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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A 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)
SEPTEMBER 30, 1997
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COMMISSION FILE NUMBER 1-9319 COMMISSION FILE NUMBER 1-9320
PATRIOT AMERICAN HOSPITALITY, PATRIOT AMERICAN HOSPITALITY
INC. OPERATING COMPANY
- ------------------------------------------------------ -------------------------------------------------------------
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
DELAWARE DELAWARE
- ------------------------------------------------------ -------------------------------------------------------------
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
<S> <C> <C> <C>
94-0358820 94-2878485
- ------------------------------------------------------ -------------------------------------------------------------
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
3030 LBJ FREEWAY, SUITE 1500 3030 LBJ FREEWAY, SUITE 1500
DALLAS, TEXAS 75234 DALLAS, TEXAS 75234
- ------------------------------------------------------ -------------------------------------------------------------
(Address of principal executive offices) (Zip Code) (Address of principal executive offices) (Zip Code)
(972) 888-8000 (972) 888-8000
- ------------------------------------------------------ -------------------------------------------------------------
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
- ------------------------------------------------------ -------------------------------------------------------------
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<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
In September 1997, Patriot American Hospitality, Inc. ("Patriot REIT"),
through certain of its subsidiaries, acquired six hotels (including an
approximate 50% controlling ownership interest in the Omni Inner Harbor Hotel)
and in October 1997, Patriot REIT, through certain of its subsidiaries, acquired
four additional hotels. The ten hotels were acquired from entities affiliated
with the Gencom American Hospitality group of companies ("Gencom") and CHC
International, Inc. ("CHCI") for an aggregate purchase price of approximately
$237 million. In addition, Patriot REIT has entered into a non-binding agreement
whereby Patriot REIT may indirectly acquire the remaining ownership interest in
the Omni Inner Harbor Hotel through a merger of the parent company of the
Gencom-related entity that owns such interest with Patriot REIT or by other
means for approximately $19.3 million. The ten hotels will be leased to and
managed by Patriot American Hospitality Operating Company ("Patriot Operating
Company") and its subsidiaries (Patriot REIT's shares of common stock are paired
and trade together with the shares of common stock of Patriot Operating Company
as a single unit pursuant to a stock pairing arrangement). The purchase of the
ten hotels was financed with approximately $45 million of cash drawn on Patriot
REIT's revolving credit facility and by issuing 1,703,943 paired shares of
Patriot REIT common stock and Patriot Operating Company common stock and
2,174,773 paired OP Units in the Patriot Partnerships. Four of the hotels are
encumbered by the mortgage loans, in the aggregate amount of approximately
$103.4 million (including accrued interest), that Patriot REIT had previously
made to certain Gencom and CHCI affiliates.
In addition, Patriot REIT acquired the leasehold interests related to eight
hotels which were previously leased by CHC Lease Partners and leased such hotels
to Patriot Operating Company. Prior to such acquisition, the management
contracts with GAH-II, L.P. ("GAH"), an affiliate of CHCI and Gencom, related to
the eight hotels were terminated. The aggregate purchase price of the leasehold
interests was approximately $52.8 million. Concurrently, Patriot Operating
Company purchased an approximate 50% managing, controlling ownership interest in
GAH from affiliates of Gencom for a purchase price of approximately $13.9
million. These transactions were financed with approximately $644,000 of cash
and by issuing 2,388,932 paired units of limited partnership interest ("OP
Units") of Patriot American Hospitality Partnership, L.P., a subsidiary of
Patriot REIT (the "Patriot REIT Partnership") and Patriot American Hospitality
Operating Company Partnership, L.P., a subsidiary of Patriot Operating Company
(the "Patriot Operating Company Partnership") and 476,682 preferred OP Units of
Patriot Operating Company Partnership.
GAH, directly and through certain of its subsidiaries, owns nine management
contracts related to hotels leased by Patriot Operating Company, 15 third-party
management contracts, and certain other hospitality management assets.
Concurrent with Patriot Operating Company's purchase of its controlling interest
in GAH, Patriot Operating Company also entered into a Hospitality Advisory,
Asset Management and Support Services Agreement with CHCI and GAH whereby
Patriot Operating Company will provide certain hospitality advisory, asset
management and support services to certain CHCI and GAH subsidiaries for base
fees aggregating $750,000 per month plus a percentage of excess cash flows of
the hotels.
Patriot REIT, Patriot Operating Company and CHCI have also entered into an
Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI Merger
Agreement"), providing, subject to regulatory approvals, for the merger of the
hospitality-related businesses of CHCI with and into Patriot Operating Company
with Patriot Operating Company being the surviving company (the "CHCI Merger").
Subject to regulatory approvals, CHCI's gaming operations will be transferred to
a new legal entity prior to the CHCI Merger and such operations will not be a
part of the transaction. It is anticipated that the CHCI Merger will be
consummated in the first or second quarter of 1998, although the precise timing
is subject to receipt of all necessary regulatory approvals. As a result of the
CHCI Merger, Patriot Operating Company, through its subsidiaries, will acquire
the remaining 50% investment interest in GAH, the remaining 17 leases and 16 of
the associated management contracts related to the Patriot REIT hotels leased by
CHC Lease Partners, 3 management contracts related to Patriot REIT hotels leased
by Patriot Operating Company, 12 third-party management contracts, 2 third-party
lease contracts, the Grand Bay and Registry Hotels & Resorts proprietary brand
names and certain other hospitality management assets. Patriot Operating Company
has also agreed to provide CHCI with a $7 million line of credit until such time
as the CHCI Merger is completed.
By operation of the CHCI Merger, each issued and outstanding share of
common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain
stock option rights will be converted into the right to receive
2
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shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per
share of Patriot Operating Company (the "Series A Preferred Stock") and shares
of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share,
of Patriot Operating Company (the "Series B Preferred Stock"). The formula for
determining the exchange ratio of CHCI Shares for Series A Preferred Stock and
Series B Preferred Stock is based on issuing an aggregate of approximately
4,396,000 shares of Patriot Operating Company preferred stock (based on an
aggregate purchase value of approximately $102.2 million and a market price per
paired share of $23.25), subject to reduction if certain specified events occur
and subject to increase representing adjustments for dividends paid on paired
shares of Patriot REIT and Patriot Operating Company common stock after
September 30, 1997. Generally, the aggregate number of shares of Patriot
Operating Company preferred stock that each shareholder shall have the right to
receive pursuant to the CHCI Merger shall consist of, to the extent possible, an
equal number of Series A Preferred Stock and the Series B Preferred Stock.
Generally, each share of Patriot Operating Company Series A Preferred Stock
may be redeemed for one paired share of Patriot REIT common stock and Patriot
Operating Company common stock at any time following the one-year anniversary of
the closing of the CHCI Merger. Each share of Patriot Operating Company Series B
Preferred Stock may be redeemed for one paired share of Patriot REIT common
stock and Patriot Operating Company common stock, however, such redemption is
generally restricted until the fifth-year anniversary of the closing of the CHCI
Merger. The value of a paired share at the time of redemption (the "Redemption
Value") may, at Patriot Operating Company's option, be paid in cash. Further,
if Patriot Operating Company fails to comply with certain restrictions, the
preferred shares may be redeemed for cash or, at Patriot Operating Company's
option, paired shares at the Redemption Value plus a premium. The dividend rate
on the shares of preferred stock is equivalent to the dividend rate on the
paired shares of Patriot REIT common stock and Patriot Operating Company common
stock. Dividends on Series B Preferred Stock are subject to increase during the
five years subsequent to the closing of the CHCI Merger if the shares are
transferred by the original holder. If the dividends on the preferred shares are
not paid when due, dividends will instead accrue at the rate of 15% per annum on
a compounded basis. The preferred shares are redeemable at Patriot Operating
Company's option at the Redemption Value, plus a premium in the case of the
original holders thereof and certain permitted transferees.
In connection with the acquisition of GAH, preferred OP Units of the
Patriot Operating Company Partnership with a value of approximately $5 million
have been held back and the CHCI Merger equity consideration is subject to
reduction in the amount of approximately $5 million if the hotels and leaseholds
acquired fail to achieve certain operating targets over the period prior to the
closing of the CHCI Merger.
In addition, on September 30, 2000 and September 30, 2002, Patriot
Operating Company may be obligated to pay the CHCI stockholders and a subsidiary
of Patriot Operating Company may be obligated to pay a Gencom-related entity
additional consideration, in each case based upon the delivery and performance
of certain specified assets.
As part of the above-described acquisitions, Karim Alibhai, the chief
executive officer of Gencom, was appointed to the position of president, chief
operating officer and director of Patriot Operating Company. Patriot Operating
Company has entered into an employment agreement with Mr. Alibhai, pursuant to
which Mr. Alibhai serves as president and chief operating officer of Patriot
Operating Company for a term of three years at an initial annual base
compensation of $350,000, subject to any increases in base compensation approved
by the Compensation Committee of the Patriot Operating Company Board of
Directors. In addition, under the terms of the employment contract, Mr. Alibhai
is eligible to receive cash incentive compensation in an amount to be determined
by the Compensation Committee, but not less than $75,000 per year, up to 80% of
his annual base compensation, as adjusted. In addition, Mr. Alibhai was granted
nonqualified options to purchase 280,000 paired shares of Patriot REIT and
Patriot Operating Company common stock at an exercise price of $32.0625 per
paired share (the closing market price of Patriot REIT and Patriot Operating
Company common stock on the date of grant). The options to purchase common
stock vest in equal quarterly installments over a period of three years.
3
<PAGE>
ITEM 5. OTHER EVENTS
On October 15, 1997, Patriot REIT, through certain of its subsidiaries,
acquired The Buttes, a 353-room resort hotel in Tempe, Arizona, for a purchase
price of approximately $63.6 million from SCP (Buttes) Inc., a wholly owned
subsidiary of Shimizu Corporation. The purchase was financed primarily with
funds drawn on Patriot REIT's revolving credit facility. Patriot REIT has
leased the hotel to Patriot Operating Company. Patriot Operating Company will
also manage the hotel.
In July 1997, Patriot REIT, through certain of its subsidiaries, acquired the
219-room Ambassador West, a Grand Heritage Hotel in Chicago, Illinois for
approximately $15.9 million from Historic Hotel Partners of Chicago, Limited
Partnership. In addition, Patriot REIT, through certain of its subsidiaries,
acquired the 124-room Union Station Hotel, a Grand Heritage Hotel in Nashville,
Tennessee for approximately $8.5 million from Historic Hotel Partners of
Nashville, Limited Partnership. These acquisitions were financed with cash of
approximately $2.6 million, approximately $21 million of proceeds from the sale
of certain land and assumption of net working capital liabilities of
approximately $800,000.
4
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
The index to the financial information for GAH-II, L.P. (doing business
as Gencom American Hospitality); CHC International, Inc. Hospitality
Division; the "Acquired Hotels" (which includes the Omni Inner Harbor
Hotel, the Radisson Riverwalk Hotel, the Doubletree Guest Suites in
Glenview, Illinois, the Crowne Plaza Toledo, the Radisson Suites Hotel
in Kansas City, Missouri, the Melbourne Hilton at Rialto Place in
Melbourne, Florida and the Holiday Inn Y.O. Ranch); G.B.H. Joint Venture
(doing business as the Grand Bay Hotel); River House Associates (doing
business as the Sheraton Gateway Hotel); and W-L Tampa, Ltd. (which
includes the Sheraton Grand Hotel) is included on page F-1 of this
report.
This report supplementally includes financial information for SCP
(Buttes) Inc. (which includes The Buttes resort); Historic Hotel
Partners of Chicago, Limited Partnership (which includes the Ambassador
West Hotel); and Historic Hotel Partners of Nashville, Limited
Partnership (which includes the Union Station Hotel). The index to the
financial information for these entities is included on page F-1 of this
report.
(B) PRO FORMA FINANCIAL INFORMATION
The index to the separate and combined pro forma financial information
for Patriot American Hospitality, Inc. and Patriot American Hospitality
Operating Company and for the Combined Lessees is included on page F-1
of this report.
(C) EXHIBITS
Exhibit
Number Description
------ -----------
23.1 Consent of Ernst & Young LLP -- Dallas, Texas
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Ernst & Young LLP -- Miami, Florida
23.5 Consent of Coopers & Lybrand LLP
23.6 Consent of Pannell Kerr Forster P.C.
5
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrants have duly caused the report to be signed on their behalf by the
undersigned thereunto duly authorized.
DATED: October 24, 1997
PATRIOT AMERICAN HOSPITALITY, INC.
By: /s/ Rex E. Stewart
----------------------------------------------------
Rex E. Stewart
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
By: /s/ Rex E. Stewart
-----------------------------------------------------
Rex E. Stewart
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
6
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INDEX TO FINANCIAL INFORMATION
<TABLE>
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Page
----
PRO FORMA FINANCIAL INFORMATION
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PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996
(unaudited)........................................................................................... F-11
Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 1997
(unaudited)........................................................................................... F-13
Pro Forma Condensed Combined Balance Sheet as of June 30, 1997 (unaudited).............................. F-16
PATRIOT AMERICAN HOSPITALITY INC.:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996
(unaudited)........................................................................................... F-22
Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 1997
(unaudited)........................................................................................... F-26
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996
(unaudited)........................................................................................... F-29
Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 1997
(unaudited)........................................................................................... F-32
COMBINED LESSEES:
Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996
(unaudited) and the six months ended June 30, 1997 (unaudited)....................................... F-35
HISTORICAL FINANCIAL INFORMATION
GAH-II, L.P. (D/B/A GENCOM AMERICAN HOSPITALITY):
Report of Independent Auditors -- Ernst & Young LLP.....................................................
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited)..............
Consolidated Statements of Income for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)............................................
Consolidated Statements of Partners' Capital for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1997 (unaudited)....................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)............................................
Notes to Consolidated Financial Statements..............................................................
CHC INTERNATIONAL, INC. HOSPITALITY DIVISION:
Report of Independent Certified Public Accountants -- Price Waterhouse, L.L.P...........................
Balance Sheets as of November 30, 1995 and 1996 and May 31, 1997 (unaudited)...........................
Statements of Operations for the years ended November 30, 1995 and 1996 and
the six months ended May 31, 1996 and 1997 (unaudited).................................................
Statements of Changes in Stockholders' Equity (Deficit) for the years ended
November 30, 1995 and 1996 and the six months ended May 31, 1997 (unaudited)...........................
Statements of Cash Flows for the years ended November 30, 1995 and 1996 and
the six months ended May 31, 1996 and 1997 (unaudited).................................................
Notes to Financial Statements...........................................................................
</TABLE>
F-1
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INDEX TO FINANCIAL INFORMATION CONTINUED
<TABLE>
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Page
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ACQUIRED HOTELS (WHICH INCLUDE THE OMNI INNER HARBOR HOTEL, THE RADISSON RIVERWALK HOTEL, THE DOUBLETREE
GUEST SUITES IN GLENVIEW, ILLINOIS, THE CROWNE PLAZA TOLEDO HOTEL, THE RADISSON SUITES HOTEL IN KANSAS
CITY, MISSOURI, THE MELBOURNE HILTON AT RIALTO PLACE IN MELBOURNE, FLORIDA AND THE HOLIDAY INN Y.O.
RANCH):
Report of Independent Auditors -- Deloitte & Touche LLP...................................................
Combined Balance Sheets as of December 31, 1996 and 1995 and June 30, 1997 (unaudited)....................
Combined Statements of Operations for the years ended December 31, 1996 and 1995 and the six months ended
June 30, 1996 and 1997 (unaudited).......................................................................
Combined Statements of Partners' Capital for the years ended December 31, 1996 and 1995 and the six months
ended June 30, 1997 (unaudited)..........................................................................
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1995 and the six months
ended June 30, 1996 and 1997 (unaudited).................................................................
Notes to Combined Financial Statements....................................................................
G.B.H. JOINT VENTURE (D/B/A GRAND BAY HOTEL):
Report of Independent Certified Public Accountants -- Ernst & Young LLP..................................
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited).............................
Statements of Operations for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)..............................................
Statements of Venturers' Deficit for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1997 (unaudited)......................................................
Statements of Cash Flows for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)..............................................
Notes to Financial Statements.............................................................................
RIVER HOUSE ASSOCIATES (D/B/A SHERATON GATEWAY HOTEL):
Report of Independent Certified Public Accountants -- Ernst & Young LLP...................................
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited).............................
Statements of Operations and Changes in Venturers' Deficit for the years ended
December 31, 1995 and 1996 and the six months ended June 30, 1996 and 1997 (unaudited)...................
Statements of Cash Flows for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)..............................................
Notes to Financial Statements.............................................................................
W-L TAMPA, LTD. (THE SHERATON GRAND HOTEL):
Report of Independent Certified Public Accountants -- Ernst & Young LLP...................................
Balance Sheets as of December 31,1995 and 1996 and June 30, 1997 (unaudited).............................
Statements of Operations and Partners' Deficit for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)..............................................
Statements of Cash Flows for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)..............................................
Notes to Financial Statements.............................................................................
</TABLE>
F-2
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INDEX TO FINANCIAL INFORMATION CONTINUED
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SCP (BUTTES) INC.:
Report of Independent Accountants -- Coopers & Lybrand L.L.P............................................
Balance Sheets as of December 31, 1996 and June 30, 1997 and 1996 (unaudited)...........................
Statements of Operations the year ended December 31, 1996
and for the six months ended June 30, 1997 and 1996 (unaudited)........................................
Statements of Changes in Stockholders' Equity the year ended December 31, 1996
and for the six months ended June 30, 1997 (unaudited)................................................
Statements of Cash Flows for the year ended December 31, 1996
and six months ended June 30, 1997 and 1996 (unaudited)................................................
Notes to Financial Statements...........................................................................
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP (AMBASSADOR WEST):
Report of Independent Accountants -- Pannell Kerr Forster P.C...........................................
Report of Independent Auditors -- Pannell Kerr Forster P.C..............................................
Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996....................................
Statements of Operations the six months ended June 30, 1997 (unaudited)
and for the year ended December 31, 1996...............................................................
Statements of Partners' Deficit for the year ended December 31, 1996
and for the six months ended June 30, 1997 (unaudited)................................................
Statements of Cash Flows for six months ended June 30, 1997 (unaudited)
and the year ended December 31, 1996...................................................................
Notes to Financial Statements...........................................................................
HISTORIC HOTEL PARTNERS OF NASHVILLE, LIMITED PARTNERSHIP (UNION STATION):
Report of Independent Accountants -- Pannell Kerr Forster P.C...........................................
Report of Independent Auditors -- Pannell Kerr Forster P.C..............................................
Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996....................................
Statements of Operations the six months ended June 30, 1997 (unaudited)
and for the year ended December 31, 1996...............................................................
Statements of Partners' Deficit for the year ended December 31, 1996
and for the six months ended June 30, 1997 (unaudited)................................................
Statements of Cash Flows for six months ended June 30, 1997 (unaudited)
and the year ended December 31, 1996...................................................................
Notes to Financial Statements...........................................................................
</TABLE>
F-3
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Background
On July 1, 1997, pursuant to an Agreement and Plan of Merger (the "Cal
Jockey Merger Agreement") between the entities formerly known as Patriot
American Hospitality, Inc. ("Old Patriot REIT"), its subsidiary Patriot American
Hospitality Partnership, L.P., a limited partnership (the "Patriot REIT
Partnership"), California Jockey Club ("Cal Jockey") and Bay Meadows Operating
Company ("Bay Meadows"), Old Patriot REIT merged with and into Cal Jockey, with
Cal Jockey being the surviving legal entity (the "Cal Jockey Merger"). In
connection with the Cal Jockey Merger, Cal Jockey changed its name to Patriot
American Hospitality, Inc. ("Patriot REIT") and Bay Meadows changed its name to
Patriot American Hospitality Operating Company ("Patriot Operating Company").
Patriot REIT's shares of common stock are paired and trade together with the
shares of common stock of Patriot Operating Company as a single unit pursuant to
a stock pairing arrangement. Patriot REIT and Patriot Operating Company are
collectively referred to herein as the "Patriot Companies."
By operation of the Cal Jockey Merger, each issued and outstanding share of
common stock, no par value per share of Old Patriot REIT ("Old Patriot REIT
Common Stock") was converted into 0.51895 shares of common stock, par value
$0.01 per share of Patriot REIT ("Patriot REIT Common Stock") and 0.51895 shares
of common stock, par value $0.01 per share of Patriot Operating Company
("Patriot Operating Company Common Stock"), which shares are paired and
transferable only as a single unit. Each paired share of Cal Jockey and Bay
Meadows common stock remained outstanding and represented the same number of
paired shares of Patriot REIT Common Stock and Patriot Operating Company Common
Stock.
In connection with the Cal Jockey Merger, Bay Meadows formed an operating
partnership (the "Patriot Operating Partnership") into which Bay Meadows
contributed its assets in exchange for units of limited partnership interest
("OP Units") of the Patriot Operating Partnership, and Cal Jockey contributed
certain of its assets to the Patriot REIT Partnership in exchange for OP Units
of the Patriot REIT Partnership (collectively, the Patriot Operating Partnership
and the Patriot REIT Partnership are referred to herein as the "Patriot
Partnerships"). Subsequent to completion of the Cal Jockey Merger and the
transactions contemplated by the Cal Jockey Merger Agreement (the "Related
Transactions"), substantially all of the operations of Patriot REIT and Patriot
Operating Company have been conducted through the Patriot Partnerships and their
subsidiaries.
The following unaudited Pro Forma Financial Statements have been adjusted
for the purchase method of accounting whereby the Bay Meadows Racecourse
("Racecourse") facilities and related leasehold improvements owned by Cal Jockey
and Bay Meadows are adjusted to estimated fair market value. The Cal Jockey
Merger has been accounted for as a reverse acquisition whereby Cal Jockey is
considered to be the acquired company for accounting purposes.
On July 10, 1997, the respective Boards of Directors of Patriot REIT and
Patriot Operating Company declared a 1.927-for-1 stock split on its shares of
common stock effected in the form of a stock dividend distributed on July 25,
1997 to shareholders of record on July 15, 1997.
Unless otherwise indicated, all references in the pro forma financial
statements to the number of shares, per share amounts, and market prices of the
common stock and options to purchase common stock have been restated to reflect
the impact of the conversion of each share of Old Patriot REIT Common Stock into
0.51895 paired shares issued in the Cal Jockey Merger and the 1.927-for-1 stock
split. In addition, all references in the pro forma financial statements to the
number of shares, per share amounts, and market prices of the common stock and
options to purchase common stock related to periods prior to the 2-for-1 stock
split on Old Patriot REIT Common Stock effected in the form of a stock dividend
distributed on March 18, 1997 to shareholders of record on March 7, 1997 have
been restated to reflect the impact of such stock split.
Patriot REIT leases each of its hotels, except the Crowne Plaza Ravinia
Hotel and the Wyndham WindWatch Hotel, which are separately owned through
special purpose entities, to lessees that are responsible for operating the
hotels (the "Lessees"). The hotels are leased for periods ranging from one to
12-years pursuant to
F-4
<PAGE>
separate lease agreements providing for the payment of the greater of base or
participating rent, plus certain additional charges, as applicable (the
"Participating Leases"). The Lessees, in turn, have entered into separate
agreements with hotel management entities (the "Operators") to manage the
hotels. The Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel were
structured without lessees and are managed directly by an Operator.
As of October 15, 1997, 35 of Patriot REIT's hotels are leased to separate
Lessees (excluding the Park Shore Hotel) and 42 hotels are leased to Patriot
Operating Company.
Businesses Acquired
Since June 30, 1997, Patriot REIT, through the Patriot REIT Partnership and
its subsidiaries, has invested approximately $319,019 in the acquisition of 14
hotels with a total of 3,658 rooms (the "Recent Acquisitions") described below.
In addition, in connection with certain other transactions described below (see
"Acquisition of Gencom American Hospitality and Merger with CHC International,
Inc."), Patriot REIT, through the Patriot REIT Partnership and its subsidiaries,
has invested approximately $236,984 million in the acquisition of 10 additional
hotels with a total of 3,119 rooms (the "CHC Hotels").
In July 1997, Patriot REIT acquired 90% of the equity interests in four
separate limited liability companies which own the 266-room Holiday Inn
Westlake, the 196-room Radisson Beachwood, and the 113-room Courtyard by
Marriott Beachwood, all in Cleveland, Ohio and the 130-room Radisson Hotel in
Akron, Ohio (the "Snavely Portfolio") for an aggregate purchase price of
approximately $51,066. Patriot REIT's contribution was financed primarily with
funds drawn on the Patriot Companies' revolving credit facility. The Radisson
Beachwood Hotel is subject to a mortgage loan with a financial institution with
a principal balance of approximately $5,774. In addition, Patriot REIT, through
the Patriot REIT Partnership and its subsidiaries, acquired the 224-room Holiday
Inn at the San Francisco International Airport; the 323-room Ramada Inn at the
San Francisco International Airport; the 219-room Ambassador West, a Grand
Heritage Hotel in Chicago, Illinois; and the 124-room Union Station Hotel, a
Grand Heritage Hotel in Nashville, Tennessee for an aggregate purchase price of
approximately $60,646. These acquisitions were financed primarily with the
proceeds from the sale of certain land described below and with funds drawn on
the Patriot Companies' revolving credit facility described below.
In August 1997, Patriot REIT, through the Patriot REIT Partnership and its
subsidiaries, acquired the 227-room Park Shore Hotel in Honolulu, Hawaii for a
purchase price of approximately $23,574. The acquisition was financed primarily
with funds drawn on the Patriot Companies' revolving credit facility. The
following unaudited Pro Forma Condensed Combined Statements of Operations do not
include the results of operations of the Park Shore Hotel.
On September 4, 1997, Patriot REIT, through a consolidated partnership in
which the Patriot REIT Partnership owns an 85% general partnership interest and
an affiliate of Doubletree Hotels Corporation owns a 15% limited partnership
interest, acquired four Doubletree Hotels in Houston, Texas, Anaheim,
California, St. Louis, Missouri and Overland Park, Kansas, with an aggregate of
1,483 rooms (the "Met-Doubletree Hotels"). The Met-Doubletree Hotels were
acquired for an aggregate purchase price of approximately $147,316, which was
financed through a combination of mortgage debt of $98,893, cash contributions
to the partnership of approximately $26,300 by the Patriot REIT Partnership and
$7,123 by the affiliate of Doubletree Hotels Corporation and the issuance of
614,046 paired units of limited partnership interest in the Patriot REIT
Partnership and the Patriot Operating Partnership, valued at approximately
$15,000 (based on the average market price of the Patriot Companies' common
stock for the 20 days prior to the closing of the acquisition). Patriot REIT
Partnership's cash contribution was financed primarily with funds drawn on the
Patriot Companies' revolving credit facility.
In August 1997, the Patriot Companies acquired Grand Heritage Hotels, Inc.
a hotel management and marketing company, and other Grand Heritage subsidiaries
including Grand Heritage Leasing, L.L.C. which leased three hotels from Patriot
REIT (the "Grand Heritage Acquisition"). The total purchase price for the Grand
Heritage Acquisition was approximately $22,500 which was financed primarily
through the issuance of 931,972 Class A preferred OP Units of Patriot Operating
Partnership.
Effective October 1, 1997, Patriot Operating Company, through certain of
its subsidiaries, acquired the members' interests of PAH RSI, L.L.C., a limited
liability company owned and controlled by certain executive
F-5
<PAGE>
officers of the Patriot Companies ("PAH RSI Lessee") for approximately $143.
PAH RSI Lessee leased eight of Patriot REIT's hotels. As a result of the
acquisition, Patriot Operating Company holds these leasehold interests.
On October 15, 1997, Patriot REIT, through certain of its subsidiaries,
acquired The Buttes, a 353-room resort hotel in Tempe, Arizona, for a purchase
price of approximately $63,600 from SCP (Buttes) Inc. The purchase was financed
primarily with funds drawn on Patriot REIT's revolving credit facility. Patriot
REIT has leased the hotel to Patriot Operating Company. Patriot Operating
Company will also manage the hotel.
On July 14, 1997, Patriot REIT sold approximately 174 acres of land in San
Mateo, California, representing substantially all of the land which was owned by
Cal Jockey prior to the Cal Jockey Merger, to an affiliate of PaineWebber
Incorporated ("PaineWebber") for a purchase price of approximately $80,864 (the
"PaineWebber Land Sale"). These funds were placed in a restricted trust account
in order to facilitate a tax-deferred, like-kind exchange through the
acquisition of suitable hotel properties. During July 1997, three suitable
hotels (the Holiday Inn at the San Francisco International Airport, the
Ambassador West Hotel and the Union Station Hotel) were acquired using a portion
of the proceeds from this restricted account. Patriot REIT retained ownership of
the improvements located on the land, including the Racecourse and its related
facilities. Simultaneously with the consummation of the PaineWebber Land Sale,
the PaineWebber affiliate and Patriot REIT entered into a ground lease covering
a portion of the land on which the Racecourse is situated for a term of seven
years. The lease provides for quarterly rental payments of $750 through March
1998, $813 through March 1999, $875 through March 2000, $1,000 through March
2002 and $1,250 through July 2004. Patriot REIT has subleased the Racecourse
land and leased the related improvements to Patriot Operating Company in order
to permit Patriot Operating Company to continue horseracing operations at the
Racecourse through the term of Patriot REIT's lease. The sublease is for a term
of seven years with annual payments based on percentages of revenue generated.
In addition, Patriot REIT has leased certain land adjacent to the Racecourse to
Borders, Inc. (the "Borders Lease") for an initial term of 20 years with a fixed
net annual rent of $279 for years 1 through 10, $362 for years 11 through 15 and
$416 for years 16 through 20. In connection with the sale, Patriot REIT
assigned all of its rights and benefits under existing leases, contracts,
permits and entitlements relating to the land sold (excluding the Borders Lease)
to the PaineWebber affiliate, and the PaineWebber affiliate assumed all of
Patriot REIT's development obligations including, but not limited to, all
obligations for on and off-site improvements and all obligations under existing
lease and contracts. The parties have the option to renew such leases upon
their expiration under certain circumstances.
Financing Transactions
On July 21, 1997, the Patriot Companies entered into a revolving credit
facility with Paine Webber Real Estate Securities, Inc. ("Paine Webber Real
Estate"), The Chase Manhattan Bank ("Chase") and certain other lenders
(collectively, the "Lenders") for a three-year $700,000 unsecured revolving line
of credit (the "Revolving Credit Facility"). Borrowings have been made under the
Revolving Credit Facility to repay all outstanding amounts under Old Patriot
REIT's secured line of credit with Paine Webber Real Estate (the "Old Line of
Credit"). The Revolving Credit Facility will also be used for acquisition of
additional properties, businesses and other assets, for capital expenditures and
for general working capital purposes. The interest rate for the Revolving Credit
Facility ranges from LIBOR plus 1.0% to 2.0% (depending on the Patriot
Companies' leverage ratio or investment grade ratings received from the rating
agencies) or the customary alternate base rate announced from time to time plus
0.0% to 0.5% (depending on the Patriot Companies' leverage ratio). The interest
rate currently in effect for the Revolving Credit Facility is 7.656% per annum.
Additionally, Patriot REIT has entered into a commitment letter with Paine
Webber Real Estate and Chase for a $500,000 term loan (the "Term Loan"). It is
anticipated that the Term Loan will be secured by specific assets and properties
of the Patriot Companies that will be transferred to a special purpose
"bankruptcy remote" entity. The Term Loan will be used to finance payments to be
made in connection with the acquisition of certain properties and is expected to
have an interest rate per annum equal to LIBOR plus 1.75%.
F-6
<PAGE>
The Patriot Companies have entered into three interest rate swap
arrangements to swap floating rate LIBOR-based interest rates for fixed rate
interest amounts as a hedge against $375,000 of the $700,000 Revolving Credit
Facility. Each of the interest rate swaps covers $125,000 of borrowings under
the Revolving Credit Facility and fixes the LIBOR portion of the Revolving
Credit Facility interest rate at 6.09%, 6.255%, and 6.044%, respectively. The
interest rate swap arrangements expire November 2002. The following unaudited
Pro Forma Condensed Combined Statements of Operations do not include adjustments
to pro forma interest expense to reflect these interest rate swap arrangements.
In June 1997, Patriot REIT loaned approximately $20,500 to a partnership
affiliated with members of CHC Lease Partners relating to the Doubletree Hotel
in Glenview, Illinois. In July 1997, Patriot REIT loaned approximately $25,600
to another partnership affiliated with members of CHC Lease Partners, relating
to the Sheraton Gateway Hotel in Miami (also known as the Sheraton River House
Hotel). Both loans mature in two years, bear interest at a rate per annum equal
to 30-day LIBOR plus 2.75%, and are secured by first priority liens on the
respective hotels. Additionally, Patriot REIT purchased two additional loans
from a financial institution on which partnerships affiliated with the members
of CHC Lease Partners were borrowers for an aggregate purchase price of $57,000.
One of the purchased loans, in the principal amount of approximately $30,700,
matures in December 2000 and bears interest at a rate per annum equal to 8.0%
until November 30, 1997, 8.5% from December 1, 1997 until November 30, 1999, and
9.0% from December 1, 1999 until December 1, 2000. The second purchased loan, in
the principal amount of approximately $24,400, matures on December 31, 1999 and
bears interest at a rate per annum equal to 8.0% until December 31, 1997 and
9.5% from January 1, 1998 until December 31, 1999. Each of the purchased loans
is secured by first priority liens on the respective hotels. The notes contain
certain penalties for early repayment. In connection with such loans, Patriot
REIT entered into a short-term financing arrangement with an affiliate of Paine
Webber Real Estate (the "Paine Webber Mortgage Financing"), whereby such
affiliate loaned Patriot REIT $103,000 through April 15, 1998 at a rate equal to
the greater of 30-day LIBOR plus 1.75% or the borrowing rate on the Revolving
Credit Facility. This financing is secured by a collateral assignment of the
mortgage loans encumbering the four hotels. In October 1997, Patriot REIT,
through certain of its subsidiaries, acquired 100% of the ownership interests in
the four partnerships that own these hotels (see "Acquisition of Gencom American
Hospitality and Merger with CHC International, Inc." below). As a result, the
note balances and the related interest income and expense are eliminated in
Patriot REIT's consolidated financial statements.
On August 1, 1997, Patriot Operating Company purchased a participating loan
from National Resort Ventures, L.P., a Delaware limited partnership, related to
the 1,013-room Buena Vista Palace Hotel in Orlando, Florida for $23,750 in cash
(the "Participating Note"). The Participating Note acquisition closed
simultaneously with the closing of the public offering of common stock discussed
below. The Buena Vista Palace Hotel is owned by a joint venture between
Equitable Life Insurance Company who owns a 55% interest and Hotel Venture
Partners, Ltd., a Florida limited partnership, who owns a 45% interest. The
Participating Note is subordinated to a ground lease, a $51,000 first leasehold
mortgage loan and a separate $8,500 participating loan.
In August 1997, the Patriot Companies completed a public offering (the
"Offering") of 10,580,000 paired shares of common stock (including 1,380,000
paired shares of common stock issued upon exercise of the underwriters' over-
allotment option), with net proceeds (less underwriter discount and expenses) of
approximately $240,795. The net proceeds were primarily used to reduce the
outstanding debt under the Revolving Credit Facility.
Acquisition of Gencom American Hospitality and Merger with CHC International,
Inc.
In September 1997, Patriot REIT, through certain of its subsidiaries,
acquired six hotels (including an approximate 50% controlling ownership interest
in the Omni Inner Harbor Hotel) and in October 1997, Patriot REIT, through
certain of its subsidiaries, acquired four additional hotels. The ten hotels
were acquired from entities affiliated with the Gencom American Hospitality
group of companies ("Gencom") and CHC International, Inc. ("CHCI") for an
aggregate purchase price of approximately $236,984. In addition, Patriot REIT
has entered into a non-binding agreement whereby Patriot REIT may indirectly
acquire the remaining ownership interest in the Omni Inner Harbor Hotel through
a merger of the parent company of the Gencom-related entity that owns such
interest with Patriot REIT or by other means for approximately $19,314. The ten
hotels will be leased to and managed by Patriot Operating Company and its
subsidiaries. The purchase of the ten hotels was financed with approximately
$45,000 of cash drawn on the Revolving Credit Facility and by issuing 1,703,943
paired shares of Patriot REIT Common Stock and Patriot Operating Company Common
Stock and 2,174,773 paired OP Units in
F-7
<PAGE>
the Patriot Partnerships. Four of the hotels are encumbered by the mortgage
loans, in the aggregate amount of approximately $103,443 including accrued
interest, that Patriot REIT made in connection with the Paine Webber Mortgage
Financing discussed above.
In addition, Patriot REIT acquired the leasehold interests related to eight
hotels which were previously leased by CHC Lease Partners and re-leased such
hotels to Patriot Operating Company. Prior to such acquisition, the management
contracts with GAH-II, L.P. ("GAH"), an affiliate of CHCI and Gencom, related to
the eight hotels were terminated. The aggregate purchase price of the leasehold
interests was approximately $52,766. Concurrently, Patriot Operating Company
purchased an approximate 50% managing, controlling ownership interest in GAH
from affiliates of Gencom for a purchase price of approximately $13,860. These
transactions were financed with approximately $644 of cash, and by issuing
2,388,932 paired OP Units of the Patriot REIT Partnership and the Patriot
Operating Company Partnership and 476,682 preferred OP Units of Patriot
Operating Company Partnership.
GAH, directly and through certain of its subsidiaries, owns nine management
contracts related to hotels leased by Patriot Operating Company, 15 third-party
management contracts, and certain other hospitality management assets.
Concurrent with Patriot Operating Company's purchase of its controlling interest
in GAH, Patriot Operating Company also entered into a Hospitality Advisory,
Asset Management and Support Services Agreement with CHCI and GAH whereby
Patriot Operating Company will provide certain hospitality advisory, asset
management and support services to certain CHCI and GAH subsidiaries for base
fees aggregating $750 per month plus a percentage of excess cash flows of the
hotels.
Patriot REIT, Patriot Operating Company and CHCI have also entered into an
Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI Merger
Agreement"), providing, subject to regulatory approvals, for the merger of the
hospitality-related businesses of CHCI with and into Patriot Operating Company
with Patriot Operating Company being the surviving company (the "CHCI Merger").
Subject to regulatory approvals, CHCI's gaming operations will be transferred to
a new legal entity prior to the CHCI Merger and such operations will not be a
part of the transaction. It is anticipated that the CHCI Merger will be
consummated in the first or second quarter of 1998, although the precise timing
is subject to receipt of all necessary regulatory approvals. As a result of the
CHCI Merger, Patriot Operating Company, through its subsidiaries, will acquire
the remaining 50% investment interest in GAH, the remaining 17 leases and 16 of
the associated management contracts related to the Patriot REIT hotels leased by
CHC Lease Partners, 3 management contracts related to Patriot REIT hotels leased
by Patriot Operating Company, 12 third-party management contracts, 2 third-party
lease contracts, the Grand Bay and Registry Hotels & Resorts proprietary brand
names and certain other hospitality management assets. Patriot Operating Company
has also agreed to provide CHCI with a $7,000 line of credit until such time as
the CHCI Merger is completed.
