating assets and liabilities-
Accounts receivable 1,025,142 (962,462)
Inventories (3,280) (315,172)
Deferred financing and other charges 33,915 --
Prepaid expenses and other 482,417 (174,873)
Accounts payable and accrued expenses (800,773) 1,522,514
Deferred revenue (158,291) 1,136,656
Other liabilities 434,154 --
------------ ------------
Net cash provided by operating activities 5,633,260 2,276,226
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (see Note 1) (418,992) --
Proceeds from sale of property and equipment (see Note 1) 2,703,379 --
Advances from affiliates, net (3,208,161) (44,322)
Increase in short-term investments (679,854) --
Payments received on notes receivable 50,236 --
Receivables from Crescent -- 2,353,175
------------ ------------
Net cash provided by (used in) financing
activities (1,553,392) 2,308,853
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable (see Note 1) (933,334) --
Distributions for nonrevenue enhancing repairs
and improvements -- (524,823)
------------ ------------
Net cash used in investing activities (933,334) (524,823)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,146,534 4,060,256
CASH, beginning of period 4,765,015 --
------------ ------------
CASH, end of period $ 7,911,549 $ 4,060,256
============ ============
SUPPLEMENTAL NONCASH TRANSACTIONS:
Investment in Crescent Partnership units $ 27,056,217 $ --
============ ============
Assumption of note payable by Crescent $ 27,733,333 $ --
============ ============
Contribution of assets, net of liabilities assumed $ -- $ 344,205
============ ============
Predecessor equity $ -- $(39,444,230)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE> 86
CANYON RANCH IN TUCSON
(As Defined In Note 1)
and
CANYON RANCH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ACCOUNTING POLICIES:
Description of Business
Canyon Ranch in Tucson is a luxury health and fitness resort (the "Resort") in
Tucson, Arizona.
Organization
Prior to July 26, 1996, Canyon Ranch, Inc. (CRI) held title to all assets of the
Resort. On July 26, 1996, the following transactions were effected:
CRI contracted with Canyon Ranch Management, L.L.C. (CRM), a limited liability
corporation owned by the stockholder and an officer of CRI, to manage the
Resort, under a management agreement. The management agreement provides CRM with
exclusive rights to manage the Resort for thirty years with two ten-year renewal
options. The agreement is subject to termination by the parties under certain
circumstances.
CRI leased the majority of the Resort's real property to Canyon Ranch Leasing,
L.L.C. (CRL), a limited liability corporation owned by the owners of CRM, under
a ten-year lease agreement (the management agreement and the lease agreement are
collectively referred to hereafter as the "Agreements").
CRI sold the leased real property, the supplies inventories and certain other
assets of the Resort to Crescent Real Estate Equities Company ("Crescent"), who
also assumed CRI's indebtedness relating to the resort. CRI also granted to
Crescent a personal, nonexclusive license to use the tradenames and trademarks
of the Resort (the ownership of which CRI retained) solely in connection with
the operation, promotion and development of the Resort, and conveyed to Crescent
all of its rights and obligations under the Agreements.
The real property not leased under the Lease Agreement and all personal property
of the Resort were purchased by CRL. Subsequent to December 31, 1996, ownership
of CRL was transferred to RoseStar Management, L.L.C..
Basis of Presentation
The accompanying financial statements reflect the accounts and transactions of
the Resort for the period from July 26, 1996, through December 31, 1996. For the
period from January 1, 1996, through July 25, 1996, the accompanying statements
include the accounts of and results of operations of CRI as CRI owned and
operated the Resort for that period.
F-82
<PAGE> 87
The sale of the leased assets by CRI to Crescent required Crescent to purchase
certain noncash operating assets and liabilities of the Resort (guest
receivables, trade accounts payable, etc.). Crescent contributed these accounts,
along with the Resort's supplies inventories and certain operating funds, to the
Resort. Property and equipment and assumed indebtedness were not contributed and
are therefore excluded from the statement of assets, liabilities and project
equity at December 31, 1996. The accompanying statement of assets, liabilities,
and project equity at December 31, 1996, reflects the net contribution of
$344,205 resulting from these transactions.
Under the terms of the Agreements, subsequent to July 26, 1996, CRL owes base
and percentage rental payments, and management fees to Crescent and CRM,
respectively. These liabilities are paid by CRM on behalf of CRL, and have been
included in the accompanying statement of operations of the Resort for the
period from July 26, 1996, through December 31, 1996, to appropriately reflect
all expenses incurred by or on behalf of CRL. Base and percentage rentals
allocated to the Resort for the period from July 26, 1996, through December 31,
1996, were $1,366,955 and $102,505, respectively. Management fees allocated to
the Resort for the period from July 26, 1996, through December 31, 1996, were
$261,987. Through December 31, 1996, the Resort has advanced $1.3 million to CRL
to fund these liabilities. The remaining unfunded balance of $390,655 is
reflected as advances from affiliates in the accompanying financial statements.
Inventories
Inventories, consisting primarily of food and supplies, are stated at the lower
of cost (first-in, first-out basis) or market.
