<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A No. 3
CURRENT REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
JANUARY 16, 1997
COMMISSION FILE NUMBER: 0-26528
PATRIOT AMERICAN HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 75-2599709
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 LBJ FREEWAY, SUITE 1500 75234
DALLAS, TEXAS (Zip Code)
(Address of principal executive office)
(972) 888-8000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changes since last
report)
===============================================================================
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF PROPERTIES ACQUIRED
The index to the financial information for Resorts Limited Partnership
(which includes the financial position and results of operations for The
Boulders and Ventana Canyon), CV Ranch Limited Partnership and Telluride Resort
and Spa Limited Partnership are included on page F-1 of this report.
(B) PRO FORMA FINANCIAL INFORMATION
The index to the pro forma financial information for Patriot American
Hospitality, Inc. and the Combined Lessees is included on page F-1 of this
report.
(C) EXHIBITS
NUMBER
EXHIBIT DESCRIPTION
------- ----------------------------
23.1 Consent of Ernst & Young LLP
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 8, 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)
3
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
PRO FORMA FINANCIAL INFORMATION:
<S> <C>
PATRIOT AMERICAN HOSPITALITY:
Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1996 (unaudited).........................................F-4
Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1996 (unaudited)........................................................F-6
COMBINED LESSEES:
Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1996 (unaudited).........................................F-9
FINANCIAL STATEMENTS OF PROPERTIES ACQUIRED:
RESORTS LIMITED PARTNERSHIP:
Report of Independent Auditors - Ernst & Young LLP....................................F-11
Consolidated Balance Sheets as of December 31, 1996 and 1995..........................F-12
Consolidated Statements of Income for the years ended December 31, 1996 and
1995.................................................................................F-13
Consolidated Statements of Partners' Capital for the years ended December 31, 1996
and 1995............................................................................F-14
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995............................................................................F-15
Notes to Consolidated Financial Statements............................................F-17
CV RANCH LIMITED PARTNERSHIP:
Report of Independent Auditors - Ernst & Young LLP....................................F-31
Balance Sheets as of December 31, 1996 and 1995.......................................F-32
Statements of Operations for the years ended December 31, 1996 and 1995 ..............F-33
Statements of Changes in Partners' Capital for the years ended December 31, 1996
and 1995.............................................................................F-34
Statements of Cash Flows for the years ended December 31, 1996 and 1995...............F-35
Notes to Financial Statements.........................................................F-36
TELLURIDE RESORT AND SPA LIMITED PARTNERSHIP:
Report of Independent Auditors - Ernst & Young LLP....................................F-41
Balance Sheets as of December 31, 1996 and 1995.......................................F-42
Statements of Operations for the years ended December 31, 1996 and 1995...............F-43
Statements of Changes in Partners' Capital for the years ended December 31,
1996 and 1995.......................................................................F-44
Statements of Cash Flows for the years ended December 31, 1996 and 1995...............F-45
Notes to Financial Statements.........................................................F-46
</TABLE>
F-1
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Patriot American Hospitality, Inc. (collectively with its subsidiaries, the
"Company") completed an initial public offering (the "Initial Offering") of its
common stock on October 2, 1995 and commenced operations. Upon completion of the
Initial Offering, the Company, through its wholly-owned subsidiary, PAH LP,
Inc., contributed substantially all of the net proceeds of the Initial Offering
to Patriot American Hospitality Partnership, L.P. (the "Operating Partnership")
in exchange for an approximately 85.3% limited partnership interest in the
Operating Partnership. The Company, through its wholly-owned subsidiary, PAH GP,
Inc., is the sole general partner and the holder of a 1.0% general partnership
interest in the Operating Partnership.
The Operating Partnership used a portion of the net proceeds of the Initial
Offering to acquire ownership interests in 20 hotels (the "Initial Hotels") from
various entities (the "Selling Entities") and to repay existing mortgage and
other indebtedness of the Initial Hotels. In consideration for the sale of the
Initial Hotels, certain owners in the Selling Entities, including affiliates of
the Company, elected to receive a combination of cash and limited partnership
units in the Operating Partnership ("OP Units"). The OP Units received by such
owners represented an approximate 13.7% equity interest in the Operating
Partnership as the Company commenced operations. The balance of the proceeds
from the Initial Offering, together with proceeds from the Company's line of
credit, were used to finance acquisitions of two additional hotel investments,
provide for renovations to existing hotels and for general working capital
during 1995.