By operation of the CHCI Merger, each issued and outstanding share of
common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain
stock option rights will be converted into the right to receive shares of Series
A Redeemable Convertible Preferred Stock, par value $0.01 per share of Patriot
Operating Company (the "Series A Preferred Stock") and shares of Series B
Redeemable Convertible Preferred Stock, par value $0.01 per share, of Patriot
Operating Company (the "Series B Preferred Stock"). The formula for determining
the exchange ratio of CHCI Shares for Series A Preferred Stock and Series B
Preferred Stock is based on issuing an aggregate of approximately 4,396,000
shares of Patriot Operating Company preferred stock (based on an aggregate
purchase value of approximately $102,200 and a market price per paired share of
$23.25), subject to reduction if certain specified events occur and subject to
increase representing adjustments for dividends paid on paired shares of Patriot
REIT and Patriot Operating Company common stock after September 30, 1997.
Generally, the aggregate number of shares of Patriot Operating Company preferred
stock that each shareholder shall have the right to receive pursuant to the CHCI
Merger shall consist of, to the extent possible, an equal number of Series A
Preferred Stock and the Series B Preferred Stock.
Generally, each share of Patriot Operating Company Series A Preferred Stock
may be redeemed for one paired share of Patriot REIT common stock and Patriot
Operating Company common stock at any time following the one-year anniversary of
the closing of the CHCI Merger. Each share of Patriot Operating Company Series B
Preferred Stock may be redeemed for one paired share of Patriot REIT common
stock and Patriot Operating Company common stock, however, such redemption is
generally restricted until the fifth-year anniversary of the closing of the CHCI
Merger. The value of a paired share at the time of redemption (the "Redemption
Value") may, at Patriot Operating Company's option, be paid in cash. Further,
if Patriot Operating Company fails to comply
F-8
<PAGE>
with certain restrictions, the preferred shares may be redeemed for cash or, at
Patriot Operating Company's option, paired shares at the Redemption Value plus a
premium. The dividend rate on the shares of preferred stock is equivalent to the
dividend rate on the paired shares of Patriot REIT common stock and Patriot
Operating Company common stock. Dividends on Series B Preferred Stock are
subject to increase during the five years subsequent to the closing of the CHCI
Merger if the shares are transferred by the original holder. If the dividends on
the preferred shares are not paid when due, dividends will instead accrue at the
rate of 15% per annum on a compounded basis. The preferred shares are
redeemable at Patriot Operating Company's option at the Redemption Value, plus a
premium in the case of the original holders thereof and certain permitted
transferees.
In connection with the acquisition of GAH, preferred OP Units of the
Patriot Operating Company Partnership with a value of approximately $5,000 have
been held back and the CHCI Merger equity consideration is subject to reduction
in the amount of approximately $5,000 if the hotels and leaseholds acquired fail
to achieve certain operating targets over the period prior to the closing of the
CHCI Merger.
In addition, on September 30, 2000 and September 30, 2002, Patriot
Operating Company may be obligated to pay the CHCI stockholders and a subsidiary
of Patriot Operating Company may be obligated to pay a Gencom-related entity
additional consideration, in each case based upon the delivery and performance
of certain specified assets.
As part of the above-described acquisitions, Karim Alibhai, the chief
executive officer of Gencom, was appointed to the position of president, chief
operating officer and director of Patriot Operating Company. Patriot Operating
Company has entered into an employment agreement with Mr. Alibhai, pursuant to
which Mr. Alibhai serves as president and chief operating officer of Patriot
Operating Company for a term of three years at an initial annual base
compensation of $350, subject to any increases in base compensation approved by
the Compensation Committee of the Patriot Operating Company Board of Directors.
In addition, under the terms of the employment contract, Mr. Alibhai is eligible
to receive cash incentive compensation in an amount to be determined by the
Compensation Committee, but not less than $75 per year, up to 80% of his annual
base compensation, as adjusted. In addition, Mr. Alibhai was granted
nonqualified options to purchase 280,000 paired shares of Patriot REIT and
Patriot Operating Company common stock at an exercise price of $32.0625 per
paired share (the closing market price of Patriot REIT and Patriot Operating
Company common stock on the date of grant). The options to purchase common
stock vest in equal quarterly installments over a period of three years.
Summary
As of October 15, 1997, Patriot REIT owned interests in 80 hotels and
resorts and held an approximate 83.5% ownership interest in the Patriot REIT
Partnership. Patriot Operating Company held an approximate 82.1% ownership
interest in the Patriot Operating Company Partnership. The unaudited Pro Forma
Financial Statements reflect a 16.3% minority ownership interest in the Patriot
REIT Partnership and a 16.8% minority ownership interest in the Patriot
Operating Company Partnership, which represents the estimated ownership interest
subsequent to consummation of the acquisition of GAH and the CHCI Merger.
As of October 15, 1997, 35 of Patriot REIT's hotels are leased to
independent Lessees (excluding the Park Shore Hotel acquired in August 1997 and
the Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel which are managed
directly by an Operator), and 42 hotels are leased to Patriot Operating Company.
However, the following unaudited Pro Forma Condensed Consolidated Statements of
Operations assume that the CHCI Merger has been completed which results in
Patriot Operating Company acquiring the leases for 17 hotels currently leased to
CHC Lease Partners.
The following unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1996 and the six months ended June
30, 1997 of Patriot REIT and Patriot Operating Company are derived from the
individual unaudited Pro Forma Condensed Consolidated Statements of Operations
of Patriot REIT and Patriot Operating Company which are located elsewhere in
this Joint Current Report. Such pro forma information is based in part upon:
(i) the Separate and Combined Statements of Income of Cal Jockey and Bay
Meadows filed with the Cal Jockey and Bay Meadows Annual Report on
Form 10-K for the year ended December 31, 1996 and the Joint Quarterly
Report on Form 10-Q for the six months ended June 30, 1997;
(ii) the Consolidated Statements of Operations of Old Patriot REIT filed
with the Old Patriot REIT Annual Report on Form 10-K for the year
ended December 31, 1996 and the Joint Quarterly Report on Form 10-Q
for the six months ended June 30, 1997;
F-9
<PAGE>
(iii) the historical financial statements of certain hotels acquired by Old
Patriot REIT filed in Old Patriot REIT's Current Reports on Form 8-K
dated April 2, 1996, as amended, December 5, 1996, January 16, 1997,
as amended:
(iv) the historical financial statements of certain hotels acquired by
Patriot REIT filed in the Patriot Companies' Joint Current Report on
Form 8-K dated September 17, 1997;
(v) the historical financial statements included in this Joint Current
Report; and
(vi) the Pro Forma Condensed Combined Statements of Operations of the
Lessees which are located elsewhere in this Joint Current Report.
The following unaudited Pro Forma Condensed Combined Statements of
Operations assume the following transactions (the "Recent Transactions") have
occurred at the beginning of the periods presented:
(i) the Cal Jockey Merger and the Related Transactions have been
consummated on terms set forth in the Cal Jockey Merger Agreement;
(ii) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased that portion of the land upon which the
Racecourse is situated to Patriot REIT, and Patriot REIT has subleased
this land to Patriot Operating Company;
(iii) Patriot REIT has leased certain land to Borders, Inc.;
(iv) Patriot REIT has acquired the Recent Acquisitions (excluding the Park
Shore Hotel acquired in August 1997);
(v) Patriot Operating Company has completed the Grand Heritage Acquisition
and the acquisition of PAH RSI Lessee;
(vi) the mortgage notes to affiliates of CHC Lease Partners have been
funded;
(vii) Patriot REIT has replaced the Old Line of Credit with the Revolving
Credit Facility;
(viii) Patriot Operating Company has acquired the Participating Note; and
(ix) the Offering of 10,580,000 paired shares of common stock has been
completed.
The unaudited Pro Forma Condensed Combined Statements of Operations also
assume the following additional transactions have occurred at the beginning of
the periods presented:
(i) Patriot REIT has acquired the CHC Hotels and leased such hotels to
Patriot Operating Company;
(ii) Patriot Operating Company has acquired GAH; and
(iii) the CHCI Merger has been consummated on terms set forth in the CHCI
Merger Agreement.
In addition, the pro forma results of operations for the year ended
December 31, 1996 assume the 24 hotels acquired during 1996 and the private
placement of equity securities and the public offering of common stock completed
by Old Patriot REIT during 1996 had occurred as of January 1, 1996.
In management's opinion, all material adjustments necessary to reflect the
effects of these transactions have been made. The following unaudited Pro Forma
Condensed Combined Statements of Operations are not necessarily indicative of
what the actual results of operations of Patriot REIT and Patriot Operating
Company would have been assuming such transactions had been completed as of the
beginning of the period presented, nor do they purport to represent the results
of operations for future periods. Further the unaudited Pro Forma Condensed
Combined Statement of Operations for the interim period ended June 30, 1997 is
not necessarily indicative of the results of operations for the full year.
F-10
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PATRIOT
PATRIOT AMERICAN
AMERICAN HOSPITALITY
HOSPITALITY, OPERATING
INC. COMPANY ELIMINATION PRO FORMA
PRO FORMA PRO FORMA ENTRIES TOTAL
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Revenue:
Participating lease revenue....................... $213,868 $ -- $(172,119) (A) $ 41,749
Hotel revenue..................................... -- 572,292 -- 572,292
Racecourse facility and land lease revenue........ 5,945 51,946 (5,611) (B) 52,280
Management fees and service fees income........... -- 13,522 -- 13,522
Interest and other income......................... 2,297 10,012 (5,916) (C) 6,393
-------- -------- --------- --------
Total revenue................................. 222,110 647,772 (183,646) 686,236
-------- -------- --------- --------
Expenses:
Departmental costs -- hotel operations............ -- 241,792 -- 241,792
Racing facility operations........................ -- 46,351 (5,611) (B) 40,740
Direct operating costs of management company,
service department and development costs...... -- 11,143 -- 11,143
Ground lease expense.............................. 5,693 733 -- 6,426
General and administrative........................ 6,797 71,700 (34) (C) 78,463
Repair and maintenance............................ -- 29,897 -- 29,897
Utilities......................................... -- 26,843 -- 26,843
Interest expense.................................. 64,877 1,393 (5,882) (C) 60,388 (D)
Real estate and personal property taxes and
casualty insurance............................... 22,488 398 -- 22,886
Marketing......................................... -- 51,238 -- 51,238
Management fees................................... -- 9,469 -- 9,469
Depreciation and amortization..................... 62,723 10,348 -- 73,071
Participating lease payments...................... -- 172,119 (172,119) (A) --
-------- -------- --------- --------
Total expenses................................ 162,578 673,424 (183,646) 652,356
-------- -------- --------- --------
Income(loss) before equity in earnings of
unconsolidated subsidiaries, income tax provision
and minority interests............................ 59,532 (25,652) -- 33,880
Equity in earnings of unconsolidated
subsidiaries..................................... 7,559 -- -- 7,559
-------- -------- --------- --------
Income (loss) before income tax provision and
minority interests................................ 67,091 (25,652) -- 41,439
Income tax provision.............................. (170) (760) -- (930)
-------- -------- --------- --------
Income (loss) before minority interests............ 66,921 (26,412) -- 40,509
Minority interest in the Patriot Partnerships..... (10,610) 4,437 -- (6,173)
Minority interest in consolidated subsidiaries.... (1,832) -- -- (1,832)
-------- -------- --------- --------
Net income (loss) applicable to common
shareholders (F).................................. $ 54,479 $(21,975) $ -- $ 32,504 (D)
======== ======== ========== ========
Net income (loss) per common paired share (E)...... $ 0.74 $ (0.30) $ 0.44 (D)
======== ======== ========
</TABLE>
See notes on following page.
F-11
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING
COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996:
(A) Represents elimination of participating lease revenue and expense related to
the 59 hotels (including the 17 leases acquired in connection with the CHCI
Merger) leased by Patriot REIT to Patriot Operating Company.
(B) Represents elimination of rental income and expense related to the
Racecourse facility and land leased by Patriot REIT to Patriot Operating
Company.
(C) In connection with the Cal Jockey Merger, Patriot REIT Partnership
subscribed for shares of Bay Meadows common stock (which became shares of
Patriot Operating Company Common Stock in connection with the Cal Jockey
Merger) in an amount equal to the number of shares of Patriot REIT Common
Stock that were issued to Old Patriot REIT stockholders in the Cal Jockey
Merger (the "Subscription Shares"). In addition, Patriot REIT Partnership
similarly subscribed for OP Units in the Patriot Operating Partnership in an
amount equal to the number of OP Units of Patriot REIT Partnership that were
outstanding subsequent to the Cal Jockey Merger (the "Subscribed Units").
The subscription for the Subscribed Shares and the Subscribed Units was
funded through the issuance of promissory notes in the aggregate amount of
$58,901 (the "Subscription Notes") payable to Patriot Operating Company. The
Subscription Notes accrue interest at a rate of 8% per annum and mature
December 31, 1997. The pro forma adjustment represents the elimination of
$4,712 of interest income and expense related to the Subscription Notes, the
elimination of $1,170 of interest income and expense related to a note
receivable issued to Old Patriot REIT in connection with the sale of certain
assets to PAH RSI Lessee, which assets were acquired by Patriot Operating
Company, and the elimination of $34 of other intercompany income and expense
items.
(D) The pro forma amounts presented assume an average interest rate of 7.183%
per annum (representing LIBOR plus 1.7%) on the amounts outstanding under
the Revolving Credit Facility. An increase of 0.25% in the interest rate
would increase pro forma interest expense to $61,963 and decrease net income
applicable to common shareholders to $31,186. Net income per common share
would be $0.42.
In connection with the closing of the Revolving Credit Facility, deferred
loan costs totaling approximately $13,192, including fees, legal and other
expenses were incurred and amortization expense of approximately $4,397 is
reflected in pro forma interest expense. Amortization of deferred loan costs
is computed using the straight-line method over the 3-year loan term. As a
result of the closing of the Revolving Credit Facility, deferred loan costs
totaling approximately $2,910 related to the Old Line of Credit are to be
written off. This amount will be reported as an extraordinary item in the
Patriot Companies' results of operations and has been reflected as an
adjustment to retained earnings for pro forma presentation purposes.
(E) Pro forma earnings per share is computed based on 73,516 weighted average
common paired shares and common paired share equivalents outstanding for the
period. The number of shares used for the calculation includes adjustments
to reflect the impact of the conversion of shares of Patriot Operating
Company preferred stock into paired shares of common stock. In addition,
the net income per common paired share and the weighted average number of
common paired shares and common paired share equivalents have been adjusted
for (i) the March 1997 2-for-1 stock split on Old Patriot REIT Common Stock
effected in the form of a stock dividend, (ii) the conversion of each share
of Old Patriot REIT Common Stock into 0.51895 paired shares issued in the
Cal Jockey Merger, and (iii) the July 1997 1.927-for-1 stock split effected
in the form of a stock dividend.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings Per Share ("Statement
128"). Statement 128 specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be $0.47 per paired common share. The impact of Statement 128
on the calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
(F) In connection with the acquisition of GAH and the CHCI Merger, Patriot REIT
acquired eight Participating Leases held by CHC Lease Partners (and leased
these hotels to Patriot Operating Company) and Patriot Operating Company
acquired the remaining 17 Participating Leases held by CHC Lease Partners
for aggregate consideration of approximately $105,532. Because the intent of
the accompanying pro forma condensed combined statement of operations for
the year ended December 31, 1996 is to reflect the expected continuing
impact of the above-described transactions on the Patriot Companies, the
one-time adjustment to write off the cost of acquiring these leases has been
excluded. This expense will be recorded as an operating expense on Patriot
REIT's and Patriot Operating Company's respective statements of operations,
however, the Patriot Companies will not deduct this expense for purposes of
calculating funds from operations, due to the non-recurring nature of the
expense.
F-12
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PATRIOT
PATRIOT AMERICAN
AMERICAN HOSPITALITY
HOSPITALITY, OPERATING
INC. COMPANY ELIMINATION PRO FORMA
PRO FORMA PRO FORMA ENTRIES TOTAL
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease revenue....................... $117,348 $ -- $ (95,694) (A) $ 21,654
Hotel revenue..................................... -- 313,694 -- 313,694
Racecourse facility and land lease revenue........ 2,802 22,538 (2,635) (B) 22,705
Management fees and service fees income........... -- 7,866 -- 7,866
Interest and other income......................... 2,806 5,364 (2,965) (C) 5,205
-------- -------- --------- --------
Total revenue................................. 122,956 349,462 (101,294) 371,124
-------- -------- --------- --------
Expenses:
Departmental costs -- hotel operations............ -- 127,484 -- 127,484
Racing facility operations........................ -- 20,282 (2,635) (B) 17,647
Direct operating costs of management company,
service department and development costs...... -- 6,639 -- 6,639
Ground lease expense.............................. 2,804 446 -- 3,250
General and administrative........................ 5,077 36,332 (24) (C) 41,385
Repair and maintenance............................ -- 15,882 -- 15,882
Utilities......................................... -- 12,887 -- 12,887
Interest expense.................................. 32,694 623 (2,941) (C) 30,376 (D)
Real estate and personal property taxes and
casualty insurance............................... 12,084 220 -- 12,304
Marketing......................................... -- 26,629 -- 26,629
Management fees................................... -- 6,000 -- 6,000
Depreciation and amortization..................... 32,188 5,113 -- 37,301
Participating lease payments...................... -- 95,694 (95,694) (A) --
-------- -------- --------- --------
Total expenses................................ 84,847 354,231 (101,294) 337,784
-------- -------- --------- --------
Income (loss) before equity in earnings of
unconsolidated subsidiaries, income tax provision
and minority interests............................ 38,109 (4,769) -- 33,340
Equity in earnings of unconsolidated
subsidiaries..................................... 3,093 -- -- 3,093
-------- -------- --------- --------
Income (loss) before income tax provision and
minority interests................................ 41,202 (4,769) -- 36,433
Income tax provision.............................. (85) 222 -- 137
-------- -------- --------- --------
Income (loss) before minority interests............ 41,117 (4,547) -- 36,570
Minority interest in the Patriot Partnerships..... (6,541) 764 -- (5,777)
Minority interest in consolidated subsidiaries.... (987) -- -- (987)
-------- -------- --------- --------
Net income (loss) applicable to common
shareholders (F).................................. $ 33,589 $ (3,783) $ -- $ 29,806 (D)
======== ======== ========= ========
Net income (loss) per common paired share (E)...... $ 0.45 $ (0.05) $ 0.40 (D)
======== ======== ========
</TABLE>
See notes on following page.
F-13
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY
OPERATING COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR
THE SIX MONTHS ENDED JUNE 30, 1997:
(A) Represents elimination of participating lease revenue and expense related to
the 59 hotels (including the 17 leases to be acquired in connection with the
CHCI Merger) leased by Patriot REIT to Patriot Operating Company.
(B) Represents elimination of rental income and expense related to the
Racecourse facility and land leased by Patriot REIT to Patriot Operating
Company.
(C) Represents the elimination of $2,356 of interest income and expense related
to the Subscription Notes issued to Patriot Operating Company in connection
with the subscription for shares of Patriot Operating Company Common Stock
and Patriot Operating Partnership OP Units issued in connection with the Cal
Jockey Merger, the elimination of $585 of interest income and expense
related to a note receivable issued to Old Patriot REIT in connection with
the sale of certain assets to PAH RSI Lessee, which assets were acquired by
Patriot Operating Company, and the elimination of $24 of other intercompany
income and expense items.
(D) The pro forma amounts presented assume an average interest rate of 7.264%
per annum (representing LIBOR plus 1.7%) on the amounts outstanding under
the Revolving Credit Facility. An increase of 0.25% in the interest rate
would increase pro forma interest expense to $31,165 and decrease net income
applicable to common shareholders to $29,145. Net income per common share
would be $0.39.
In connection with the closing of the Revolving Credit Facility, deferred
loan costs totaling approximately $13,192, including fees, legal and other
expenses were incurred and amortization expense of approximately $2,199 is
reflected in pro forma interest expense. Amortization of deferred loan costs
is computed using the straight-line method over the 3-year loan term. As a
result of the closing of the Revolving Credit Facility, deferred loan costs
totaling approximately $2,910 related to the Old Line of Credit are to be
written off. This amount will be reported as an extraordinary item in the
Patriot Companies' results of operations and has been reflected as an
adjustment to retained earnings for pro forma presentation purposes.
(E) Pro forma earnings per share is computed based on 74,045 weighted average
common paired shares and common paired share equivalents outstanding for the
period. The number of shares used for the calculation includes adjustments
to reflect the impact of the conversion of shares of Patriot Operating
Company preferred stock into paired shares of common stock. In addition, the
net income per common paired share and the weighted average number of common
paired shares and common paired share equivalents have been adjusted to
reflect the impact of the 1.927-for-1 stock split effected in the form of a
stock dividend.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the six months ended
June 30, 1997 would be $0.43 per paired common share. The impact of
Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
(F) In connection with the acquisition of GAH and the CHCI Merger, Patriot REIT
acquired eight Participating Leases held by CHC Lease Partners (and leased
these hotels to Patriot Operating Company) and Patriot Operating Company
acquired the remaining 17 Participating Leases held by CHC Lease Partners
for aggregate consideration of approximately $105,532. Because the intent of
the accompanying pro forma condensed combined statement of operations for
the six months ended June 30, 1997 is to reflect the expected continuing
impact of the above-described transactions on the Patriot Companies, the
one-time adjustment to write off the cost of acquiring these leases has been
excluded. This expense will be recorded as an operating expense on Patriot
REIT's and Patriot Operating Company's respective statements of operations,
however, the Patriot Companies will not deduct this expense for purposes of
calculating funds from operations, due to the non-recurring nature of the
expense.
F-14
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited Pro Forma Condensed Combined Balance Sheet assumes
the following Recent Transactions have occurred as of June 30, 1997:
(i) the Cal Jockey Merger and the Related Transactions have been
consummated on terms set forth in the Cal Jockey Merger Agreement;
(ii) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased that portion of the land upon which the Racecourse
is situated to Patriot REIT, and Patriot REIT has subleased this land
to Patriot Operating Company;
(iii) Patriot REIT has leased certain land to Borders, Inc.;
(iv) Patriot REIT has acquired the Recent Acquisitions (excluding the Park
Shore Hotel);
(v) Patriot Operating Company has completed the Grand Heritage Acquisition
and the acquisition of PAH RSI Lessee;
(vi) the mortgage notes to affiliates of CHC Lease Partners have been
funded;
(vii) Patriot REIT has replaced the Old Line of Credit with the Revolving
Credit Facility;
(viii) Patriot REIT has acquired the Participating Note; and
(ix) the Offering of 10,580,000 paired shares of common stock has been
completed.
The unaudited Pro Forma Condensed Combined Balance Sheet also assumes the
following additional transactions have occurred as of June 30, 1997:
(i) Patriot REIT has acquired the CHC Hotels and leased such hotels to
Patriot Operating Company;
(ii) Patriot Operating Company has acquired GAH; and
(iii) the CHCI Merger has been consummated on the terms set forth in the
CHCI Merger Agreement.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Condensed Combined Balance Sheet is
derived from Old Patriot REIT's Consolidated Balance Sheet as of June 30, 1997
and Patriot REIT's and Patriot Operating Company's Combined Balance Sheet as of
June 30, 1997 and should be read in conjunction with the financial statements
filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the
six months ended June 30, 1997 (which included the financial statements of Old
Patriot REIT as of and for the six months ended June 30, 1997).
The Cal Jockey Merger has been accounted for as a reverse acquisition
whereby Cal Jockey is considered to be the acquired company for accounting
purposes. The unaudited Pro Forma Condensed Combined Balance Sheet reflects
adjustments for the purchase method of accounting whereby the Bay Meadows
Racecourse ("Racecourse") facilities and related leasehold improvements owned by
Cal Jockey and Bay Meadows are adjusted to estimated fair market value and Cal
Jockey's and Bay Meadows' historical shareholders' equity is eliminated. The
following Pro Forma Condensed Combined Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of June 30, 1997, nor does it purport to
represent the future financial position of Patriot REIT and Patriot Operating
Company.
F-15
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
(in thousands, except for share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OLD PATRIOT ACQUISITION
PATRIOT COMPANIES CAL OF GAH AND
REIT COMBINED JOCKEY OTHER CHC HOTELS CERTAIN
HISTORICAL HISTORICAL MERGER ACQUISITIONS ACQUISITION LEASEHOLDS
(A) (B) (C) (D) (E) (F)
---------- ---------- ------- ------------ ----------- ----------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Net investment in hotel and
resort properties and land held
for sale........................ $1,011,940 -- $ -- $323,682 $ 255,813 $ --
Net investment in Racecourse
facility and related
improvements..................... -- 21,080 485 (H) -- -- --
Mortgage notes and other
receivables from unconsolidated
subsidiaries..................... 74,424 -- -- -- -- --
Other notes and receivables....... 33,796 -- (2,900) (I) 96,842 (J) (103,125) (K) --
Management contracts.............. -- -- -- 10,960 (L) -- 9,942 (L)
Trade names and franchise costs... -- -- -- 11,500 (L) -- --
Investment in unconsolidated
subsidiaries..................... 12,448 -- -- -- --
Cash and cash equivalents......... 8,975 4,256 -- 7,515 (M) -- (1,508) (N)
Restricted cash (O)............... -- -- 80,864 (H) (39,320) (O) -- --
Accounts receivable............... 13,075 163 -- -- -- --
Goodwill.......................... -- -- 103,121 (P) 4,888 (P) -- 4,735 (P)
Deferred expenses, net............ 9,656 -- -- 4,194 (Q) -- --
Prepaid expenses and other assets. 13,087 771 -- 2,838 2,051 1,852
Deferred income taxes............. -- 227 -- -- -- --
---------- ------- -------- -------- -------- -------
Total assets.................... $1,177,401 $26,497 $181,570 $423,099 $154,739 $15,021
========== ======= ======== ======== ========= =======
CHCI
MERGER PRO FORMA
(G) TOTAL
------ ---------
ASSETS
Net investment in hotel and
resort properties and land held
for sale........................ $ -- $1,591,435
Net investment in Racecourse
facility and related
improvements..................... -- 21,565
Mortgage notes and other
receivables from unconsolidated
subsidiaries..................... -- 74,424
Other notes and receivables....... -- 24,613
Management contracts.............. 22,911 (L) 43,813
Trade names and franchise costs... 5,000 (L) 16,500
Investment in unconsolidated
subsidiaries..................... -- 12,448
Cash and cash equivalents......... -- 19,238
Restricted cash (O)............... -- 41,544
Accounts receivable............... -- 13,238
Goodwill.......................... 7,269 (P) 120,013
Deferred expenses, net............ -- 13,850
Prepaid expenses and other assets. (1,082) 19,517
Deferred income taxes............. -- 227
------- ----------
Total assets.................... $34,098 $2,012,425
======= ==========
</TABLE>
See notes on page F-18.
F-16
<PAGE>
<TABLE>
<CAPTION>
OLD PATRIOT ACQUISITION OF
PATRIOT COMPANIES CAL GAH AND
REIT COMBINED JOCKEY OTHER CHC HOTELS CERTAIN
HISTORICAL HISTORICAL MERGER ACQUISITIONS ACQUISITION LEASEHOLDS
(A) (B) (C) (D) (E) (F)
---------- ---------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowings under a line of
credit facility and mortgage $ 584,294 $ -- $ -- $137,056 (R) $ 45,000 $ --
notes...........................
Accounts payable and accrued
expenses......................... 12,013 5,541 12,339 (S) 2,437 (S) 2,838 (S) 344 (S)
Note payable...................... -- 2,900 (2,900) (I) -- -- --
Due to unconsolidated
subsidiaries..................... 6,314 -- -- -- -- --
Minority interest in the Patriot
Partnerships..................... 118,151 -- -- 37,260 (T) 49,458 (T) 66,626 (T)
Minority interest in consolidated
subsidiaries..................... 15,767 -- -- 12,223 (U) -- --
Shareholders' equity:
Preferred stock.................. -- -- -- -- -- 6 (Y)
Common stock..................... -- 116 459 (V) 750 (W) 51 (X) --
Paid-in capital.................. 460,029 18,384 171,228 (V) 240,045 (W) 57,392 (X) 13,854 (Y)
Unearned stock compensation,
net............................. (16,397) -- -- -- -- --
Retained earnings................ (2,770) (444) 444 (V) (6,672) (W) -- (65,809) (Y)
---------- ------- -------- -------- -------- --------
Total shareholders' equity...... 440,862 18,056 172,131 234,123 57,443 (51,949)
---------- ------- -------- -------- -------- --------
Total liabilities and
shareholders' equity........... $1,177,401 $26,497 $181,570 $423,099 $154,739 $ 15,021
========== ======= ======== ======== ======== ========
CHCI PRO
MERGER FORMA
(G) TOTAL
---------- -----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowings under a line of
credit facility and mortgage
notes........................... $ -- $ 766,350
Accounts payable and accrued
expenses......................... -- 35,512
Note payable...................... -- --
Due to unconsolidated
subsidiaries..................... -- 6,314
Minority interest in the Patriot
Partnerships..................... -- 271,495
Minority interest in consolidated
subsidiaries..................... -- 27,990
Shareholders' equity:
Preferred stock.................. 38 (Z) 44
Common stock..................... -- 1,376
Paid-in capital.................. 88,302 (Z) 1,049,234
Unearned stock compensation,
net............................. -- (16,397)
Retained earnings................ (54,242) (Z) (129,493)
-------- ----------
Total shareholders' equity...... 34,098 904,764
-------- ----------
Total liabilities and
shareholders' equity........... $ 34,098 $2,012,425
======== ==========
</TABLE>
F-17
<PAGE>
PATIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING
COMPANY
Notes to Pro Forma Condensed Combined Balance Sheet as of June 30, 1997:
(A) Represents the historical consolidated financial position of Old Patriot
REIT as of June 30, 1997.
(B) Represents the historical combined financial position of Cal Jockey and Bay
Meadows as of June 30, 1997 (prior to the Cal Jockey Merger).
(C) Represents adjustments to the historical combined financial position of Old
Patriot REIT, Cal Jockey and Bay Meadows assuming the Cal Jockey Merger and
the Related Transactions and the PaineWebber Land Sale had been consummated
as of June 30, 1997.
(D) Represents adjustments to the Patriot Companies' pro forma financial
position assuming (i) Patriot REIT had acquired the Recent Acquisitions
(excluding the Park Shore Hotel); (ii) Patriot Operating Company had
completed the Grand Heritage Acquisition and had acquired PAH RSI Lessee;
(iii) the mortgage notes to affiliates of CHC Lease Partners had been
funded; (iv) the Patriot Companies' Old Line of Credit was replaced with
the Revolving Credit Facility; (v) Patriot REIT acquired the Participating
Note; and (vi) the Offering of 10,580,000 paired shares of common stock was
completed as of June 30, 1997.
(E) Represents adjustments to the Patriot Companies' pro forma financial
position assuming the ten CHC Hotels had been acquired as of June 30, 1997.
(F) Represents adjustments to the Patriot Companies' pro forma financial
position assuming Patriot Operating Company had acquired GAH and Patriot
REIT had acquired eight Participating Leases held by CHC Lease Partners as
of June 30, 1997.
(G) Represents adjustment to the Patriot Companies' pro forma financial position
assuming the CHCI Merger had been consummated as of June 30, 1997.
(H) Represents adjustment for the purchase method of accounting whereby the
Racecourse facility and related leasehold improvements owned by Cal Jockey
and Bay Meadows are adjusted to estimated fair market value after the sale
of substantially all of the Cal Jockey land to an affiliate of PaineWebber
for $80,864.
(I) Represents the elimination of the note payable between Cal Jockey and Old
Patriot REIT issued in connection with the Cal Jockey Merger.
(J) Represents the following adjustments:
<TABLE>
<S> <C>
To reflect the funding of the mortgage notes to affiliates of
CHC Lease Partners.......................................... $82,625
To reflect the acquisition of the Participating Note......... 23,750
To reflect the elimination of the note receivable and
accrued interest between Patriot REIT and PAH RSI Lessee
which relates to certain assets, trade names and right
to receive certain royalty fees which were acquired by
Patriot Operating Company...................................... (9,533)
-------
$96,842
=======
</TABLE>
(K) Represents the elimination of the principal balance of the mortgage notes
held by Patriot REIT encumbering four of the CHC Hotels.
(L) Represents the estimated value of the management contracts and trade names
acquired in the acquisition of Grand Heritage Hotels, Inc., PAH RSI Lessee,
GAH and in the CHCI Merger.
(M) Represents the following adjustments:
<TABLE>
<S> <C>
To reflect cash payments made in the acquisition of certain
of the Recent Acquisitions..................................... $(5,974)
To reflect the remaining net proceeds from the Offering......... 13,312
To reflect cash balances acquired in the Grand Heritage
Acquisition.................................................... 177
-------
$ 7,515
=======
</TABLE>
(N) Represents cash paid for working capital balances related to the GAH hotel
leases and management contracts.
(O) The restricted cash balance represents the cash proceeds from the
PaineWebber Land Sale (in the amount of $80,864) that were placed in a
restricted trust account in order to facilitate a tax-deferred, like-kind
exchange through the acquisition of suitable hotel properties. In order to
qualify as a tax-deferred exchange, suitable properties must be located and
exchanged and the exchange must be effectuated within a relatively short
time period allowed by Internal Revenue Service regulations. Management
believes that the three hotel properties that were purchased with
PaineWebber Land Sale proceeds are suitable hotel properties that qualify as
a tax-deferred, like-kind exchange.
(P) Represents the purchase consideration in excess of the fair market value of
the net assets. In the case of Cal Jockey and Bay Meadows, management
primarily attributes this amount to the paired share structure that,
subsequent to the Cal Jockey Merger, enables Patriot REIT and Patriot
Operating Company to be a fully
F-18
<PAGE>
integrated owner and operator of hotels. The paired share tax treatment is
no longer available under the Internal Revenue Code of 1986, as amended (the
"Code"); however, Cal Jockey and Bay Meadows are one of only four publicly-
held companies in existence for which this structure has been
"grandfathered."
(Q) Represents adjustments to reflect deferred loan costs associated with the
closing of the Revolving Credit Facility, net of the write-off of $2,910 of
unamortized deferred loan costs associated with the Old Line of Credit.
(R) Represents the following adjustments:
<TABLE>
<S> <C>
To reflect replacement of the Old Line of Credit with the
Revolving Credit Facility and funds drawn on the Revolving
Line of Credit related to the acquisition of the Recent
Acquisitions (excluding the Park Shore Hotel).............. $ 135,389
To reflect mortgage debt assumed or acquired in the
acquisition of the Recent Acquisitions..................... 104,667
To reflect the funds drawn to acquire the
Participating Note......................................... 21,375
To reflect the funding of the Paine Webber
Mortgage Financing......................................... 103,000
To reflect application of net proceeds from the
Offering to reduce amounts Outstanding under the
Revolving Credit Facility.................................. (227,375)
---------
$ 137,056
=========
</TABLE>
(S) Represents adjustment in the amount of $12,339 for accrued Cal Jockey Merger
costs including legal and accounting fees, printing and various other
professional fees incurred in connection with the Cal Jockey Merger and the
Related Transactions. Other amounts represent adjustments for accounts
payable and accrued expenses assumed or incurred in connection with the
acquisition of hotel properties, the Grand Heritage Acquisition and the GAH
acquisition.
(T) Represents adjustments to reflect:
<TABLE>
<S> <C>
The issuance of 614,046 OP Units of the Patriot Partnerships
in connection with the acquisition of the Met-Doubletree
Hotels..................................................... $15,000
The issuance of 931,972 preferred OP Units of the
Patriot Operating Company Partnership in connection with
the Grand Heritage Acquisition............................. 22,260
-------
$37,260
=======
To reflect the issuance of 2,174,773 OP Units of
the Patriot Partnerships in connection with the
acquisition of the CHC Hotels.............................. $49,458
=======
To reflect the issuance of 2,388,932 OP Units of
the Patriot Operating Company Partnership and
the Patriot REIT Partnership and 476,832
preferred OP Units of the Patriot Operating
Company Partnership:
In connection with the acquisition of GAH................. $13,860
In connection with the acquisition of the
Participating Leases for eight hotels.................... 52,766
-------
$66,626
=======
</TABLE>
(U) Represents cash and property contributions of the minority interest partners
in the consolidated subsidiaries which were formed to acquire eight of the
Recent Acquisition hotel properties.
(V) Represents the exchange of shares of Old Patriot REIT Common Stock for
paired shares of Patriot REIT Common Stock and Patriot Operating Company
Common Stock. Pursuant to the Cal Jockey Merger Agreement, Old Patriot REIT
stockholders were entitled to receive, for each share of Old Patriot REIT
Common Stock held by them at the effective time of the Cal Jockey Merger,
0.51895 shares of Patriot REIT Common Stock and 0.51895 shares of Patriot
Operating Company Common Stock, which shares are paired and transferable
only as a single unit. At June 30, 1997, Old Patriot REIT had 44,311,225
shares of Old Patriot REIT Common Stock outstanding which were assumed to be
exchanged for approximately 22,995,310 paired shares of Patriot REIT Common
Stock and Patriot Operating Company Common Stock, resulting in an increase
in common stock of approximately $459, which has been offset by a
corresponding adjustment to paid-in capital.
Pursuant to the Cal Jockey Merger Agreement, Old Patriot REIT stockholders
received 0.51895 shares of Patriot REIT Common Stock and 0.51895 shares of
Patriot Operating Company Common Stock for each Old Patriot REIT share. The
estimated value of the Cal Jockey and Bay Meadows paired shares, based on
the closing price of Old Patriot REIT's Common Stock on October 30, 1996, of
$17.125 (adjusted for the stock splits and Cal Jockey Merger conversion of
shares), is $33.00 per paired share. Based on 5,763,257 paired shares of Cal
Jockey common stock and Bay Meadows common stock outstanding, the total
purchase consideration is approximately $190,187. The adjustments to
shareholders' equity eliminate the historical equity accounts of Cal Jockey
and Bay Meadows which total $23,708 and record equity based on the number of
F-19
<PAGE>
paired shares of Cal Jockey common stock and Bay Meadows common stock that
remained outstanding after the Cal Jockey Merger at $33.00 per paired share.