Deferred Revenue
Deferred revenue consists principally of deposits for future services which will
be recognized as revenue in the period services are rendered.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. GAIN ON SALE OF REAL PROPERTY:
As discussed in Note 1, on July 26, 1996, CRI sold certain real property and
related assets of the Resort to Crescent. Assets sold to Crescent had the
following net book values recorded on the books of CRI at the date of the sale:
<TABLE>
<S> <C>
Inventory $ 611,195
Deferred financing costs, net 334,312
Property and equipment, net 20,885,588
Construction in process 463,900
-----------
Total $22,294,995
===========
</TABLE>
In exchange for these assets, Crescent issued $27,056,217 in units of Crescent's
Operating Partnership, paid $2,703,379 in cash and assumed the $27,733,333
indebtedness of the Resort. This represents the total purchase price of
$58,000,000, net of closing costs and proration adjustments of $507,071. For
financial reporting purposes, CRI recognized a gain on the sale of $35,197,934.
F-83
<PAGE> 88
3. LEASES:
CRL leases space at the Resort to a boutique, store, and beauty salon under
five-year leases with renewal options. The leases provide for either a base
rental plus a percentage of gross revenue, or a percentage of gross revenue
only. Base and contingent rentals were $149,465 for the period from January 1,
1996 through July 25, 1996, and $98,425 for the period from July 26, 1996,
through December 31, 1996.
4. EMPLOYEE COMPENSATION:
All noncontract personnel working at Canyon Ranch are employed by CRM. Under the
Agreements, CRL is required to reimburse CRM for all employee related
compensation and benefits incurred after July 26, 1996.
401(k) Profit Sharing Plan
CRM maintains a 401(k) and profit sharing plan (the "Plan"), which is a defined
contribution plan covering all except commissioned employees. Participants may
contribute up to 18% of their compensation to the Plan. CRM may make
discretionary contributions to the Plan equal to 1% of all participants'
compensation, which immediately vests, as well as additional discretionary
contributions, which vest over a seven-year period. Matching and discretionary
contributions to the Plan which are reimbursable by CRL amounted to $30,142 in
the period from July 26, 1996, through December 31, 1996.
Life Insurance Policies
CRI maintains life insurance policies for certain key management personnel of
CRM (the "Managers"). The cash surrender value of these policies (the CSV)
accrued to CRI and serves, in part, to offset certain awards provided by CRI to
the Managers and other employees of CRM prior to July 26, 1996. Any excess of
the CSV over the awards vest to the Managers at a rate of 4% per year.
The premiums on these policies are reflected as an expense in the accompanying
financial statements. Changes in the CSV and vested awards offset the recorded
premium expense and are recorded as advances to affiliate for compensation on
the accompanying statement of assets, liabilities and project equity at December
31, 1996. This receivable does not bear interest and will be paid upon the
future disposition of the respective awards. At December 31, 1996, these
advances totaled $68,092.
5. RELATED-PARTY TRANSACTIONS:
Crescent bears the financial obligation related to the construction of revenue
enhancing improvements, such as the addition of new rooms. The receivable from
Crescent of $166,560 recorded in the accompanying statement of assets,
liabilities and project equity at December 31, 1996, represents amounts extended
by Canyon Ranch on behalf of Crescent for such improvements that have yet to be
reimbursed.
Canyon Ranch makes expenditures for nonrevenue enhancing repairs and
improvements of the Resort on behalf of Vintage Resorts, L.L.C. and Crescent.
Such expenditures have been reflected as a distribution in the accompanying
financial statements as they are not obligations or expenditures of the Resort.
Canyon Ranch advances funds to CRI and affiliated entities. The advances do not
bear interest and are payable upon demand. At December 31, 1996, these advances
totaled $366,885.
F-84
<PAGE> 89
Report of Independent Auditors
Board of Directors
Canyon Ranch, Inc.
We have audited the accompanying balance sheets of Canyon Ranch, Inc., as of
December 31, 1995 and 1994, and the related statements of income, changes in
stockholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of Canyon Ranch, Inc.'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 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 opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Canyon Ranch, Inc., at December
31, 1995 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tucson, Arizona
March 26, 1996,
except for Note 7, as to which the date is
July 25, 1996
F-85
<PAGE> 90
Canyon Ranch, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------- -----------
<S> <C> <C>
ASSETS (Note 3)
Current assets:
Cash $ 1,795,185 $ 6,783,760
Restricted cash (Note 3) -- 2,320,436
Short-term investments 2,969,830 524,704
Accounts receivable 1,350,830 1,048,936
Current portion of notes receivable from related parties
(Note 2) 57,228 365,210
Property held for sale 373,000 568,000
Inventories 607,915 547,181
Prepaid expenses and other 594,524 468,637
----------- -----------
Total current assets 7,748,512 12,626,864
Notes receivable, less current portion 64,967 81,909
Notes receivable from related parties, less current portion
(Note 2) -- 570,434
Advances to stockholder (Note 2) 794,614 842,683
Advances to affiliates (Note 2) 287,948 245,196
Receivable from the general partners of Canyon Ranch
Bellefontaine Associates, L.P., net (Note 2) 3,809,185 4,979,369
Prepaid financing costs, net 368,228 47,416
Property and equipment
Land 4,803,736 4,803,736
Land improvements 1,953,266 1,921,850
Buildings 16,338,727 15,508,804
Furniture, fixtures, and equipment 10,626,721 9,434,335
----------- -----------
33,722,450 31,668,725
Less accumulated depreciation 12,278,431 10,925,298
----------- -----------
21,444,019 20,743,427
Construction-in-progress 54,452 485,311
----------- -----------
21,498,471 21,228,738
----------- -----------
$34,571,925 $40,622,609
=========== ===========
</TABLE>
F-86
<PAGE> 91
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 928,104 $ 880,721
Accrued expenses 1,875,027 1,825,137
Deferred revenue 2,335,985 2,161,830
Current portion of long-term debt (Note 3) 1,599,996 6,333,333
------------ ------------
Total current liabilities 6,739,112 11,201,021
Long-term debt, less current portion (Note 3) 27,066,671 28,666,667
Other liabilities (Note 5) 357,080 424,530
Contingencies (Note 6)
Stockholder's equity:
Common stock, $1 par value, 1,000,000 shares authorized,
759,000 shares issued and outstanding 759,000 759,000
Additional paid-in capital 150,000 150,000
Accumulated deficit (499,938) (578,609)
------------ ------------
Total stockholder's equity 409,062 330,391
------------ ------------
$ 34,571,925 $ 40,622,609
============ ============
</TABLE>
See accompanying notes.