During the first quarter of 1996, the Company acquired three additional
hotel properties, utilizing cash drawn on its line of credit and issuing 167,012
OP Units in connection with the purchases. During the second quarter of 1996,
the Company acquired eight additional hotel properties, utilizing cash drawn on
its line of credit and issuing 331,577 OP Units in connection with the
purchases. In addition, in May 1996, the Company sold an aggregate of
approximately $40,000 of equity securities to an institutional investor that
purchased the securities on behalf of two owners (the "Private Placement"). The
proceeds of the Private Placement were used primarily to reduce amounts
outstanding under the line of credit.
During the third quarter of 1996, the Company completed a public offering
(the "Follow-on Offering") of 12,293,400 shares of its common stock, using
approximately $151,963 of the net proceeds to reduce amounts outstanding under
the line of credit. The Company acquired nine additional hotel properties,
financed primarily with funds drawn on its line of credit and issuing 17,036 OP
Units in connection with the purchase of one of the hotel properties.
During the fourth quarter of 1996, the Company acquired four additional
hotel properties, utilizing primarily cash drawn on its line of credit and
issuing 85,078 OP Units in connection with the purchase of one of the hotel
properties. As a result of the transactions described above, as of December 31,
1996, the Company owned 46 hotels in 18 states with an aggregate 11,340 guest
rooms and owned an approximate 87.3% interest in the Operating Partnership.
Subsequent to December 31, 1996, the Company has acquired ownership
interests in two additional hotel properties (the "Recent Acquisitions"),
financed primarily with funds drawn on its line of credit.
In addition, on January 16, 1997 and January 17, 1997, the Company acquired
from Resorts Limited Partnership, Carefree Resorts Corporation and The Morgan
Stanley Real Estate Fund, L.P. four resort properties (the "Carefree Resorts")
for a total purchase price of approximately $264 million. The Boulders located
near Scottsdale, Arizona, consists of 160 guest "casitas" and includes access to
33 private homes which participate in a rental pool. The Peaks Resort and Spa
located in Telluride, Colorado, consists of 177 guests rooms plus 7 penthouse
condomimiums. Ventana Canyon, located in Tucson, Arizona, consists of 49 suites
and Carmel Valley Ranch located near Carmel, California, consists of 100 one-
bedroom guest suites. The acquisition of the Carefree Resorts was primarily
financed with funds drawn on the Company's line of credit and the issuance of
1,295,077 OP Units.
Subsequent to the acquisition of the two hotel properties and the Carefree
Resorts described above, the Company owns interests in 52 hotels and resorts and
has an approximate 83.0% interest in the Operating Partnership.
On January 30, 1997, the Company's Board of Directors declared a 2-for-1
stock split effected in the form of a stock dividend distributed on March 18,
1997 to shareholders of record on March 7, 1997. All references herein to number
of shares, per share amounts and market prices of the Company's common stock and
options to purchase common stock have been restated to reflect the impact of the
stock split.
The Company leases each of its hotels, except the Crowne Plaza Ravinia
Hotel and the Marriott WindWatch Hotel, which are separately owned through
special purpose corporations, to lessees who are responsible for operating the
hotels (the "Lessees"). All of the Lessees except PAH RSI, L.L.C. ("PAH RSI
Lessee") are independent of the Company. PAH
F-2
<PAGE>
RSI Lessee is owned and controlled by certain executive officers of the Company
(and was formed in anticipation of the Company's planned merger with and into
California Jockey Club, a real estate investment trust which is paired with an
operating corporation, Bay Meadows Operating Company). The Company leases 25 of
its hotel investments to CHC Lease Partners for staggered terms of ten to twelve
years pursuant to separate participating leases providing for the payment of the
greater of base or participating rent, plus certain additional charges, as
applicable (the "Participating Leases"). Nine of the hotels are leased to
NorthCoast Hotels, L.L.C. ("NorthCoast") under similiar Participating Lease
agreements. DTR North Canton, Inc. (the "Doubletree Lessee") leases six hotels
and Crow Hotel Lessee, Inc. (the "Wyndham Lessee") leases two hotels under
similiar Participating Lease agreements. PAH RSI Lessee leases five hotels,
Metro Hotels Leasing Corporation ("Metro Lease Partners") leases one hotel, and
Grand Heritage Leasing, L.L.C. ( the "Grand Heritage Lessee") leases two hotels
under similiar Participating Lease agreements. 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
Marriott WindWatch Hotel acquisitions were structured without lessees and are
managed directly by Holiday Inns, Inc. and Marriott International, Inc.,
respectively.