(W) Represents the following adjustments to Shareholders' Equity:
<TABLE>
<CAPTION>
Common Paid-in Retained
Stock Capital Earnings
------ --------- ---------
<S> <C> <C> <C>
Pursuant to the Offering.................. $212 $240,583 $ --
Write-off of unamortized deferred
loan costs............................... -- -- (2,910)
Write-off the estimated cost to acquire
three Participating Leases in Grand
Heritage Acquisition..................... -- -- (3,762)
Pursuant to the 1.927-for-1 stock split... 538 (538) --
---- -------- -------
$750 $240,045 $(6,672)
==== ======== =======
</TABLE>
The Patriot Companies completed the Offering of 10,580,000 shares of common
stock, par value $0.02 per paired share, resulting in net proceeds of
approximately $240,795.
In connection with the replacement of the Old Line of Credit with the
Revolving Credit Facility, Patriot REIT will write-off unamortized deferred
loan costs related to the Old Line of Credit. This amount will be reported
as an extraordinary item in Patriot REIT's results of operations and has
been reflected as an adjustment to retained earnings for purposes of pro
forma balance sheet presentation.
In connection with the Grand Heritage Acquisition, Patriot Operating Company
acquired three Participating Leases related to three hotels that Patriot
REIT had leased to Grand Heritage Leasing, L.L.C. The cost of acquiring
these leases will be reflected as a one-time charge to operating expense in
the Patriot Operating Company results of operations and has been reflected
as an adjustment to retained earnings for pro forma presentation purposes.
The reclassification entry of $538 pursuant to the July 1997 1.927-for-1
stock split effected in the form of a stock dividend, represents the
reclassification of the par value (at $0.02 per paired share) of the common
stock issued in connection with the stock split.
(X) Represents adjustments to reflect the issuance of 2,534,656 paired shares of
the Patriot Companies' common stock in connection with the acquisition of
the ten CHC Hotels. The amounts include adjustments to reflect the
acquisition of the remaining approximate 50% interest in the Omni Inner
Harbor Hotel for 830,713 paired shares of the Patriot Companies' common
stock.
(Y) Represents the following adjustments the Shareholders' Equity:
<TABLE>
<CAPTION>
Preferred Paid-in Retained
Stock Capital Earnings
--------- --------- ---------
<S> <C> <C> <C>
Pursuant to issuance of a total of
approximately 596,129 shares of Series A
Preferred Stock and Series B Preferred
Stock of Patriot Operating Company in
connection with the CHCI Merger.................. $ 6 $13,854 $(13,043)
Write-off the estimated cost to acquire eight
Participating Leases related to hotels
leased by Patriot REIT to CHC Lease Partners..... -- -- (52,766)
----- -------- --------
$ 6 $13,854 $(65,809)
===== ======= ========
</TABLE>
The adjustment to retained earnings in the amount of $13,043 represents the
estimated cost of acquiring certain management contracts related to hotels
owned by Patriot REIT. The adjustment to retained earnings in the amount of
$52,766 represents the estimated cost of acquiring eight leaseholds related
to Participating Lease agreements for eight hotels leased by CHC Lease
Partners. The cost of acquiring these management contracts and leaseholds
will be recorded as an operating expense in Patriot Operating Company's and
Patriot REIT's respective results of operations. However, because the intent
of the pro forma financial statements is to reflect, among other things, the
expected continuing impact of the CHCI Merger and the acquisition of GAH on
the Patriot Companies, this one-time adjustment has been excluded from the
pro forma statements of operations and has been reflected as an adjustment
to retained earnings for pro forma presentation purposes.
F-20
<PAGE>
(Z) Represents the following adjustments to Shareholders' Equity:
<TABLE>
<CAPTION>
Preferred Paid-in Retained
Stock Capital Earnings
--------- ------- ---------
<S> <C> <C> <C>
Pursuant to issuance of approximately
a total of approximately 3,799,571
shares of Series A Preferred Stock
and Series B Preferred Stock of Patriot
Operating Company in connection with the
CHCI Merger................................. $38 $88,302 $ --
Write-off the estimated cost to acquire
17 Participating Leases related to hotels
leased by Patriot REIT to CHC Lease
Partners.................................... -- -- (52,766)
Write-off unamortized lease inducement
costs related to the 25 Participating
Leases...................................... -- -- (1,476)
--------- ------- --------
$38 $88,302 $(54,242)
========= ======= ========
</TABLE>
In connection with the CHCI Merger, Patriot Operating Company will acquire
the remaining 17 Participating Leases held by CHC Lease Partners, issuing a
combination of Series A Preferred Stock and Series B Preferred Stock in
connection with the transaction. The cost of acquiring these leases will be
recorded as an operating expense in Patriot Operating Company's results of
operations. However, because the intent of the pro forma financial
statements is to reflect, among other things, the expected continuing impact
of the CHCI Merger and the acquisition of GAH on Patriot Operating Company,
this one-time adjustment has been excluded from the pro forma statements of
operations and has been reflected as an adjustment to retained earnings for
pro forma presentation purposes.
F-21
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
OLD PATRIOT PATRIOT REIT
REIT (CAL JOCKEY) RECENT CHC HOTELS
HISTORICAL HISTORICAL TRANSACTIONS ACQUISITION OTHER PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS TOTAL
----------- ------------ ------------ ----------- ----------- ----------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Participating lease revenue.... $75,893 $ -- $ 98,428 (E) $39,702 (E) $ (155) $213,868
Rental of Racecourse facility
and land...................... -- 4,918 1,027 (F) -- -- 5,945
Interest and other income...... 600 494 1,203 (G) -- -- 2,297
------- ------- -------- ------- ------- --------
Total revenue.............. 76,493 5,412 100,658 39,702 (155) 222,110
------- ------- -------- ------- ------- --------
Expenses:
Ground lease expense........... 1,075 -- 4,238 (H) 380 -- 5,693
General and administrative..... 4,500 5,696 (3,399) (I) -- -- 6,797
Interest expense............... 7,380 -- 46,731 (J) 7,753 (J) 3,013 (J) 64,877 (R)
Real estate and personal
property taxes and
casualty insurance............ 7,150 -- 10,121 (K) 5,217 (K) -- 22,488
Depreciation and
amortization.................. 17,420 932 32,894 (L) 11,477 (L) -- 62,723
------- ------- -------- ------- ------- --------
Total expenses............. 37,525 6,628 90,585 24,827 3,013 162,578
------- ------- -------- ------- ------- --------
Income (loss) before equity in
earnings of unconsolidated
subsidiaries, income tax
provision and minority
interests...................... 38,968 (1,216) 10,073 14,875 (3,168) 59,532
Equity in earnings of
unconsolidated
subsidiaries.................. 5,845 -- 1,714 (M) -- -- 7,559
------- ------- -------- ------- ------- --------
Income (loss) before income tax
provision and minority
interests...................... 44,813 (1,216) 11,787 14,875 (3,168) 67,091
Income tax provision........... -- -- -- -- (170) (N) (170)
------- ------- -------- ------- ------- --------
Income (loss) before minority
interests...................... 44,813 (1,216) 11,787 14,875 (3,338) 66,921
Minority interest in Patriot
REIT Partnership.............. (6,767) -- 448 (O) -- (4,291) (O) (10,610)
Minority interest in
consolidated subsidiaries..... (55) -- (1,777) (P) -- -- (1,832)
------- ------- -------- ------- ------- --------
Net income (loss) applicable to
common shareholders............ $37,991 $(1,216) $ 10,458 $14,875 $(7,629) $ 54,479 (R)
======= ======= ======== ======= ======= ========
Net income (loss) per common
share (Q)...................... $ 1.06 $ (0.11) $ 0.74 (R)
======= ======= ========
</TABLE>
See notes on following page.
F-22
<PAGE>
NOTES TO PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996:
(A) Represents Old Patriot REIT's historical results of operations for the year
ended December 31, 1996.
(B) Represents the historical results of operations of Patriot REIT (formerly
known as Cal Jockey) for the year ended December 31, 1996.
(C) Represents adjustment to Patriot REIT's results of operations assuming (i)
the Cal Jockey Merger and the Related Transactions have been consummated;
(ii) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased the Racecourse land to Patriot REIT and Patriot REIT
has subleased this land to Patriot Operating Company; (iii) Patriot REIT has
leased certain land to Borders, Inc.; (iv) Patriot REIT has acquired the
Recent Acquisitions (excluding the Park Shore Hotel); (v) the mortgage notes
to affiliates of CHC Lease Partners have been funded; (vi) Patriot REIT has
replaced the Old Line of Credit with the Revolving Credit Facility; (vii)
the Offering has been completed; and (viii) the 24 hotels acquired by
Patriot REIT, the private placement of equity securities and the public
offering of common stock completed by Old Patriot REIT during 1996 had
occurred as of January 1, 1996.
(D) Represents adjustment to Patriot REIT's results of operations assuming the
CHC Hotels had been acquired as of January 1, 1996.
(E) Represents adjustments to participating lease revenue assuming the 77 hotels
owned by Patriot REIT and its subsidiaries (excluding the Crowne Plaza
Ravinia Hotel and the Wyndham WindWatch Hotel which are not leased to
Lessees and excluding the Park Shore Hotel) had been leased to the Lessees
or the Patriot Operating Company as of January 1, 1996.
(F) Represents adjustments to Racecourse facility rental revenue as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the Related Transactions and
the PaineWebber Land Sale and (ii) rental income related to the Borders
Lease.
(G) Represents the following adjustments to interest and other income:
<TABLE>
<CAPTION>
<S> <C>
Related to interest earned on notes receivable issued to the Patriot REIT
Partnership by PAH RSI Lessee in connection with the sale of certain
assets and the right to receive certain royalty fees......................... $ 1,170
Related to the $500 mortgage note receivable issued to
the Patriot REIT Partnership by NorthCoast Hotels, L.L.C. ("NorthCoast
Lessee")..................................................................... 48
Related to interest earned from notes receivable from
an unconsolidated subsidiary................................................. 21
Related to the elimination of interest earned on the
$2,900 note receivable issued to Old Patriot REIT by Cal Jockey in
connection with the Cal Jockey Merger........................................ (36)
------
$1,203
======
</TABLE>
(H) Represents ground lease payments pursuant to the ground lease agreement with
an affiliate of PaineWebber of $3,964 and pro forma ground lease payments to
be made with respect to certain of the hotels of $274.
(I) Represents the following adjustments to general and administrative expense:
<TABLE>
<CAPTION>
<S> <C>
Related to elimination of administrative salaries and other expenses
not expected to be incurred by Patriot REIT............................. $ (568)
Related to elimination of non-recurring legal fees....................... (1,344)
Related to elimination of Cal Jockey Merger related
costs................................................................... (3,284)
Related to increased salaries, insurance, travel,
audit, legal and other
expenses associated with operating as a public
company and the
continued growth of Patriot REIT....................................... 150
Related to the annual amortization of unearned stock
compensation
computed on a straight-line basis over the 3 to
5-year vesting periods................................................ 1,647
-------
$ (3,399)
=======
</TABLE>
F-23
<PAGE>
<TABLE>
<S> <C>
(J) Interest expense consists of the following components:
Historical interest expense............................................ $ 7,380
Interest expense related to 47 hotels acquired by Patriot REIT since
January 1, 1996 (excluding the Park Shore Hotel and the CHC Hotels).. 37,569
Interest expense related to the Subscription Notes payable to
Patriot Operating Company............................................ 4,712
Interest expense related to amortization of deferred loan costs........ 4,397
Interest expense related to amortization of capitalized interest....... 53
Interest expense related to four of the CHC Hotels encumbered by
mortgage loans held by Patriot REIT.................................. 7,753
Interest expense related to the acquisition of the 10 CHC Hotels....... 3,013
-------
$64,877
=======
</TABLE>
(K) Represents real estate and personal property taxes and casualty insurance to
be paid by Patriot REIT related to the 47 hotels acquired since January 1,
1996 (except for the Park Shore Hotel) and the 10 CHC Hotels .
(L) Represents the following adjustments to depreciation and amortization:
<TABLE>
<CAPTION>
Depreciation related to 47 hotels acquired by Patriot REIT since
<S> <C>
January 1, 1996 (excluding the Park Shore Hotel and the
CHC Hotels)........................................................... $30,603
Reduction of depreciation expense related to the
Racecourse facility..................................................... (93)
Amortization of goodwill resulting from the adjustment for
purchase method of accounting whereby the Racecourse facility and
retained leasehold improvements owned by Cal Jockey are adjusted
to estimated fair market value.......................................... 2,384
-------
$32,894
=======
Depreciation related to the CHC Hotels.................................. $11,477
=======
</TABLE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and improvements,
20 years for the Racecourse facility and 5 to 7 years for furniture,
fixtures and equipment ("F, F, & E"). These estimated useful lives are based
on management's knowledge of the properties and the industry in general.
Amortization of goodwill is computed using the straight-line method over a
40 year estimated useful life. Because the paired share structure is
"grandfathered" under the Code, management believes the life of the paired
share structure is perpetual. Under generally accepted accounting
principles, however, the maximum amortization period is 40 years for
intangible assets.
(M) Represents equity in income of PAH WindWatch, L.L.C. and PAH Boulders, Inc.
acquired in September 1996 and January 1997, respectively.
(N) Represents an adjustment for estimated state income tax liabilities.
(O) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions. The
estimated minority interest percentage subsequent to the Recent Transactions
is approximately 11.8%. The estimated minority interest percentage
subsequent to the acquisition of the CHC Hotels, the acquisition of GAH and
the CHCI Merger is approximately 16.3%.
(P) Represents the minority interest related to the partnerships with an
affiliate of Doubletree Hotels Corporation and the limited liability
companies which own the Snavely Portfolio hotels assuming such entities had
been formed and the 15 hotels owned by such entities had been acquired at
January 1, 1996.
(Q) Pro forma earnings per share is computed based on 73,516 weighted average
common paired shares and common paired share equivalents outstanding for the
period. The number of shares used for the calculation includes adjustments
to reflect the impact of the conversion of shares of Patriot Operating
Company preferred stock into paired shares of common stock. In addition,
the net income per common paired share and the weighted average number of
common paired shares and common paired share equivalents have been adjusted
for (i) the March 1997 2-for-1 stock split on Old Patriot REIT Common Stock
effected in the form of a stock dividend, (ii) the conversion of each share
of Old Patriot REIT Common Stock into 0.51895 paired shares issued in the
Cal Jockey Merger, and (iii) the July 1997 1.927-for-1 stock split effected
in the form of a stock dividend, as applicable. Historical basis earnings
per share is computed based on 35,938 and 11,106 weighted average common
shares and common share equivalents outstanding for Old Patriot REIT and Cal
Jockey, respectively.
F-24
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended
December 31, 1996 would be $0.79 per common share. The impact of Statement
128 on the calculation of diluted earnings per share is not expected to
differ significantly from the earnings per share amounts reported.
(R) If the interest rate on the Revolving Credit Facility increased by 0.25%,
interest expense would increase to approximately $66,452, net income would
decrease to $53,161 and net income per common share would decrease to $0.72.
F-25
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OLD PATRIOT PATRIOT REIT
REIT (CAL JOCKEY) RECENT CHC HOTELS
HISTORICAL HISTORICAL TRANSACTIONS ACQUISITION OTHER PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS TOTAL
----------- ------------ ------------ ------------ -------------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Participating lease revenue.... $71,986 $ -- $25,975 (E) $19,465 (E) $ (78) $117,348
Rental of Racecourse facility
and land...................... -- 2,017 785 (F) -- -- 2,802
Interest and other income...... 1,132 1,715 (41) (G) -- -- 2,806
------- ------ ------- ------- ------- --------
Total revenue.............. 73,118 3,732 26,719 19,465 (78) 122,956
------- ------ ------- ------- ------- --------
Expenses:
Ground lease expense........... 683 -- 1,982 (H) 139 -- 2,804
General and administrative..... 5,081 2,657 (2,661) (I) -- -- 5,077
Interest expense............... 17,328 -- 9,948 (J) 3,896 (J) 1,522 (J) 32,694 (Q)
Real estate and personal
property taxes and
casualty insurance............ 6,966 -- 2,770 (K) 2,348 (K) -- 12,084
Depreciation and
amortization.................. 18,006 478 8,566 (L) 5,138 (L) -- 32,188
------- ------ ------- ------- ------- --------
Total expenses............. 48,064 3,135 20,605 11,521 1,522 84,847
------- ------ ------- ------- ------- --------
Income (loss) before equity in
earnings of unconsolidated
subsidiaries, income tax
provision and minority
interests...................... 25,054 597 6,114 7,944 (1,600) 38,109
Equity in earnings of
unconsolidated subsidiaries... 3,093 -- -- -- -- 3,093
------- ------ ------- ------- ------- --------
Income (loss) before income tax
provision and minority
interests...................... 28,147 597 6,114 7,944 (1,600) 41,202
Income tax provision........... -- -- -- -- (85) (M) (85)
------- ------ ------- ------- ------- --------
Income (loss) before minority
interests...................... 28,147 597 6,114 7,944 (1,685) 41,117
Minority interest in Patriot
REIT Partnership.............. (4,534) -- 537 (N) -- (2,544) (N) (6,541)
Minority interest in
consolidated subsidiaries..... (447) -- (540) -- -- (987)
------- ------ ------- ------- ------- --------
Net income (loss) applicable to
common shareholders............ $23,166 $ 597 $ 6,111 $ 7,944 $(4,229) $ 33,589 (Q)
======= ====== ======= ======= ======== ========
Net income (loss) per common
share (P)..................... $0.52 $0.05 $ 0.45 (Q)
======= ====== ========
</TABLE>
See notes on following page.
F-26
<PAGE>
NOTES TO PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997:
(A) Represents Old Patriot REIT's historical results of operations for the six
months ended June 30, 1997.
(B) Represents the historical results of operations of Patriot REIT (formerly
known as Cal Jockey) for the six months ended June 30, 1997.
(C) Represents adjustment to Patriot REIT's results of operations assuming (i)
the Cal Jockey Merger and the Related Transactions have been consummated;
(ii) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased the Racecourse land to Patriot REIT and Patriot REIT
has subleased this land to Patriot Operating Company; (iii) Patriot REIT has
leased certain land to Borders, Inc.; (iv) Patriot REIT has acquired the
Recent Acquisitions (excluding the Park Shore Hotel); (v) the mortgage notes
to affiliates of CHC Lease Partners have been funded; (vi) Patriot REIT has
replaced the Old Line of Credit with the Revolving Credit Facility; and
(vii) the Offering has been completed as of January 1, 1996.
(D) Represents adjustment to Patriot REIT's results of operations assuming the
CHC Hotels had been acquired as of January 1, 1996.
(E) Represents adjustments to participating lease revenue assuming the 77 hotels
owned by Patriot REIT and its subsidiaries (excluding the Crowne Plaza
Ravinia Hotel and the Wyndham WindWatch Hotel which are not leased to
Lessees and excluding the Park Shore Hotel) had been leased to the Lessees
or the Patriot Operating Company as of January 1, 1996.
(F) Represents adjustments to Racecourse facility rental revenue as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the Related Transactions and
the PaineWebber Land Sale and (ii) rental income related to the Borders
Lease.
(G) Represents the following adjustments to interest and other income:
<TABLE>
<CAPTION>
<S> <C>
Related to interest earned on notes receivable
issued to the Patriot REIT Partnership by PAH RSI
Lessee in connection with the sale of certain
assets and the right to receive certain royalty fees......... $52
Related to interest earned on the mortgage notes
receivable from affiliates of CHC Lease Partners............. (14)
Related to the elimination of interest earned
on the $2,900 note receivable issued to Old Patriot REIT
by Cal Jockey in connection with the Cal Jockey Merger....... (79)
----
$(41)
====
</TABLE>
(H) Represents ground lease payments pursuant to the ground lease agreement with
an affiliate of PaineWebber.
(I) Represents elimination of approximately $2,092 of non-recurring legal fees
and Cal Jockey Merger related costs and adjustment to the amortization of
unearned stock compensation computed on a straight-line basis over the 3 to
5-year vesting periods of $569.
(J) Interest expense consists of the following components:
<TABLE>
<S> <C>
Historical interest expense........................................ $17,328
Interest expense related to the 23 hotels acquired by Patriot REIT
since January 1, 1997 (excluding the Park Shore Hotel and the
CHC Hotels)....................................................... $ 5,367
Interest expense related to the Subscription Notes payable to
Patriot Operating Company......................................... 2,356
Interest expense related to amortization of deferred loan costs.... 2,199
Interest expense related to amortization of capitalized interest... 26
Interest expense related to four of the CHC Hotels encumbered by
mortgage loans held by Patriot REIT............................... 3,896
Interest expense related to the acquisition of the 10 CHC Hotels... 1,522
-------
$32,694
=======
</TABLE>
(K) Represents real estate and personal property taxes and casualty insurance to
be paid by Patriot REIT related to the 23 hotels acquired since January 1,
1997 (except for the Park Shore Hotel) and the 10 CHC Hotels.
F-27
<PAGE>
(L) Represents the following adjustments to depreciation and amortization:
<TABLE>
<S> <C>
Depreciation related to 23 hotels acquired by Patriot REIT
since January 1, 1997 (excluding the Park Shore Hotel and the
CHC Hotels)....................................................... $7,433
Reduction of depreciation expense related to the
Racecourse facility.............................................. (59)
Amortization of goodwill resulting from the adjustment for
purchase method of accounting whereby the Racecourse facility
and retained leasehold improvements owned by Cal Jockey are
adjusted to estimated fair market value.......................... 1,192
------
$8,566
======
Depreciation related to the CHC Hotels............................ $5,138
======
</TABLE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and improvements,
20 years for the Racecourse facility and 5 to 7 years for F, F, & E. These
estimated useful lives are based on management's knowledge of the properties
and the industry in general. Amortization of goodwill is computed using the
straight-line method over a 40 year estimated useful life. Because the
paired share structure is "grandfathered" under the Code, management
believes the life of the paired share structure is perpetual. Under
generally accepted accounting principles, however, the maximum amortization
period is 40 years for intangible assets.
(M) Represents an adjustment for estimated state income tax liabilities.
(N) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions. The
estimated minority interest percentage subsequent to the Recent Transactions
is approximately 11.8%. The estimated minority interest percentage
subsequent to the acquisition of the CHC Hotels, the acquisition of GAH and
the CHCI Merger is approximately 16.3%.
(O) Represents adjustments to the minority interest related to the partnerships
with an affiliate of Doubletree Hotels Corporation and the limited liability
companies which own the hotels in the Snavely Portfolio assuming such
entities had been formed and the 15 hotels owned by such entities had been
acquired as of January 1, 1996.
(P) Pro forma earnings per share is computed based on 74,045 weighted average
common paired shares and common paired share equivalents outstanding for the
period. The number of shares used for the calculation includes adjustments
to reflect the impact of the conversion of shares of Patriot Operating
Company preferred stock into paired shares of common stock. In addition,
the historical net income per common paired share and the weighted average
number of common paired shares and common paired share equivalents have been
adjusted for the conversion of each share of Old Patriot REIT Common Stock
into 0.51895 paired shares issued in the Cal Jockey Merger, and the July
1997 1.927-for-1 stock split effected in the form of a stock dividend, as
applicable. Historical basis earnings per share is computed based on 44,783
and 11,106 weighted average common shares and common share equivalents
outstanding for Old Patriot REIT and Cal Jockey, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the six months ended
June 30, 1997 would be $0.49 per common share. The impact of Statement 128
on the calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
(Q) If the interest rate on the Revolving Credit Facility increased by 0.25%,
interest expense would increase to approximately $33,483, net income would
decrease to $32,928 and net income per common share would decrease to $0.44.
F-28
<PAGE>
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(unaudited)
-----------
<TABLE>
<CAPTION>
PATRIOT
OPERATING
COMPANY CHC HOTELS
(BAY MEADOWS) RECENT AND LEASE GAH
HISTORICAL TRANSACTIONS ACQUISITION HISTORICAL
(A) (B) (C) (D)
------------- ------------ ------------ ----------
(in thousands, except for per share data)
<S> <C> <C> <C> <C>
Revenue:
Room revenue................................. $ -- $145,801 $187,365 $ --
Other hotel revenues......................... -- 132,243 97,250 --
Racecourse facility revenue.................. 51,946 -- -- --
Management fee and service fee income........ -- 3,165 -- 7,270
Interest and other income.................... 1,526 7,757 (G) -- 14
------- -------- -------- ------
Total revenue............................ 53,472 288,966 284,615 7,284
------- -------- -------- ------
Expenses:
Departmental costs -- hotel operations....... -- 124,924 112,873 --
Racecourse facility operations............... 45,658 693 (H) -- --
Management company, service department
and development costs ..................... -- 1,595 -- 4,882
General and administrative................... 4,381 28,264 (I) 28,568 (J) 1,056 (J)
Ground lease expense......................... -- 733 -- --
Repair and maintenance....................... -- 16,777 13,120 --
Utilities.................................... -- 12,676 14,167 --
Marketing.................................... 1,436 22,717 27,085 --
Management fees.............................. -- 8,743 6,671 --
Depreciation and amortization................ 754 1,591 (K) -- 112
Participating lease payments................. -- 78,240 (L) 93,879 (L) --
Interest expense............................. 130 1,240 -- 23
Real estate and personal property taxes
and casualty insurance..................... 398 -- -- --
------- -------- -------- ------
Total expenses........................... 52,757 298,193 296,363 6,073
------- -------- -------- ------
Income (loss) before income tax provision
and minority interests...................... 715 (9,227) (11,748) 1,211
Income tax provision........................ (260) -- -- --
------- -------- -------- ------
Income (loss) before minority interest........ 455 (9,227) (11,748) 1,211
Minority interest in Patriot Operating
Partnership............................... -- 1,123 (O) -- --
------- -------- -------- ------
Net income (loss) applicable to
common shareholders......................... $ 455 $ (8,104) $(11,748) $1,211
======= ======== ======== ======
Net income per common share (P)............... $ 0.04
=======
CHCI
HOSPITALITY
DIVISION
HISTORICAL PRO FORMA
(E) OTHER TOTAL
----------- ------------ ------------
(in thousands, except for per share data)
Revenue:
Room revenue................................. $ 5,282 $ -- $338,448
Other hotel revenues......................... 4,351 -- 233,844
Racecourse facility revenue.................. -- -- 51,946
Management fee and service fee income........ 9,032 (5,945)(F) 13,522
Interest and other income.................... 715 -- 10,012
------- ------- --------
Total revenue............................ 19,380 (5,945) 647,772
------- ------- --------
Expenses:
Departmental costs -- hotel operations....... 3,995 -- 241,792
Racecourse facility operations............... -- -- 46,351
Management company, service department
and development costs ..................... 4,666 -- 11,143
General and administrative................... 9,431 (J) -- 71,700
Ground lease expense......................... -- -- 733
Repair and maintenance....................... -- -- 29,897
Utilities.................................... -- -- 26,843
Marketing.................................... -- -- 51,238
Management fees.............................. -- (5,945)(F) 9,469
Depreciation and amortization................ 853 7,038 (K) 10,348
Participating lease payments................. -- -- 172,119
Interest expense............................. 3,304 (3,304)(M) 1,393
Real estate and personal property taxes
and casualty insurance..................... -- -- 398
------- ------- --------
Total expenses........................... 22,249 (2,211) 673,424
------- ------- --------
Income (loss) before income tax provision
and minority interests...................... (2,869) (3,734) (25,652)
Income tax provision........................ (92)(N) (408)(N) (760)
------- ------- --------
Income (loss) before minority interest........ (2,961) (4,142) (26,412)
Minority interest in Patriot Operating
Partnership............................... -- 3,314 (O) 4,437
------- ------- --------
Net income (loss) applicable to
common shareholders.......................... $(2,961) $ (828) $(21,975)
======= ======= ========
Net income per common share (P)............... $ (0.30)
========
</TABLE>
See notes on following page.
F-29
<PAGE>
NOTES TO PATRIOT OPERATING COMPANY CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996:
(A) Represents the historical results of operations of Patriot Operating Company
(formerly known as Bay Meadows) for the year ended December 31, 1996.
(B) Represents adjustments to Patriot Operating Company's results of operations
assuming 23 of Patriot REIT's hotel properties had been leased to Patriot
Operating Company as of January 1, 1996. These hotel properties include 10
of the Recent Acquisitions (the four hotels in the Snavely Portfolio, the
four Met-Doubletree Hotels and the Ambassador West Hotel and the Union
Station Hotel), the eight hotels previously lease to PAH RSI Lessee, the
Mayfair Suites Hotel, the Tutwiler Hotel, the Holiday Inn Redmont Hotel, the
Doubletree Hotel at Allen Center and the Doubletree Hotel in Tulsa,
Oklahoma.
(C) Represents the combined results of operations for the year ended December
31, 1996 of the 10 CHC Hotels and 25 hotels leased by CHC Lease Partners
assuming that such hotels were leased to Patriot Operating Company as of
January 1, 1996.
(D) Represents the results of operations of GAH for the year ended December 31,
1996, assuming it had been acquired by Patriot Operating Company as of
January 1, 1996.
(E) Represents the results of operations for the contracts acquired as a result
of the CHCI Merger for the year ended December 31, 1996, assuming such
contracts had been acquired by Patriot Operating Company as of January 1,
1996.
(F) Represents the elimination of management fees for Patriot REIT hotels
previously managed by Gencom and CHCI, which subsequent to the acquisition
of GAH and the CHCI Merger such hotels are assumed to be managed by Patriot
Operating Company.
(G) Adjustments to interest and other income consist of the following
components:
<TABLE>
<S> <C>
Interest and other income related to PAH RSI Lessee........................ $ 2,030
Interest income related to the Subscription Notes receivable from
Patriot REIT.............................................................. 4,712
Interest income related to the Participating Note.......................... 1,015
------
$ 7,757
======
</TABLE>
(H) Represents adjustment to Racecourse facility rental expense as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the Related Transactions and
(ii) the PaineWebber Land Sale.
(I) Represents the following adjustments to general and administrative expense:
<TABLE>
<S> <C>
Represents expense related to the hotels recently acquired................ $24,497
Represents general liability insurance expense............................ 1,441
Related to elimination of costs related to the Cal Jockey Merger.......... (861)
Related to increased salaries, insurance, travel, audit, legal and other
expenses associated with operating as a public company and the
continued growth of Patriot REIT........................................ 300
Represents expense related to the annual amortization of unearned stock
compensation computed on a straight-line basis over the 3 to 5-year
vesting periods......................................................... 2,887
-------
$28,264
=======
</TABLE>
(J) Represent general and administrative expense related to the 10 CHC Hotels
and general and administrative expense related to the contracts acquired in
connection with the acquisition of GAH and the CHCI Merger.
(K) Represents the following adjustments to depreciation and amortization:
<TABLE>
<S> <C>
Adjustment to increase depreciation related to F, F & E.................... $ 245
Adjustment to reflect amortization of goodwill............................. 438
Adjustment to reflect amortization of trade names.......................... 125
Adjustment to reflect amortization of management contract costs............ 783
-------
$ 1,591
=======
Adjustment to increase depreciation related to F, F & E.................... $ 86
Adjustment to reflect amortization of goodwill............................. 600
Adjustment to reflect amortization of trade names.......................... 250
Adjustment to amortization of management contract costs.................... 6,102
-------
$ 7,038
======
</TABLE>
F-30
<PAGE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 5 to 7 years for F, F & E. Amortization of
goodwill related to the Cal Jockey Merger is computed using the straight-
line method over a 40 year estimated useful life. Because the paired share
structure is "grandfathered" under the Code, management believes the life of
the paired share structure is perpetual. Under generally accepted accounting
principles, however, the maximum amortization period is 40 years for
intangible assets. Amortization of goodwill related to the acquisition of
the management operations of Grand Heritage Hotels, Inc., GAH and CHCI is
computed using the straight-line method over a 20 year estimated useful
life. Amortization of trade names is computed using the straight-line method
over a 20 year estimated useful life. Amortization of management contract
costs is computed using the straight-line method over the estimated
remaining term of the contracts.
(L) Represents lease payments from Patriot Operating Company to Patriot REIT
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the period
presented.
(M) Represents the elimination of interest expense related to debt that Patriot
Operating Company will not assume in connection with the CHCI Merger.
(N) Represents an adjustment to the estimated federal and state tax liability as
a result of the pro forma adjustments to the operating results of Patriot
Operating Company for the year ended December 31, 1996.
(O) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions. The
estimated minority interest percentage subsequent to the Recent Transactions
is approximately 11.8%. The estimated minority interest percentage
subsequent to the acquisition of the CHC Hotels, the acquisition of GAH and
the CHCI Merger is approximately 16.8%.
(P) Pro forma earnings per share is computed based on 73,516 weighted average
common paired shares and common paired share equivalents outstanding for the
period. The number of shares used for the calculation includes adjustments
to reflect the impact of the conversion of shares of Patriot Operating
Company preferred stock into paired shares of common stock. In addition,
the historical net income per common paired share and the weighted average
number of common paired shares and common paired share equivalents have been
adjusted for (i) the March 1997 2-for-1 stock split on Old Patriot REIT
Common Stock effected in the form of a stock dividend, (ii) the conversion
of each share of Old Patriot REIT Common Stock into 0.51895 paired shares
issued in the Cal Jockey Merger, and (iii) the July 1997 1.927-for-1 stock
split effected in the form of a stock dividend, as applicable. Historical
basis earnings per share is computed based on 11,106 weighted average common
shares and common share equivalents outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be a net loss of $0.32 per common share. The impact of
Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
F-31
<PAGE>
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PATRIOT OPERATING
COMPANY CHC HOTELS
(BAY MEADOWS) RECENT AND LEASE GAH
HISTORICAL TRANSACTIONS ACQUISITION HISTORICAL
(A) (B) (C) (D)
---------- ------------ ---------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Room revenue...................................... $ -- $ 80,223 $103,839 $ --
Other hotel revenues.............................. -- 72,621 51,731 --
Racecourse facility revenue....................... 22,538 -- -- --
Management fee and service fee income............. -- 1,603 -- 4,831
Interest and other income......................... 525 3,748 (G) 685 10
------- -------- -------- ------
Total revenue................................. 23,063 158,195 156,255 4,841
------- -------- -------- ------
Expenses:
Departmental costs -- hotel operations............ -- 66,229 59,080 --
Racecourse facility operations.................... 19,664 618 (H) -- --
Management company, service department and
development costs................................ -- 1,088 -- 2,978
General and administrative........................ 3,486 12,726 (I) 14,689 (J) 619 (J)
Ground lease expense.............................. -- 433 13 --
Repair and maintenance............................ -- 8,994 6,888 --
Utilities......................................... -- 5,974 6,913 --
Marketing......................................... 497 11,225 14,907 --
Management fees................................... -- 5,566 3,734 --
Depreciation and amortization..................... 358 754 (L) -- 78
Participating lease payments...................... -- 44,964 (M) 50,730 (M) --
Interest expense.................................. 27 585 -- 11
Real estate and personal property taxes and
casualty insurance.............................. 220 -- -- --
------- -------- -------- ------
Total expenses................................ 24,252 159,156 156,954 3,686
------- -------- -------- ------
Income (loss) before income tax provision and
minority interests............................... (1,189) (961) (699) 1,155
Income tax (provision) benefit................... 472 -- -- --
------- -------- -------- ------
Income (loss) before minority interest............. (717) (961) (699) 1,155
Minority interest in Patriot Operating
Partnership.................................... -- 215 (P) -- --
------- -------- -------- ------
Net income (loss) applicable to common
shareholders..................................... $ (717) $ (746) $ (699) $1,155
======= ======== ======== ======
Net income (loss) per common share (Q)............. $ (0.06)
=======
CHCI
HOSPITALITY
DIVISION
HISTORICAL PRO FORMA
(E) OTHER TOTAL
---------- ------------ ----------
Revenue:
Room revenue...................................... $ 2,778 $ -- $186,840
Other hotel revenues.............................. 2,502 -- 126,854
Racecourse facility revenue....................... -- -- 22,538
Management fee and service fee income............. 4,732 (3,300)(F) 7,866
Interest and other income......................... 396 -- 5,364
------- ------- --------
Total revenue................................. 10,408 (3,300) 349,462
------- ------- --------
Expenses:
Departmental costs -- hotel operations............ 2,175 -- 127,484
Racecourse facility operations.................... -- -- 20,282
Management company, service department and
development costs................................ 2,573 -- 6,639
General and administrative........................ 6,512 (J) (1,700)(K) 36,332
Ground lease expense.............................. -- -- 446
Repair and maintenance............................ -- -- 15,882
Utilities......................................... -- -- 12,887
Marketing......................................... -- -- 26,629
Management fees................................... -- (3,300)(F) 6,000
Depreciation and amortization..................... 399 3,524 (L) 5,113
Participating lease payments...................... -- -- 95,694
Interest expense.................................. 1,413 (1,413)(N) 623
Real estate and personal property taxes and
casualty insurance.............................. -- -- 220
------- ------- --------
Total expenses................................ 13,072 (2,889) 354,231
------- ------- --------
Income (loss) before income tax provision and
minority interests............................... (2,664) (411) (4,769)
Income tax (provision) benefit................... (53)(O) (197)(O) 222
------- ------- --------
Income (loss) before minority interest............. (2,717) (608) (4,547)
Minority interest in Patriot Operating
Partnership.................................... -- 549 (P) 764
------- ------- --------
Net income (loss) applicable to common
shareholders..................................... $(2,717) $ (59) $ (3,783)
======= ======= ========
Net income (loss) per common share (Q)............. $ (0.05)
========
</TABLE>
See notes on following page.
F-32
<PAGE>
NOTES TO PATRIOT OPERATING COMPANY CONDENSED CONSOLIDATED PRO FORMA STATEMENT
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997:
(A) Represents the historical results of operations of Patriot Operating
Company (formerly known as Bay Meadows) for the six months ended June 30,
1997.
(B) Represents adjustments to Patriot Operating Company's results of
operations assuming 23 of Patriot REIT's hotel properties had been leased
to Patriot Operating Company as of January 1, 1996. These hotel
properties include 10 of the Recent Acquisitions (the four hotels in the
Snavely Portfolio, the four Met-Doubletree Hotels and the Ambassador West
Hotel and the Union Station Hotel), the eight hotels previously leased to
PAH RSI Lessee, the Mayfair Suites Hotel, the Tutwiler Hotel, the Holiday
Inn Redmont Hotel, the Doubletree Hotel at Allen Center and the Doubletree
Hotel in Tulsa, Oklahoma.
(C) Represents the combined results of operations for the six months ended
June 30, 1997 of the 10 CHC Hotels and 25 leases of CHC Lease Partners
leased by CHC Lease Partners assuming that such hotels were leased to
Patriot Operating Company as of January 1, 1996.
(D) Represents the results of operations of GAH for the six months ended June
30, 1997, assuming it had been acquired by Patriot Operating Company as of
January 1, 1996.
(E) Represents the results of operations for the contracts acquired as a
result of the CHCI Merger for the six months ended June 30, 1997, as if
they were acquired by Patriot Operating Company as of January 1, 1996.