F-87
<PAGE> 92
Canyon Ranch, Inc.
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
----------- -----------
<S> <C> <C>
REVENUES
Guest and ancillary services $30,866,332 $31,053,455
Other 1,736,513 1,452,510
----------- -----------
32,602,845 32,505,965
EXPENSES
Salaries, wages, and commissions 12,562,136 12,618,159
Employee benefits 2,557,567 2,447,649
General and administrative 3,316,868 2,997,233
Expendable supplies 1,486,724 1,654,188
Food and beverage costs 1,439,291 1,514,070
Utilities 665,824 697,890
Repairs and maintenance 547,792 464,938
Professional fees 313,234 208,420
Marketing and advertising 477,125 433,857
Depreciation and amortization 1,421,155 1,442,311
Interest 2,836,458 3,477,632
----------- -----------
Total expenses 27,624,174 27,956,347
----------- -----------
Net income $ 4,978,671 $ 4,549,618
=========== ===========
</TABLE>
See accompanying notes.
F-88
<PAGE> 93
Canyon Ranch, Inc.
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 759,000 $ 759,000 $150,000 $ (428,227) $ 480,773
Net income for the year -- -- -- 4,549,618 4,549,618
Distribution to stockholder
(Note 2) -- -- -- (4,700,000) (4,700,000)
---------- ---------- -------- ------------- -------------
Balance at December 31, 1994 759,000 759,000 150,000 (578,609) 330,391
Net income for the year -- -- -- 4,978,671 4,978,671
Distribution to stockholder
(Note 2) -- -- -- (4,900,000) (4,900,000)
---------- ---------- -------- ------------- -------------
Balance at December 31, 1995 759,000 $ 759,000 $150,000 $ (499,938) $ 409,062
========== ========== ======== ============= =============
</TABLE>
See accompanying notes.
F-89
<PAGE> 94
Canyon Ranch, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,978,671 $ 4,549,618
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,421,155 1,442,311
Gain on sales of property held for sale (501,000) (69,575)
Forgiveness of interest on advances to the general partners of
Canyon Ranch Bellefontaine Associates, L.P. -- 20,631
Changes in operating assets and liabilities:
Accounts receivable (301,894) 30,534
Inventories (60,734) (22,990)
Prepaid expenses and other (518,107) (135,978)
Accounts payable and accrued expenses 97,273 65,435
Deferred revenue 174,155 276,864
Other liabilities (67,450) (62,070)
----------- -----------
Cash provided by operating activities 5,222,069 6,094,780
INVESTING ACTIVITIES
Purchase of short-term investments (2,445,126) (19,926)
Net increase in advances to stockholder, affiliates and the general
partners of Canyon Ranch Bellefontaine Associates, L.P. (3,724,499) (2,355,677)
Issuance of notes receivable -- (50,000)
Collection of notes receivable 20,328 279,486
Issuance of notes receivable from related parties (76,917) (103,953)
Collection of notes receivable from related parties 955,333 1,943,787
Purchases of property and equipment, net (1,622,866) (2,346,604)
Proceeds from sale of property held for sale 696,000 165,000
Decrease (increase) in restricted cash 2,320,436 (325,608)
----------- -----------
Cash used in investing activities (3,877,311) (2,813,495)
FINANCING ACTIVITIES
Repayments of long-term debt (6,333,333) --
----------- -----------
Cash used in financing activities (6,333,333) --
----------- -----------
(Decrease) increase in cash (4,988,575) 3,281,285
Cash, beginning of year 6,783,760 3,502,475
----------- -----------
Cash, end of year $ 1,795,185 $ 6,783,760
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
Distribution of earnings offsetting advances $ 4,900,000 $ 4,700,000
=========== ===========
</TABLE>
See accompanying notes.
F-90
<PAGE> 95
1. ACCOUNTING POLICIES
Description of Business
Canyon Ranch, Inc. (Canyon Ranch) operates a luxury health and fitness resort in
Tucson, Arizona.
Inventories
Inventories, consisting primarily of food and supplies, are stated at the lower
of cost (first-in, first-out basis) or market.
Prepaid Financing Costs
Canyon Ranch capitalized certain costs associated with obtaining long-term debt.