The following unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1996 of the Company is presented as
if (i) the Private Placement and the Follow-on Offering, (ii) the acquisition of
24 hotel properties in 1996 (iii) the acquisition of the Recent Acquisitions,
and (iv) the acquisition of Carefree Resorts had occurred as of January 1, 1996.
Such pro forma information is based in part upon the Consolidated Statements of
Operations of the Company filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and the Pro Forma Condensed Combined
Statements of Operations of the Lessees included in this Current Report. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statement of
Operations is not necessarily indicative of what actual results of operations
of the Company would have been assuming such transactions had been completed as
of the beginning of the period presented, nor does it purport to represent the
results of operations for future periods.
F-3
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Company Recent
Historical Adjustments Acquisitions Carefree Pro Forma
(A) (B) (C) Resorts (D) Total
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue:
Participating lease revenue.... $75,893 $27,111 (E) $2,904 (E) $17,643 (E) $123,551
Interest and other income...... 600 21 (F) -- 1,170 (F) 1,791
------- ------- ------ ------- -------
Total revenue................ 76,493 27,132 2,904 18,813 125,342
------- ------- ------ ------- -------
Expenses:
Real estate and personal
property taxes and
casualty insurance............ 7,150 3,703 (G) 464 (G) 1,443 (G) 12,760
Ground lease expense............ 1,075 315 (H) -- -- 1,390
General and administrative...... 4,500 -- -- 100 (I) 4,600
Interest expense................ 7,380 4 (J) 1,734 (J) 14,818 (J) 23,936
Depreciation and amortization... 17,420 7,040 (K) 1,076 (K) 7,446 (K) 32,982
------- ------- ------ ------- -------
Total expenses 37,525 11,062 3,274 23,807 75,668
------- ------- ------ ------- -------
Income (loss) before equity in
earnings of unconsolidated
subsidiaries and minority
interest........................ 38,968 16,070 (370) (4,994) 49,674
Equity in earnings of
unconsolidated subsidiaries... 5,845 1,371 (L) -- -- 7,216
------- ------- ------ ------- -------
Income (loss) before minority
interests....................... 44,813 17,441 (370) (4,994) 56,890
Minority interest in Operating
Partnership................... (6,767) (1,050) (M) 47 (M) (1,781) (M) (9,551)
Minority interest in other
partnerships.................. (55) (650) (N) -- -- (705)
------- ------- ------ ------- -------
Net income (loss) applicable to
common shareholders............. $37,991 $15,741 $ (323) $(6,775) $46,634
======= ======= ====== ======== =======
Net income per common share(O).... $ 1.06 $ 1.06
======= =======
Weighted average number of
common shares and common
share equivalents outstanding(O). 35,938 43,898
======= =======
- ----------------------------------------
</TABLE>
(A) Represents the Company's historical results of operations for the year
ended December 31, 1996.
(B) Represents adjustments to the Company's results of operations assuming the
Private Placement, the Follow-on Offering and the acquisition of interests
in 24 additional hotels (the hotels acquired by the Company during 1996)
had occurred at the beginning of the period presented.
(C) Represents adjustments to the Company's results of operations assuming the
acquisitions of the Radisson Overland Park Hotel and the Radisson
Northbrook Hotel had occurred at the beginning of the period
presented.
(D) Represents adjustments to the Company's results of operations assuming the
acquisition of the Carefree Resort properties had occurred at the beginning
of the period presented. Sales and cost of sales related to the residential
real estate which was owned, developed and sold by Carefree Resorts are
excluded because the Company anticipates selling the residential real
estate to an affiliate at fair market value. Therefore, no gain or loss on
the sale of the residential real estate is expected.
(E) Represents lease payments from the Lessees to the Operating Partnership
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels
assuming January 1, 1996 was the start of the lease term.
(F) For hotels owned as of December 31, 1996 the adjustment represents
interest income earned on the Company's mortgage notes receivable from
unconsolidated subsidiaries assuming the mortgage notes were outstanding at
the beginning of the period presented. For the Carefree Resorts, the
adjustment represents interest income earned on the Company's notes
receivable issued in connection with the sale of certain assets to PAH RSI
Lessee assuming the notes were outstanding at the beginning of the period
presented.
(G) Represents real estate and personal property taxes, and casualty insurance
to be paid by the Operating Partnership.
(H) Represents ground lease payments to be made with respect to certain of the
hotels.
F-4
<PAGE>
(I) Represents incremental salaries, insurance, travel, audit, legal and other
expenses associated with the continued growth of the Company. Also
includes annual amortization of unearned stock compensation computed on a
straight-line basis over the three to four year vesting periods.