(F) Represents the elimination of management fees for Patriot REIT hotels
previously managed by Gencom and CHCI, which subsequent to the acquisition
of GAH and the CHCI Merger such hotels are assumed to be managed by
Patriot Operating Company.
(G) Adjustments to interest and other income consists of the following
components:
<TABLE>
<S> <C>
Interest and other income related to PAH RSI Lessee....................... $ 885
Interest income related to the Subscription Notes receivable
from Patriot REIT...................................................... 2,356
Interest income related to the Participating Note......................... 507
------
$3,748
======
</TABLE>
(H) Represents adjustment to Racecourse facility rental expense as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the Related Transactions
and (ii) the PaineWebber Land Sale.
(I) Represents the following adjustments to general and administrative
expense:
<TABLE>
<S> <C>
Represent expense related to the hotels recently acquired................. $12,365
Represents general liability insurance expense............................ 559
Related to elimination of costs related to the Cal Jockey Merger.......... (1,792)
Related to increased salaries, insurance, travel, audit, legal and other
expenses associated with operating as a public company and the
continued growth of Patriot REIT....................................... 150
Represents expense related to the annual amortization of unearned stock
compensation computed on a straight-line basis over the 3 to 5-year
vesting periods........................................................ 1,444
-------
$12,726
=======
</TABLE>
(J) Represent general and administrative expense related to the 10 CHC Hotels
and general and administrative expense related to the contracts acquired
in connection with the acquisition of GAH and the CHCI Merger.
(K) Represents elimination of approximately $1,700 of non-recurring legal fees
and CHCI Merger related costs.
(L) Represents the following adjustments to depreciation and amortization:
<TABLE>
<S> <C>
Adjustment to increase depreciation related to F, F & E................... $ 142
Adjustment to reflect amortization of goodwill............................ 158
Adjustment to reflect amortization of trade names......................... 63
Adjustment to reflect amortization of management contract costs........... 391
------
$ 754
======
Adjustment to increase depreciation related to F, F & E................... $ 21
Adjustment to reflect amortization of goodwill............................ 300
Adjustment to reflect amortization of trade names......................... 125
Adjustment to reflect amortization of management contract costs........... 3,078
------
$3,524
======
</TABLE>
F-33
<PAGE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 5 to 7 years for F, F & E. Amortization of
goodwill related to the Cal Jockey Merger is computed using the
straight-line method over a 40 year estimated useful life. Because the
paired share structure is "grandfathered" under the Code. Management
believes the life of the paired share structure is perpetual. Under
generally accepted accounting principles, however, the maximum
amortization period is 40 years for intangible assets. Amortization of
goodwill related to the acquisition of the management operations of Grand
Heritage Hotels, Inc., GAH and CHCI is computed using the straight-line
method over a 20 year estimated useful life. Amortization of trade names
is computed using the straight-line method over a 20 year estimated useful
life. Amortization of management contract costs is computed using the
straight-line method over the estimated remaining term of the contracts.
(M) Represents lease payments from Patriot Operating Company to Patriot REIT
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the
period presented.
(N) Represents the elimination of interest expense related to debt which
Patriot Operating Company will not assume in connection with the CHCI
Merger.
(O) Represents an adjustment to the estimated federal and state tax liability
as a result of the pro forma adjustment to Patriot Operating Company for
the six months ended June 30, 1997.
(P) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions. The
estimated minority interest percentage subsequent to the Recent
Transactions is approximately 11.8%. The estimated minority interest
percentage subsequent to the acquisition of the CHC Hotels, the
acquisition of GAH and the CHCI Merger is approximately 16.8%.
(Q) Pro forma earnings per share is computed based on 74,045 weighted average
common paired shares and common paired share equivalents outstanding for
the period. The number of shares used for the calculation includes
adjustments to reflect the impact of the conversion of shares of Patriot
Operating Company preferred stock into paired shares of common stock. In
addition, the historical net income per common paired share and the
weighted average number of common paired shares and common paired share
equivalents have been adjusted for the conversion of each share of Old
Patriot REIT Common Stock into 0.51895 paired shares issued in the Cal
Jockey Merger, and the July 1997 1.927-for-1 stock split effected in the
form of a stock dividend, as applicable. Historical basis earnings per
share is computed based on 11,106 weighted average common shares and
common share equivalents outstanding.
In February 1997, the Financial Accounting Standards Board issued
Statement 128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the six months ended
June 30, 1997 would be a net loss of $0.05 per common share. The impact of
Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
F-34
<PAGE>
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Patriot REIT leases each of its hotels (except the Crowne Plaza Ravinia
Hotel and the Wyndham WindWatch Hotel, which are managed directly by Operators)
to Lessees. The Combined Lessees subsequent to (i) the Cal Jockey Merger and
the Related Transactions; (ii) the Grand Heritage Acquisition (which included
the acquisition of Grand Heritage Leasing, L.L.C. which leased three hotels from
Patriot REIT); (iii) the acquisition of PAH RSI Lessee (which included the
acquisition of eight Patriot REIT hotel leases); and (iv) the acquisition of GAH
and the CHCI Merger (which included the acquisition of 25 Patriot REIT hotel
leases from CHC Lease Partners) consist of NorthCoast Lessee which leases 11
hotels (excluding the Park Shore Hotel), DTR North Canton, Inc. which leases
four hotels, Crow Hotel Lessee, Inc. which leases two hotels, and Metro Hotels
Leasing Corporation which leases one hotel. The Participating Leases provide for
staggered terms of one to twelve years and the payment of the greater of base or
participating rent, plus certain additional charges, as applicable.
The Combined Lessees' unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1996 and the six months ended June
30, 1997 are presented as if the 18 hotels that Patriot REIT leases to the
Combined Lessees pursuant to Participating Leases (excluding the Park Shore
Hotel) had been leased as of January 1, 1996. The three hotels which were leased
to Grand Heritage Leasing, L.L.C., the eight hotels which were leased to PAH RSI
Lessee and the 25 hotels which were leased to CHC Lease Partners are assumed to
have been leased to Patriot Operating Company and, therefore, have been
eliminated from the Pro Forma Condensed Combined Statements of Operations for
the Combined Lessees. The pro forma information is based in part upon the
Statements of Operations of NorthCoast Lessee filed with Old Patriot REIT's
Annual Report on Form 10-K for the year ended December 31, 1996 and the
Statements of Operations of NorthCoast Lessee filed with the Patriot Companies'
Joint Quarterly Report on Form 10-Q for the six months ended June 30, 1997. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
The unaudited Pro Forma Condensed Combined Statements of Operations are not
necessarily indicative of what actual results of operations of the Combined
Lessees would have been assuming such transactions had been completed as of the
beginning of the periods presented, nor do they purport to represent the results
of operations for future periods. Further, the unaudited Pro Forma Condensed
Combined Statement of Operations for the interim period ended June 30, 1997 is
not necessarily indicative of the results of operations for the full year.
F-35
<PAGE>
<TABLE>
<CAPTION>
COMBINED LESSEES
<S> <C> <C>
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
------------------ -----------------
(in thousands)
Revenue:
Room...................................................................... $46,264 $ 88,410
Food and beverage......................................................... 19,146 36,878
Telephone and other....................................................... 3,919 7,837
------- --------
Total revenue........................................................... 69,329 133,125
------- --------
Expenses:
Departmental costs and expenses........................................... 28,001 54,564
General and administrative................................................ 6,161 11,597
Ground lease expense...................................................... 903 2,496
Repair and maintenance.................................................... 3,355 6,670
Utilities................................................................. 2,524 5,435
Marketing................................................................. 4,847 9,169
Insurance................................................................. 72 998
Participating lease payments (A).......................................... 21,654 41,749
------- --------
Total expenses.......................................................... 67,517 132,678
------- --------
Income before lessee income (expense)...................................... 1,812 447
------- --------
Dividend and interest income (B)........................................... 1,039 142
Management fees (C)........................................................ (2,010) (3,479)
Lessee general and administrative (D)...................................... (382) (577)
------- --------
(1,353) (3,914)
------- --------
Net income (loss).......................................................... $ 459 $ (3,467)
======= ========
</TABLE>
____________________________________________
(A) Represents lease payments calculated on a pro forma basis by applying the
provisions of the Participating Leases to the historical revenue of the
hotels.
(B) Includes dividend income on OP Units in the Patriot Partnerships which form
a portion of the required capitalization of NorthCoast Lessee. Pro forma
amounts exclude additional dividend income earned on OP Units held by
certain Lessees, and pro forma interest income earned on invested cash
balances.
(C) Represents pro forma management fees paid to the Operators under the terms
of their respective management agreements with the Lessees.
(D) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
F-36
<PAGE>
Report of Independent Auditors
The Partners
GAH-II, L.P.
We have audited the accompanying consolidated balance sheets of GAH-II, L.P. (a
Delaware limited partnership) (formerly GAH-I, L.P. and GAH-II, L.P.) and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, partners' capital, and cash flows for the years then
ended. These financial statements are the responsibility of 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 consolidated financial position of GAH-II, L.P. and
subsidiary at December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
January 23, 1997, except for Note 8,
as to which the date is September 30, 1997
1
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30,
1995 1996 1997
---------------------------------------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 10,856 $ 348,896 $ 342,106
Accounts receivable-affiliates, net of allowance
of $69,399 at December 31, 1995 and 1996,
and $257,222 (unaudited) at June 30, 1997 694,036 1,545,890 2,546,810
Accounts receivable-other 51,439 82,428 139,932
Prepaid assets 4,608 5,574 9,311
----------------------------------------------
Total current assets 760,939 1,982,788 3,038,159
----------------------------------------------
Property and equipment
Furniture and fixtures 193,418 280,268 296,555
Equipment and automobiles 189,817 450,539 494,512
Leasehold improvements 84,072 109,027 109,027
----------------------------------------------
467,307 839,834 900,094
Less accumulated depreciation (153,409) (263,836) (340,824)
----------------------------------------------
313,898 575,998 559,270
----------------------------------------------
Deferred acquisition fees and other assets, net -- 47,919 49,231
Deferred receivables-affiliates, net of
allowance of $30,228 at December 31, 1995 and
$187,823 at December 31, 1996 30,102 453,222 398,552
----------------------------------------------
Total assets $1,104,939 $3,059,927 $4,045,212
==============================================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable and accrued expenses $ 197,815 $ 463,628 $ 386,111
Payables to affiliates 143,814 847,263 950,192
Accrued compensation 25,000 116,858 291,708
Current portion of note payable 114,662 100,000 50,000
Current portion of capital lease obligation -- 58,479 77,085
Deferred revenue 158,392 -- 109,919
----------------------------------------------
Total current liabilities 639,683 1,586,228 1,865,015
Note payable, less current portion 100,000 -- --
Capital lease obligation, less current portion -- 107,007 82,428
Minority interest in consolidated partnership 3,067 -- --
----------------------------------------------
Total liabilities 742,750 1,693,235 1,947,443
----------------------------------------------
Commitments and contingencies -- -- --
Partners' capital 362,189 1,366,692 2,097,769
----------------------------------------------
Total liabilities and partners' capital $1,104,939 $3,059,927 $4,045,212
==============================================
</TABLE>
See accompanying notes.
2
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1995 1996 1996 1997
-----------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
REVENUES
<S> <C> <C> <C> <C>
Affiliate revenues
Management fees, net of refunds $3,452,251 $5,612,694 $2,804,316 $3,753,368
Acquisition fees 308,759 152,407 152,407 334,000
Commissions 25,479 11,896 46,960
Construction supervisory fees 238,564 595,069 254,789 235,687
Insurance processing fees 75,790 169,328 80,675 109,139
Accounting fees 157,750 259,488 114,738 155,457
Franchise commissions and fees 177,513 180,799 180,799 --
Other commissions 190,251 274,834 137,235 196,622
Other income 13,991 13,531 3,647 9,611
----------------------------------------------------------------
Total revenues 4,614,869 7,283,629 3,740,502 4,840,844
----------------------------------------------------------------
EXPENSES
Salaries and wages 2,526,808 3,579,325 1,755,558 2,310,643
Consulting fees 491,407 1,212,962 486,827 652,473
General and administrative 216,777 389,478 170,048 333,346
Professional services 151,397 73,008 20,423 36,458
Office lease 140,449 171,088 82,494 91,447
Equipment lease and maintenance 33,062 52,678 27,892 32,190
Travel and entertainment 116,384 199,663 75,762 123,869
Acquisition expense 75,951 89,712 25,960 16,050
Bad debt expense, including
provision for losses on receivables 472,177 169,727 53,662 1,215
Depreciation and amortization 55,374 112,236 42,777 77,710
Interest expense 31,322 22,938 9,562 10,807
----------------------------------------------------------------
Total operating expenses 4,311,108 6,072,815 2,750,965 3,686,208
----------------------------------------------------------------
Income before minority interest 303,761 1,210,814 989,537 1,154,636
Minority interest (3,058) (17,294) (8,382) (23,559)
----------------------------------------------------------------
Net income $ 300,703 $1,193,520 $ 981,155 $1,131,077
================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Consolidated Statements of Partners' Capital
<TABLE>
<S> <C>
Balance, January 1, 1995 $ 1,355,731
Cash distributions (381,549)
Noncash distributions (1,115,726)
Conversion of partner capital to note payable (100,000)
Contributions 303,030
Net income 300,703
-----------
Balance, December 31, 1995 362,189
Contributions 60,983
Distributions (250,000)
Net income 1,193,520
-----------
Balance, December 31, 1996 1,366,692
Distributions (unaudited) (400,000)
Net income (unaudited) 1,131,077
-----------
Balance, June 30, 1997 (unaudited) $ 2,097,769
===========
</TABLE>
See accompanying notes.
4
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1995 1996 1996 1997
----------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income $ 300,703 $1,193,520 $ 981,155 $ 1,131,077
Adjustments to reconcile net income
to net cash provided by operating
activities
Bad debt expense 472,177 169,727 53,662 1,215
Amortization 1,809 1,809 1,085 722
Depreciation 53,565 110,427 41,692 76,988
Minority interest 3,058 17,294 8,382 23,559
Change in assets and liabilities
Accounts receivable-affiliates (908,348) (851,854) (700,474) (1,189,958)
Accounts receivable-other (47,572) (43,121) (192,339) (57,504)
Prepaid assets 6,225 (966) 358 (3,737)
Deferred receivables (250,687) (580,715) (266,699) 242,493
Other assets -- (49,728) (7,227) (2,034)
Accounts payable and accrued expenses 471,955 265,813 363,532 (77,517)
Payables to affiliates 132,135 703,449 328,933 102,929
Accrued compensation 25,000 91,858 147,999 174,850
Deferred revenues 158,392 (158,392) (74,729) 109,919
----------------------------------------------------------------
Net cash provided by operating activities 418,412 869,121 685,330 533,002
----------------------------------------------------------------
INVESTING ACTIVITIES
Notes receivable-affiliate (300,000) -- -- --
Additions to property and equipment (54,316) (372,527) (116,749) (60,260)
----------------------------------------------------------------
Net cash used in investing activities (354,316) (372,527) (116,749) (60,260)
----------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from capital lease -- 199,939 -- 30,836
Payments on notes payable (13,931) (114,662) (57,282) (50,000)
Payments on capital lease obligation -- (34,453) -- (36,809)
Capital contributions from partners 303,030 60,983 -- --
Distributions to partners (381,549) (250,000) -- (400,000)
Distributions to minority investors -- (20,361) (11,449) (23,559)
----------------------------------------------------------------
Net cash used in financing activities (92,450) (158,554) (68,731) (479,532)
----------------------------------------------------------------
Net change in cash and cash equivalents (28,354) 338,040 499,850 (6,790)
Cash and cash equivalents, beginning of
year 39,210 10,856 10,856 348,896
----------------------------------------------------------------
Cash and cash equivalents, end of year $ 10,856 $ 348,896 $ 510,706 $ 342,106
================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 7,869 $ 25,402 $ 11,069 $ 12,081
================================================================
Noncash distributions to partners $1,115,726
Conversion of partner capital to note
payable $ 100,000
</TABLE>
See accompanying notes.
5
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements
December 31, 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF THE BUSINESS
GAH-II, L.P. (GAH or the Partnership) (formerly GAH-I, L.P. and GAH-II, L.P.), a
Delaware limited partnership, was formed on May 18, 1992, for the purpose of
operating and managing hotel properties owned by affiliates and third parties.
As of December 31, 1996, the Partnership managed 37 hotels located throughout
the United States and Canada.
For the period from inception through October 2, 1995, the partners and
respective ownership interests in GAH were Patriot American Hospitality, L.P.
(PAH) 49.5%, Gencom Hospitality, L.P. (GH) 49.5%, and GAH-II Corporation (the
sole general partner) 1%. On October 2, 1995, PAH sold its interest in GAH to
CHC REIT Management Corporation (CHC) pursuant to a Sale and Purchase Agreement
(the Agreement). The Agreement called for GAH to retain all management
contracts, fixed assets and associated liabilities and a note payable to PAH.
The remaining receivables and payables were distributed to PAH and GH as of the
purchase date. Accordingly, a noncash distribution of $1,115,726 was made to the
partners during 1995. Simultaneous with the Agreement, the GAH partnership
agreement was amended and restated, requiring capital contributions from the
partners.
BASIS OF ACCOUNTING AND PRESENTATION
BASIS OF PRESENTATION
During 1995, the assets and liabilities of GAH-I, L.P. (an entity affiliated
with GAH through common ownership) were transferred to GAH, and GAH-I, L.P. was
dissolved. The accompanying 1995 financial statements include the combined
results of operations of GAH-I, L.P. and GAH prior to the date of transfer,
similar to a pooling of interests.
PRINCIPLES OF CONSOLIDATION
On October 2, 1995, GAH acquired a 99% limited partnership interest in GAH REIT
Management Company, L.P., a Delaware limited partnership (GAH REIT) which
manages certain hotel properties which are leased by an affiliate. The
consolidated financial statements include the accounts of GAH and GAH REIT; all
intercompany transactions are eliminated in consolidation.
6
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements (continued)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Partnership considers all demand and money market accounts and certificates
of deposit purchased with maturities of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated over periods of
five to seven years on a straight-line basis.
REVENUE RECOGNITION
Revenues from hotel management, acquisition, and hotel operating activities are
recognized as earned. For those fees and other amounts which are currently
receivable by the Partnership, an allowance for doubtful accounts is provided
against receivables which are estimated to be uncollectible.
An individual who controls an entity which owns a 49.5% interest in GAH is also
a principal in certain partnerships for which GAH provides management and other
services. This individual has personally guaranteed fees and other receivables
due from three affiliated partnerships totaling approximately $445,000 at
December 31, 1996. Accordingly, no provision for uncollectible receivables has
been recorded for such amounts.
In certain instances, management fees are subordinated to the payment of
preferred returns to the hotel owners or debt service obligations of the hotel
(the "Deferred Receivables"). Management of the Partnership evaluates the
collectibility of these Deferred Receivables from each hotel based upon the
hotel's ability to generate sufficient cash flow to meet its preferred return
and/or debt service obligations in the near term. For those hotels which cannot
demonstrate the ability to meet these obligations, the Partnership has
established reserves against Deferred Receivables deemed to be uncollectible.
7
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements (continued)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACQUISITION COSTS
Costs incurred to pursue potential agreements to manage various hotels that are
not reimbursed by the hotel owner are expensed. These costs are primarily travel
and due diligence costs.
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.
CONCENTRATIONS
A 50% owner of GAH-II, L.P. has an ownership interest in 23 of the hotels for
which GAH-II, L.P. provides management and other services. In addition, this
individual has an ownership interest in an entity which owns the remaining 14
hotels which are managed by GAH REIT. Therefore, the Partnership is economically
dependent upon affiliate-owned hotels.
INCOME TAXES
No federal income taxes are payable by the Partnership. The income or loss of
the Partnership flows through to the partners, who are responsible for including
their share of the Partnership's income or loss in their respective income tax
returns.
INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying consolidated financial statements as of June 30, 1997 and for
the six months ended June 30, 1996 and 1997 are unaudited; however, in the
opinion of management, all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial
statements have been included. The results of interim periods are not
necessarily indicative of the results to be obtained for a full year.
8
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements (continued)
2. MANAGEMENT, FRANCHISE AND COMMISSION AGREEMENTS
GAH provides hotel management services under management agreements that
generally provide for receipt of monthly fees equal to a percentage of gross
receipts of the property (ranging up to 4.0%). The terms of these agreements are
generally for five to 12 years and are typically extended thereafter for
consecutive one-year periods unless otherwise terminated as provided by the
agreements. In addition, GAH earns fees for construction supervision and
purchasing services equal to 5% of the total expenditures and earns fees for
acquisition due diligence services provided to affiliated entities purchasing
hotels. GAH also charges the hotels for accounting and insurance processing
services.
Insurance processing fees are paid by each hotel at the beginning of a policy
year. GAH records such fees received as deferred revenues and recognizes
insurance processing fee revenue over the life of the related insurance policy.
Deferred revenue as of December 31, 1995 and June 30, 1997 of $158,392 and
$109,919, respectively, is reflected in the accompanying financial statements.
GAH entered into an agreement with Holiday Inns Franchising, Inc. ("HIFI"),
whereby HIFI provides certain incentives to GAH to franchise and develop Holiday
Inn hotels. As a result of this agreement, commissions and fees totaling
$177,513 and $180,799 based on hotel revenues were paid to GAH for the years
ended December 31, 1995 and 1996, respectively. The majority of these agreements
with HIFI expired in June 1996. In addition, GAH has agreements with third
parties to provide telephone and long distance services to certain affiliated
hotels. As a result, GAH earned commissions and fees totaling $134,372 and
$167,573 based on long distance revenues for the years ended December 31, 1995
and 1996, respectively, and $65,692 and $108,600 for the six months ended June
30, 1996 and 1997, respectively.
3. NOTES PAYABLE
In November 1993, GAH obtained loans to finance the purchase of three
automobiles. The loans required monthly installments of $1,269, including
principal and interest at 5.95%, and were repaid in November 1996.
Contemporaneous with the execution of the Agreement discussed in Note 1, the
Partnership refinanced $200,000 of loans due to PAH. The resulting note bears
interest at 10% and requires quarterly principal payments of $25,000 plus
accrued interest commencing on January 1, 1996 through maturity on October 1,
1997.
9
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements (continued)
4. LEASE AGREEMENTS
GAH leases its office facilities, under an operating lease agreement which
expires February 2001, and an automobile. At the end of the lease term, the
automobile may be purchased for the residual value as specified in the lease. At
the end of the office lease term, GAH may renew the lease for five years at
then-prevailing market rates. Future minimum payments under these noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1997 $218,277
1998 214,853
1999 227,556
2000 227,556
2001 46,826
--------
$935,068
========
</TABLE>
GAH also leases equipment under three-year capital leases which expire in 1999.
Each lease contains a provision whereby GAH may purchase the equipment for $1
upon expiration of the lease. At December 31, 1996, the carrying amount of
equipment capitalized in the accompanying consolidated balance sheet was
$179,794, net of accumulated depreciation of $20,145. Future minimum payments
under these noncancelable capital leases are as follows:
<TABLE>
<S> <C>
1997 $ 69,898
1998 75,737
1999 39,232
--------
Total lease payments 184,867
Less amounts representing interest (19,381)
--------
Present value of minimum lease payments $165,486
========
</TABLE>
10
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements (continued)
5. CONSULTING AGREEMENTS
On October 2, 1995, GAH entered into a consulting agreement with GH whereby GH
is paid consulting fees ranging from 15% to 20% of the management fees
collected. Consulting fees of $102,809 and $696,882 were incurred for the period
from October 2 through December 31, 1995 and for the year ended December 31,
1996, respectively. Consulting fees of $325,183 and $436,467 were incurred for
the six months ended June 30, 1996 and 1997, respectively.
GAH entered into agreements whereby 50% of the management fees earned from one
hotel is paid to third-party consultants. Consulting fees paid during the years
ended December 31, 1995 and 1996 related to these agreements totaled $89,180 and
$88,332, respectively. Consulting fees paid during the six months ended June 30,
1996 and 1997 totaled $44,589 and $41,492, respectively.
The Partnership also entered into agreements, which expired June 1996, with
individuals affiliated with certain partners for services related to the
management of all hotels. Consulting fees paid related to these agreements
totaled $123,192 and $175,849 for the years ended December 31, 1996 and 1995,
respectively.
On October 2, 1995, GAH REIT entered into an agreement with CHC whereby CHC is
paid 25% of the management fees related to contracts GAH REIT entered into after
October 2, 1995. During 1995, no such fees were incurred. For the year ended
December 31, 1996, $143,572 of such fees were incurred. Such fees were $54,356
and $77,023, respectively, for the six months ended June 30, 1996 and 1997.
6. RELATED PARTY TRANSACTIONS
All sources of revenue (excluding franchise and other commissions) reflected in
the accompanying financial statements are derived from hotels in which a 50%
owner of GAH also has a direct or indirect ownership interest.
11
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
The Partnership invoices the affiliates on a monthly basis for management and
other services as described in Note 2. In addition, certain expenses are paid by
the Partnership on behalf of the affiliates for insurance, advertising and other
expenses which are also billed monthly. Receivables from affiliates related to
these fees and expense recoveries are as follows:
<TABLE>
<CAPTION>
December 31 June 30,
1995 1996 1997
----------------------------------------------
(unaudited)
<S> <C> <C> <C>
Management fees $390,707 $ 856,679 $2,026,866
Insurance fees and premium recoveries 161,838 220,371 175,755
Expense recoveries 82,743 188,436 262,428
Accounting fees 26,500 78,000 89,000
Advertising fees and recoveries -- 144,333 115,791
Construction fees 38,967 61,614 56,830
Other 62,680 65,856 77,362
----------------------------------------------
$763,435 $1,615,289 $2,804,032
==============================================
</TABLE>
Fees earned by GAH for management and other services provided to affiliated
hotels are, in certain instances, subordinate to the payment of (i) preferred
returns to the owners of such hotels, or (ii) payment of debt service
obligations in accordance with loan agreements. Deferred fees receivable due
from these affiliates totaled $60,330 and $641,045 as of December 31, 1995 and
1996, respectively, and $398,552 as of June 30, 1997.
As discussed in Note 1, an individual who controls an entity which owns a 49.5%
interest in GAH has personally guaranteed management fees and other receivables
due from three affiliated partnerships totaling $445,000 at December 31, 1996.
During 1995, GAH had a note receivable from an affiliated hotel of $300,000 (as
discussed at Note 7) which was subsequently distributed to the partners on
October 2, 1995. GAH also had accrued $300,000 for various management and other
fee receivables from this hotel which was charged-off to bad debt expense in
1995.
As discussed in Note 5, GAH has entered into a consulting agreement with GH, a
partner.
12
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES
GUARANTEES
GAH guaranteed up to $404,000, as necessary, to fund the replacement reserve,
debt service obligations, and operating deficits of an affiliated partnership
which owns the Toledo Crowne Plaza Hotel. The guarantee expired December 31,
1996. As of October 2, 1995, GAH had loaned $300,000 with respect to this
guarantee. Rights to receive repayment of these loans were distributed to PAH
and GH pursuant to the Sale and Purchase Agreement, as discussed in Note 1. GAH
has also guaranteed two notes payable executed by the same partnership totaling
$850,000. This guarantee expires on March 15, 1999 when the notes payable are
due.
Effective October 2, 1995, GAH assigned to PAH and GH, and PAH and GH accepted,
its beneficial interests in Braeswood Hospitality, a limited partnership which
acquired a leasehold interest in a hotel property in February 1994. GAH has
guaranteed in full the payment of monthly lease payments of Braeswood
Hospitality. Monthly lease payments are $18,837 through October 1, 2000.
Pursuant to the Purchase and Sale Agreement described in Note 1, PAH and GH
indemnified CHC from and against any damages (as defined in the Agreement)
arising out of or resulting from the above guarantees of GAH.
GAH REIT has agreed to refund management fees (limited to 50% of total
management fees paid to it from the hotels managed as of October 2, 1995) to the
extent any hotel managed by GAH REIT incurs operating losses as defined in the
Agreement Among Managers between GAH REIT and CHC. Management fees of $55,063
and $359,154 were refunded during 1995 and 1996, respectively. Management fees
of $25,669 and $147,160 were refunded during the six months ended June 30, 1996
and 1997, respectively.
LAWSUITS
GAH is co-defendant in a lawsuit along with Braeswood Hospitality and certain
other unaffiliated defendants. Braeswood Hospitality owns a leasehold interest
in a hotel property located in Houston, Texas (the Property). The plaintiffs
(certain limited partners in the partnership which owns the Property) are
seeking a declaratory judgment against Braeswood Hospitality and GAH, claiming
that the lease agreement by and among the
13
<PAGE>
GAH-II, L.P.
dba Gencom American Hospitality
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
owner of the Property, Braeswood Hospitality, and GAH relating to the
Property is null and void because the plaintiff's consent to the execution of
the lease was not obtained, as allegedly required by the terms of the limited
partnership agreement of the owner. At this time, legal counsel for the
Partnership does not believe the plaintiffs are seeking damages against GAH,
except for the recovery of statutory attorney's fees and court costs. Management
estimates such losses to range between $10,000 and $50,000.
8. SUBSEQUENT EVENTS
On September 30, 1997, Patriot American Hospitality Operating Company purchased
an approximate 50% managing and controlling ownership interest in GAH from GH.
Simultaneously, Patriot American Hospitality, Inc. acquired the leasehold
interests in eight hotel properties which were managed by GAH REIT. The
management contracts related to those eight hotel properties were terminated in
connection with such acquisition.
14
<PAGE>
[LOGO APPEARS HERE]
[LETTERHEAD OF PRICE WATERHOUSE APPEARS HERE]
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and
Shareholders of CHC International, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of the
hospitality division of CHC International, Inc. at November 30, 1995 and 1996,
and the results of its operations and its cash flows for the years ended
November 30, 1995 and 1996, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements were prepared on the basis of presentation
in Note 1.
/s/ Price Waterhouse, LLP
Price Waterhouse, LLP
Miami, Florida
October 3, 1997
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
November 30,
------------ May 31,
1995 1996 1997
-------- -------- --------
(unaudited)
Assets
------
Current Assets
<S> <C> <C> <C>
Cash and cash equivalents $ 1,105 $ 1,627 $ 897
Trade accounts receivable, net of allowance for
doubtful accounts of $1,352, $699 and $690 at
November 30, 1995 and 1996 and May 31, 1997,
respectively 1,150 1,482 2,252
Trade accounts receivable - affiliates, net of
allowance for doubtful accounts of $488, $716
and $696 at November 30, 1995, 1996 and May 31,
1997, respectively 1,261 1,108 2,306
Notes and stock subscription receivable - affiliates
and officers 340 480 1,105
Receivables, net 7,200 - -
Other current assets 713 921 764
-------- -------- --------
Total current assets 11,769 5,618 7,324
Property and equipment, net 623 669 2,136
Investments in and advances to affiliates 8,324 8,457 8,916
Receivables, net 1,900 1,900 1,950
Deferred charges, net 1,932 1,609 966
Intangibles, net 6,716 6,047 5,760
Other assets 1,859 1,939 2,178
-------- -------- --------
Total Assets $ 33,123 $ 26,239 $ 29,230
======== ======== ========
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current Liabilities
Accounts payable $ 903 $ 672 $ 2,064
Due to affiliates and officers 1,069 1,617 1,679
Accrued interest 70 414 727
Accrued expenses 5,204 5,878 6,384
Current portion of long-term debt and capital lease
obligations 1,566 12,069 3,102
-------- -------- --------
Total current liabilities 8,812 20,650 13,956
Deferred compensation plan liability 5,537 6,102 6,651
Long-term debt 17,272 5,459 15,719
Other liabilities 1,710 108 31
-------- -------- --------
Total liabilities 33,331 32,319 36,357
-------- -------- --------
Commitments and contingencies (Note 11) - - -
Stockholders' Equity (Deficit)
Preferred stock, $.01 par value; 1,000 shares
authorized; no shares issued or outstanding - - -
Common stock, $.005 par value; 20,000 shares
authorized; 10,355, 10,621 and 10,621 shares issued and
outstanding at November 30, 1995 and 1996 and May 31,
1997, respectively 52 53 53
Additional paid-in capital 17,050 13,853 14,225
Accumulated deficit (10,217) (12,012) (13,560)
Notes receivable stock purchases - affiliates (6,686) (7,675) (7,675)
Unearned compensation (407) (299) (170)
-------- -------- --------
Total stockholders (deficit) (208) (6,080) (7,127)
-------- -------- --------
Total liabilities and stockholders' equity (deficit) $ 33,123 $ 26,239 $ 29,230
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
November 30, May 31,
------------ -------
1995 1996 1996 1997
-------- -------- -------- --------
(Unaudited)
Revenues
<S> <C> <C> <C> <C>
Rooms $ 4,638 $ 5,282 $ 2,367 $ 2,778
Food and beverage 3,907 4,351 2,080 2,502
Management service fees - from affiliates 5,212 4,284 2,320 2,089
Management service fees - from non-affiliates 5,391 4,748 2,717 2,643
-------- -------- -------- --------
Total revenues 19,148 18,665 9,484 10,012
-------- -------- -------- --------
Operating Expenses
Rooms 1,075 1,223 549 593
Food and beverage 2,386 2,772 1,340 1,582
Other costs and expenses 14,455 14,097 6,931 7,385
Depreciation and amortization 832 853 469 399
-------- -------- -------- --------
Total operating expenses 18,748 18,945 9,289 9,959
-------- -------- -------- --------
Income (loss) from operations before
equity in net earnings of affiliates 400 (280) 195 53
Equity in net earnings of affiliates 355 1,003 839 1,093
-------- -------- -------- --------
Income from operations 755 723 1,034 1,146
-------- -------- -------- --------
Other Income (Expense)
Interest income 1,720 686 369 396
Interest expense (2,365) (3,304) (1,405) (1,413)
Loss on impairment of notes receivable (4,431) - - -
Merger and other costs - - - (1,700)
Other income (expense) (104) 29 28 -
-------- -------- -------- --------
Total other income (expense) (5,180) (2,589) (1,008) (2,717)
Minority interests 148 163 82 76
-------- -------- -------- --------
Income (loss) before provision for income taxes (4,277) (1,703) 108 (1,495)
Provision for income taxes 131 92 26 53
-------- -------- -------- --------
Net income (loss) $ (4,408) $ (1,795) $ 82 $ (1,548)
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED NOVEMBER 30, 1995 AND 1996 AND
SIX MONTHS ENDED MAY 31, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Notes
Receivable
Common Stock Additional Stock Stockholders'
------------ Paid-in Accumulated Purchases Unearned Equity
Shares Amount Capital Deficit Affiliates Compensation (Deficit)
------ ------ ------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1994 10,355 $ 52 $ 22,645 $ (5,809) $ (7,350) $ (523) $ 9,015
Receipts from notes receivable stock
purchases - affiliates - - - - 664 - 664
Amortization of unearned
compensation - - - - - 116 116
Net change in gaming division - - (5,595) - - - (5,595)
intercompany account
Net loss - - - (4,408) - - (4,408)
------ ---- -------- -------- -------- -------- --------
Balance, November 30, 1995 10,355 52 17,050 (10,217) (6,686) (407) (208)
------ ---- -------- -------- -------- -------- --------
Additional common shares issued 266 1 2,999 - (3,000) - -
Receipts from notes receivable stock
purchases - affiliates - - - - 2,011 - 2,011
Amortization of unearned
compensation - - - - - 108 108
Net change in gaming division - - (6,196) - - - (6,196)
intercompany account
Net loss - - - (1,795) - - (1,795)
------ ---- -------- -------- -------- -------- --------
Balance, November 30, 1996 10,621 53 13,853 (12,012) (7,675) (299) (6,080)
------ ---- -------- -------- -------- -------- --------
Amortization of unearned
compensation - - - - - 129 129
Net change in gaming division - - 372 - - - 372
intercompany account
Net loss - - - (1,548) - - (1,548)
------ ---- -------- -------- -------- -------- --------
Balance, May 31, 1997 (unaudited) 10,621 $ 53 $ 14,225 $(13,560) $ (7,675) $ (170) $ (7,127)
====== ==== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(PAGE 1 OF 2)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
November 30, May 31,
------------ -------
1995 1996 1996 1997
------- ------- ------- -------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income (loss) $(4,408) $(1,795) $ 82 $(1,548)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Provision (benefit) for losses or impairments on
receivables and equity investments 5,765 (212) 106 (43)
Depreciation and amortization 832 853 469 399
Amortization of deferred charges 844 1,533 503 696
Undistributed equity in net earnings of affiliates (355) (1,003) (839) (1,093)
Minority interests (148) (163) (82) (76)
Change in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (292) 313 (96) (747)
Trade accounts receivable - affiliates (796) 227 120 (979)
Deferred charges (28) (1,084) (1,084) 90
Other assets and other receivables (964) (707) (133) (324)
Increase (decrease) in:
Accounts payable (667) (231) (131) 1,392
Accrued interest 37 344 41 325
Accrued expenses (239) (822) (1,628) 458
Deferred compensation plan liability 600 565 282 548
Other liabilities (34) 56 72 -
------- ------- ------- -------
Net cash provided (used) by operating activities 147 (2,126) (2,318) (902)
------- ------- ------- -------
Cash flows from investing activities:
Sales of notes receivable - 7,200 7,200 -
Purchases of property and equipment (168) (134) (62) (1,548)
Investments in and advances to affiliates (2,645) (50) - (564)
Sales of or distributions from investments in affiliates 959 834 284 1,199
Project loans and advances (1,900) - - (50)
------- ------- ------- -------
Net cash flows (used) provided by investing activities (3,754) 7,850 7,422 (963)
------- ------- ------- -------
Cash flows from financing activities:
Receipts from notes receivable stock purchases - affiliates 7,756 2,011 - -
Increase (decrease) in due to affiliates (1,145) 408 (26) (529)
Borrowings 2,900 500 - 1,505
Payments of debt and capital lease obligations and
other deferred charges (577) (1,926) (1,283) (213)
Net change in gaming division intercompany account (5,595) (6,195) (4,683) 372
------- ------- ------- -------
Net cash flows provided (used) by financing activities 3,339 (5,202) (5,992) 1,135
------- ------- ------- -------
Net increase (decrease) in cash and equivalents (268) 522 (888) (730)
Cash and cash equivalents at beginning of period 1,373 1,105 1,105 1,627
------- ------- ------- -------
Cash and cash equivalents at end of period $ 1,105 $ 1,627 $ 217 $ 897
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(PAGE 2 OF 2)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
November 30, May 31,
1995 1996 1996 1997
------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest (net of amount
capitalized) $1,626 $1,718 $ 708 $ 557
====== ====== ====== ======
Cash paid during the period for income taxes $ 96 $ 89 $ 22 $ 22
====== ====== ====== ======
Cash received during the period for income taxes $ 29 $ 34
====== ======
Supplemental Schedule of noncash investing and financing activities:
Investments in Affiliates:
Loan for purchase of interest in GAH-II, L.P. $3,750
Loan for investment in CHC Lease Partners 1,088
Operating partnership units received as payment of
interest 572
Operating partnership units received as payment of
notes receivable stock purchases - affiliates 388
------
Total investments in affiliates $5,798
======
Other:
Common stock issued for notes receivable
stock purchase-affiliates $3,000
======
Capital leases $ 166 $ 41 $ 41
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The financial statements of CHC International, Inc. - Hospitality Division (the
"Company") have been prepared pursuant to the Agreement and Plan of Merger by
and among Patriot American Hospitality Operating Company ("Opco"), Patriot
American Hospitality, Inc. ("PAH") and CHC International, Inc. ("CHC") dated as
of September 30, 1997 (the "Merger Agreement"). The Merger Agreement
contemplates, subject to appropriate approvals, (i) CHC's contribution of its
gaming business to a wholly-owned subsidiary ("Spinco"), (ii) CHC's distribution
of all of the common stock of Spinco to the stockholders of CHC pro rata based
on their ownership in CHC, (iii) CHC's retention of its hospitality business and
(iv) CHC merging into OpCo subsequent to the distribution of Spinco. CHC's major
operations consist of (i) the hospitality business including managing, leasing
and developing of and investing in hotel and resort properties and (ii) the
gaming business including owning, managing and developing casino properties.