These costs are being amortized over the term of the related loan using the
interest method. Accumulated amortization of such costs amounted to $53,927 and
$868,741 at December 31, 1995 and 1994, respectively. Fully amortized costs
related to refinanced debt (see Note 3) were charged to income in 1995.
Property Held for Sale
Property held for sale, consisting of residential lots, is stated at the lower
of cost or net realizable value. All property held for sale at December 31, 1995
was sold to a related party in January 1996 for cash and a note receivable.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the related assets as
follows:
<TABLE>
<CAPTION>
Years
---------------------
<S> <C> <C>
Land improvements 30 - 40
Buildings 30 - 40
Furniture, fixtures, and equipment 3 - 10
</TABLE>
Deferred Revenue
Deferred revenue consists principally of deposits for future services which will
be recognized as revenue in the period services are rendered.
F-91
<PAGE> 96
Income Taxes
Canyon Ranch has elected to be taxed as an S corporation for state and federal
income tax purposes. As a result, all items of income, expense, and available
tax credits are passed through to Canyon Ranch's stockholder. Accordingly, there
is no provision for income taxes in the accompanying financial statements.
Short-Term Investments
Short-term investments consist of money market funds and U.S. treasury
securities with a maturity of one year or less when purchased. At December 31,
1995, all investments were classified as available-for-sale and stated at fair
value which approximated cost.
Proceeds of $2,959,871 were received in 1995 from sales of securities classified
as available for sale. Gross gains of approximately $4,000 were recognized on
such sales in 1995.
Fair Value of Financial Instruments
The Company's cash, accounts receivable, investments, notes receivable, advances
to stockholders and affiliates and long-term debt represent financial
instruments as defined by Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments. The carrying value of
these financial instruments is a reasonable approximation of fair value.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of adoption will be material.
Reclassifications
The financial statements for 1994 have been reclassified to conform with the
1995 presentation.
2. RELATED PARTY TRANSACTIONS
Advances to Related Parties
Entities owned by the stockholder and an officer of Canyon Ranch are general
partners of Canyon Ranch Bellefontaine Associates, L.P. (Lenox), a limited
partnership which operates a luxury health and fitness resort in Lenox,
Massachusetts. Advances to the general partners of Lenox at December 31, 1995
and 1994 were approximately $3.8 million and $5 million, respectively. Interest
was to accrue on $2 million of the advances at the prime rate. In 1993, Canyon
Ranch agreed to forgive all previous and future interest on the advances upon
successful restructuring of the Lenox mortgage note and the successful
modification of certain terms contained in
F-92
<PAGE> 97
the limited partnership agreement. Management accordingly recorded a reserve of
$888,763 (the amount of interest accrued through December 31, 1995).
Canyon Ranch advances cash to the stockholder, businesses affiliated with the
stockholder, and other affiliates. Advances to the stockholder and affiliates
are limited under loan covenants. Advances to the stockholder and affiliates
totaled $3,724,499 and $2,355,677 in 1995 and 1994, respectively.
The advances, which are guaranteed by the stockholder, do not bear interest
(exclusive of the $2 million in advances for which interest has been fully
reserved) and have no repayment terms. The stockholder intends to net current
and future undistributed S corporation taxable income of Canyon Ranch against
the balances of the advances. The stockholder applied $4,900,000 and $4,700,000
against the advances in 1995 and 1994, respectively. As these conditions were
met in 1995, management believes that future S corporation earnings will be
sufficient to fully fund and offset all outstanding advances at December 31,
1995.
Notes Receivable from Related Parties
Canyon Ranch has entered into various note agreements with entities affiliated
with board members and the stockholder. The related parties used the note
proceeds to acquire certain residential lots and undeveloped land in Tucson. The
related parties intend to improve and sell the land to developers; the sales
proceeds will be used to repay the notes. Notes receivable from related parties
consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Note receivable from a board member, due January 22, 1996 interest payable
monthly at 10%, collateralized by a first deed of trust
in certain real estate $ 57,228 $ 54,034
Note receivable from a limited partnership affiliated with a board
member and the stockholder, repaid in 1995 -- 74,800
Funds made available to a limited partnership affiliated with a
board member and the stockholder, repaid in 1995 -- 566,433
Note receivable from a board member, repaid in 1995 -- 174,508
Promissory note receivable from a board member, repaid in 1995
-- 65,869
-------- --------
57,228 935,644
Less current portion 57,228 365,210
-------- --------
$ -- $570,434
======== ========
</TABLE>
3. LONG-TERM DEBT
In February 1995, Canyon Ranch refinanced $30 million of a then-outstanding $35
million promissory note. This promissory note payable to a bank requires monthly
principal payments ranging from $133,333 to $187,500, with final payment due
February 2002. For interest purposes, the note is composed of two components,
one of $20 million and another of $10 million. Interest on the $10 million
component bears interest at LIBOR or IBOR plus 2%, the bank's reference rate (as
defined) plus 1/2% or the bank's first rate (as defined) plus 2% as chosen by
Canyon Ranch (interest on the $10 million averaged 8% in 1995). Interest on the
$20 million bears interest for the first 60 months at 9.97%, thereafter, at the
same rate as the $10 million component. The promissory note is
F-93
<PAGE> 98
collateralized by virtually all assets of Canyon Ranch. This note contains
various financial (minimum debt coverage ratio, minimum liquid reserves, minimum
tangible net worth) and other restrictive covenants (limitations on
distributions to stockholder, advances to affiliates and capital expenditures).