The financial statements have been prepared as if the Company has operated as an
independent, stand alone entity for all periods presented and give no effect to
the net changes of assets and liabilities contemplated by the Merger Agreement.
Such financial statements have been prepared using the historical basis of
accounting and include all of the assets, liabilities, revenues and expenses
previously included in CHC's consolidated financial statements prior to the
transactions contemplated by the Merger Agreement, except for all the assets,
liabilities, (including contingent liabilities), revenues and expenses of the
gaming business of CHC and its subsidiaries. Consequently, these financial
statements include certain balances for goodwill and other assets and
liabilities related to the Company that were previously included in CHC's
consolidated financial statements including (i) the allocation of certain fixed
assets and related depreciation expense, (ii) notes receivable and borrowings
and related interest income and expense and (iii) other liabilities and related
expenses. In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 55 ("SAB 55"), the Company's financial statements exclude certain
corporate expenses incurred by CHC on the gaming division's behalf. The
Company's fiscal year ends on November 30. All significant intercompany balances
and transactions have been eliminated. Investments in less than majority-owned
non-gaming businesses, in which a significant equity ownership interest is held,
are accounted for on the equity method.
Summary of Significant Accounting Policies
- ------------------------------------------
These financial statements have been prepared in accordance with generally
accepted accounting principles. Significant accounting policies are summarized
below.
2
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
- -------------------
Hotel room and food and beverage revenues and expenses from leased hotel
operations are included in the statements of operations during the lease term.
Revenues from rooms and food and beverage sales are recognized at the time the
related service is performed.
Revenue from management service fees for management of hotels are based upon
contracted terms and are recognized when the services are performed.
Reimbursed Operating Expenses
- -----------------------------
The Company is fully reimbursed by certain managed hotels for salaries and
related costs for hotel personnel employed by the Company in accordance with
management contract terms and the administration of services consisting
primarily of sales, marketing and reservations. These costs amounted to $47,324
and $50,237 for the years ended November 30, 1995 and 1996, respectively. All
such costs and related reimbursements have been netted in the statements of
operations, with reimbursable amounts and accrued salaries and related costs
reflected as trade accounts receivable and accrued expenses, respectively, in
the balance sheets.
During the year ended November 30, 1995 the Company was reimbursed for $1,400
of costs incurred in conjunction with an unconsummated transaction previously
expensed in the statements of operations during the period inception (February
3, 1994) to November 30, 1994.
Stock Based Compensation
- ------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation". SFAS No. 123, the disclosure provisions of which must be
implemented for fiscal years beginning subsequent to December 15, 1995,
establishes a fair value based method of accounting for stock based compensation
plans, the effect of which can either be disclosed or recorded. The Company
intends to adopt the provisions of SFAS No. 123 in fiscal 1997 and upon adoption
intends to retain its intrinsic value method of accounting for stock based
compensation.
3
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include short-term investments with original purchase
maturities of 90 days or less.
Trade Accounts Receivable and Trade Accounts Receivable - Affiliates
- --------------------------------------------------------------------
Trade accounts receivable are from non-affiliated hotels under management and
lease, and hotel customers. Trade accounts receivable - affiliates are
receivables from hotel or other entities in which the Company, CHC, its
stockholders or officers have an investment interest. The Company provides an
allowance for doubtful accounts based upon a periodic review of outstanding
receivables and evaluation of aggregate collectibility.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization are
provided on a straight-line basis over estimated useful lives of the assets.
Useful lives range from three to five years. Expenditures for repairs and
maintenance are charged to expenses as incurred. Expenditures for major renewals
and betterments, which significantly extend the useful lives of existing
equipment, are capitalized and depreciated.
Equipment held under capital leases is amortized over the lesser of useful life
or lease term.
Deferred Charges
- ----------------
Costs incurred in connection with the Company's term loan are recorded as
deferred charges and are amortized over the term of the loan. Trademark and
organization costs are amortized on a straight line basis over 40 and 5 years,
respectively.
Deferred charges consist of the following at November 30,:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred debt costs $ 2,022 $ 3,197
Trademark and organization costs 1,180 1,110
------- -------
3,202 4,307
Accumulated amortization (1,270) (2,698)
------- -------
Deferred charges, net $ 1,932 $ 1,609
======= =======
</TABLE>
4
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Intangibles
- -----------
Goodwill is amortized on a straight line basis over 30 to 40 years. Management
contract intangibles are amortized on a straight-line basis over 9 to 25 years.
The Company periodically assesses the future benefit associated with management
contract intangibles through a review on a contract by contract basis of
estimated undiscounted future operating cash flow. Any impairment of intangible
assets is charged to operations and reflected as a reduction of the related
intangible asset account.
Impairment of Long-Lived Assets
- -------------------------------
The Company during fiscal 1996 adopted SFAS No. 121, "Accounting for Impairment
of Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-term
assets, including related goodwill, be reviewed for impairment and written down
to fair value whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.
Income Taxes
- ------------
Income taxes are provided based on the liability method of accounting pursuant
to SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are
recorded to reflect tax consequences on future years' differences between tax
bases of assets and liabilities and their financial reporting amounts at each
year-end as if the Company were a stand alone taxpayer.
Interim Unaudited Financial Information
- ---------------------------------------
The consolidated financial statements for the six months ended May 31, 1996 and
1997 are unaudited; however, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six-month periods
ended May 31, 1996 and 1997 are not necessarily indicative of the results that
may be expected for a full year.
Concentration of Credit Risk
- ----------------------------
Financial instruments which potentially subject The Company to concentrations of
credit risk exist principally in receivable balances.
The Company provides its services to the hotel industry. Hotel management
services are contracted for terms normally ranging from 1 to 20 years, and in
limited instances on a month-to-month basis. To reduce credit risk, the Company,
through its management of such hotels, monitors the hotels' financial condition.
The Company does not generally require collateral. Five management contracts
accounted for 26% of management service fees revenues for each of the years
ended November 30, 1995 and 1996.
5
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has a note receivable from the Rhode Island Convention Center
Authority in conjunction with agreements to develop and operate a hotel. To
reduce credit risk with respect to the note receivable from the Rhode Island
Convention Center Authority, the Company, through its management of the
property, which is the primary source of repayment, monitors the hotel's
financial condition, and management believes the credit risk related to the
receivable is minimal.
The Company has notes receivable from certain stockholders for the purchase of
the Company's common stock. Management believes the concentration of credit risk
with respect to the notes from certain stockholders for the purchase of company
common stock is minimal. (See note 13.)
The estimated fair value of financial instruments have been determined by the
Company using available market and effective interest rate information for such
instruments and the carrying amounts approximate their fair value.
Common Share Data
- -----------------
In February 1996, the Company's common stock was adjusted pursuant to a 2-for-1
stock split where each share of the Company's common stock, $.01 par value per
share was converted into two shares of the Company's common stock, $.005 par
value per share. All share and per share amounts have been retroactively
adjusted to give effect to the stock splits.
NOTE 2 - RECEIVABLES
Noncurrent receivables consist of a $1,900 note receivable from the Rhode Island
Convention Center Authority (the "Authority") with an interest rate equal to the
lesser of manager share of net cash flow as defined or 11% (effective interest
rate of 3.90% and 1.0% as of November 30, 1995 and 1996, respectively) payable
annually, interest only, with principal due on earlier of December 30, 2024 or
the date the management agreement between the Authority and the Company is
terminated.
The Company owned nonrecourse subordinated notes in the amount of $12,500
("Notes Receivable Crystal Palace") secured by a leasehold interest in the
Crystal Palace Hotel. The Company originally recorded a discount of $1,000 on
the Notes Receivable Crystal Palace. On December 29, 1995, The Company sold its
interest in the Notes Receivable Crystal Palace to the issuer for $7,200, plus
accrued interest. The Company recorded a loss on the impairment in value for the
Notes Receivable Crystal Palace of $4,431 during the year ended November 30,
1995.
6
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at November 30,:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Furniture, fixtures and other equipment $ 509 $ 615
Leasehold improvements 195 198
Equipment under capital leases 335 384
------ ------
1,039 1,197
Accumulated depreciation and amortization (416) (528)
------ ------
Property and equipment, net $ 623 $ 669
====== ======
</TABLE>
Depreciation expense was $82 and $129 for the years ended November 30, 1995 and
1996, respectively.
NOTE 4 - LEASES
Capital Leases
- --------------
The Company leases certain equipment under capital leases. Minimum rentals under
such capital leases are as follows at November 30, 1996:
<TABLE>
<CAPTION>
Year ending November 30,:
------------------------
<S> <C>
1997 $ 69
1998 70
1999 59
2000 55
2001 9
----
Total minimum lease payments 262
Less amount representing interest 54
----
Net obligations 208
Less current portion 47
----
Long-term portion $161
====
</TABLE>
The long-term portion of capital lease obligations is included in long-term
debt.
7
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating Leases
- ----------------
The Company leases office and warehouse space under operating lease agreements.
The Company also leases office space from a partnership owned 58% by certain of
its officers under an operating lease whose term runs through April 30, 2004
(see Note 14).
The Company entered into an agreement to lease and operate the Washington Duke
Inn, located in Durham, North Carolina. The initial lease term, which is through
July 31, 1997 and can be extended through July 31, 1998, includes payment of $95
on or before August 1, 1996 and a monthly rent of $134 plus 6% of gross revenues
through July 31, 1996; $134 plus 7% of gross revenues through July 31, 1997; and
$155 plus 7% of gross revenues from August 1, 1997 through July 31, 1998 (See
Note 15).
Future minimum lease payments, for all operating leases with non-cancelable
terms in excess of one year are as follows at November 30, 1996:
<TABLE>
<CAPTION>
Year ending November 30,:
------------------------
<S> <C>
1997 $2,008
1998 1,558
1999 319
2000 319
2001 319
Thereafter 772
------
Total minimum lease payments $5,295
======
</TABLE>
Rental expense amounted to $2,143, and $2,437 for the years ended November 30,
1995 and 1996, respectively.
8
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
On October 2, 1995 the Company and a principal owner of the Gencom group of
companies (which includes GAH-II, L.P. noted below) formed CHC Lease Partners,
with each owning 50%. At November 30, 1996, CHC Lease Partners leases 24 hotels
pursuant to operating leases with terms averaging 11 years from Patriot American
Hospitality Partnership, L.P. (the "Operating Partnership"), a majority owned
subsidiary of Patriot American Hospitality, Inc., a publicly traded, self-
administered real estate investment trust. CHC Lease Partners entered into
separate management agreements with a wholly-owned subsidiary of the Company and
the Company's 50% owned subsidiary, GAH-II, L.P. ("GAH"), a Houston, Texas based
hotel management business, to manage the leased hotels. Management fees earned
under such agreements are subordinate to CHC Lease Partners' obligations to the
Operating Partnership under the lease agreements. If, after payment of
management fees at the contract rate, CHC Lease Partners would be deficient in
lease payments to the Operating Partnership under any of the lease agreements in
any year, the Company and GAH would be required to refund and forego the
management fee for each of the hotels which are deficient in lease payments. If
after the management fees are refunded and foregone, CHC Lease Partners would
still be deficient in lease payments under any of the lease agreements, the
Company and GAH would each be required to pay CHC Lease Partners up to 50% of
the total management fees earned.
Summarized balance sheet and statement of operations information for CHC Lease
Partners, which is accounted for using the equity method, at November 30, 1995
and 1996 and the period from inception (October 2, 1995) to November 30, 1995
and the year ended November 30, 1996 are as follows:
<TABLE>
<CAPTION>
Summarized balance sheet information
- ------------------------------------
November 30,
------------
1995 1996
---- ----
<S> <C> <C>
Current assets $18,768 $25,245
Investments 5,100 5,100
Other assets 100 391
------- -------
Total assets $23,968 $30,736
======= =======
Current liabilities $12,530 $19,376
Long-term liabilities 2,020 2,369
------- -------
Total liabilities 14,550 21,745
------- -------
Net assets $ 9,418 $ 8,991
======= =======
</TABLE>
9
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Summarized statement of operations information
- ----------------------------------------------
<TABLE>
<CAPTION>
November 30,
------------
1995 1996
---- ----
<S> <C> <C>
Revenues $22,807 $156,086
------- --------
Income before lessee income $ 957 $ 2,921
(expense) ------- --------
Lessee income (expense) $ (639) $ (2,258)
------- --------
Net income $ 318 $ 663
------- --------
</TABLE>
CHC Lease Partners is required to maintain minimum net worth and adequate
working capital for the term of the leases. At inception, the Company and its
partner each contributed to CHC Lease Partners cash of $2,000 and units of
limited partnership interest in the Operating Partnership ("O.P. Units"), which
after an appropriate discount from the fair market value of Patriot American
Hospitality, Inc. common stock, were valued at $2,550. The O.P. Units may be
redeemed for, subject to certain restrictions, the common stock of PAH. The
Company received distributions from CHC Lease Partners of $545 for the year
ended November 30, 1996.
On October 2, 1995 the Company purchased a 50% ownership interest in GAH from
Patriot American Hospitality, L.P. for a nonrecourse note in the amount of
$3,750 (See Note 9) and also contributed $150 to GAH.
Summarized balance sheet and statement of operations information for GAH, which
is accounted for using the equity method, at December 31, 1995 and 1996 and the
period date of acquisition (October 2, 1995) to December 31, 1995 and the year
ended December 31, 1996 is as follows:
Summarized balance sheet information
- ------------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
<S> <C> <C>
Current assets $ 761 $1,983
Other assets 344 1,077
------ ------
Total assets $1,105 $3,060
====== ======
Current liabilities $ 640 $1,586
Long-term liabilities 103 107
------ ------
Total liabilities 743 1,693
------ ------
Net assets $ 362 $1,367
====== ======
</TABLE>
Summarized statement of operations information
- ----------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
<S> <C> <C>
Revenues $1,149 $7,284
====== ======
Income (loss) before minority interest $ (30) $1,211
====== ======
Net income (loss) $ (33) $1,194
====== ======
</TABLE>
10
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The cost of the Company's initial investment in excess of its interest in the
net assets has been assigned principally to management contracts and goodwill
which are being amortized on a straight-line basis over 12 and 30 years,
respectively. The unamortized excess of the Company's investment over the
Company's interest in GAH is $3,627 and $3,425 at November 30, 1995 and 1996
respectively. The Company received distributions of $123 from GAH for the year
ended November 30, 1996.
The Company's remaining investments in and advances to affiliates in the
aggregate are not significant.
NOTE 6 - INTANGIBLES
Intangibles are summarized as follows:
<TABLE>
<CAPTION>
Management
Contract Total
Intangibles Goodwill Intangibles
----------- -------- -----------
<S> <C> <C> <C>
Net balance, November 30, 1994 $2,389 $4,966 $7,355
Amortization, net (490) (149) (639)
------ ------ ------
Net balance, November 30, 1995 1,899 4,817 6,716
Amortization, net (521) (148) (669)
------ ------ ------
Net balance, November 30, 1996 $1,378 $4,669 $6,047
====== ====== ======
</TABLE>
The Company has included in amortization the write-off of $35 and $83 of
management contract intangibles related to terminated contracts for the years
ended November 30, 1995 and 1996, respectively.
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Company maintains a non-qualified defined benefit deferred compensation plan
which covers most management employees and provides an annual retirement
benefit, after twenty-five years of service, equal to 50% of the participant's
average last five years, pay reduced by social security benefits and further
reduced for years of service less than twenty-five, on a pro rata basis.
Benefits are vested on an eleven year cliff basis. Assets designated to cover
plan liabilities include cash, accounts receivable, life insurance policies on
the lives of certain participants, short-term investments and a loan to an
officer. While it is the intention of management to utilize the assets
designated for the deferred compensation plan to pay plan benefits, such assets
have not been placed in trust and are not otherwise restricted and accordingly,
they are available for general corporate purposes.
11
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Under the terms of the life insurance policies, the Company receives the cash
surrender value if the policies are terminated or all benefits due upon the
death of the insured. In addition, the Company can borrow against the available
net cash surrender value of the policies.
The following is a summary of the assets designated for the deferred
compensation plan which are included in other assets at November 30,:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Gross cash surrender value of insurance policies $ 1,170 $ 1,225
Less policy loans (1,085) (1,157)
------- -------
Cash surrender value of insurance policies, net 85 68
Accounts receivable 82 82
Cash and cash equivalents 625 614
Loan to officer 1,006 1,077
------- -------
Total assets designated for the deferred
compensation plan $ 1,798 $ 1,841
======= =======
</TABLE>
Deferred compensation plan costs, net of forfeitures, included in the combined
statements of operations for the years ended November 30, 1995 and 1996 were
approximately $569 and $374, respectively. The earnings rate for the deferred
compensation plan benefit liability was 7% for the years ended November 30, 1995
and 1996.
Deferred compensation plan costs, net of forfeitures, for the years ended
November 30, 1995 and 1996, includes the following components:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Service cost $ 381 $ 142
Interest cost on projected benefit obligation 188 232
----- -----
Deferred compensation plan costs $ 569 $ 374
===== =====
</TABLE>
The following table details the status of the plan at November 30:
<TABLE>
<CAPTION>
1995 1996
------- -------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits $ 4,257 $ 5,016
Non-vested benefits 1,280 1,086
------- -------
Projected benefit obligations $ 5,537 $ 6,102
======= =======
Plan assets less than projected benefit
obligations $(5,537) $(6,102)
</TABLE> ======= =======
12
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company plans to adopt a new non-qualified defined contribution deferred
compensation plan which, when enacted, will be effective retroactively to
January 1, 1992. The cost of the new plan will be substantially the same as the
existing plan.
NOTE 8 - INCOME TAXES
The Company files income tax returns as part of CHC's consolidated group.
Income taxes in the accompanying financial statements are computed as if the
Company had been a separate taxable entity.
The Company's provision for income taxes attributable to continuing operations
is comprised of the following for the years ended November 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----- -----
Current tax expense:
<S> <C> <C>
State $ 81 $ 52
Foreign 50 40
----- -----
Total provision for income taxes $ 131 $ 92
===== =====
</TABLE>
The Company generated a tax net operating loss carryforward of approximately
$3,661 during the year ended November 30, 1996 and has accumulated tax net
operating loss carryforwards of approximately $4,221 as of November 30, 1996.
Approximately $560 and $3,661 of the net operating loss carryforwards will
expire in the years 2009 and 2011, respectively. The tax net operating loss
carryforward is generally available to offset future taxable earnings.
The difference between the taxes provided for continuing operations at the U.S.
federal statutory rate and the Company's actual tax provision is reconciled
below for the years ended November 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Taxes provided at statutory rate $ - $ -
State tax expense 81 52
Foreign tax expense 50 40
----- -----
Total provision for income taxes $ 131 $ 92
===== =====
</TABLE>
13
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The approximate effect of the Company's temporary differences and carryforwards
that give rise to deferred tax balances at November 30, were as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net operating loss carryforwards $ 224 $ 1,688
Deferred compensation plan liability 2,106 2,330
Allowance for doubtful accounts receivable 559 800
Valuation allowance for Notes Receivable Crystal
Palace 1,772 -
Other, net 1,275 878
------- -------
5,936 5,696
Deferred tax asset valuation allowance (5,936) (5,696)
------- -------
Noncurrent deferred tax asset $ - $ -
======= =======
</TABLE>
In accordance with SFAS No.109, the Company recorded a valuation allowance on
the entire amount of the deferred tax asset at November 30, 1995 and 1996
because the Company sustained taxable losses and there was no assurance that a
deferred tax asset would be realized. The net decrease in the valuation
allowance for deferred tax assets of approximately $240 during the year ended
November 30, 1996 was primarily due to increases in deferred tax assets in net
operating loss carryforwards and allowance for doubtful receivables reduced for
the sale of Notes Receivable Crystal Palace.
14
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - LONG-TERM DEBT
Long-term debt is comprised of the following as of November 30,:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Variable-rate term loan (effective interest
rate of 10.375% and 10.0% at November 30,
1995 and 1996, respectively) interest payable
quarterly with balance due at maturity February
28, 1997 (see below) $11,500 $ 11,500
Variable rate non-recourse loan (effective interest
rate of 9.0% at November 30, 1995 and 1996) interest
and principal payable quarterly from 25% of net cash
flow of GAH, as defined, with balance due October 2,
2000 3,750 3,750
Variable rate loan (effective interest rate of
10.75% and 10.25% at November 30, 1995 and 1996,
respectively) interest payable monthly and principal
payable in annual installments of $190 from December
30, 1995 with balance due December 30, 1997 1,900 1,710
Variable rate unsecured demand loans (effective
interest rate of 9.75% at November 30, 1995)
interest payable monthly. 1,000 -
8% note payable - interest payable annually and
principal payable in annual installments of $120
through October 10, 1999 480 360
Capital lease obligations (see Note 4) 208 208
------- --------
Total debt 18,838 17,528
Current portion (1,566) (12,069)
------- --------
Total long-term debt $17,272 $ 5,459
======= ========
</TABLE>
Aggregate principal payments for the long-term debt including capital lease
obligations are as follows at November 30, 1996:
<TABLE>
<CAPTION>
Year ending November 30:
------------------------
<S> <C>
1997 $12,069
1998 1,906
1999 381
2000 3,163
2001 9
-------
Total $17,528
=======
</TABLE>
15
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's $11,500 variable-rate term loan (the "Term Loan"), as amended, (i)
bears interest at the bank's base lending rate plus 2.0% or, at the Company's
option, London Interbank Market Rate (LIBOR) plus 4 1/2%, (ii) is secured by
substantially all of the Company's assets and (iii) matures February 28, 1997.
On February 28, 1997, the Term Loan was further amended whereby the Term Loan
(i) bears interest at the bank's lending rate plus 1.5% or, at the Company's
option, LIBOR plus 2.5% and (ii) matures in quarterly installments of 2.5% of
the principal amount outstanding commencing June 30, 1997 with the balance due
June 30, 1998. The Company has also agreed to pay the lender a fee equal to
1.5% of the fair market value of the Company, but in no event less than $2,500
or more than $6,000. The fee is payable at the lender's option at any time
during the ten-year period commencing February 28, 1997. Interest expense for
the years ended November 30, 1995 and 1996 include $500 and $1,200 respectively
related to the lender fee. The Term Loan agreement contains customary financial
covenants, and various covenants including limitations on indebtedness,
liabilities, liens, distributions, dividends, redemptions, prepayments of other
indebtedness, mergers, purchases and sales of assets, loans, investments and
guarantees, and prohibitions of any change of control.
In December, 1994, the Company entered into a loan agreement with a commercial
bank in the amount of $1,900. The loan bears interest at the bank prime rate
plus 2% per annum payable monthly. Principal is payable in annual installments
of $190 in December 1995 and 1996, with the balance due in December 1997.
In October 1995, in connection with the Company's purchase of a 50% interest in
GAH (see Note 5), the Company entered into a nonrecourse loan agreement with the
seller in the amount of $3,750. The loan bears interest at the lesser of 9.0%
and the maximum non-usurious amount permissible. Interest and principal are
payable quarterly commencing January 25, 1996 from 25% of GAH net cash flow, as
defined, continuing until the earlier of October 2, 2000 and the date all
amounts outstanding under the nonrecourse term loan are paid in full.
In January 1996, CHC established a $1,500,000 line of credit on an unsecured
basis with a commercial bank guaranteed by two shareholders of CHC. Advances
under the line of credit bear interest at the bank rate plus 1% per annum
payable on demand. No amounts are currently outstanding under the line of
credit.
16
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Related Party Borrowings
- ------------------------
In October 1995, the Company borrowed 53,314 O.P. Units from certain
shareholders. As permitted by the securities loan agreement, the O.P. Units,
valued after an appropriate discount, at $1,088, were contributed by the Company
to CHC Lease Partners (see Note 5). The Company must return O.P. Units to the
shareholders on demand and pay to the shareholders interest equal to
distributions received by the Company from the O.P. Units. The obligation under
the O.P. Units borrowing is included in due to affiliates and officers in the
balance sheets.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of its business, the Company is named as defendant in
legal proceedings resulting from incidents taking place at hotels it manages, or
in which it has an ownership interest. The Company maintains comprehensive
liability insurance and also requires hotel owners to maintain adequate
insurance coverage. Management believes such coverage to be of a nature and
amount sufficient to ensure that the Company is adequately protected from any
material financial loss as a result of such claims.
The Company owns a 30% interest in Plaza Associates Limited Partnership ("Plaza
Associates") which owns and operates the Holiday Inn - Dayton Mall in Dayton,
Ohio. The Company has joint and severally guaranteed partial payment of two
Plaza Associates notes payable. The joint and several guaranty is mitigated by
a contribution agreement among Plaza Associates partners which reduced the
Company's obligation to 30% of the guaranty. The total maximum potential
liability to the Company under the guaranty after giving effect to the
contribution agreement is as follows: through December 31, 1999 up to $375;
January 1, 2000 to December 31, 2002 up to $225; January 1, 2003 to March 1,
2004 up to $150 and zero thereafter. In addition, The Company has joint and
severally guaranteed payment of certain other Plaza Associates obligations, the
maximum potential liability to the Company is $540.
In November 1996, the Company entered into an agreement with Grant Hotels, Inc.
to manage the Sam Lord's Castle Resort in Barbados, West Indies and provide
consulting and technical services with respect to the conversion of the resort
to a Carnival Resort. The agreement provides the Company will loan the resort
up to $900 for conversion of the resort, working capital, referral fees and
certain other expenses of which no amounts have been advanced as of November 30,
1996.
NOTE 12 - MINORITY INTEREST
The Company owns a 75% interest in the TCC-Registry Joint Venture (the "Registry
Venture") acquired in October 1994. The Company's combined financial statements
include 100% of the assets, liabilities and operations of the Registry Venture.
The effects of the minority interests have
17
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
been reflected in the accompanying combined statements of operations. Included
in other liabilities in the accompanying combined balance sheets is minority
interest of the Registry Venture of $78 and $108 as of November 30, 1995 and
1996, respectively.
NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIT)
As a result of the basis of presentation as outlined in Note 1, including the
allocation of certain assets and liabilities to the gaming division, the
Company's equity (deficit) includes balances arising from the net change in the
gaming divisions' intercompany account with the Company.
In June 1994, the Company granted to an executive officer 155,000 shares of
common stock valued at $3.75 per share, subject to forfeiture if employment is
terminated prior to vesting. The stock grant originally scheduled to vest over
five years has been accelerated and now vests as to 50% of the shares of common
stock in January 1997 and 50% of the shares of common stock in January 1998. The
amortization period of the unearned compensation has been revised accordingly.
The stock grant also becomes fully vested on the earlier to occur of any
termination of employment due to death or disability, or May 1997, if the
Company does not offer to extend the employment agreement until May 1999 for any
reason other than cause. Compensation expense for the stock grant was $116 and
$108 for the years ended November 30, 1995 and 1996, respectively.
Pursuant to the terms of a stock purchase agreement dated November 30, 1994
between the Company, Carnival Corporation and certain shareholders, the Company
agreed to sell to such persons an aggregate of 4,000,000 shares of common stock
at $6.25 per share. The aggregate purchase price of $25,000 was satisfied by the
conversion of a $10,000 principal balance due by the Company to Carnival
Corporation under a revolving credit loan, $9,350 in notes payable to the
Company due November 1998 and the balance in cash. The notes bear interest at
7.1% payable annually with principal installments due annually of $2,337. The
installment due November 30, 1995, was partially satisfied by cash payments of
$2,106 and $125 of O.P. Units. In addition, prepayments totaling $432 of O.P.
Units were received during the year ended November 30, 1995. The installment due
November 30, 1996 less prepayments received was satisfied by cash payments of
$2,011. The notes are secured by a pledge of all purchased shares of common
stock.
Pursuant to the terms of a stock purchase agreement dated November 29, 1996
between the Company and CHC Investor Partners, L.P. ("CHC Investor"), a Texas
limited partnership controlled by a principal owner of the Gencom group of
companies, the Company agreed to sell 265,513 shares of common stock at $11.30
per share and grant non-qualified stock options to purchase 61,130 shares of
common stock at a per share exercise price of $11.30. The aggregate purchase
price of $3,000 was satisfied with a note. The note is due in installments of
$500 on November 29, 1997 and $2,500 on November 29, 1998; however, the note
plus accrued interest becomes due and payable 180 days after any public offering
by the Company. The note bears interest at 7.1% payable annually.
18
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has an Employee Stock Option Plan (the "Plan") which provides for
the grant to employees of both incentive stock options (within the meaning of
Section 422 of the Internal Revenue Code) and non-statutory stock options to
eligible employees (including officers and directors) and non-employee
directors. A total of 1,700,000 shares of common stock has been reserved for
issuance under the Plan.
The table below summarizes common stock option activity as of and for the years
ended November 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Options outstanding, beginning of period 988,052 988,052
Granted - 264,317
Returned - (30,564)
-------- ----------
Options outstanding, end of year 988,052 1,221,805
-------- ----------
Options exercisable end of year 197,610 419,672
-------- ----------
Exercise price per share $ 6.25 $ 6.25
of options exercisable to to
during the period $ 6.25 $ 11.50
-------- ----------
</TABLE>
All options issued were granted at the fair market value of CHC's common stock
on the date of grant, have a term of ten years, and generally become exercisable
with respect to 20% of the covered shares commencing one year after grant, and
are generally exercisable with respect to an additional 20% of the covered
shares after each additional year until fully exercisable.
NOTE 14 - RELATED PARTY TRANSACTIONS AND ALLOCATIONS
The Company provides services and pays certain costs which are reimbursable
under management agreements with hotels, which are affiliated with the Company
by virtue of common ownership. Total fees earned from affiliated hotels for the
years ended November 30, 1995 and 1996 were $5,212 and $4,284, respectively.
Total fees and reimbursable expenses due from affiliated hotels were $1,261 and
$1,108 at November 30, 1995 and 1996, respectively.
In March, 1994, CHC and Carnival Corporation entered into a 20 year Trademark
License Agreement providing for CHC's use of the "Carnival" trademark so that
CHC may do business as "Carnival Hotels and Casinos" (and the Company may do
business as "Carnival Hotels and Resorts"). Fees due under the agreement are the
greater of $100, or 1% of CHC's revenues, as defined. The trademark license
fees for the Company the years ended November 30, 1995 and 1996 were $115 and
$150, respectively.
19
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Certain of the Company's officers hold a 58% interest in a partnership which
owns the office building in which the Company's executive offices are located.
Under this lease, rental expense for the years ended November 30, 1995 and 1996
were $401 and $375, respectively.
The Company provides accounting services, at cost, to certain entities owned and
controlled by certain of its officers. The entities are obligated to reimburse
the Company for such services provided. The cost of such services were $175 and
$145 for the years ended November 30, 1995 and 1996, respectively.
Pursuant to the terms of a stock purchase agreement dated November 30, 1994
between certain shareholders and Carnival Corporation, certain shareholders
agreed to buy at $6.25 per share, 2,610,000 shares of Company common stock from
Carnival Corporation. The aggregate purchase price of $16,313 was paid in
promissory notes due November 30, 1998 subject to certain condition as defined
in the stock purchase agreement. The notes bear interest at 6.0% payable at
maturity. The stock purchase agreement provides certain shareholders a put
option which requires Carnival Corporation to repurchase at $6.25 per share plus
a rate of return of 6.1% per annum, all of the 2,610,000 shares of Company
common stock, by November 30, 1998. The stock purchase agreement also requires
Carnival Corporation to reduce its ownership in the Company's common stock
(assuming exercise of the put option) to less than 25% of the Company's
outstanding common stock no later than November 30, 1998, as defined in the
stock purchase agreement (See Note 13).
Pursuant to the terms of a stock purchase agreement dated November 29, 1996
between the Company, certain shareholders and CHC Investor, CHC Investor agreed
to buy at $11.30 per share 265,513 shares of Company common stock from certain
shareholders for $3,000 in cash (See Note 13).
The Company entered into a borrowing arrangement with certain shareholders (See
Note 9).
CHC has allocated a portion of its corporate expenses to the gaming division.
These expenses include management and corporate overhead; benefit
administration; risk management/insurance administration, and other support and
executive functions. Allocations and charges were based on either a direct cost
pass through or a percentage allocation for such services provided based on
factors such as revenues, management time, or headcount. Such allocations and
charges totaled $3,734 and $3,720 for the years ended November 30, 1995 and
1996, respectively.
Management believes that the basis used for allocating corporate services is
reasonable and that the terms of these transactions would not materially differ
from those that would result from transactions among unrelated parties.
20
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15 - SUBSEQUENT EVENTS
Effective January 1, 1997, the Company entered into a new agreement to lease and
operate the Washington Duke Inn which supersedes the previous agreement. The
term which is through December 31, 2002 includes rent for each year of 22% of
gross revenues up to $10,000, adjusted annually, plus 30% of gross revenues in
excess of $10,000, adjusted annually, provided in any event a minimum rent of
$1,800. Rent is payable monthly. In addition, the Company purchased $1,505 of
furniture, fixtures and equipment in exchange for a promissory note and is
required to fund a reserve account for furniture, fixtures and equipment
expenditures in an amount not less than 3% of gross revenues in 1997 and 4% of
gross revenues thereafter. The loan bears interest at 7% per annum. Principal
and interest are payable monthly installments of $26 with balance due December
31, 2002. The loan is secured by the furniture, fixtures and equipment and
limits the sale or encumbrance of the furniture, fixtures and equipment. In
connection with the expiration of the lease, the Company has the right to resell
the furniture, fixtures and equipment to the original seller and the original
seller has the right to repurchase the furniture, fixtures and equipment for
$1,505.
****************************
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
the Partnerships of Acquired Hotels:
We have audited the accompanying combined balance sheets of the Partnerships of
Acquired Hotels (described in Note 1), which are under common control and
management, as of December 31, 1996 and 1995, and the related combined
statements of operations, partners' capital and cash flows for the years then
ended. These financial statements are the responsibility of the general
partners of the Partnerships. 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, such financial statements present fairly, in all material
respects, the combined financial position of the Partnerships of Acquired
Hotels, as of December 31, 1996 and 1995, and the combined results of their
operations and their combined cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
September 30, 1997
<PAGE>
PARTNERSHIPS OF ACQUIRED HOTELS
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------
December 31, June 30,
----------------------------------
ASSETS 1996 1995 1997
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,810,718 $ 1,690,993 $ 3,701,951
Cash held in escrow 2,968,943 1,841,148 2,841,768
Accounts receivable, net of allowance for doubtful
accounts: 1996, $114,029; 1995, $103,856 2,930,552 1,745,130 4,040,945
Due from affiliates 165,079 76,388 165,621
Inventories 276,406 230,444 294,953
Prepaid expenses 555,289 294,031 692,398
------------ ------------ ------------
Total current assets 10,706,987 5,878,134 11,737,636
------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Land 15,560,380 8,325,080 15,560,380
Building and improvements 47,432,644 32,594,394 47,814,124
Furniture and equipment 23,005,435 13,521,116 26,464,641
------------ ------------ ------------
Total property and equipment 85,998,459 54,440,590 89,839,145
Less accumulated depreciation (6,418,641) (2,373,548) (8,889,561)
------------ ------------ ------------
Net property and equipment 79,579,818 52,067,042 80,949,584
OTHER ASSETS - Net of accumulated amortization:
1996, $287,550; 1995, $96,647 1,000,850 491,481 1,824,615
------------ ------------ ------------
TOTAL $ 91,287,655 $ 58,436,657 $ 94,511,835
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 2,747,767 $ 2,858,713 $ 2,971,221
Accrued liabilities 3,417,351 2,891,618 4,275,902
Due to affiliates 1,296,178 405,496 1,560,222
Current maturities of long-term debt 1,212,574 1,442,744 1,589,141
------------ ------------ ------------
Total current liabilities 8,673,870 7,598,571 10,396,486
------------ ------------ ------------
LONG-TERM DEBT:
Mortgage notes 57,055,100 39,984,652 70,432,779
Other notes payable 2,954,835 1,126,251 697,804
------------ ------------ ------------
Total long-term debt 60,009,935 41,110,903 71,130,583
------------ ------------ ------------
Total liabilities 68,683,805 48,709,474 81,527,069
COMMITMENTS AND CONTINGENCIES (Note 5)
PARTNERS' CAPITAL 22,603,850 9,727,183 12,984,766
------------ ------------ ------------
TOTAL $ 91,287,655 $ 58,436,657 $ 94,511,835
============ ============ ============
</TABLE>
See notes to financial statements.
-2-
<PAGE>
PARTNERSHIPS OF ACQUIRED HOTELS
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
1996 1995 1997 1996
<S> <C> <C> <C> <C>
(Unaudited)
REVENUES:
Rooms $ 40,266,682 $ 17,619,445 $ 22,521,478 $ 17,862,671
Food and beverage 16,213,745 8,151,981 8,589,355 7,227,870
Telephone 1,337,914 709,859 764,393 638,678
Other 2,686,565 459,058 1,366,039 1,090,708
------------- ------------- ------------- -------------
Total revenues 60,504,906 26,940,343 33,241,265 26,819,927
------------- ------------- ------------- -------------
COST OF SALES:
Rooms 9,651,249 5,095,006 5,288,624 4,344,955
Food and beverage 11,780,526 6,962,813 5,866,164 5,222,217
Telephone 790,444 472,487 422,556 379,989
Other 967,547 150,566 613,546 408,395
------------- ------------- ------------- -------------
Total cost of sales 23,189,766 12,680,872 12,190,890 10,355,556
------------- ------------- ------------- -------------
GROSS PROFIT 37,315,140 14,259,471 21,050,375 16,464,371
------------- ------------- ------------- -------------
OPERATING EXPENSES:
General and administrative 6,564,029 3,503,493 3,847,704 2,701,674
Marketing 5,833,746 2,742,055 3,124,607 2,547,973
Maintenance and repairs 2,610,460 1,530,254 1,390,859 1,209,291
Utilities 3,971,012 1,932,709 2,080,528 1,696,685
------------- ------------- ------------- -------------
Total operating
expenses 18,979,247 9,708,511 10,443,698 8,155,623
------------- ------------- ------------- -------------
OTHER EXPENSES:
Depreciation and amortization 4,196,872 1,784,324 2,569,249 1,874,254
Interest 5,431,013 2,737,246 2,927,574 2,470,356
Management fees 2,038,157 797,397 1,128,680 936,974
Property taxes, insurance,
rent and other 3,199,782 1,667,861 1,703,571 1,476,009
------------- ------------- ------------- -------------
Total other expenses 14,865,824 6,986,828 8,329,074 6,757,593
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 3,470,069 $ (2,435,868) $ 2,277,603 $ 1,551,155
============= ============= ============= =============
</TABLE>
See notes to financial statements.
-3-
<PAGE>
PARTNERSHIPS OF ACQUIRED HOTELS
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<S> <C>
BALANCE, DECEMBER 31, 1994 $ 7,499,620
Net loss (2,435,868)
Partner capital contributions 4,824,537
Distributions to partners (161,106)
-------------
BALANCE, DECEMBER 31, 1995 9,727,183
Net income 3,470,069
Partner capital contributions 14,976,849
Distributions to partners (5,570,251)
-------------
BALANCE, DECEMBER 31, 1996 $ 22,603,850
=============
</TABLE>
See notes to financial statements.
-4-
<PAGE>
PARTNERSHIPS OF ACQUIRED HOTELS
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------
Six Months Ended
Years Ended December 31, June 30,
-------------------------------- ----------------------------------
1996 1995 1997 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,470,069 $ (2,435,868) $ 2,277,603 $ 1,551,155
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,196,872 1,784,324 2,569,249 1,874,254
Deferred interest 201,872 282,711 107,324 101,195
Changes in, net of acquisitions:
Cash held in escrow 372,205 (91,246) 127,175 720,267
Accounts receivable, net (1,123,428) (274,329) (1,110,393) (2,637,582)
Due from affiliates (33,482) (50,078) (542) 8,044
Inventories 58,817 (79,406) (18,547) 29,005
Prepaid expenses (23,009) (161,756) (137,109) 78,947
Other assets (502,530) (90,216) (135,185) (471,501)
Accounts payable (110,946) 2,093,953 223,454 328,821
Due to affiliates 858,617 351,689 264,044 371,100
Accrued liabilities 449,452 1,023,769 858,551 1,189,696
------------ ------------ ------------ ------------
Net cash provided by operating activities 7,814,509 2,353,547 5,025,624 3,143,401
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of working capital assets (liabilities), net (1,851,634) 205,107 (1,851,634)
Additions to property and equipment (31,549,450) (30,484,224) (3,840,682) (29,084,802)
------------ ------------ ------------ ------------
Net cash used in investing activities (33,401,084) (30,279,117) (3,840,682) (30,936,436)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayment on mortgage notes (1,028,005) (499,973) (19,251,165) (672,156)
Principal repayments on other notes payable (1,024,209) (10,252) (2,408,944) (528,491)
Proceeds from borrowings of long-term debt 20,523,216 24,509,600 33,050,000 19,593,102
Deferred loan costs (171,300) (158,471) (786,913) (171,300)
Partner capital contributions 14,976,849 4,824,537 1,337,333 14,976,849
Distributions to partners (5,570,251) (161,106) (13,234,020) (4,720,424)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities 27,706,300 28,504,335 (1,293,709) 28,477,580
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,119,725 578,765 (108,767) 684,545
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 1,690,993 1,112,228 3,810,718 $ 1,690,993
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,810,718 $ 1,690,993 $ 3,701,951 $ 2,375,538
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the year for
interest $ 5,229,000 $ 2,454,000 $ 2,820,000 $ 2,268,000
============ ============ ============ ============
</TABLE>
See notes to financial statements.
-5-
<PAGE>
PARTNERSHIPS OF ACQUIRED HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
On September 30, 1997, a limited partnership of Patriot American Hospitality,
Inc. ("Patriot") acquired seven operating hotel properties (collectively, the
"Acquired Hotels") from various entities (the "Partnerships"). Following is
a listing of the Acquired Hotels:
<TABLE>
<CAPTION>
Number Month/Year
Partnerships Property Name/Location of Rooms Acquired
<S> <C> <C> <C>
Travis Real Estate Group Joint
Venture Omni Inner Harbor Hotel-Baltimore, MD 707 3/96
Marina Hospitality, L.P. Radisson Riverwalk Hotel-Jacksonville, FL 332 11/95
Glenview Hospitality, L.P. Doubletree Guest Suites-Glenview, IL 252 6/94
Toledo Hotel Investors Crowne Plaza Toledo - Toledo, OH 241 4/94
Kansas City Hospitality, L.P. Radisson Suite Hotel - Kansas City, MO 240 2/95
Melbourne Hospitality, L.P. Melbourne Hilton at Rialto Place - 237 12/94
Melbourne, FL
Y.O. Hotel Investors, L.P. Holiday Inn Y.O. Ranch-Kerrville, TX 200 3/93
</TABLE>
The financial statements include only those activities of the Partnerships
and the acquired hotels from the date of their respective acquisitions.
Patriot purchased the Acquired Hotels from the Partnerships for an aggregate
purchase price of approximately $154 million. The owners of the Partnerships
received cash and securities issued by Patriot and Patriot American
Hospitality Partnership, L.P. as consideration for the sale.
The accompanying financial statements of the Partnerships are presented on a
combined basis because the Partnerships have a common ownership and were
operated by the same management company. All significant transactions among
the Partnerships have been eliminated in the combined presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS - In the opinion of management all adjustments
necessary for a fair presentation of such financial statements have been
included. Such adjustments consisted of normal recurring items. Interim
results are not necessarily indicative of results for a full year.
INCOME TAXES - No provision has been made for federal income taxes since
these taxes are the liability of the individual partners of the Partnerships.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is computed over periods ranging from 3 to 35 years using the
straight-line method. Improvements are capitalized while repair and
maintenance costs are charged to operating expense.
CASH AND CASH EQUIVALENTS - The Partnerships consider all demand and money
market accounts and certificates of deposit with original maturities of three
months or less at the date of purchase to be cash equivalents.
CASH HELD IN ESCROW - Cash held in escrow, primarily, is for repair and
replacement reserves, taxes and insurance. Under the terms of the individual
partnership agreements and certain mortgage note agreements, the Partnerships
are required to fund a reserve for repair and replacement of property and
equipment. Restricted repair and replacement funds, included in cash held in
escrow totaled $2,317,672 and $426,687 at 1996 and 1995, respectively.
-6-
<PAGE>
At December 31, 1995 a certificate of deposit totaling $500,000 was pledged
as collateral on a note and is included in cash held in escrow.
INVENTORIES - Inventories, consisting primarily of food and beverages, are
stated at the lower of cost (first in, first out) or market.
OTHER ASSETS - Other assets consist primarily of franchise fees, organization
costs and loan fees. Franchise fees are being amortized over the life of the
franchise agreements (15 to 20 years) using the straight-line method. All
other assets are being amortized over five years or the life of the loan.
REVENUE RECOGNITION - Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
IMPAIRMENT OF LONG-LIVED ASSETS - The Partnerships evaluate long-lived assets
for impairment based upon the recoverability of the asset's carrying value.
When it is probable that the undiscounted future cash flows will not be
sufficient to recover the asset's carrying value, an impairment is
recognized. No such impairments have been incurred by the Partnerships.
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 these
estimates.
3. HOTEL ACQUISITIONS
The cost of hotel acquisitions during 1996 and 1995 approximated $28.4
million and $26.5 million, respectively, and were accounted for under the
purchase method of accounting, and, accordingly, the costs were allocated to
the fair values of the assets acquired and liabilities assumed. The 1996
statement of operations includes revenues of $19.2 million and net income of
$3.5 million for a hotel acquired in March 1996 and the 1995 statement of
operations includes revenues of $4.8 million and net losses of $0.9 million
for hotels acquired in February and November 1995.
4. LONG-TERM DEBT
Substantially all of the assets of the Partnerships are pledged as collateral
for the long-term debt.
MORTGAGE NOTES - Mortgage notes payable consists of ten notes as of
December 31, 1996 and 1995, generally collateralized by a first lien deed of
trust, assignment of rents and security agreement. The notes are interest-
only amortizing notes which mature at various dates through 2001.
A mortgage note totaling $445,329 and $450,000 at December 31, 1996 and 1995,
respectively, has a fixed interest rate of 9.25%.
Variable rate notes at December 31, 1996 and December 31, 1995 total
$43,199,710 and $26,061,305, respectively. Interest rates on the variable
rate notes are generally based on one month or three month LIBOR rates which
were 5.53% and 5.56%, respectively, at December 31, 1996 and 5.72% and 5.66%,
respectively, at December 31, 1995.
-7-
<PAGE>
A note in the amount of $2,440,162 and $2,472,420 at December 31, 1996 and
December 31, 1995 respectively, bears interest at the rate of 6.5% for the
first year, 7.0% for the second and third years, and 8.25% thereafter. This
Note requires the maintenance of a reserve account with the lender to fund
capital improvements, repairs and replacements for the property.
A note in the amount of $2,768,720 and $3,379,657 at December 31, 1996 and
1995, respectively, bears interest at LIBOR rate plus 2.5% and at prime rate
plus 0.25%.
A note in the amount of $8,999,505 and $8,797,633 at December 31, 1996 and
1995, respectively, bears interest at Chase Manhattan Bank, N.A. prime rate
plus 1% per annum, which was 9.25% at December 31, 1996 and 9.50% at December
31, 1995. Interest is payable at rates ranging from 6% through year two, 7%
for year three, 7.5% for year four, 8% for year five and 8.5% thereafter.
The note amount has been increased by the difference between the interest
accrued and paid.
Effective June 1997, one of the Partnerships entered into a new two year
mortgage agreement for $20,500,000. The note bears interest equal to one
month LIBOR plus 2.75% and monthly principal payments are equal to Net Cash
Flow for the immediately preceding calendar month, as defined in the loan
agreement. Proceeds were used to repay mortgage notes totaling $9,445,000 at
December 31, 1996 and to fund distributions to partners.
Effective May 1997, one of the Partnerships entered into a new three year
mortgage agreement for $10,000,000. The note bears interest of one month
LIBOR plus 3.25%. Proceeds were used to repay notes totaling $9,286,000 at
December 31, 1996 and to provide additional working capital.
Certain of the mortgage notes are personally guaranteed by certain partners.
The aggregate maturities, after giving effect to the aforementioned
refinancings, for mortgage notes are as follows:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1997 $ 798,326
1998 921,986
1999 12,830,293
2000 29,021,420
2001 14,281,401
-----------
Total $57,853,426
===========
</TABLE>
-8-
<PAGE>
OTHER NOTES PAYABLE - Other notes payable consists of five notes totaling
$3,369,082 and four notes totaling $1,392,632 as of December 31, 1996 and
1995, respectively. The notes mature at various dates through March 2000.
One of the notes has a variable interest rate based on prime rate, which was
8.75% and 8.5% at December 31, 1996 and 1995, respectively. The other notes
bear interest at fixed rates ranging from 8.51% to 15%. Certain of the notes
are personally guaranteed by certain partners.
Included in other notes payable is a note in the amount of $300,000 and
$509,708 as of December 31, 1996 and 1995, respectively, payable to an
affiliate of the general partner.
The aggregate maturities, after giving effect to subsequent refinancings, of
other notes payable are as follows:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1997 $ 414,248
1998 117,031
1999 389,824
2000 367,983
2001 2,079,997
----------
Total $3,369,083
==========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
FRANCHISE AGREEMENTS - Under the terms of hotel franchise agreements expiring
at various dates through December 2015, monthly payments for franchise
royalties, reservation and marketing services are due for all seven hotels.
Fees are computed based upon percentages ranging from 2% to 5% of gross room
revenue. In certain cases marketing and reservation fees ranging from 1% to
3.5% of gross room revenue and Holidex fees ranging from $5.42 to $5.69 per
guest room are also due.
OPERATING LEASES - Equipment is leased under various noncancelable operating
lease agreements expiring at various times through October 2000. The
Partnerships recorded expenses under these leases of $570,369 and $153,098
during the years ended December 31, 1996 and 1995, respectively. The future
annual minimum lease payments required under these leases as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1997 $ 689,134
1998 574,714
1999 536,128
2000 420,958
2001 130,039
Thereafter 5,940
----------
Total $2,356,913
==========
</TABLE>
CONTINGENCIES - The Partnerships may be involved in various claims, lawsuits
and proceedings arising in the ordinary course of business. While there are
certain uncertainties inherent in the ultimate outcome of such matters,
management believes the resolution of such uncertainties should not have a
materially adverse effect on the Partnerships' financial statements.
6. RELATED-PARTY TRANSACTIONS/MANAGEMENT AGREEMENTS
The hotels are operated under management agreements with a company that
shares common ownership with the Partnerships. The agreements expire at
various dates through May 2004, with certain agreements containing automatic,
unlimited one year renewal periods. Management fees generally range from
2.5% to 3.5% of gross revenue. In addition, certain of the hotels incurred
bonus management fees based on achievement of specified return on capital
criteria as defined in the individual management agreements. One hotel
incurred an incentive management fee based on the lesser of 1% of gross
income or net cash flows available for distribution, as defined in the
management agreement. Total fees incurred to the affiliated entity for
management were $2,038,157 and $797,397 for 1996 and 1995, respectively.
Management fees due were $485,368 and $156,096 for 1996 and 1995,
respectively. Four of the hotels provided for the deferral of 1% of the
management fee without interest until the achievement of specified return on
equity criteria as defined in the management agreement. Deferred management
fees were $484,435 and $38,679 for 1996 and 1995, respectively.
-9-
<PAGE>
Additionally, the Partnerships reimburse the management company for certain
operating expense at cost.
7. SUBSEQUENT EVENTS (UNAUDITED)
During the six months ended June 30, 1997, one of the Partnerships drew
additional funds of $2,550,000 on a mortgage note.
Subsequent to September 30, 1997 all long-term debt of the Partnerships was
retired by Patriot in connection with the transaction described in Note 1.
******
-10-
<PAGE>
Report of Independent Certified Public Accountants
The Venture Partners
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
We have audited the accompanying balance sheets of G.B.H. Joint Venture d/b/a
Grand Bay Hotel (the Joint Venture) as of December 31, 1995 and 1996, and the
related statements of operations, venturers' deficit and cash flows for the
years then ended. These financial statements are the responsibility of the Joint
Venture'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 G.B.H. Joint Venture d/b/a
Grand Bay Hotel at December 31, 1995 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
March 13, 1997,
except for the third paragraph of Note 7
as to which the date is April 2, 1997
1
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
------------------------------ -----------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 992,038 $ 1,100 $ 500
Restricted cash -- 705,004 395,878
Accounts receivable, less allowance for doubtful
accounts of $73,071 and $80,440 at December 31,
1995 and 1996 and $80,467 at June 30, 1997 932,598 965,830 1,504,503
Inventories 653,765 663,471 699,191
Prepaid expenses 47,903 197,371 203,373
Other current assets 53,733 35,224 35,224
------------------------------- -----------
Total current assets 2,680,037 2,568,000 2,838,669
Property and equipment, net 23,963,330 23,720,271 23,404,509
Intangibles, net of accumulated amortization of
$164,377 and $209,981 at December 31, 1995
and 1996 and $236,216 at June 30, 1997 835,623 893,009 883,676
------------------------------- -----------
$27,478,990 $27,181,280 $27,126,854
=============================== ===========
LIABILITIES AND VENTURERS' DEFICIT
Current liabilities:
Accounts payable $ 1,477,573 $ 2,390,593 $ 2,151,452
Accrued expenses 1,975,801 1,851,755 727,040
Advance reservation and other deposits 244,287 260,675 174,786
Loans from partners 667,000 667,000 126,638
Loans from affiliates 665,949 651,937 658,233
Current portion of long-term debt 220,397 -- --
Current portion of obligations under capital leases 73,041 96,035 89,761
------------------------------- -----------
Total current liabilities 5,324,048 5,917,995 3,927,910
Long-term debt, less current portion 24,443,362 24,443,362 24,443,362
Accrued interest on long-term debt 739,500 1,578,996 1,848,870
Obligations under capital leases 131,518 190,543 149,853
------------------------------ -----------
30,638,428 32,130,896 30,369,995
Commitments and contingencies
Venturers' deficit (3,159,438) (4,949,616) (3,243,141)
------------------------------- -----------
$27,478,990 $27,181,280 $27,126,854
=============================== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1995 1996 1996 1997
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
(Unaudited)
Revenues:
Rooms $ 9,438,933 $ 9,081,263 $5,158,068 $ 5,975,952
Food and beverage 5,615,230 5,784,278 3,066,634 2,859,890
Telephone 595,047 579,645 306,362 290,441
Other 336,964 307,491 165,062 934,916
------------------------------- ------------------------------
Total revenues 15,986,174 15,752,677 8,696,126 10,061,199
Cost and expenses:
Rooms 2,372,169 2,388,551 1,221,988 1,289,976
Food and beverage 5,278,322 5,641,523 2,864,581 2,770,704
Telephone 374,859 354,531 179,371 176,008
Administrative and general 1,699,693 1,800,357 982,982 888,163
Advertising and promotional 1,201,324 1,104,785 529,759 659,474
Energy 490,967 530,093 259,484 281,169
Repairs and maintenance 823,713 874,341 428,294 459,970
Depreciation and amortization 1,219,554 1,275,415 618,215 706,014
Taxes, insurance and rent 846,869 897,164 442,160 477,714
Interest 2,421,433 2,481,978 1,184,210 1,276,757
Management fees 428,637 393,867 219,039 230,775
------------------------------- ------------------------------
Total cost and expenses 17,157,540 17,742,605 8,930,083 9,216,724
------------------------------- ------------------------------
Net (loss) income $(1,171,366) $(1,989,928) $ (233,957) $ 844,475
=============================== ==============================
</TABLE>
See accompanying notes.
3
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Statements of Venturers' Deficit
<TABLE>
<S> <C>
Balance at December 31, 1994 $(3,025,822)
Capital contributions 152,750
Contribution of amounts due to affiliates 885,000
Net loss (1,171,366)
-----------
Balance at December 31, 1995 (3,159,438)
Capital contributions 199,750
Net loss (1,989,928)
-----------
Balance at December 31, 1996 (4,949,616)
Capital contributions (Unaudited) 862,000
Net income (Unaudited) 844,475
-----------
Balance at June 30, 1997 (Unaudited) $(3,243,141)
===========
</TABLE>
See accompanying notes.
4
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1995 1996 1996 1997
----------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
(Unaudited)
OPERATING ACTIVITIES
Net (loss) income $(1,171,366) $(1,989,928) $(233,957) $ 844,475
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,219,554 1,275,415 618,215 706,014
Gain on settlement of franchise fees -- -- -- (766,943)
Changes in operating assets and liabilities:
Accounts receivable 443,334 (33,232) (17,574) (538,673)
Inventories (54,816) (9,706) (18,566) (35,720)
Prepaid expenses and other current assets 3,948 (130,959) (179,960) (6,002)
Accounts payable and accrued expenses 433,109 788,974 161,903 (596,913)
Advance reservation deposits and other
deposits (119,281) 16,388 (155,483) (85,889)
Accrued interest 739,500 839,496 (47,783) 269,874
----------------------------- -----------------------------
Net cash provided by (used in) operating activities 1,493,982 756,448 126,795 (209,777)
INVESTING ACTIVITIES
Purchase of property and equipment (182,682) (823,260) (243,434) (364,017)
FINANCING ACTIVITIES
Restricted cash -- (705,004) (765,806) 309,126
Loan refinancing costs -- (102,990) (103,062) (16,902)
Proceeds of loans and other advances
from partners and affiliates -- 25,988 12,994 139,631
Repayment of loans and other advances
from partners and affiliates (150,833) (40,000) (40,000) (6,697)
Repayment of long-term debt (239,993) (220,397) (25,396) --
Repayment of capital leases (112,248) (81,473) (40,879) (46,964)
Capital contributions 152,750 199,750 87,250 195,000
----------------------------- -----------------------------
Net cash flows (used in) provided by
financing activities (350,324) (924,126) (874,899) 573,194
----------------------------- -----------------------------
Net increase (decrease) in cash and
cash equivalents 960,976 (990,938) (991,538) (600)
Cash and cash equivalents at beginning
of period 31,062 992,038 992,038 1,100
----------------------------- -----------------------------
Cash and cash equivalents at end of period $ 992,038 $ 1,100 $ 500 $ 500
============================= =============================
</TABLE>
5
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1995 1996 1996 1997
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $1,684,151 $1,642,482 $1,231,993 $1,006,883
=========================== =============================
NON-CASH INVESTING AND FINANCING
ACTIVITIES
Acquisition of equipment under
capital lease $ -- $ 163,492 $ -- $ --
=========================== =============================
Contribution of amounts due to affiliates $ 885,000 $ -- $ -- $ 667,000
=========================== =============================
</TABLE>
See accompanying notes.
6
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Notes to Financial Statements
December 31, 1996
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
G.B.H. Joint Venture (the Joint Venture), was formed on June 15, 1989 as a
general partnership to purchase and operate the Grand Bay Hotel (the Hotel),
which consists of 178 rooms and related hotel facilities and is located in
Miami, Florida. Upon formation, the Joint Venture partners were W-L Bay
Associates, Ltd. (W-L Bay) and T.A. at Coconut Grove, Ltd. (T.A.), an affiliate
of Tobishima Management, Ltd. (Tobishima), each having a 50% ownership interest.
On March 31, 1992, T.A. assigned its ownership interest to W/L GB Associates,
Ltd. (W/L), an entity with common ownership to W-L Bay. Profits and losses of
the Joint Venture are allocated to the venturer's capital accounts in accordance
with the respective percentage ownership of the Joint Venture. The venture
partners, in the past, have funded operating deficits and intend to fund the
operating deficit, if any, for 1997.
During 1995 and the six months ended June 30, 1997, W-L Bay and W/L or their
affiliates contributed amounts totaling $885,000 and $667,000 which were
previously advanced to the Joint Venture during 1994 and 1996, respectively.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Partnership to
concentrations of credit risk, consist principally of cash and accounts
receivable. The Partnership places its cash with high credit quality financial
institutions. However, the Partnership occasionally maintains cash balances in
excess of the FDIC insured limits, thereby failing to limit the amount of credit
exposure to any one financial institution. Concentrations of credit risk, with
respect to trade receivables, are reduced due to the Partnership's large number
of customers. The Partnership generally does not require collateral or other
security from these customers.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of amounts in operating accounts and highly
liquid investments, readily convertible into known amounts of cash, with
original maturities of three months or less.
7
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RESTRICTED CASH
Restricted cash consists of amounts placed in escrow in accordance with debt
agreements for replacement reserves, payment of certain fixed charges and debt
service shortfalls.
INVENTORIES
Inventories, consisting principally of food and beverage, linen, china, glass
and silverware, are stated at the lower of cost or market. Cost is determined on
a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and betterments are
capitalized. Maintenance, repairs and minor renewals are charged to expense as
incurred. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets which range from 5 to 40 years. In the case
of certain property under capital lease, amortization is provided over the
lesser of the useful life of the leased asset or the lease term.
INTANGIBLES
Intangibles relate to loan financing costs and goodwill established at the
formation of the Joint Venture. Amortization of goodwill is provided on the
straight-line method over 40 years. Amortization of loan financing costs is
provided on the interest method over the life of the related debt. Amortization
expense for the years ended December 31, 1995 and 1996 amounted to $26,813 and
$45,604, respectively. For the six months ended June 30, 1996 and 1997,
amortization expense amounted to $12,503 and $26,235, respectively.
ADVERTISING EXPENSE
The Joint Venture expenses costs of advertising as incurred. Advertising expense
for the years ended December 31, 1995 and 1996 totaled $278,227 and $281,244,
respectively. For the six months ended June 30, 1996 and 1997, advertising
expense amounted to $142,032 and $136,862, respectively.
8
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
No provision has been made for income taxes for the Joint Venture since, for
Federal and State income tax purposes, each venture partner includes its
proportionate share of income, loss or credits in its respective income tax
return.
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.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board 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 recognized for
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows are not sufficient to recover the assets'
carrying amount. The impairment loss is measured by comparing the fair value of
the assets to its carrying amount. The Joint Venture adopted Statement 121
effective January 1, 1996. The adoption of this accounting standard did not have
a material impact on the financial statements as of and for the year ended
December 31, 1996.
9
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Notes to Financial Statements (continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
-------------------------- -----------
(Unaudited)
<S> <C> <C> <C>
Land $ 9,309,625 $ 9,309,625 $ 9,309,625
Building and improvements 15,954,594 16,302,568 16,302,568
Furniture and fixtures and
capital assets 6,758,701 7,397,479 7,761,496
-------------------------- -----------
32,022,920 33,009,672 33,373,689
Less accumulated depreciation (8,059,590) (9,289,401) (9,969,180)
-------------------------- -----------
Property and equipment, net $23,963,330 $23,720,271 $23,404,509
========================== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1996 amounted to
$1,192,741 and $1,229,811, respectively. For the six months ended June 30, 1996
and 1997, depreciation expense totaled $605,712 and $679,779, respectively.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
------------------------ --------
(Unaudited)
<S> <C> <C> <C>
Real estate taxes $ 471,974 $ 491,640 $205,027
Franchise fees 797,168 816,943 50,000
Accrued salaries and wages 135,465 164,328 147,521
Other 571,194 378,844 324,492
------------------------ --------
Total $1,975,801 $1,851,755 $727,040
======================== ========
</TABLE>
10
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Notes to Financial Statements (continued)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
------------------------- -----------
<S> <C> <C> <C>
(Unaudited)
Mortgage payable, as amended, interest
only at 6.5% from January 1, 1995 to
December 31, 1996, 8% from January 1,
1997 to December 31, 1997 and 9.5% from
January 1, 1998 to December 31, 1999, at
which time $24,443,362 plus a yield
maintenance premium of $2,560,200 is due
(the yield premium will be $2,118,750 if
paid off on December 31, 1997; and
$2,329,000 if paid off on December 31,
1998); collateralized by a first mortgage
on all new property and equipment and an
assignment of management agreements and
certain licenses. $24,443,362 $24,443,362 $24,443,362
Mortgage payable, non-interest bearing,
principal payments of $25,397 and
$195,000 due in March 31, 1996 and
December 31, 1996, respectively. 220,397 -- --
------------------------- -----------
Total long-term debt 24,663,759 24,443,362 24,443,362
Less current portion 220,397 -- --
------------------------- -----------
Long-term debt, excluding current portion $24,443,362 $24,443,362 $24,443,362
========================= ===========
</TABLE>
11
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Notes to Financial Statements (continued)
5. OBLIGATIONS UNDER CAPITAL LEASES
The Joint Venture leases certain equipment, which is included in property and
equipment on the accompanying balance sheets, under capital leases. Future
minimum rental payments under capital leases as of December 31, 1996 are as
follows:
Year ending December 31
1997 $122,933
1998 86,315
1999 67,121
2000 43,162
2001 28,775
--------
Total minimum lease payments 348,306
Less amount representing interest 61,728
--------
Total obligations under capital leases 286,578
Less current portion 96,035
--------
Long-term portion $190,543
========
As of June 30, 1997, there has been no significant changes in the terms of the
leases.
12
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Notes to Financial Statements (continued)
6. LOANS FROM PARTNERS AND AFFILIATES
The Joint Venture is indebted on loans from partners and affiliates who are
related through common ownership. The loans are unsecured and due on demand with
accrued interest paid at maturity. The loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
---------------------- --------
<S> <C> <C> <C>
(Unaudited)
Loans from affiliates:
Sheraton Grand Hotel,
interest at 6% $425,000 $425,000 $425,000
CHC International, Inc.,
variable rate 139,429 140,233 133,536
---------------------- --------
564,429 565,233 558,536
Accrued interest 101,520 86,704 99,697
---------------------- --------
Total loans and accrued
interest from affiliates $665,949 $651,937 $658,233
====================== ========
Loans from Partners:
W-L Bay Associates, Ltd.,
unsecured, non-interest bearing $333,500 $333,500 $ 63,319
W-L GB Associates, Ltd.,
unsecured, non-interest bearing 333,500 333,500 63,319
---------------------- --------
Total loans from partners $667,000 $667,000 $126,638
====================== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
MANAGEMENT FEES AND RELATED PARTY TRANSACTIONS
The Joint Venture pays a management fee to Grand Bay Management Company, an
entity related through common ownership, to operate and manage the Hotel. Under
the terms of the Hotel Management Agreement (the Agreement), the management fee
consists of 3.5% of gross
13
<PAGE>
G.B.H. Joint Venture
d/b/a Grand Bay Hotel
Notes to Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
revenues, as defined. Effective March 1, 1995, the Agreement was amended whereby
the management fee was decreased to 2.5% of gross revenue, as defined, and the
term was extended to June 14, 2024. Management fee expense for the years ended
December 31, 1995 and 1996 totaled $428,637 and $393,867, respectively. For the
six months ended June 30, 1996 and 1997, management fee expense was $219,039 and
$230,775, respectively.
FRANCHISE AGREEMENT
The Hotel, pursuant to an agreement with Ciga Hotels Marketing, S.P.A. (CIGA),
operated as a CIGA hotel. The agreement provided for the payment of franchise
fees of 2% of gross room revenues as well as other charges as specified in the
agreement. Franchise fees for the year ended December 31, 1995 was $188,733,
which is included in advertising and promotional expenses in the accompanying
statement of operations. As of December 31, 1995 the cumulative amount owed to
CIGA was $916,943 and was in dispute. During 1996, no additional amounts were
accrued to CIGA. In connection with the negotiation of a settlement agreement,
the Partnership paid $100,000 to CIGA which was held in escrow at December 31,
1996.
On April 2, 1997, the Joint Venture received notification of acceptance by CIGA
of a negotiated settlement with respect to its franchise agreement disputes.
Pursuant to such settlement agreement, the Joint Venture will pay a total of
$150,000 to CIGA; $100,000 which was paid upon execution of the contract and the
balance due one year from the execution of the contract.
Accordingly, included in other income for the six months ended June 30, 1997 is
a gain on settlement of franchise fees of $766,943.
LITIGATION
In the normal course of business, the Joint Venture is subject to litigation.
Management believes that ultimate resolution of pending or threatened litigation
will not have a material adverse impact on the Joint Venture's financial
condition or results of operations, and, consequently, no loss provisions for
such claims have been reflected in the financial statements.
14
<PAGE>
Report of Independent Certified Public Accountants
The Partners
River House Associates
d/b/a The Sheraton Gateway Hotel
We have audited the accompanying balance sheets of River House Associates d/b/a
The Sheraton Gateway Hotel (a general partnership operating as a Joint Venture)
(the Joint Venture) as of December 31, 1995 and 1996, and the related statements
of operations and changes in venturers' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Joint
Venture'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 River House Associates d/b/a
The Sheraton Gateway Hotel at December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
September 23, 1997
1
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
--------------------------- -----------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash (including restricted cash of $82,519, $1,180
and $-0- at December 31, 1995 and 1996 and
June 30, 1997, respectively) $ 227,644 $ 187,486 $ 405,248
Accounts receivable, less allowance for doubtful accounts
of $46,315, $24,291 and $37,320 at December 31, 1995
and 1996 and June 30, 1997, respectively 1,130,995 878,481 466,526
Inventories 165,548 173,707 175,005
Prepaid expenses -- 124,523 313,017
Other current assets 26,629 49,674 23,874
---------------------------- -----------
Total current assets 1,550,816 1,413,871 1,383,670
Property and equipment, net 18,366,256 18,018,251 17,339,348
Other assets:
Deferred charges 263,177 95,607 11,150
Security deposits 127,782 127,782 131,635
---------------------------- -----------
Total other assets 390,959 223,389 142,785
---------------------------- -----------
Total assets $ 20,308,031 $ 19,655,511 $ 18,865,803
============================ ============
LIABILITIES AND VENTURERS' DEFICIT
Current liabilities:
Current portion of mortgage payable, net $ -- $ 21,263,608 $ --
Current portion of notes payable 55,400 43,738 14,199
Current portion of obligations under capital leases -- 93,093 99,882
Accounts payable 1,342,186 1,341,128 829,727
Accrued expenses 418,561 505,028 526,745
Taxes and insurance payable 368,951 365,178 397,374
Due to affiliates 462,220 754,133 719,919
Loans from affiliates 1,545,065 1,786,773 1,790,503
Other current liabilities 377,485 330,640 233,085
---------------------------- -----------
Total current liabilities 4,569,868 26,483,319 4,611,434
Mortgage payable 20,552,368 -- 21,500,000
Obligations under capital leases, less current portion 38,565 418,524 364,922
---------------------------- -----------
25,160,801 26,901,843 26,476,356
Commitments and contingencies
Venturers' deficit (4,852,770) (7,246,332) (7,610,553)
---------------------------- -----------
Total liabilities and venturers' deficit $ 20,308,031 $ 19,655,511 $ 18,865,803
============================ ============
</TABLE>
See accompanying notes.
2
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Statements of Operations and Changes in Venturers' Deficit
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
1995 1996 1996 1997
----------------------------- ----------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Rooms $ 7,441,765 $ 8,626,251 $ 4,446,831 $ 5,209,148
Food and beverage 2,410,510 2,728,303 1,353,015 1,653,411
Telephone 338,685 436,768 223,537 240,333
Other 204,843 204,603 105,443 171,172
----------------------------- ----------------------------
10,395,803 11,995,925 6,128,826 7,274,064
Cost and expenses:
Rooms 2,150,348 2,298,238 1,131,942 1,396,582
Food and beverage 2,279,307 2,588,986 1,297,252 1,358,788
Telephone 282,044 280,659 150,939 153,284
Administrative and general 1,312,135 1,663,041 785,806 771,071
Advertising and promotion 771,878 972,618 444,416 488,372
Energy 529,909 592,240 284,585 305,978
Repairs and maintenance 612,047 622,489 284,147 360,624
Depreciation and amortization 1,482,041 1,664,285 759,051 935,657
Taxes and insurance 424,463 525,169 320,673 293,229
Interest 1,980,403 2,102,700 999,717 1,052,162
Amortization of mortgage discount 535,812 567,340 283,670 236,392
Management fees 207,079 240,132 122,723 145,680
Franchise fees 148,751 172,550 88,961 104,183
Other 81,022 99,040 42,131 36,283
----------------------------- ----------------------------
12,797,239 14,389,487 6,996,013 7,638,285
----------------------------- ----------------------------
Net loss (2,401,436) (2,393,562) (867,187) (364,221)
Venturers' deficit at beginning of period (2,451,334) (4,852,770) (4,852,770) (7,246,332)
----------------------------- ----------------------------
Venturers' deficit at end of period $ (4,852,770) $ (7,246,332) $(5,719,957) $(7,610,553)
============================= ============================
</TABLE>
See accompanying notes.
3
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
1995 1996 1996 1997
---------------------------------- ----------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,401,436) $(2,393,562) $(867,187) $ (364,221)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,482,041 1,664,285 759,051 935,657
Amortization of mortgage discount 535,812 567,340 283,670 236,392
Changes in operating assets and
liabilities:
Accounts receivable (55,453) 252,514 (285,593) 411,955
Inventories (23,106) (8,159) (9,895) (1,298)
Prepaid expenses and other
current assets 57,540 (147,568) (246,667) (199,411)
Security deposit (114,634) - - -
Accounts payable 498,626 (1,058) 338,284 (511,401)
Accrued expenses 64,675 86,467 39,338 21,717
Taxes and insurance payable 4,011 (3,773) 51,284 32,196
Due to affiliates 240,132 780,193 (34,214)
Other current liabilities 233,940 4,936 (546,650) (97,555)
----------------------------- ---------------------------
Net cash provided by operating activities 282,016 261,554 295,828 429,817
Investing activities
Purchase of property and equipment (2,893,431) (580,238) (531,691) (139,433)
Financing activities
Proceeds (repayments) of loans from
affiliates 473,345 241,708 (39,284) 3,730
Proceeds from notes payable 137,378 - - -
Restricted cash 175,322 81,339 82,519 1,180
Repayment of obligations under capital
leases - (56,855) (23,689) (46,813)
Repayment of notes payable (43,413) (50,227) (27,175) (29,539)
Proceeds from mortgage payable 2,167,600 143,900 143,900 -
Increase in deferred charges (238,967) - - -
----------------------------- ---------------------------
Net cash provided by (used in) financing
activities 2,671,265 359,865 136,271 (71,442)
----------------------------- ---------------------------
Net increase (decrease) in cash 59,850 41,181 (99,592) 218,942
Cash, unrestricted beginning of period 85,275 145,125 145,125 186,306
----------------------------- ---------------------------
Cash, unrestricted end of period $ 145,125 $ 186,306 $ 45,533 $ 405,248
============================= ===========================
</TABLE>
4
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
1995 1996 1996 1997
----------------------- -----------------------
(Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $1,761,508 $1,935,398 $ 999,717 $1,124,662
======================= =======================
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES
Acquisition of equipment under capital
leases $ - $ 568,472 $ 332,256 $ -
======================= =======================
</TABLE>
See accompanying notes.
5
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Notes to Financial Statements
December 31, 1995 and 1996
and June 30, 1997 (Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
River House Associates (the Joint Venture), was formed on December 8, 1982 as a
general partnership between Preferred Properties Fund 81, Ltd. (Preferred) and
Miami Airport Hotel Associates, Ltd. (MAHA) to purchase and operate a 408 room
hotel (the Hotel) located in Miami, Florida. On March 30, 1993, Preferred
assigned its 70% ownership interest in the Joint Venture to River Orchids
Associates, Ltd. (Orchids).
Profits and losses are allocated in accordance with each venturers' respective
ownership interest in the Joint Venture as follows:
Orchids 70%
MAHA 30%
Orchids and certain affiliates in the past have funded operating deficits and
intend to fund operating deficits, if any, for 1997. Additionally, management
refinanced the existing $21.5 million mortgage during July 1997 (see Note 3).