Should the ratio of (i) the outstanding principal amount of the new promissory
note to (ii) the as is value of the real property collateralizing the note
exceed 60%, the bank has the authority to demand repayment in an amount
sufficient to bring the ratio to 60%.
Cash restricted under the previous promissory note is classified as a current
asset at December 31, 1994 as it was used in February 1995 in connection with
the refinancing.
Long-term debt matures in future fiscal years as follows:
<TABLE>
<S> <C> <C>
1996 $ 1,599,996
1997 1,599,996
1998 1,599,996
1999 1,599,996
2000 2,141,666
Thereafter 20,125,017
-----------
$28,666,667
===========
</TABLE>
Interest paid in 1995 and 1994 was $2,892,424 and $3,468,105, respectively.
4. LEASES
Canyon Ranch leases space at the resort to a boutique, store and beauty salon
under five year leases with renewal options. The leases provide for either a
base rental plus a percentage of gross revenue, or a percentage of gross revenue
only. Base and contingent rentals included in revenue were $27,000 and $204,482
in 1995 and $27,000 and $236,315 in 1994, respectively.
5. EMPLOYEE BENEFITS
Deferred Compensation
From 1983 through 1987, Canyon Ranch awarded certain employees additional
compensation, which the employees elected to defer. Interest accrues on this
compensation at the prime rate.
401(K) Profit Sharing Plan
Canyon Ranch has a 401(k) and voluntary profit sharing plan (the Plan) which is
a defined contribution plan covering substantially all employees, except
employees paid solely on a commission basis. Participants may contribute up to
18% of their compensation to the Plan, and are immediately vested in all such
contributions plus actual earnings thereon. Canyon Ranch is required to make an
annual contribution equal to 1% of each participant's compensation should
certain profit levels be achieved and may elect to make a discretionary profit
sharing contribution which is allocated to participants pro rata based upon
total compensation and years of service. Participants are immediately vested in
the required contribution, while discretionary contributions vest over a seven
year period. Total contributions to the Plan amounted to $192,130 and $186,256
in 1995 and 1994, respectively.
F-94
<PAGE> 99
Profit Sharing Plan
Canyon Ranch maintained an unqualified, unfunded profit sharing program which
was terminated on January 1, 1991, at which time all participants became fully
vested in their accounts. These accounts are payable upon termination (at the
discretion of Canyon Ranch) or retirement. As a means of funding a portion of
their liability under the Plan, Canyon Ranch purchased life insurance policies
in 1991 on behalf of certain key employees who were participants in this Plan.
These employees vest in the cash surrender value of the policies up to the
balance in their profit sharing account. Benefits paid to these key employees
will be paid first from the cash surrender value, with any remainder to be paid
by Canyon Ranch. Should the cash surrender value exceed the participants account
balance, such excess will vest to the participant at a rate of 4% per year
employed. The liability under the former profit sharing plan, net of the cash
surrender value of life insurance policies, was $160,511 and $211,774 at
December 31, 1995 and 1994, respectively.
6. CONTINGENCIES
Canyon Ranch had a membership program under which individuals purchased
lifeshare units which provided the buyer with the right to use the resort in the
future at a reduced rate. Under this program, Canyon Ranch agreed to repurchase
the units at specified prices for a period of ten years (expiring for all units
by December 31, 1996) following the sale. The repurchase price is dependent upon
the length of time the customer has used the unit and the amount of services
received while at Canyon Ranch. The maximum contingent liability to Canyon Ranch
for the repurchase of lifeshare units is approximately $681,000 at December 31,
1995. It is management's opinion that the repurchase of lifeshare units will not
have a material effect on financial position, results of operations or cash
flows as guest and ancillary services can be sold to replace refunded
memberships.
7. SUBSEQUENT EVENT
On July 25, 1996, Canyon Ranch contributed to Crescent Real Estate Equities
Limited Partnership (the Partnership) substantially all of the land, buildings,
improvements and fixtures of the luxury health and fitness resort in Tucson,
Arizona. The Partnership concurrently assumed the balance due of $27,733,333
under a promissory note payable by Canyon Ranch to a bank (see Note 3) and
issued Canyon Ranch ownership units in the Partnership valued at $27,056,217.
Canyon Ranch's furniture, fixtures and equipment and its lifeshare assets were
sold in a separate transaction to Canyon Ranch Leasing, L.L.C., an affiliate of
Canyon Ranch.
Prior to the above date, Canyon Ranch entered into an agreement to lease the
luxury health and fitness resort to Canyon Ranch Leasing, L.L.C., and an
agreement with Canyon Ranch Management L.L.C. (an affiliate of Canyon Ranch) to
manage the luxury health and fitness resort.
F-95
<PAGE> 100
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited Pro Forma Consolidated Statements of Operations of
Crescent Operating, Inc. (the "Company") include the completion of (i) the
formation and capitalization of the Company, (ii) the acquisition of Moody-Day
Inc. and a 1.21% Investment in Hicks Muse Tate & Furst Equity Fund II, L.P.