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Joint Venture to
concentrations of credit risk, consist principally of cash and accounts
receivable. The Joint Venture places its cash with high credit quality financial
institutions. However, the Joint Venture occasionally maintains cash balances in
excess of the FDIC insured limits, thereby failing to limit the amount of credit
exposure to any one financial institution. Concentrations of credit risk, with
respect to trade receivables, are reduced due to the Joint Venture's large
number of customers. The Joint Venture generally does not require collateral or
other security from these customers.
CASH
Cash consists of funds in operating accounts and restricted cash relating to
reserves for the renovation of the Hotel.
6
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories, consisting principally of food and beverage, linen, china, glass
and silverware, are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, after adjustment for permanent
impairment which occurred on March 30, 1993 upon Preferred's assignment of its
70% ownership interest to Orchid. Major renewals and betterments are
capitalized. Maintenance, repairs and minor renewals are expensed as incurred.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets which range from 5 to 25 years. Depreciation expense
includes amortization of assets recorded under capital leases.
DEFERRED CHARGES
Deferred charges represent costs incurred and capitalized in obtaining
refinancing on the Joint Venture's long-term debt. Such costs are amortized on
the interest method over the life of the loan.
LONG-LIVED ASSETS
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 Joint Venture adopted Statement 121 in the first
quarter of 1996 and the effect of adoption was not material to the financial
statements.
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.
7
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
The Joint Venture expenses cost of advertising as incurred. Advertising expense
for the years ended December 31, 1995 and 1996 was $263,886 and $380,549,
respectively. For the six months ended June 30, 1996 and 1997, advertising
expense was $144,194 and $188,328, respectively.
INCOME TAXES
The Joint Venture is a general partnership and not subject to Federal or state
income taxes and none have been provided in the accompanying financial
statements. However, the Joint Venture is required to file informational tax
returns and the venturers are required to include their share of Joint Venture
income or loss in their respective tax returns.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
--------------------------- -----------
(Unaudited)
<S> <C> <C> <C>
Land $ 3,819,048 $ 3,819,048 $ 3,819,048
Building and improvements 11,803,387 12,149,573 12,202,589
Furniture, fixtures and equipment 5,239,550 6,106,710 6,193,127
Vehicles 137,378 137,378 137,378
Construction in progress 64,636 -- --
----------- ----------- -----------
21,063,999 22,212,709 22,352,142
Less accumulated depreciation (2,697,743) (4,194,458) (5,012,794)
----------- ----------- -----------
$18,366,256 $18,018,251 $17,339,348
=========== =========== ===========
</TABLE>
8
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Notes to Financial Statements (continued)
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
------------------------------------ -------------------
(Unaudited)
<S> <C> <C> <C>
Mortgage payable, interest only at 9%, payable in monthly
installments through June 1997 at which time the
principal balance is due; collateralized by a
first mortgage on the Joint Venture's real property
and equipment $ 21,356,100 $ 21,500,000 $ 21,500,000
Less unamortized discount on mortgage (803,732) (236,392) --
------------------------------------ -------------------
Mortgage payable, net 20,552,368 21,263,608 21,500,000
Less current portion (see paragraph below regarding
refinancing and classification) -- 21,263,608 --
==================================== ===================
Mortgage payable, excluding current portion $ 20,552,368 $ -- $ 21,500,000
==================================== ===================
Notes payable at 7.3% interest, payable in monthly
installments of principal and interest, maturing
July 20, 1997; collateralized by vehicles with
a carrying value of $86,818, $65,107 and $54,263
at December 31, 1995 and 1996, and June 30, 1997,
respectively $ 71,209 $ 30,273 $ 8,923
Note payable at 8.75% interest, payable in monthly
installments of principal and interest,
maturing November 3, 1997; collateralized
by a vehicle with a carrying value of $24,528,
$19,235 and $16,351 at December 31, 1995 and 1996
and June 30, 1997, respectively 22,756 13,465 5,276
------------------------------------ -------------------
93,965 43,738 14,199
Less current portion 55,400 43,738 14,199
------------------------------------ -------------------
Notes payable, long-term portion $ 38,565 $ -- $ --
==================================== ===================
</TABLE>
On September 30, 1994, the Joint Venture entered into an agreement (the Loan
Agreement) with Equitable Life Assurance Society of the United States (the
Lender), to refinance its mortgage note payable and to obtain additional funding
to renovate the Hotel. The mortgage note (the Note) in the amount of $21,500,000
consolidated the outstanding loan balance of $17,886,736 at June 1, 1994 with an
additional $3,613,264 which was advanced to the Joint Venture to fund
renovations of the Hotel.
9
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Notes to Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
The Note requires monthly Excess Cash Flow Payments, as defined, to be deposited
into an escrow account established by the lender which will be applied annually:
first, to the payment of real estate taxes; second, to the funding of an "FF&E
Reserve Account", as defined, and third, to reduce the unpaid principal balance
of the Note.
Additionally, in the event of a sale of the Hotel or a refinancing or prepayment
of the Note, the lender is entitled to a payment of additional interest equal to
50% of the Net Equity, as defined.
On July 9, 1997, the Joint Venture entered into a $25,625,000 promissory note
(the New Note). The net proceeds of the New Note were used (i) to pay the
outstanding balance on the Note of $21,500,000 plus accrued interest, (ii) to
pay approximately $2,800,000 of related party payables, and (iii) to increase
working capital by approximately $275,000. The New Note calls for monthly
interest only payments at the one month LIBOR rate plus 2.75% through July 1999,
the maturity date. In addition, the New Note requires monthly payments based on
Net Cash Flow, as defined. The classification of mortgage payable as long-term
at June 30, 1997 reflects the terms of the New Note described above.
4. OBLIGATIONS UNDER CAPITAL LEASES
The Joint Venture leases certain equipment under capital leases. Future minimum
rental payments under non-cancelable capital leases are as follows:
Year ending December 31
1997 $159,288
1998 159,288
1999 159,288
2000 159,288
2001 48,290
--------
Total minimum lease payments 685,442
Less amount representing interest 173,825
--------
Total obligation under capital leases 511,617
Less current portion 93,093
--------
Obligations under capital leases, long-term portion $418,524
========
As of June 30, 1997, there have been no significant changes in the terms of the
leases.
10
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
LOANS FROM AFFILIATES
The Joint Venture's loans from affiliates consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
---------------------- ----------
(Unaudited)
<S> <C> <C> <C>
Tampa Grand Hotel including interest
accrued at 6%, unsecured, due on demand $ 227,515 $ 241,529 $ 247,006
W/L Liquidating Trust, including
interest accrued at 6%, unsecured, due
on demand 151,800 160,404 164,379
River Orchids Associates, Ltd. including
interest accrued at 6%, unsecured, due
on demand 1,165,750 1,384,840 1,379,118
---------------------- ----------
$1,545,065 $1,786,773 $1,790,503
====================== ==========
</TABLE>
MANAGEMENT FEES
The Hotel is operated under a management agreement with an entity related
through common ownership. The agreement, which expires May 30, 2014, provides
for payments of 2.0% of monthly Gross Revenues, as defined. Management fee
expense for the year ended December 31, 1995 and 1996 totaled $207,079 and
$240,132, respectively. For the six months ended June 30, 1996 and 1997,
management fee expense was $122,723 and $145,680, respectively. Due to
affiliates represents the cumulative amount of unpaid management fees.
REIMBURSABLE EXPENSES
Included in accounts payable at December 31, 1995 and 1996 are $ 72,684 and $
515,278, respectively, which represents amounts due to affiliates for
reimbursement of expenses paid on behalf of the Hotel. At June 30, 1997, amounts
included in accounts payable due to affiliates for reimbursement of expenses
totaled $390,318.
11
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Notes to Financial Statements (continued)
6. LEASING REVENUES
Approximate future minimum rentals from a non-cancelable lease are as follows:
Year ending December 31
1997 $ 40,000
1998 40,000
1999 33,333
--------
$113,333
========
On November 4, 1994, the Joint Venture entered into a five year lease with an
unrelated individual to operate the Gift Shop for an annual base rent of
$40,000, or 10% of gross sales as defined, whichever is greater. Total income
under the lease agreement is included with other revenues in the accompanying
statements of operations.
7. COMMITMENTS AND CONTINGENCIES
FRANCHISE AGREEMENT
The Hotel is operated under a franchise agreement with the Sheraton Corporation.
The agreement, which expires on July 1, 1997, provides for the payment of
franchise fees of 2% of gross room revenues as well as other charges as
specified in the agreement. Franchise fees for the years ended December 31, 1995
and 1996 were $148,751 and $172,550, respectively. For the six months ended June
30, 1996 and 1997, franchise fees were $88,961 and $104,183, respectively.
LITIGATION
In the normal course of business, the Joint Venture is subject to litigation.
Management believes that the ultimate resolution of pending or threatened
litigation will not have a material adverse impact on the Joint Venture's
financial condition or results of operations, and, consequently, no loss
provisions for such claims have been reflected in the financial statements.
12
<PAGE>
River House Associates
d/b/a The Sheraton Gateway Hotel
Notes to Financial Statements (continued)
8. SUBSEQUENT EVENTS
The Joint Venture is currently negotiating a contribution agreement whereby the
Hotel and certain related assets and liabilities will be contributed in exchange
for certain partnership interests which, it is contemplated, will qualify as a
tax free contribution under section 721 of the Internal Revenue Code.
13
<PAGE>
Report of Independent Certified Public Accountants
The Partners
W-L Tampa, Ltd.
We have audited the accompanying balance sheets of W-L Tampa, Ltd. as of
December 31, 1995 and 1996, and the related statements of operations and
partners' 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 W-L Tampa, Ltd. at December 31,
1995 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Miami, Florida
September 19, 1997
1
<PAGE>
W-L Tampa, Ltd.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
------------------------------ -----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 401,023 $ 468,258 $ 924,418
Restricted cash 577,462 505,642 275,592
Accounts receivable--trade, less allowance
for doubtful accounts of $23,994, $7,675
and $7,226 at December 31, 1995 and 1996
and June 30, 1997, respectively 849,073 849,632 850,106
Inventories 398,786 410,078 388,385
Prepaid expenses 195,988 375,243 677,508
------------------------------- --------------
Total current assets 2,422,332 2,608,853 3,116,009
Property and equipment, net 21,883,034 21,549,657 21,385,599
Other assets:
Deferred charges 416,341 321,879 322,091
Due from affiliates 1,020,525 1,065,287 1,087,423
------------------------------- --------------
Total other assets 1,436,866 1,387,166 1,409,514
------------------------------- --------------
Total assets $ 25,742,232 $ 25,545,676 $ 25,911,122
=============================== ==============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable--trade $ 939,771 $ 941,865 $ 625,747
Accrued expenses 911,964 957,186 753,688
Current portion of obligation under capital lease 19,060 20,160
Loans from affiliate 395,337 416,395 426,808
------------------------------- --------------
Total current liabilities 2,247,072 2,334,506 1,826,403
Obligation under capital lease 79,004 68,641
Mortgage note payable and related interest 46,692,518 48,357,087 49,259,097
------------------------------- --------------
48,939,590 50,770,597 51,154,141
Commitments and contingencies
Partners' deficit (23,197,358) (25,224,921) (25,243,019)
------------------------------- --------------
Total liabilities and partners' deficit $ 25,742,232 $ 25,545,676 $ 25,911,122
=============================== ==============
</TABLE>
See accompanying notes.
2
<PAGE>
W-L Tampa, Ltd.
Statements of Operations and Partners' Deficit
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1995 1996 1996 1997
------------------------------- -------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Rooms $ 6,942,639 $ 7,586,814 $ 4,236,369 $ 4,845,979
Food and beverage 6,194,539 7,182,945 3,705,968 4,194,737
Telephone 296,975 264,630 147,274 133,753
Other operating revenue 259,799 218,182 125,137 230,541
------------------------------- -------------------------------
13,693,952 15,252,571 8,214,748 9,405,010
Costs and expenses:
Rooms 1,510,233 1,676,030 881,828 965,142
Food and beverage 4,707,181 5,600,445 2,915,038 3,153,343
Telephone 197,074 191,525 101,786 99,853
Administrative and general 1,504,729 1,663,929 828,989 935,650
Sales, advertising and public
relations 1,034,479 1,085,610 547,474 757,910
Repairs and maintenance 482,771 546,142 281,966 275,442
Utility expenses 640,706 618,902 324,294 310,558
Property taxes and insurance 632,334 619,513 325,871 328,836
Interest expense 4,552,465 4,143,479 2,081,185 2,136,041
Depreciation and amortization 1,036,490 1,134,559 591,672 460,333
------------------------------- -------------------------------
16,298,642 17,280,134 8,880,103 9,423,108
------------------------------- -------------------------------
Net loss (2,604,690) (2,027,563) (665,355) (18,098)
Partners' deficit at beginning
of period (20,592,668) (23,197,358) (23,197,358) (25,224,921)
------------------------------- -------------------------------
Partners' deficit at end of period $(23,197,358) $(25,224,921) $(23,862,713) $(25,243,019)
=============================== ===============================
</TABLE>
See accompanying notes.
3
<PAGE>
W-L Tampa, Ltd.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30
1995 1996 1996 1997
-------------------------------- -------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,604,690) $(2,027,563) $ (665,355) $ (18,098)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,036,490 1,134,559 591,672 460,333
Deferred interest expense 2,405,386 1,664,569 828,651 866,194
Changes in operating assets and liabilities:
Accounts receivable (520,042) (559) 319,259 (474)
Due from affiliates 885,980 (44,762) (14,786) (22,136)
Inventories (51,784) (11,292) 33,690 21,693
Prepaid expenses (51,059) (179,255) (58,348) (302,265)
Other assets (351,851) -- -- --
Accounts payable 462,685 2,094 (279,891) (316,118)
Accrued expenses (1,203,098) 45,222 (239,465) (203,498)
Due to affiliate 395,337 21,058 10,471 10,413
-------------------------------- -------------------------------
Net cash provided by operating activities 403,354 604,071 525,898 496,044
INVESTING ACTIVITY
Purchase of property and equipment (196,835) (595,700) (309,154) (260,671)
-------------------------------- -------------------------------
Net cash used in investing activity (196,835) (595,700) (309,154) (260,671)
FINANCING ACTIVITIES
Repayment of obligation under capital lease -- (12,956) -- (9,263)
Restricted cash (577,462) 71,820 241,665 230,050
Net cash (used in) provided by financing
activities (577,462) 58,864 241,665 220,787
-------------------------------- -------------------------------
Net (decrease) increase in cash (370,943) 67,235 458,409 456,160
Cash at beginning of period 771,966 401,023 401,023 468,258
-------------------------------- -------------------------------
Cash at end of period $ 401,023 $ 468,258 $ 859,432 $ 924,418
================================ ===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 3,347,271 $ 2,462,253 $1,252,234 $1,234,031
================================ ===============================
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Acquisition of equipment under capital leases $ -- $ 111,020 $ 111,020 $ --
================================ ===============================
</TABLE>
See accompanying notes.
4
<PAGE>
W-L Tampa, Ltd.
Notes to Financial Statements
December 31, 1996 and 1995 and
June 30, 1997 (Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
W-L Tampa, Ltd. (a Florida Limited Partnership) (the Partnership) was formed on
January 4, 1988. On June 1, 1988 the Partnership purchased the 325-room Sheraton
Grand Hotel located in Tampa, Florida.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Partnership to
concentrations of credit risk, consist principally of cash and accounts
receivable. The Partnership places its cash with high credit quality financial
institutions. However, the Partnership occasionally maintains cash balances in
excess of the FDIC insured limits, thereby failing to limit the amount of credit
exposure to any one financial institution. Concentrations of credit risk, with
respect to trade receivables, are reduced due to the Partnership's large number
of customers. The Partnership generally does not require collateral or other
security from these customers.
RESTRICTED CASH
Restricted cash consists of amounts placed in escrow in accordance with debt
agreements for replacement reserves, payment of certain fixed charges and debt
service shortfalls.
INVENTORIES
Inventories consist of food, beverage and operating supplies and are stated at
the lower of cost or market. Cost is determined by the first-in, first-out
method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on either
the straight-line method or an accelerated method over the estimated useful
economic lives of the assets which range from 5 to 39 years.
5
<PAGE>
W-L Tampa, Ltd.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 1995, the Financial Accounting Standards Board 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 recognized for
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows are not sufficient to recover the asset's
carrying amount. The impairment loss is measured by comparing the fair value of
the assets to their carrying amount. The Partnership adopted Statement 121
effective January 1, 1996. The adoption of this accounting standard did not have
a material impact on the financial statements as of and for the year ended
December 31, 1996.
INTANGIBLE ASSETS
Intangible assets subject to amortization include loan closing costs and
franchise fees. Loan closing costs are being amortized on the interest method
over the life of the related loan. Franchise fees are amortized over the life of
the agreement on a straight-line basis over a period of 2 to 20 years.
Amortization expense for the years ended December 31, 1995 and 1996 amounted to
$33,624 and $94,462, respectively. For the six months ended June 30, 1996 and
1997, amortization expense amounted to $33,185 and $35,604, respectively.
ADVERTISING EXPENSE
The Partnership expenses advertising costs as incurred. Advertising expenses for
the years ended December 31, 1995 and 1996 totaled $229,979 and $230,226,
respectively. For the six months ended June 30, 1996 and 1997, advertising
expenses totaled $102,906 and $137,230, respectively.
INCOME TAXES
No provision has been made for income taxes for the Partnership since, for
Federal and state income tax purposes, each partner includes its proportionate
share of income, loss or credits in its respective income tax return.
6
<PAGE>
W-L Tampa, Ltd.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
------------------------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Land $ 4,995,140 $ 4,995,140 $ 4,995,140
Building 21,212,266 21,428,817 21,428,817
Furniture, fixtures and equipment 3,615,306 3,524,873 3,785,544
Leased equipment 111,020 111,020
-------------------------------------------------
29,822,712 30,059,850 30,320,521
Less accumulated depreciation and
amortization (7,939,678) (8,510,193) (8,934,922)
------------------------------- --------------
$21,883,034 $21,549,657 $21,385,599
=============================== ==============
</TABLE>
Depreciation expense totaled $1,002,866 and $1,040,097 for the years ended
December 31,1995 and 1996, respectively. For the six months ended June 30, 1996
and 1997, depreciation totaled $558,487 and $424,729, respectively. Included in
depreciation expense is amortization of assets recorded under capital lease.
7
<PAGE>
W-L Tampa, Ltd.
Notes to Financial Statements (continued)
3. MORTGAGE NOTE PAYABLE
Mortgage note payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
------------------------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Mortgage Note Payable--Secured by
property and equipment, accounts
receivable, inventories and other
assets $30,667,000 $30,667,000 $30,667,000
Interest payable on Mortgage
Note--Secured by property and
equipment, accounts receivable,
inventories and other assets 12,660,075 12,660,075 12,660,075
Interest incurred on the above note
from December 1, 1993 with payment
due December 1, 2000--Secured by
property and equipment, accounts
receivable, inventories and other
assets 3,365,443 5,030,012 5,932,022
------------------------------- ---------------
$46,692,518 $48,357,087 $49,259,097
=============================== ===============
</TABLE>
In December 1993, the Partnership entered into a modification agreement with the
mortgage lender on the $30,667,000 mortgage note payable. Pursuant to this
agreement, interest is payable monthly at 8% through November 30, 1997, 8.5%
from December 1, 1997 through November 30, 1999 and 9% from December 1, 1999
through December 1, 2000 (maturity date). The agreement also provides for an
internal rate of return equal to 9% from December 1993 to the date of maturity
or prepayment. In addition to the monthly interest payments, the borrower must
provide for amortization of principal based on "Net Cash Flow", as defined in
the modification agreement, due and payable on an annual basis.
8
<PAGE>
W-L Tampa, Ltd.
Notes to Financial Statements (continued)
3. MORTGAGE NOTE PAYABLE (CONTINUED)
At the time of the modification, the mortgage note payable had accrued interest
totaling $12,660,075. Pursuant to the modification agreement, the accrued
interest payable will continue to accrue interest at the stated interest rates
through maturity, at which time all amounts will be due and payable. Provided
that the Partnership is not in default, and the Partnership prepays the
principal balance on the $30,667,000 mortgage note in full and pays all other
costs and amounts due during the month of October 2000, the Partnership shall be
released from the obligation to pay the accrued interest payable, including
accrued interest thereon of $1,995,081, $3,211,451, and $3,873,833 at December
31, 1995 and 1996 and June 30, 1997, respectively.
4. OBLIGATION UNDER CAPITAL LEASE
The Partnership leases certain equipment, which is included in property and
equipment on the accompanying balance sheets, under a capital lease. Future
minimum rental payments under the noncancelable capital lease are as follows:
<TABLE>
<CAPTION>
Year ending December 31
<S> <C>
1997 $ 29,142
1998 29,142
1999 29,142
2000 29,142
2001 7,286
------------
Total minimum lease payments 123,854
Less amount representing interest 25,790
------------
Present value of net minimum payments 98,064
Less current maturities 19,060
------------
Long-term obligation at December 31, 1996 $ 79,004
============
</TABLE>
As of June 30, 1997, there has been no significant changes in the terms of the
lease.
9
<PAGE>
W-L Tampa, Ltd.
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
DUE FROM AFFILIATES
The Partnership has made loans to affiliates who are related through common
ownership. The loans are unsecured and due on demand with accrued interest paid
at maturity. The loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
------------------------------ --------------
(Unaudited)
<S> <C> <C> <C>
Lauderdale Land Company $ 99,116 $ 99,116 $ 99,116
CHI, Inc., including interest
at 6% 84,167 88,379 90,462
W/L Inn Associates, Ltd. 11,293 11,293 11,293
Six Daisies, Inc. 1,255 1,255 1,255
Sherwood M. Weiser 50,965 50,965 50,965
Grand Bay Hotel, including interest
at 6% 485,646 511,216 523,861
Sheraton River House, including
interest at 6% 227,614 239,646 245,597
Weiser-Lefton Ltd., including
interest at 6% 56,302 59,250 60,707
Miami Airport Hotel Assn. 4,167 4,167 4,167
------------------------------ --------------
$1,020,525 $1,065,287 $1,087,423
============================== ==============
</TABLE>
The Partnership intends to collect amounts due from affiliates out of their
current earnings, owner contributions, or the sale or refinancing proceeds.
There are no assurances that amounts will be paid currently. Therefore, all
amounts have been classified as long-term.
10
<PAGE>
W-L Tampa, Ltd.
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
LOANS FROM AFFILIATE
The Partnership has loans from affiliates who are related through common
ownership. The loans are unsecured and due on demand with accrued interest paid
at maturity. The loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
---------------------------- --------------
(Unaudited)
<S> <C> <C> <C>
Greater CSMS Corporation, including
interest at 6% $395,337 $ -- $ --
Weiser & Lefton Liquidating Trust.,
including interest
at 6% -- 416,395 426,808
---------------------------- -------------
$395,337 $416,395 $426,808
============================ =============
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
MANAGEMENT AGREEMENT
The Partnership entered into a management agreement, expiring February 2018,
with a related party, affiliated through common ownership. The agreement has
been modified to provide for a fee of 2.5% of gross revenue. The management fee
expense for the years ended December 31, 1995 and 1996 was $342,347 and
$381,163, respectively. For the six months ended June 30, 1996 and 1997,
management fee expense was $205,366 and $235,130, respectively. These fees are
included in administrative and general expenses.
FRANCHISE AGREEMENTS
The Partnership is currently obligated under a license agreement expiring
September 1997, with Sheraton Inns, Inc. Under the terms of this agreement, the
Partnership pays a monthly franchise fee equal to 5% of gross room revenues.
Sheraton agreed to lower the fee effective May 1, 1994 to 4% until December 31,
1996. For the years ended December 31, 1995 and 1996, the franchise
11
<PAGE>
W-L Tampa, Ltd.
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
fees incurred under this agreement were $305,985 and $303,473, respectively. The
franchise fees for the six months ended June 30, 1996 and 1997 were $169,455 and
$242,299, respectively. These fees are included in sales, advertising and public
relations expense.
In October 1994, the Partnership entered into a two-year license agreement with
Don Shula's Steakhouses, Inc. Under the terms of this agreement, the Partnership
paid a one-time license fee of $50,000 and is required to pay a monthly
franchise fee based on a percentage of gross food and beverage revenue. The
franchise fee percentage in year one ranges from 10% on the first $2,500,000 in
revenues to 13% on revenues of $4,000,000 or more. In year two, the franchise
fee percentage ranges from 12% on the first $2,500,000 of revenues to 15% on
revenues of $4,000,000 or more. The license agreement expired in October 1996
and the Partnership is in the process of negotiating a new agreement and has
been operating under the original agreement. For the years ended December 31,
1995 and 1996, the franchise fee incurred under this agreement was $275,922 and
$453,746, respectively. The franchise fee for the six months ended June 30, 1996
and 1997 was $231,805 and $240,474, respectively. These fees are included in
food and beverage costs.
LITIGATION
In the normal course of business, the Partnership is subject to litigation.
Management believes that ultimate resolution of pending or threatened litigation
will not have a material adverse impact on the Partnership's financial condition
or results of operations, and, consequently, no loss provision for such claims
have been reflected in the financial statements.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors
SCP (Buttes) Inc.
We have audited the accompanying balance sheet of SCP (Buttes) Inc. as of
December 31, 1996, and the related statements of operations, changes in
stockholder's equity, and cash flows for the year 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 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 SCP (Buttes) Inc. as of
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.
/s/ Coopers & Lybrand LLP
Phoenix, Arizona
March 7, 1997 except for Note 12
as to which the date is October 7, 1997
<PAGE>
SCP (BUTTES) INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
DECEMBER 31, 1997 1996
1996 (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
ASSETS
Investments in hotel property, at cost:
<S> <C> <C> <C>
Buildings & Improvements 28,912,153 28,955,211 28,853,296
Furniture and equipment 3,828,307 4,254,138 3,476,689
Less: accumulated depreciation (4,438,957) (5,247,925) (3,648,539)
----------- ----------- -----------
Net investment in hotel property $28,301,503 $27,961,424 $28,681,446
Cash and cash equivalents 1,015,065 1,262,877 703,700
Cash restricted for capital expenditures 2,565,728 2,632,828 2,356,626
Accounts receivable, net of allowance for
doubtful accounts of $39,854, $45,184
(unaudited) and $55,450 (unaudited),
respectively 1,884,156 1,491,896 2,225,397
Inventories 838,549 747,763 825,306
Prepaid expenses and deposits 113,815 76,633 65,007
Deferred income taxes 2,935,759 2,930,422 2,983,088
----------- ----------- -----------
Total Assets $37,654,575 $37,103,843 $37,840,570
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Note payable $34,300,000 $33,300,000 $35,100,000
Accounts payable and accrued expenses 1,506,801 939,213 929,572
Taxes payable 467,893 375,780 682,807
Advance deposits 681,076 211,693 183,485
Capital lease obligation 10,030 14,797 65,025
Other liabilities 491,757 491,757 497,018
----------- ----------- -----------
Total liabilities 37,457,557 35,333,240 37,457,907
Stockholder's equity:
Common stock, no par, 5,000 shares
authorized, 200 shares issued and
outstanding 1,000,000 1,000,000 1,000,000
Retained earnings 5,212,477 6,786,062 5,398,122
----------- ----------- -----------
6,212,477 7,786,062 6,398,122
Less distribution at acquisition (6,015,459) (6,015,459) (6,015,459)
----------- ----------- -----------
Total stockholder's equity 197,018 1,770,603 382,663
----------- ----------- -----------
Total liabilities and stockholder's
equity $37,654,575 $37,103,843 $37,840,570
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SCP (BUTTES) INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
DECEMBER 31, 1997 1996
1996 (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
Revenues
<S> <C> <C> <C>
Rooms $13,838,840 $ 8,499,488 $ 7,884,067
Food and beverage 12,003,255 6,729,024 6,638,650
Other operating revenues 1,231,327 637,133 699,323
Interest income 144,844 87,197 62,204
Other income 8,918
----------- ----------- -----------
Total revenues 27,227,184 15,952,842 15,284,244
----------- ----------- -----------
Expenses:
Rooms 3,542,168 1,800,077 1,718,912
Food and beverage 9,084,195 4,835,768 4,771,453
Other operating costs 973,038 533,175 535,728
Administrative and general 2,093,731 1,115,602 1,030,505
Management Fees 1,434,483 1,007,272 930,300
Marketing 1,770,325 852,668 899,046
Energy costs 794,476 337,796 365,670
Property operating and maintenance 993,468 518,283 514,615
Land rent 649,452 391,689 362,296
Property taxes and insurance 178,079 80,400 72,869
Interest expense 2,184,945 1,045,555 1,109,821
Depreciation expense 1,472,417 808,948 681,999
----------- ----------- -----------
Total expenses 25,170,777 13,327,233 12,993,214
----------- ----------- -----------
Income before provision for
income taxes 2,056,407 2,625,609 2,291,030
Provision for income taxes (887,589) (1,052,024) (936,567)
----------- ----------- -----------
Net income $ 1,168,818 $ 1,573,585 $ 1,354,463
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SCP (BUTTES) INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------- Retained Distribution
Shares Amount Earnings at Acquisition Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 (unaudited) 200 $1,000,000 $4,043,659 $(6,015,459) $ (971,800)
------ ---------- ---------- ----------- ----------
Net income 1,168,818 1,168,818
------ ---------- ---------- ----------- ----------
Balance at December 31, 1996 200 1,000,000 5,212,477 (6,015,459) 197,018
------ ---------- ---------- ----------- ----------
Net income (unaudited) 1,573,585 1,573,585
------ ---------- ---------- ----------- ----------
Balance at June 30, 1997 (unaudited) 200 $1,000,000 $6,786,062 $(6,015,459) $1,770,603
====== ========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SCP (BUTTES) INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
DECEMBER 31, 1997 1996
1996 (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 1,168,818 $ 1,573,585 $ 1,354,463
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 1,472,417 808,948 681,999
Provision for doubtful accounts 13,900 6,514 27,279
Deferred income taxes 186,929 5,337 139,600
Gain on sale of property and equipment (3,040)
Net changes in operating assets and liabilities:
Accounts receivable 118,478 385,746 (236,140)
Inventories (18,943) 90,786 (5,700)
Prepaid expenses and deposits (74,148) 37,182 (25,340)
Accounts payable and accrued expenses 243,463 (557,069) (323,247)
Taxes payable 241,739 (92,113) 456,653
Advance deposits 352,295 (469,383) (145,296)
Capital lease obligations and other liabilities (16,296) 4,767 (21,556)
----------- ----------- -----------
Net cash provided by operating activites 3,685,612 1,794,300 1,902,715
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (580,711) (468,869) (170,236)
Net cash deposited for future capital expenditures (609,100) (67,100) (399,998)
Proceeds from sale of property and equipment 3,040
----------- ----------- -----------
Net cash used in investing activities (1,186,771) (535,969) (570,234)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on note payable (2,000,000) (1,000,000) (1,200,000)
Principal payments on capital lease obligations (86,482) (10,519) (31,487)
----------- ----------- -----------
Net cash used in financing activities (2,086,482) (1,010,519) (1,231,487)
----------- ----------- -----------
Net increase in cash and cash equivalents 412,359 247,812 100,994
Cash and cash equivalents, beginning of period 602,706 1,015,065 602,706
----------- ----------- -----------
Cash and cash equivalents, end of period $ 1,015,065 $ 1,262,877 $ 703,700
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 2,176,747 $ 1,045,555 $ 1,100,700
=========== =========== ===========
Cash paid for income taxes $ 458,921 $ 1,070,405 $ 345,562
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SCP (BUTTES) INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
ORGANIZATION
SCP (Buttes) Inc. (the "Company"), a California Corporation, is a wholly-
owned subsidiary of Shimizu Corporation. The Company owns and operates The
Buttes (the "Hotel"), a 353-room resort and convention hotel located in
Tempe, Arizona. The Hotel opened for business in 1986.
ACQUISITION OF THE HOTEL PROPERTY
On July 30, 1993, the Company purchased the Hotel (including all operating
assets and liabilities) for $39,499,996 from the Tempe Buttes Hotel Limited
Partnership (the Partnership). At the purchase date, the owners of the
Partnership were the Westcor Limited Partnership (Westcor), which held a
general partnership interest of approximately 43%, and the Shimizu Land
Corporation (SLC), a related entity to the Company, which held a general and
limited partnership interest of approximately 57%. Due to the partial
related party nature of the acquisition, generally accepted accounting
principles required that the Company record the basis of that portion of the
net assets acquired from SLC at historical cost, and that portion of the net
assets acquired from Westcor be "stepped-up" to their fair value at the date
of the acquisition. The effect of this "step allocation" of basis resulted
in the net assets of the Partnership being recorded on the books of the
Company at $33,795,680 at the date of acquisition. The remaining $6,015,459
of the purchase price is reflected as a distribution at acquisition and
included as a component of stockholders' deficit.
2. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheets, statements of operations, statements of
changes in stockholders' equity and cash flow statements for the six months
ended June 30, 1997 and 1996 are unaudited. In the opinion of management,
all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for these interim periods have been included. The
results for the interim periods are not necessarily indicative of the
results for a full year.
3. SIGNIFICANT ACCOUNTING POLICIES:
INVESTMENTS IN HOTEL PROPERTY
The hotel property is stated at cost and are depreciated under the following
methods and lives: building and improvements are depreciated under the
straight-line method over 39 years; furniture, fixtures and equipment are
depreciated under the straight-line method over 5 years.
Maintenance and repairs are charged against operations as incurred and major
additions to property and equipment are capitalized. When assets are sold or
retired, the cost and the related accumulated depreciation are removed from
the appropriate accounts and the resulting gain or loss is included in
operations.
6
<PAGE>
SCP (BUTTES) INC.
NOTES TO FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with maturities of three months or less to be
cash equivalents.
INVENTORIES
Inventories, consisting primarily of food, beverage, gift shop merchandise,
china, silver, linen and uniforms are carried at the lower of cost or market
using the first-in, first-out method.
REVENUE RECOGNITION
Revenue is recognized as earned. Earned is generally defined as the date upon
which a guest occupies a room and/or utilizes the Hotel's services. Ongoing
credit evaluations are performed and potential credit losses are expensed at
the time the accounts receivable is estimated to be uncollectible.
Historically, credit losses have not been material to the Hotels' results of
operations.
Other revenue includes gift, transportation, telephone and other incidental
hotel revenue.
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 these estimates.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
4. CONCENTRATION OF CREDIT RISK:
The Company's cash and cash equivalents are on deposit with major financial
institutions. The Company, in the normal course of business, maintains cash
balances in excess of the Federal Deposit Insurance Corporation's insurance
limit; however, the Company actively evaluates the creditworthiness of the
financial institutions with which it invests. Historically, the Company has
not incurred any losses due to uninsured amounts.
All of the Company's financial instruments are recorded at amounts which
approximate their fair value at December 31, 1996.
7
<PAGE>
SCP (BUTTES) INC.
NOTES TO FINANCIAL STATEMENTS
5. CASH RESTRICTED FOR CAPITAL EXPENDITURES:
An interest-bearing account is maintained by the Company to provide for the
replacement of and additions to furniture, fixtures and equipment at the
hotel facility in accordance with the Amended and Restated Management and
Operations Agreement. A summary of the activity in this account for the year
ended December 31, 1996 and the six months ended June 30, 1997, (unaudited)
and 1996 (unaudited) is as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
DECEMBER 31, 1997 1996
1996 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Required balance, beginning of periods $ 2,060,006 $ 2,562,232 $ 2,060,006
Required deposits 1,082,937 634,626 608,882
Expenditures (580,711) (468,899) (170,236)
Over (under) funded 3,496 (95,131) (142,026)
----------- ----------- -----------
Balance, end of periods $ 2,565,728 $ 2,632,828 $ 2,356,626
=========== =========== ===========
</TABLE>
Interest earned on the restricted funds for the year ended December 31, 1996
and the six months ended June 30, 1997 and 1996 was $111,704 and $67,143
(unaudited) and $49,998 (unaudited), respectively.
8
<PAGE>
SCP (BUTTES) INC.
NOTES TO FINANCIAL STATEMENTS
6. Lease Commitments:
The Hotel is constructed on land leased from the City of Tempe, Arizona. The
lease agreement is for a period of 60 years, from October 1984 through
September 2044, with an option to extend the lease 15 years. The lease
requires annual minimum rent and an annual municipal fee in the amount of
$305 per room, both to be adjusted annually by the consumer price index, and
contingent rent based on a percentage of gross room and food and beverage
sales, as defined. Additionally, the Hotel leases televisions for rooms,
telephones and other office equipment under noncancelable capital leases with
remaining terms of less than one year.
The future minimum lease commitments at December 31, 1996 under these lease
commitments are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
1997 $ 10,330 $ 428,305
1998 428,305
1999 428,305
2000 428,305
2001 428,305
Thereafter 18,310,039
--------- ----------
Total minimum lease payments 10,330 $20,451,564
===========
Less amounts representing
interest 300
---------
Present value of net minimum
lease payments 10,030
Less current portion 10,030
---------
Capital lease obligation $ 0
=========
</TABLE>
The future minimum lease obligations presented above do not included amounts
which are to be paid for contingent rent. Rental expense was approximately
$649,000 and $392,000 (unaudited) and $362,000 (unaudited) for the six months
ended June 30, 1997 and 1996, respectively, of which approximately $244,000,
$178,000 (unaudited) and $154,000 (unaudited), respectively, represent
contingent rent.
9
<PAGE>
SCP (BUTTES) INC.
NOTES TO FINANCIAL STATEMENTS
7. NOTE PAYABLE:
The note payable consists of an uncollateralized promissory note to Shimizu
International Finance (U.S.A.), Inc., a related party. Principal and interest
are due on June 30, 1997. As of December 31, 1996, the applicable interest
rate was 6%; however, it is subject to adjustment. The note is issued subject
to the Master Credit agreement between Shimizu International Finance and SCP
(Buttes) Inc., dated July 29, 1996. The Company has received a letter from
Shimizu International Finance (U.S.A.), Inc. indicating that it intends to
renew the note. The note has been renewed with principal and interest due
upon closing of the sale (See Note 12).
Based on the short maturity of the note, its carrying value approximates its
fair value.
8. MANAGEMENT FEES:
The Buttes Hotel is managed by Resort Services, Inc. The management and
operation agreement (the "Agreement") dated January 1, 1986, extends for a
period of 30 years. The Agreement requires compensation to Resort Services,
Inc., based on a percentage of the Hotel's gross revenues and adjusted gross
operating profit, as defined in the Agreement. In connection with this
Agreement for the year ended December 31, 1996 and for the six months ended
June 30, 1997 and 1996, the Company incurred management fees of $1,314,583,
$917,222 (unaudited), and $856,000 (unaudited), respectively. At December 31,
1996 and June 30, 1997 and 1996, management fees of $78,015, $55,357
(unaudited) and $0 (unaudited), respectively, were included in accrued
expenses.