(collectively referred to as the "Carter Crowley Asset Group"), (iii) the
acquisition of a 50% equity interest in Charter Behavioral Health Systems
L.L.C. and the related acquisition of 1,238,311 warrants to purchase 1,238,311
common shares of Magellan Health Services, Inc., (v) the acquisition of a 42.5%
interest in The Woodlands Operating Company, L.P. ("TWOC"), an entity which
owns MND Hospitality, Inc., a payroll entity the assets of which are solely
related to its employee benefit plans, MND Hospitality Services Corp., an
entity used to record the expenses of temporary employees, BOCH General
Partnership, the assets of which include certain equipment, personal property
and contract rights, and WECCR General Partnership which leases the Woodlands
Conference Center and certain related assets and WECCR, Inc. which owns 1%
general partner interests in both BOCH General Partnership and WECCR General
Partnership, (v) the acquisition of 100% of the voting common stock,
representing a 5% equity interest in The Woodlands Land Company, Inc.
("LandCo"), an entity which owns 42.5% of The Woodlands Land Development
Company, L.P., (TWOC and LandCo collectively referred to as "The Woodlands
Entities"), and (v) the acquisition of RoseStar Management L.L.C. which
includes the Hyatt Regency Albuquerque, Hyatt Regency Beaver Creek, Denver City
Center Marriott, Sonoma Mission Inn, Canyon Ranch-Tucson, and Canyon
Ranch-Berkshires as if they had occurred on January 1, 1996 as it relates to
the statement of operations for the year ended December 31, 1996 and as of
January 1, 1997 as it relates to the statement of operations for the nine
months ended September 30, 1997.
In management's opinion, all adjustments necessary to reflect the above
discussed transactions have been made. The unaudited Pro Forma Consolidated
Statements of Operations are not necessarily indicative of what actual results
of operations of the Company would have been for the period, nor does it purport
to represent the Company's results of operations for future periods.
F-96
<PAGE> 101
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Crescent
Operating, Inc.
as adjusted for
Crescent Acquisition of acquisition of
Operating, Inc. Carter-Crowley Other Carter-Crowley
Historical (A) Asset Group (B) Adjustments Asset Group
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ -- $ 10,394 $ -- $ 10,394
Operating expenses -- 10,285 506(C) 10,791
----------- ----------- ----------- -----------
Income (loss) from operations -- 109 (506) (397)
----------- ----------- ----------- -----------
Other (income) expenses:
Equity in loss of CBHS -- -- -- --
Equity in income of The
Woodlands Entities -- -- -- --
Interest expense -- 356 2,768(D) 3,124
Loss (gain) on sale of property -- -- -- --
Other -- (79) -- (79)
----------- ----------- ----------- -----------
Total other (income) expense -- 277 2,768 3,045
----------- ----------- ----------- -----------
Income (loss) before minority
interest and taxes -- (168) (3,274) (3,442)
Minority interest -- -- -- --
----------- ----------- ----------- -----------
Income (loss) before income taxes -- (168) (3,274) (3,442)
Income tax provision (benefit) -- (57) -- (57)
----------- ----------- ----------- -----------
Net income (loss) $ -- $ (111) $ (3,274) $ (3,385)
=========== =========== =========== ===========
Net income (loss) per share
<CAPTION>
Crescent The Woodlands Crescent
Acquisition of Operating, Inc. Acquisition of Entities Pro Operating, Inc.
50% interest Prior The Woodlands Forma Prior
in CBHS(E) Pro Forma(F) Entities(G) Adjustments Pro Forma(L)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ 10,394 $ -- $ -- $ 10,394
Operating expenses -- 10,791 -- -- 10,791
---------- ---------- ---------- ---------- ----------
Income (loss) from operations -- (397) -- -- (397)
---------- ---------- ---------- ---------- ----------
Other (income) expenses:
Equity in loss of CBHS 8,860 8,860 -- -- 8,860
Equity in income of The
Woodlands Entities -- -- (11,232)(H) -- (11,232)
Interest expense -- 3,124 -- 282 (J) 3,406
Loss (gain) on sale of property -- -- -- -- --
Other -- (79) -- -- (79)
---------- ---------- ---------- ---------- ----------
Total other (income) expense 8,860 11,905 (11,232) 282 955
---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest and taxes (8,860) (12,302) 11,232 (282) (1,352)
Minority interest -- -- 10,355(I) -- 10,355
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (8,860) (12,302) 877 (282) (11,707)
Income tax provision (benefit) -- (57) 303 (303)(K) (57)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (8,860) $ (12,245) $ 574 $ 21 $ (11,650)
========== ========== ========== ========== ==========
Net income (loss) per share $ (1.11) $ (1.06)
========== ==========
<CAPTION>
RoseStar Sonoma Canyon RoseStar
Management Wine Country Canyon Ranch- Mission Ranch- Pro Forma Pro Forma
LLC(M) Hotel, LLC(N) Tucson(O) Inn(P) Berkshires(Q) Adjustments Consolidated
---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 71,141 $ 2,265 $ 33,456 $ 21,209 $ 25,415 $ -- $ 163,880
Operating expenses 68,510 2,452 27,202 20,487 22,795 7,465 (R) 159,702
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations 2,631 (187) 6,254 722 2,620 (7,465) 4,178
---------- ---------- ---------- ---------- ---------- ---------- ----------
Other (income) expenses:
Equity in loss of CBHS -- -- -- -- -- -- 8,860
Equity in income of The
Woodlands Entities -- -- -- -- -- -- (11,232)
Interest expense -- -- 1,546 2,273 819 (3,579)(S) 4,465
Loss (gain) on sale of property -- -- (35,198) (32,731) 2,972 64,957 (T) --
Other (134) -- (199) -- -- -- (412)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other (income) expense (134) -- (33,851) (30,458) 3,791 61,378 1,681
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest and taxes 2,765 (187) 40,105 31,180 (1,171) (68,843) 2,497
Minority interest 16 -- -- -- -- -- 10,371
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 2,749 (187) 40,105 31,180 (1,171) (68,843) (7,874)
Income tax provision (benefit) -- -- -- -- -- -- (57)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 2,749 $ (187) $ 40,105 $ 31,180 $ (1,171) $ (68,843) $ (7,817)
========== ========== ========== ========== ========== ========== ==========
Net income (loss) per share $ (.71)
==========
</TABLE>
F-97
<PAGE> 102
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
(A) The Company had no operations prior to the acquisition of the Carter-
Crowley Asset Group.