The Company also pays a management fee to Shimizu Development (New York) Inc.
for supervisory, management, and accounting services. For the year ended
December 31, 1996 and for the six months ended June 30, 1997 and 1996, the
Company paid fees of $119,900 and $90,050 (unaudited), and $74,300
(unaudited), respectively.
10
<PAGE>
SCP (BUTTES) INC.
NOTES TO FINANCIAL STATEMENTS
9. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1996 and the
six months ended June 30, 1997 (unaudited) and 1996 (unaudited) consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1996 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current $ 700,659 $ 1,046,686 $ 796,966
Deferred 186,930 5,338 139,601
---------- ----------- ---------
$ 887,589 $ 1,052,024 $ 936,567
========== =========== =========
</TABLE>
The differences between the effective tax rates of 43% and 40% and 41% at
December 31, 1996, June 30, 1997 (unaudited) and June 30, 1996 (unaudited),
respectively, and the statutory federal tax rate of 34% are due primarily to
the basis of property differences, non-deductible meals and entertainment
expenses, and state income taxes for 1996.
The income tax effects of minimum tax credit carryovers and temporary
differences between financial and income tax reporting that give rise to
deferred income tax assets at December 31, 1996 and June 30, 1997 (unaudited)
and 1996 (unaudited), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1997 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Accrued vacation $ 54,112 $ 58,633 $ 54,194
Allowance for doubtful
accounts 15,942 18,074 22,180
---------- ----------- ----------
70,054 76,707 76,374
---------- ----------- ----------
Non-current:
Basis of property
differences 2,865,705 2,853,715 2,906,714
---------- ----------- ----------
2,865,705 2,853,715 2,906,714
---------- ----------- ----------
Total deferred tax assets $2,935,759 $ 2,930,422 $2,983,088
========== =========== ==========
</TABLE>
Based on the Company's recent pre-tax income and projections of future
taxable income over the period in which the deferred income tax assets are
deductible, the Company believes it is more likely than not it will realize
the benefit of the deferred tax assets. There can be no assurance, however,
that the Company will generate a specific level of continued earnings.
At December 31, 1996 and June 30, 1997 (unaudited) and 1996 (unaudited), the
Company has no net operating loss carryover for federal income tax purposes.
11
<PAGE>
SCP (BUTTES) INC.
NOTES TO FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS
Substantially all of the Company's employees are eligible to participate in
a defined contribution profit sharing plan. The plan provides for
discretionary profit sharing and employer matching contributions as
determined by the Board of Directors. The Company contributed $103,961,
$61,661 (unaudited) and $56,838 (unaudited) to the plan for the year ended
December 31, 1996 and the six months ended June 30, 1997 (unaudited) and
1996 (unaudited), respectively.
11. RELATED PARTY TRANSACTIONS:
Transactions for the year ended December 31, 1996 and the six months ended
June 30, 1997 (unaudited) and 1996 (unaudited) related balances incurred
with related parties, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1996 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Management fee paid to
Shimizu Development
(New York), Inc. $ 119,900 $ 90,050 $ 74,300
=========== =========== ===========
Interest expense incurred
with Shimizu International
Finance (U.S.A.), Inc. $ 2,169,422 $ 1,045,555 $ 1,100,700
=========== =========== ===========
Note payable to Shimizu
International Finance
(U.S.A.), Inc. $34,300,000 $33,300,000 $35,100,000
=========== =========== ===========
Allowance for doubtful
Accounts 15,942 18,074 22,180
70,054 76,707 76,374
----------- ----------- -----------
</TABLE>
Shimizu Development (New York), Inc. and Shimizu International
Finance (U.S.A.), Inc. are subsidiaries of Shimizu Corporation,
the parent company of SCP (Buttes) Inc.
12. SUBSEQUENT EVENTS:
In October 1997, substantially all of the assets of the Company were sold to
Patriot American Hospitality Partnership, L.P. ("Patriot") under the terms
of an asset purchase agreement for a purchase price of approximately $64
million. The note payable will be paid from the proceeds of the sale of the
Hotel.
Certain amounts in the December 31, 1996 financial statements have been
reclassified to conform to the June 30, 1997 presentation.
12
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To The Stockholders Of
Patriot American Hospitality, Inc.
We have reviewed the accompanying balance sheet of Historic Hotel Partners of
Chicago, Limited Partnership as of June 30, 1997, and the related statements of
operations, partners' equity, and cash flows for the six months then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Historic Hotel Partners of Chicago, Limited Partnership.
A review consists principally of inquiries of management personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ Pannell Kerr Forster P.C.
Alexandria, Virginia
October 8, 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Partners
Historic Hotel Partners of Chicago, Limited Partnership
We have audited the accompanying balance sheet of Historic Hotel Partners of
Chicago, Limited Partnership as of December 31, 1996, and the related statements
of operations, partners' equity, and cash flows for the year 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 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 Historic Hotel Partners of
Chicago, Limited Partnership 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.
/s/ Pannell Kerr Forster P.C.
Alexandria, Virginia
February 28, 1997
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(See Accountants' Review Report)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30 December 31
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets
Cash
On hand $ 12,000 $ 24,500
In banks - 340,624
----------- -----------
12,000 365,124
----------- -----------
Accounts receivable (note 3)
Guest ledger 13,621 68,332
City ledger 437,390 256,763
Affiliates 67,950 58,397
Miscellaneous 2,582 -
----------- -----------
521,543 403,492
Less allowance for doubtful accounts (7,879) (6,447)
----------- -----------
513,664 397,045
----------- -----------
Inventories, at cost (first-in, first-out)
Food 42,594 33,165
Beverage 35,800 43,448
----------- -----------
78,394 76,613
----------- -----------
Other current assets
Prepaid insurance 33,544 -
Funds in escrow 120,323 71,907
Other prepaid expenses 35,215 32,079
----------- -----------
189,082 103,986
----------- -----------
Total current assets 793,140 942,768
----------- -----------
Property and equipment (net)
(notes 2, 3, 4, and 5) 8,649,309 8,696,779
Other assets
Mortgage acquisitions costs (net of
accumulated amortization of $5,414 and
$4,403 at June 30, 1997 and 1996,
respectively) 4,690 5,701
Restricted deposit - reserve for furniture
and equipment replacement (note 3) 77,293 66,277
----------- -----------
$ 9,524,432 $ 9,711,525
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY
June 30 December 31
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Current liabilities
Accounts payable
Cash overdraft $ 63,567 $ -
Trade 427,185 361,156
Affiliates 44,608 31,522
Taxes payable and accrued
Sales and occupancy tax 105,209 59,841
Property tax 369,111 361,944
Accrued expenses
Salaries and wages 72,125 63,864
Vacation 99,144 88,334
Distribution payable (note 6) 960,538 780,538
Advance deposits 54,735 54,735
Current portion of long-term debt
(notes 3 and 4) 352,902 198,012
----------- -----------
Total current liabilities 2,549,129 1,999,946
----------- -----------
Long-term debt
Mortgage payable (note 3) 5,882,500 5,972,500
Obligations under capital leases (note 4) 277,137 90,211
----------- -----------
6,159,637 6,062,711
Less current portion above (352,907) (198,012)
----------- -----------
5,806,730 5,864,699
----------- -----------
Total liabilities 8,355,859 7,864,645
Commitments and contingencies
(notes 5 and 7)
Partners' equity 1,168,573 1,846,880
----------- -----------
$ 9,524,432 $ 9,711,525
=========== ===========
</TABLE>
See notes to financial statements
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(SEE ACCOUNTANTS' REVIEW REPORT)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues
Rooms $2,592,166 $5,633,024
Food and beverage 858,098 2,011,198
Telephone 108,472 211,280
Other 71,541 290,064
---------- ----------
Total revenues 3,630,277 8,145,566
---------- ----------
Departmental expenses
Rooms 903,425 1,601,843
Food and beverage 859,546 1,828,023
Telephone 60,126 111,744
---------- ----------
Total departmental expenses 1,823,097 3,541,610
---------- ----------
Gross operating income 1,807,180 4,603,956
---------- ----------
Unallocated expenses
Administrative and general
Hotel 221,260 410,948
Partnership 104,226 109,514
Credit card commissions 64,752 149,260
Sales and marketing 453,439 748,766
Repairs and maintenance 309,115 579,655
Utilities 172,459 420,321
Management fees 145,211 325,747
---------- ----------
Total unallocated expenses 1,470,462 2,744,211
---------- ----------
Gross operating profit 336,718 1,859,745
---------- ----------
Capital expenses
Rent, taxes, and insurance 241,875 518,321
Interest 245,024 545,161
Depreciation and amortization 350,626 824,890
---------- ----------
Total capital expenses 837,525 1,888,372
---------- ----------
Net (loss) $ (500,807) $ (28,627)
========== ==========
</TABLE>
See notes to financial statements
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(SEE ACCOUNTANTS' REVIEW REPORT)
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
1997 1996
------------- -----------
(Unaudited)
<S> <C> <C>
Balance, beginning of period $1,846,880 $1,738,007
Partners' contributions 2,500 497,500
Distributions payable (note 6) (180,000) (360,000)
Net (loss) for the period (500,807) (28,627)
---------- ----------
Balance, end of period $1,168,573 $1,846,880
---------- ----------
</TABLE>
See notes to financial statements
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(SEE ACCOUNTANTS' REVIEW REPORT)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
1997 1996
------------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (500,807) $ (28,627)
Adjustments to reconcile net (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization 350,626 824,890
Changes in assets and liabilities:
Accounts receivable (116,619) (79,882)
Inventories (1,781) (15,614)
Prepaid expenses (85,096) 118,032
Accounts payable 79,115 (364,981)
Taxes payable and accrued expenses 71,606 (61,044)
Advance deposits - (800)
---------- ----------
Net cash provided (used) by
operating activities (202,956) 391,974
---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (105,079) (324,924)
Deposits to reserve for replacements (118,677) (147,342)
Withdrawals from reserve for replacements 107,661 131,888
---------- ----------
Net cash (used) by
investing activities (116,095) (340,378)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt (100,140) (211,427)
Partners' contribution 2,500 497,500
Cash overdraft 63,567 -
---------- ----------
Net cash provided (used)
by financing activities (34,073) 286,073
---------- ----------
Net increase (decrease) in cash (353,124) 337,669
Cash at beginning of period 365,124 27,455
---------- ----------
Cash at end of period $ 12,000 $ 365,124
---------- ----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest $ 245,024 $ 505,510
========== ==========
Supplemental disclosure of non-cash
investing and financing activities:
Distribution payable $ 180,000 $ 360,000
Property acquired with a capital lease 197,066 -
---------- ----------
$ 377,066 $ 360,000
========== ==========
</TABLE>
See notes to financial statements
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements
December 31, 1996 and June 30, 1997
Note 1 - Operations and summary of significant accounting policies
- ------------------------------------------------------------------
Operations
- ----------
Historic Hotel Partners of Chicago, Limited Partnership (the Partnership) was
organized in 1994, and owns and operates the Ambassador West Hotel (Hotel) in
Chicago, Illinois.
Property and equipment
- ----------------------
Depreciation has been computed using the straight-line method over the following
estimated useful lives:
Building 31 l/2 years
Furniture, fixtures and equipment 3-8 years
Depreciation expense totaled $349,615 for the six months ended June 30, 1997
(unaudited), and $822,862 for the year ended December 31, 1996.
Amortization
- ------------
Mortgage acquisition costs are amortized by the straight-line method over the
term of the related loan.
Income taxes
- ------------
Provision for Federal and state income taxes is not reflected in the financial
statements since partners are taxed individually on their share of Partnership
income or loss.
Statements of cash flows
- ------------------------
The statements of cash flows are prepared on the basis of cash on hand and in
banks which is subject to withdrawal on demand.
For the purposes of the statements of cash flows, the Partnership considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents. At various times through out the six
months and calendar year December 31, 1996, the Partnership had amounts on
deposit at a financial institution in excess of Federally insured limits.
Financial statement 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, disclosure of contingent
assets and liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements (continued)
December 31, 1996 and June 30, 1997
Note 1 - Operations and summary of significant accounting policies (continued)
- ------------------------------------------------------------------------------
Fair value of financial instruments
- -----------------------------------
The carrying amounts of the Partnership's financial instruments, including cash,
accounts receivable, and accounts payable, approximate fair value because of
the short maturities of these instruments. The carrying amount of long-term debt
approximates fair value because the interest rate is variable.
Note 2 - Property and equipment (net)
- -------------------------------------
Property and equipment is stated at cost and consists of the following:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, December 31,
1997 1996
------------------ -----------
(Unaudited)
<S> <C> <C>
Land $ 1,000,000 $ 1,000,000
Building 6,839,078 6,839,078
Furniture, fixtures and equipment 3,038,645 2,747,450
----------- -----------
10,877,723 10,586,528
Less accumulated depreciation (2,344,590) (1,994,975)
----------- -----------
8,533,133 8,591,553
----------- -----------
Operating equipment 116,176 105,226
----------- -----------
Net property and equipment $ 8,649,309 $8,696,779
----------- -----------
</TABLE>
Note 3 - Mortgage payable
- -------------------------
The Partnership has a mortgage comprised of two loans, a term loan of $5,202,500
and a credit line of $1,250,000 from the same lender. The loans are secured by
substantially all of the property and equipment and by accounts receivable. The
mortgage requires monthly principal payments of $15,000 plus interest. The
Partnership has the option of selecting an interest rate of either a floating
rate, as defined, or a LIBOR (London Inter-Bank Offered Rate) rate, as defined.
The interest rate in effect at June 30, 1997 was 8.063 percent. All unpaid
principal and interest is due at maturity in May 1999.
The proceeds of the term loan were used to acquire the Hotel. The Partnership
has $1,250,000 available under the credit line, out of which $200,000 was drawn
at the purchase of the Hotel for initial working capital. The remainder of the
credit was drawn to finance Hotel renovations, and for purchases of property and
equipment during 1995. At June 30, 1997, $5,972,500 was outstanding under the
mortgage. The lender's commitment to disburse funds under the credit line
expired in May 1996.
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements (continued)
December 31, 1996 and June 30, 1997
Note 3 - Mortgage payable (continued)
- -------------------------------------
Each month, the Partnership is required to deposit with the lender an amount
equal to three percent of all gross revenues, as defined, for the immediately
prior calendar month. The lender retains the amounts in a furniture, fixtures
and equipment (FF&E) reserve. Proceeds of all sales of property and equipment
must also be deposited in the reserve. The lender may release funds from the
reserve to pay for the costs of replacements and additions to property and
equipment. For the six months ended June 30, 1997, the Partnership deposited
$118,677 to the reserve and $107,661 was released from the reserve by the
lender. In 1996, the Partnership deposited $147,342 to the reserve and $131,888
was released from the reserve by the lender.
Under the terms of the mortgage, Partnership distributions are prohibited any
time prior to either the final disbursement of funds under the credit line or
the expiration of the lender's obligation to fund the credit line. Thereafter,
the Partnership may make distributions, not exceeding projected excess cash
flow, as defined, for the next twelve calendar months, without the consent of
the lender, so long as the projected debt coverage ratio, as defined, for the
next twelve months is greater than or equal to one.
The terms of the mortgage also prevent the Partnership from incurring any
additional indebtedness, other than unsecured partner loans not exceeding
$500,000 in the aggregate, or indebtedness incurred in the ordinary course of
business, so long as the aggregate amount of such debt does not exceed $250,000
at any time.
Scheduled maturities of the mortgage for the next two years, for the period
ended June 30, are as follows: 1998-$180,000 and 1999-$5,702,500.
Note 4- Capital leases
- ----------------------
Equipment leases which meet certain criteria are classified as capital leases.
Minimum future payments under the leases, which mature in March 2001, are as
follows:
<TABLE>
<CAPTION>
Year Ended
June 30 Amount
---------- --------
<S> <C>
1998 $106,232
1999 106,231
2000 92,860
2001 19,502
--------
Total minimum lease payments 324,825
Less: Amount representing interest (47,688)
--------
Present value of net minimum
lease payments $277,137
========
</TABLE>
The $328,683 cost of the equipment under capital leases is included in
furniture, fixtures and equipment on the balance sheet. Amortization of the
equipment is included in depreciation expense.
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements (continued)
December 31, 1996 and June 30, 1997
Note 5 - Commitments
- --------------------
Management contract
- -------------------
The Partnership is obligated under a management agreement with an affiliate
under common control. The agreement provides for base management fees of three
percent of gross revenues, as defined, and a chain services fee of one percent
of gross revenues, as defined. Management fees and chain services fees for the
six months ended June 30, 1997 were $145,211 (unaudited) and for the year ended
December 31, 1996 were $325,747. The agreement also provides for an incentive
management fee equal to ten percent of net income, as defined. There was no
incentive management fee for the six months ended June 30, 1997 and for the
year ended December 31, 1996.
Operating lease - as landlord
- -----------------------------
Effective January 1, 1995, the Partnership leased retail space under a lease
agreement which will expire on December 31, 2004. As part of the lease
agreement, the Partnership advanced $25,000 to the tenant for buildout
improvements to the leased space. Payments, including interest at 13.79
percent, for the first two years will be applied toward the loan.
Minimum future rentals under the lease for the next five years, and in the
aggregate, are as follows:
<TABLE>
<CAPTION>
Year Ended
June 30 Amount
---------- ------
<S> <C>
1998 $ 14,688
1999 15,270
2000 15,876
2001 16,512
2002 17,172
Thereafter 45,882
--------
Total future minimum
rental payments $125,400
========
</TABLE>
Note 6 - Distribution payable
- -----------------------------
The partnership is limited in paying distributions as discussed in note 3.
However, the Partnership follows the policy of accruing partner distributions.
The Partnership accrued a distribution of $180,000 and $360,000, for June 30,
1997 and the year ended December 31, 1996, respectively.
<PAGE>
HISTORIC HOTEL PARTNERS OF CHICAGO, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements (continued)
December 31, 1996 and June 30, 1997
Note 7 - Pension plan
- ---------------------
The affiliate management company (note 5) offers a 401(k) plan which covers all
employees of the Partnership who meet certain age and length of service
requirements. Employees can contribute from one percent to fifteen percent of
base compensation as a salary reduction contribution to the plan. The
Partnership does not contribute to the plan.
Note 8- Subsequent events
- -------------------------
On July 23, 1997, the Partnership entered into a contract with Patriot American
Hospitality to sell the Ambassador West Hotel for approximately $15,750,000 in
cash.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To The Stockholders Of
Patriot American Hospitality, Inc.
We have reviewed the accompanying balance sheet of Historic Hotel Partners of
Nashville, Limited Partnership as of June 30, 1997, and the related statements
of operations, partners' deficit and cash flows for the six months then ended,
in accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Historic Hotel Partners of Nashville, Limited Partnership.
A review consists principally of inquiries of management personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ Pannell Kerr Forster PC
Alexandria, Virginia
October 8, 1997
<PAGE>
Independent Auditors' Report
----------------------------
To the Partners
Historic Hotel Partners of Nashville, Limited Partnership
We have audited the accompanying balance sheet of Historic Hotel Partners of
Nashville, Limited Partnership as of December 31, 1996, and the related
statements of operations, partners' deficit, and cash flows for the year 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 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 Historic Hotel Partners of
Nashville, Limited Partnership 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.
/s/ Pannell Kerr Forster PC
Alexandria, Virginia
February 21, 1997
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE, LIMITED PARTNERSHIP
(See Accountants' Review Report)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND PARTNERS' DEFICIT
June 30 December 31 June 30 December 31
1997 1996 1997 1996
------------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Current assets Current liabilities
Cash and cash equivalents $ 196,987 $ 202,291 Accounts payable-trade $ 493,561 $ 1,363,603
Accounts receivable 200,921 201,580 Due to affiliates - 85,848
Insurance receivable 1,512,796 930,531 Taxes payable and accrued 39,027 42,544
Due from affiliates 49,595 37,259 Accrued expenses 170,586 120,248
Inventories, at cost Advance deposits 45,340 38,466
(first-in, first-out) 18,139 17,442 Current portion of long-
Prepaid expenses 53,978 77,656 term debt (note 3) 124,512 124,440
Escrow-real estate tax 77,506 24,525 ----------- -----------
----------- -----------
Total current liabilities 873,026 1,775,149
Total current assets 2,109,922 1,491,284
----------- ----------- Long-term debt (net of
current portion above)
Property and equipment (net) (note 3) 6,072,415 6,134,744
(note 2) 4,256,879 4,346,663
----------- ----------- Partners' loans (note 4) 2,331,535 2,331,535
Other assets Accrued interest on partners'
Escrows-reserve for replacements loans (note 4) 430,910 232,493
(note 3) 68,428 28,144 ----------- -----------
Deposits 4,417 4,417
Deferred costs of hotel sale Total liabilities 9,707,886 10,473,921
(note 9) 90,994 41,583
Mortgage acquisition costs (net of Commitments and contingencies
accumulated amortization of (notes 4, 5, 6, and 8)
$125,526 at June 30, 1997 and
$98,367 for 1996) 146,065 173,224
----------- ----------- Partners' deficit (3,031,181) (4,388,606)
----------- -----------
Total other assets 309,904 247,368
----------- -----------
$ 6,676,705 $ 6,085,315
$ 6,676,705 $ 6,085,315 =========== ===========
=========== ===========
</TABLE>
See notes to financial statements
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE, LIMITED PARTNERSHIP
(See Accountants' Review Report)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Six For The
Months Ended Year Ended
June 30 December 31
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Revenues
Rooms $ 1,215,369 $2,404,893
Food and beverage 530,512 931,517
Telephone 9,921 20,507
Parking 60,422 99,353
Business interruption insurance (note 8) 229,052 768,258
Other 70,282 115,183
----------- ----------
Total revenues 2,115,558 4,339,711
----------- ----------
Departmental expenses
Rooms 384,905 727,669
Food and beverage 379,485 799,703
Telephone 12,632 21,766
Parking 36,135 73,524
----------- ----------
Total departmental expenses 813,157 1,622,662
----------- ----------
Gross operating income 1,302,401 2,717,049
----------- ----------
Unallocated expenses
Administrative and general
Hotel 143,162 310,672
Partnership 21,094 102,654
Credit Card Commissions 31,823 63,344
Sales and marketing 211,036 432,170
Repairs and maintenance 104,020 219,964
Utilities 152,514 317,217
Management fees 111,931 228,732
----------- ----------
Total unallocated expenses 775,580 1,674,753
----------- ----------
Gross operating profit 526,821 1,042,296
----------- ----------
Capital expenses
Rent, taxes, and insurance 126,748 235,674
Interest 529,253 1,037,493
Depreciation and amortization 178,797 315,383
----------- ----------
Total capital expenses 834,798 1,588,550
----------- ----------
Net (loss) before extraordinary item (307,977) (546,254)
Extraordinary item
Gain on involuntary conversion of assets due to fire (note 8) 1,665,402 734,277
----------- ----------
Net income $ 1,357,425 $ 188,023
=========== ==========
</TABLE>
See notes to financial statements
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE, LIMITED PARTNERSHIP
(See Accountants' Review Report)
STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
For The Six For The
Months Ended Year Ended
June 30 December 31
1997 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Balance, beginning of period $(4,388,606) $(4,576,629)
Net income 1,357,425 188,023
----------- -----------
Balance, end of period $(3,031,181) $(4,388,606)
=========== ===========
</TABLE>
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE LIMITED PARTNERSHIP
(See Accountants' Review Report)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
For The Six For The
Months Ended Year Ended
June 30 December 31
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,357,425 $ 188,023
Adjustments to reconcile net income to net
cash (used) by operating activities:
Gain on involuntary conversion of assets due to fire (1,665,402) (734,277)
Depreciation and amortization 178,797 315,383
Operating equipment charged to expense 3,794 67,248
Changes in assets and liabilities:
Accounts receivable 659 (5,775)
Insurance receivable (229,053) (768,258)
Due from affiliates (12,336) (34,219)
Inventories (697) 1,963
Prepaid expenses 23,678 (19,753)
Escrow-real estate tax (52,981) 74,475
Accounts payable - Trade (870,042) 162,783
Due to affiliate (85,848) 68,414
Taxes payable and accrued (3,516) 1,117
Accrued expenses 50,338 (76,572)
Advance deposits 6,874 14,193
Accrued interest on partners' loans 198,417 (138,439)
----------- -----------
Net cash (used) by operating activities (1,099,893) (883,694)
----------- -----------
Cash flows from investing activities:
Deferred costs of hotel sale (49,411) (41,583)
Deposits to restricted cash (100,325) (158,787)
Withdrawals from restricted cash 60,041 256,540
Insurance proceeds for building and equipment 2,120,952 1,987,727
Acquisition of property and equipment (net of
$894,126 in accounts payable at December 31, 1996) (65,650) (1,392,518)
Acquisition of operating equipment - (32,660)
Payment for property and equipment recorded in accounts
payable at December 31,1996 (808,762) -
----------- -----------
Net cash (used) by investing activities 1,156,845 618,719
Cash flows from financing activities:
Proceeds of partners' loans - 750,000
Repayment of partners' loans - (256,465)
Principal payments on long-term debt (62,256) (124,512)
Payments on capital lease obligations _ (5,102)
----------- -----------
Net cash provided by financing activities (62,256) 363,921
Net (decrease) increase in cash (5,304) 98,946
Cash and equivalents at beginning of period 202,291 103,345
----------- -----------
Cash and equivalents at end of period $ 196,987 $ 202,291
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 330,835 $ 666,881
=========== ===========
</TABLE>
See notes to financial statements
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements
December 31, 1996 and June 3O, 1997
Note 1 - Operations and summary of significant accounting policies
- ------------------------------------------------------------------
Operations
- ----------
Historic Hotel Partners of Nashville, Limited Partnership (the Partnership), a
Delaware limited partnership, owns and operates the Union Station Hotel (Hotel)
in Nashville, Tennessee.
Property and equipment
- ----------------------
Depreciation is computed using the straight-line and accelerated methods over
the following estimated useful lives:
Building and improvements 15-4O years
Furniture, fixtures and equipment 3-8 years
Depreciation expense totaled $151,638 for the six months ended June 30, 1997
(unaudited) and $261,065 for the year ended December 31, 1996.
Amortization
- ------------
Mortgage acquisition costs are amortized on a straight-line basis over the term
of the related loan.
Operating equipment
- -------------------
Operating equipment, which consists of linen, china, silverware, and
glassware, is stated at cost based on a physical count at year-end. Shrinkage is
charged to expense in the rooms department and the food and beverage department.
Income taxes
- ------------
Provision for Federal and state income taxes is not reflected in the financial
statements since partners are taxed individually on their share of Partnership
income or loss.
Statements of cash flows
- ------------------------
The statements of cash flows are prepared on the basis of cash on hand and in
banks which is subject to withdrawal on demand. For the purposes of the
statements of cash flows, the Partnership considers all highly liquid debt
instruments purchased with an initial maturity of three months or less to be
cash equivalents. The Partnership has cash equivalents deposited in money market
funds. At various times, the Partnership had amounts on deposit with one
financial institution in excess of Federally insured limits.
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements (Continued)
December 31, 1996 and June 30, 1997
Note 1 - Operations and summary of significant accounting policies (continued)
- ------------------------------------------------------------------------------
Financial statement 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, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair value of financial instruments
- -----------------------------------
The carrying amounts of the Partnership's financial instruments, including cash,
accounts receivable, and accounts payable, approximate fair value because of
the short maturities of these instruments. The carrying amount of long-term debt
approximates fair value because the interest rate is variable.
Note 2 - Property and equipment
- -------------------------------
Property and equipment is stated at cost and consists of the following:
<TABLE>
<CAPTION>
For the
Six Months
Ended
June 30 December 31
1997 1996
---------- -----------
(Unaudited)
<S> <C> <C>
Land improvements $ 25,914 $ 25,914
Building 2,268,284 2,880,140
Construction in progress 2,167,866 1,450,529
Furniture, fixtures and equipment 942,411 982,243
Computers 151,773 151,773
Automobile 18,325 18,325
---------- ----------
Less accumulated depreciation 5,574,573 5,508,924
(1,396,708) (1,245,070)
---------- ----------
4,177,865 4,263,854
Operating equipment 79,014 82,809
---------- ----------
Net property and equipment $4,256,879 $4,346,663
========== ==========
</TABLE>
Property and equipment additions for 1996 include $894,126 of assets for which
payment was made subsequent to December 31, 1996. Accordingly, this represents a
non-cash financing activity for the year ended December 31, 1996.
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements (Continued)
December 31, 1996 and June 30, 1997
Note 3 - Long-term debt
- -----------------------
Long-term debt consists of a mortgage note with Heller Real Estate Financial
(Heller), requiring monthly payments of $10,370 plus interest at 485 basis
points over the 90-day LIBOR (London Inter-Bank Offered Rate) with a balloon
payment at maturity in December 1999. The note is secured by a first leasehold
mortgage on the real property, a security interest in all furniture and
equipment, and an assignment of rents, leases, licenses, and permits. At June
30, 1997 and December 31, 1996, the outstanding balance on the mortgage note
was $6,196,927 and $6,259,184, respectively. Interest expense was $330,306 and
$666,613 for the periods ended June 30, 1997 and December 31, 1996.
Under the terms of the mortgage with Heller Financial, the Partnership
is required to set aside 3.5 percent of gross revenues as a Reserve for
Replacements in an escrow held by Heller. Heller will release these funds for
approved replacements of property and equipment
Debt maturities for the next two years, for the period ended June 30, are as
follows: 1998-$124,440 and 1999-$6,072,487.
Note 4 - Partners' loans
- ------------------------
The Partners' loans payable represent note obligations in the amount of
$2,331,535 at June 30, 1997, and December 31, 1996. The loans bear interest at
the rate of fifteen percent per year and have no stated repayment terms. As a
result of certain provisions of the mortgage debt which restrict payments to the
partners, these notes and accrued interest are excluded from current
liabilities. Interest expense on partners' loans was $198,418 and $390,932 for
the period ended June 30, 1997 and December 31, 1996, respectively.
During 1996, $750,000 was paid to one partner, of which, $493,535 was
characterized as interest and $256,465 was characterized as principal. Because
another partner lent the Partnership $750,000 during 1996, management does not
believe the payments violate the mortgage covenants.
Note 5 - Commitments
- --------------------
Operating leases
- ----------------
The Hotel grounds are leased from the Metropolitan Government of Nashville and
Davidson County (Metropolitan Government) through the assumption of an amended
ground lease dated October 29, 1985. The term of the lease is effective for an
initial period of fifty years, with options for extending the lease for two
additional periods of twenty-five and fifteen years. The lease provides for
annual rent payments which are the greater of $60,000 or the real property taxes
payable on the premises. Real property taxes paid in any given year shall be
applied against the rent due the Metropolitan Government under the terms of the
amended ground lease. Base rentals were $30,000 at June 30, 1997 and $60,000 at
December 31, 1996.
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements
December 31, 1996 and June 30, 1997
Note 5 - Commitments (continued)
- --------------------------------
Operating leases (continued)
- ----------------------------
The Partnership leases parking facilities under a lease that expires February
1998, and grants the Partnership a right of first refusal on any sale of the
property. The Partnership is responsible for all repairs, maintenance, and
taxes on the facilities. Rent expense was $40,895 and $83,645 at June 30, 1997
and December 31, 1996, respectively. The lease is secured by a letter of
credit for $63,554.
Minimum future lease payments for the next five years, and in the aggregate, are
as follows:
<TABLE>
<CAPTION>
Year Ended
June 30 Amount
----------- ----------
<S> <C>
1998 $ 66,103
1999 60,000
2000 60,000
2001 60,000
2002 60,000
Thereafter 1,846,761
----------
$2,152,864
==========
</TABLE>
Note 6 - Related party transactions
- -----------------------------------
The Hotel is managed under the terms of a management agreement by a company
affiliated through common ownership. The agreement expires on January 1, 2000,
and provides for base management fees equal to four percent of gross revenues of
the Hotel. The agreement also provides for an incentive management fee equal to
ten percent of net operating income, as defined. There was no incentive
management fee at June 30, 1997 and December 31, 1996. In addition to the
management fees, the agreement also provides for a chain services fee equal to
one percent of gross revenues. Total fees for management and chain services
amounted to $111,931 and $228,732 at June 30, 1997 and December 31, 1996,
respectively. As a result of the fire on June 27, 1996 (note 8), management and
chain services fees were based on budgeted revenues for the months of July
through December 1996. Management and chain services fees for the period ended
June 30, 1997 are based on actual gross revenues.
<PAGE>
HISTORIC HOTEL PARTNERS OF NASHVILLE, LIMITED PARTNERSHIP
(See Accountants' Review Report)
Notes to Financial Statements
December 31, 1996 and June 30, 1997
Note 7 - Pension plan
- ---------------------
The affiliate management company (note 6) sponsors a 401(k) plan. All employees
of the Partnership who meet certain age and length of service requirements are
eligible to participate in the plan. Employees can contribute from one percent
to fifteen percent of base compensation as a salary reduction contribution to
the plan. The Partnership does not contribute to the plan.
Note 8 - Insurance receivable
- -----------------------------
On June 27, 1996, a building adjacent to the Hotel caught fire. The Hotel itself
did not catch fire, however, smoke from the blaze caused the sprinkler
system in one wing of the Hotel to engage, resulting in water damage to part of
the Hotel and to other property and equipment in the Hotel. In 1996, management
wrote off damaged property and equipment costing $2,007,000, with related
accumulated depreciation of $591,277, for a net book value of $1,415,723. The
write off was recorded as insurance receivable. The Hotel is fully insured for
property damage at replacement value and also for business interruption, and as
of June 30, 1997, and December 31, 1996, $2,120,952 and $1,987,727,
respectively, of insurance proceeds have been received. A gain on involuntary
conversion of assets has been recognized at June 30, 1997 and December 31, 1996,
since insurance proceeds received exceeded the net book value of damaged
property written off due to the fire. Total gain recognized at June 30, 1997 and
December 31, 1996, was $1,665,402 and $734,277, respectively. The damage to the
Hotel is currently being repaired. The Partnership also is insured for business
interruption based on budgeted net income. The Partnership had recorded revenue
related to business interruption insurance of $229,052 and $768,258 at June 30,
1997, and December 31, 1996, respectively.
Note 9 - Subsequent events
- --------------------------
In September 1996, the Partnership entered into a contract with Patriot American
Hospitality to sell the Union Station Hotel for approximately $9,100,000, in
cash and securities valued at approximately $600,000. The consummation of the
contract was contingent upon the repair of the existing fire casualty (note 8).
In July 1997, the Partnership sold their interest in the Union Station Hotel to
Patriot American Hospitality. The Partnership incurred cost relating to the sale
of the Hotel of $90,994 and $41,583 at June 30, 1997 and December 31, 1996,
respectively.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Joint Registration Statement
on Form S-3 (File No. 333-29671 and 333-29671-01) of Patriot American
Hospitality, Inc. and Patriot American Hospitality Operating Company of our
report dated January 23, 1997 (except for Note 8, as to which the date is
September 30, 1997) with respect to the Consolidated Financial Statements of
GAH-II, L.P. for the years ended December 31, 1996 and 1995, which is included
in the Joint Current Report on Form 8-K/A No. 1 of Patriot American Hospitality,
Inc. and Patriot American Hospitality Operating Company, dated September 30,
1997, as amended.
/s/ ERNST & YOUNG LLP
Dallas, Texas
October 22, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Joint Registration Statement on Form S-3 (File No.
333-29671 and 333-29671-01) of Patriot American Hospitality, Inc. and Patriot
American Hospitality Operating Company of our report dated October 3, 1997
relating to the financial statements of CHC International Inc. Hospitality
Division as of and for the years ended November 30, 1995 and 1996, which appears
in the Joint Current Report on Form 8-K of Patriot American Hospitality, Inc.
and Patriot American Hospitality Operating Company dated September 30, 1997.
/s/ PRICE WATERHOUSE, LLP
Miami, Florida
October 23, 1997
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
(File No. 333-29671) of Patriot American Hospitality, Inc. and Patriot American
Hospitality Operating Company on Form S-3, of our report dated September 30,
1997 (relating to the financial statements of Partnerships of Acquired Hotels as
of December 31, 1996 and 1995 and for the years then ended) appearing in Form
8-K/A No. 1 dated September 30, 1997 of Patriot American Hospitality, Inc. and
Patriot American Hospitality Operating Company incorporated by reference in this
Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
October 23, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Joint Registration Statement
on Form S-3 (File No. 333-29671 and 333-29671-01) of Patriot American
Hospitality, Inc. and Patriot American Hospitality Operating Company of our
reports (a) dated March 13, 1997 (except for the third paragraph of Note 7, as
to which the date is April 2, 1997) with respect to the Financial Statements of
G.B.H. Joint Venture (d/b/a Grand Bay Hotel) for the years ended December 31,
1995 and 1996; (b) dated September 23, 1997 with respect to the Financial
Statements of River House Associates (d/b/a Sheraton Gateway Hotel) for the
years ended December 31, 1995 and 1996; and (c) dated September 19, 1997 with
respect to W-L Tampa, Ltd. (the Sheraton Grand Hotel) for the years ended
December 31, 1995 and 1996; all of which are included in the Joint Current
Report on Form 8-K/A No. 1 of Patriot American Hospitality, Inc. and Patriot
American Hospitality Operating Company, dated September 30, 1997, as amended.
/s/ ERNST & YOUNG LLP
Miami, Florida
October 27, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Joint Registration Statement
on Form S-3 (File No. 333-29671 and 333-29671-01) of Patriot American
Hospitality, Inc. and Patriot American Hospitality Operating Company of our
reports (i) dated March 7, 1997 except for note 12 as to which the date is
October 7, 1997 on our audit of the Financial Statements of SCP (Bunes), Inc.,
as of and for the year ended December 31, 196, all of which are included in the
Joint Current Report on Form 8-K dated September 30, 1997 of Patriot American
Hospitality, Inc. and Patriot American Hospitality Operating Company.
/s/ COOPERS & LYBRAND LLP
Phoenix, Arizona
October 22, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Joint Registration Statement
on Form S-3 (File No. 333-29671 and 333-29671-01) of Patriot American
Hospitality, Inc. and Patriot American Hospitality Operating Company of our
reports (i) dated February 28, 1997 on our audit of the Financial Statements of
Historic Hotel Partners of Chicago, Limited Partnership as of and for the year
ended December 31, 1996 and (ii) dated February 21, 1997 on our audit of the
Financial Statements of Historic Hotel Partners of Nashville, Limited
Partnership as of and for the year ended December 31, 1996, all of which are
included in the Joint Current Report on Form 8-K dated September 30, 1997 of
Patriot American Hospitality, Inc. and Patriot American Hospitality Operating
Company.
/s/ PANNELL FOSTER KERR P.C.
Alexandria, Virginia
October 22, 1997