(B) Reflects the historical income and expenses associated with the acquired
company, assuming it occurred at the beginning of the period.
(C) Reflects the incremental:
Corporate general and administrative expenses related to the formation and
operation of the Company as follows:
<TABLE>
<S> <C>
Salaries and benefits.................................... $ 250
Rent and other office supplies........................... 200
Professional fees........................................ 150
Depreciation and amortization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group............................... (94)
-------
$ 506
-------
</TABLE>
(D) Increase is a result of interest expense for long term financing in
conjunction with the capitalization of the Company, assuming it occurred at
the beginning of the period.
<TABLE>
<S> <C>
$26,037 loan at a rate of 12% ........................ $ 3,124
Less historical interest expense ..................... (356)
---------
Incremental interest expense ......................... $ 2,768
---------
</TABLE>
(E) Reflects the Company's 50% share of net loss of Charter Behavioral Health
Systems, L.L.C. ("CBHS") (accounted for on the equity method of accounting
since the Company does not control CBHS; the four member board consists of
two directors named by the Company and two directors named by Magellan
Health Services, Inc.)
(F) Reflects the Company's pro forma consolidated statement of operations for
the year ended December 31, 1996 previously filed on Form 8-K/A filed on
July 30, 1997.
(G) Increase reflects the acquisition of a 42.5% interest in TWOC and the
acquisition of 100% of the voting stock (representing a 5% equity interest)
in LandCo.
Amounts represent the operations for the year ended January 31, 1997 for
TWOC and LandCo.
F-98
<PAGE> 103
(H) Amount is comprised of the following:
<TABLE>
<S> <C>
Equity in income LandCo. $10,900
Equity in income of TWOC 332
-------
$11,232
=======
</TABLE>
(I) Amount represents Crescent Real Estate Equities, L.P.'s 95% interest of
the equity in income of LandCo.
(J) Amount represents additional interest expense that would have been incurred
had The Woodlands Entities transactions occurred on January 1, 1996. Amount
was calculated as additional borrowing of $2,346 at 12% interest rate.
(K) Amount represents the elimination of tax expense related to the Woodlands
Entities as their income will be offset against Company losses.
(L) Reflects the Company's pro forma consolidated statement of operations for
the year ended December 31, 1996 previously filed on Form 8K/A filed on
October 14, 1997.
(M) Reflects the results of RoseStar Management L.L.C. for the year ended
December 31, 1996. RoseStar Management L.L.C. includes the results of
operations of the Hyatt Regency Albuquerque, the Hyatt Beaver Creek, and
the Denver City Center Marriott.
(N) Reflects the results of Wine Country Hotel, L.L.C. for the year ended
December 31, 1996. Wine Country Hotel, L.L.C. includes the results of
operations of Sonoma Mission Inn from November 18, 1996 through
December 31, 1996.
(O) Reflects the results of operations of Canyon Ranch, Inc. from January 1,
1996 through July 25, 1996 and the results of operations of Canyon Ranch
in Tucson for the period from July 26, 1996 through December 31, 1996.
(P) Reflects the results of operations of Sonoma Mission Inn from January 1,
1996 through November 17, 1996.
(Q) Reflects the results of operations of Canyon Ranch - Berkshires for the
year ended December 31, 1996.
(R) Amount is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Additional rent expense for hotel entities (1) $ 14,383
Additional management fees for hotel entities (1) 145
Elimination of historical depreciation for hotel entities (1) (3,218)
Elimination of 5/6 of the Sonoma Mission Inn management fee (2) (3,845)
---------
Net operating expense adjustment $ 7,465
=========
</TABLE>
(1) Adjusted to reflect expense as if entities were owned by RoseStar
for the entire period presented.
(2) Sonoma Mission Inn's historical financial statements for the period
ended November 17, 1996 included a management fee for a six year
period, therefore the Company has eliminated 5/6 of this expense as
it is not representative of the ongoing entity.
(S) Amount is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Elimination of Canyon Ranch - Tuscon historical interest expense $ (1,546)
Elimination of Sonoma Mission Inn historical interest expense (2,273)
Additional interest expense for the RoseStar transaction calculated
as additional borrowing of $2,000 at 12% interest rate 240
---------
Net interest expense adjustment $ (3,579)
=========
</TABLE>
(T) Amount represents the elimination of non-recurring gains from the pro
forma results.
F-99
<PAGE> 104
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Acquisition of Acquisition Acquisition of
Crescent Carter- of 50% The
Operating, Inc. Crowley Asset interest in Woodlands
Historical (A) Group (B) CBHS (C) Entities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 33,061 $ 4,190 $ -- $ --
Operating expenses 32,755 4,029 -- --
------------ ------------ ------------ ------------
Income (loss) from operations 306 161 -- --
------------ ------------ ------------ ------------
Other (income) expenses:
Equity in loss of CBHS 8,122 -- 3,477 --
Equity in income of The Woodlands
Entities (615) -- -- (5,051)(D)
Interest expense 1,486 135 -- --
Other (641) (14) -- --
------------ ------------ ------------ ------------
Total other (income) expense 8,352 121 3,477 (5,051)
------------ ------------ ------------ ------------
Income (loss) before minority
interest and taxes (8,046) 40 (3,477) 5,051
Minority interest -- -- -- 4,283(E)
------------ ------------ ------------ ------------
Income (loss) before income taxes (8,046) 40 (3,477) 768
Income tax provision (benefit) -- 14 -- 269
------------ ------------ ------------ ------------
Net income (loss) $ (8,046) $ 26 $ (3,477) $ 499
============ ============ ============ ============
Net income (loss) per share $ (.73)
============
<CAPTION>
Acquisition of
RoseStar
Management Pro Forma Pro Forma
L.L.C. (F) Adjustments Consolidated
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 95,371 $ -- $ 132,622
Operating expenses 89,955 169(G) 126,908
------------ ------------ ------------
Income (loss) from operations 5,416 (169) 5,714
------------ ------------ ------------
Other (income) expenses:
Equity in loss of CBHS -- -- 11,599
Equity in income of The Woodlands
Entities -- -- (5,666)
Interest expense -- 1,113(H) 2,734
Other -- -- (655)
------------ ------------ ------------
Total other (income) expense -- 1,113 8,012
------------ ------------ ------------
Income (loss) before minority
interest and taxes 5,416 (1,282) (2,298)
Minority interest -- -- 4,283
------------ ------------ ------------
Income (loss) before income taxes 5,416 (1,282) (6,581)
Income tax provision (benefit) -- (269)(I) 14
------------ ------------ ------------
Net income (loss) $ 5,416 $ (1,013) $ (6,595)
============ ============ ============
Net income (loss) per share $ (.60)
============
</TABLE>
F-100
<PAGE> 105
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS)
(A) Reflects the unaudited income and expenses for the period from May 9, 1997
through September 30, 1997 as reported on Form 10-Q dated November 14,
1997.
(B) Reflects the incremental historical income and expenses associated with the
Carter-Crowley Asset Group acquisition, assuming it occurred at the
beginning of the period as reported on Form 10-Q dated August 14, 1997.
(C) Reflects the Company's 50% share of net loss of CBHS for the period from
January 1, 1997 through June 16, 1997 (period prior to the inclusion of
CBHS operating results in the Company's results of operations).
(D) Amount is comprised of the following:
<TABLE>
<S> <C>
Equity in income of LandCo ................... $ 4,508
Equity in income of TWOC ..................... 1,158
-------
$ 5,666
Less historical equity in income of
The Woodland Entities ..................... (615)
-------
$ 5,051
=======
</TABLE>
Represents the results of operations for Landco for the period from
January 1,1997 through September 29, 1997 (acquisition date) and for TWOC
for the period from January 1, 1997 through July 31, 1997 (period prior to
the inclusion of TWOC operating results in the Company's results of
operations).
(E) Amount represents Crescent's 95% of the equity in income of LandCo.
(F) Represents the combined results of operations of RoseStar Management LLC
("RoseStar") and Wine Country Hotel L.L.C. for the period from January 1,
1997 through July 31, 1997 (period prior to the inclusion of RoseStar
operating results in the Company's results of operations).
(G) Reflects the incremental:
Corporate general and administrative expenses related to the
formation and operation of the Company as follows:
<TABLE>
<S> <C>
Salaries and benefits................................................. $ 83
Rent and other office supplies........................................ 67
Professional fees..................................................... 51
Depreciation and amortization of the purchase price adjustment
as a result of the acquisition of the Carter-Crowley Asset Group...... (32)
-----
$ 169
=====
</TABLE>
(H) Increase is a result of interest expense for long term financing in
conjunction with the capitalization of the Company, assuming it occurred at
the beginning of the period.
<TABLE>
<S> <C>
Borrowing for capitalization of the Company $ 26,037
Borrowing for the Woodlands Entities 2,346
Borrowing for RoseStar Management L.L.C. 2,000
---------
$ 30,383
Interest expense for nine months at 12% $ 2,734
Less historical interest expense (1,621)
---------
Incremental interest expense $ 1,113
=========
</TABLE>
F-93
<PAGE> 106
(I) Amount represents the elimination of tax expense related to the Woodlands
Entities as their income will be offset against other Company losses.
F-94