(J) Represents adjustments to interest expense incurred on the net borrowings
under the line of credit which were used to purchase hotel properties and
amortization of deferred loan costs. Deferred loan costs are amortized over
the term of the related loan. The adjustment related to the hotels owned as
of December 31, 1996 includes amortization of $86, the adjustment related
to the Recent Acquisitions includes amortization of $75 and the adjustment
related to the Carefree Resorts acquisition includes amortization of $377.
(K) Represents depreciation on the hotels. Depreciation is computed using the
straight-line method and is based upon the estimated useful lives of 35
years for buildings and improvements and 5-7 years for furniture and
equipment. These estimated useful lives are based on management's
knowledge of the properties and the hotel industry in general.
(L) Represents equity in income of the unconsolidated subsidiary which owns
the Marriott WindWatch Hotel.
(M) Represents the adjustments to minority interest assuming the Private
Placement, the Follow-on Offering, the acquisition of 28 additional
hotel properties and the acquisition of Carefree Resorts had occurred at
the beginning of the period presented. Prior to the acquisition of the
Carefree Resorts, the minority interest percentage was approximately 12.7%.
Subsequent to the acquisition of the Carefree Resort properties, the
minority interest percentage is approximately 17.0%.
(N) Represents the minority interest related to the partnerships with DTR PAH
Holding, Inc., assuming such entities had been formed and the five hotels
owned by such partnerships had been acquired at the beginning of the period
presented.
(O) On January 30, 1997, the Company's Board of Directors declared a 2-for-1
stock split effected in the form of a stock dividend distributed on March
18, 1997 to shareholders of record on March 7, 1997. All references herein
to number of shares, per share amounts and market prices of the Company's
common stock and options to purchase common stock have been restated to
reflect the impact of the stock split.
F-5
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is
presented as if (i) the acquisition of the Recent Acquisitions, and (ii) the
acquisition of the Carefree Resorts had occurred on December 31, 1996. Such pro
forma information is based in part upon the Company's Consolidated Balance Sheet
as of December 31, 1996 and should be read in conjunction with the financial
statements filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. In management's opinion, all adjustments necessary to
reflect the effect of these transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is
not necessarily indicative of what the actual financial position would have been
assuming such transactions had been completed as of December 31, 1996, nor does
it purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
Company Recent Carefree Pro Forma
Historical Acquisitions (A) Resorts (B) Total
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Net investment in hotel and resort
properties............................ $641,825 $ 23,085 $248,184 $ 913,094
Mortgage notes and other receivables
from unconsolidated subsidiaries..... 72,209 -- -- 72,209
Notes receivable....................... -- -- 9,000 (C) 9,000
Investment in unconsolidated
subsidiaries......................... 11,291 -- 1,590 (D) 12,881
Cash and cash equivalents.............. 6,604 (225) -- 6,379
Accounts receivable.................... 6,829 410 556 7,795
Deferred expenses, net................. 3,063 365 (E) 1,182 (E) 4,610
Prepaid expenses and other assets...... 19,110 40 (10,000) 9,150
-------- -------- -------- ----------
Total assets...................... $760,931 $ 23,675 $250,512 $1,035,118
======== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit and
mortgage notes....................... $214,339 $ 23,603 (F) $188,996 (F) $ 426,938
Dividends and distributions payable.... 13,129 -- -- 13,129
Accounts payable and accrued expenses.. 10,117 72 2,854 13,043
Due to unconsolidated subsidiaries..... 6,034 -- -- 6,034
Minority interest in Operating
Partnership.......................... 68,562 -- 58,662 (G) 127,224
Minority interest in other partnerships 11,711 -- -- 11,711
Shareholders' equity:
Preferred stock...................... -- -- -- --
Common stock......................... -- -- -- --
Paid-in capital...................... 442,540 -- -- 442,540
Unearned stock compensation, net..... (5,427) -- -- (5,427)
Retained earnings.................... (74) -- -- (74)
-------- -------- -------- ----------
Total shareholders' equity........ 437,039 -- -- 437,039
-------- -------- -------- ----------
Total liabilities and shareholders'
equity.......................... $760,931 $ 23,675 $250,512 $1,035,118
======== ======== ======== ==========
- --------------------------------------------
</TABLE>
(A) Represents adjustments to the Company's financial position assuming the
acquisition of the Radisson Overland Park Hotel and the Radisson Northbrook
Hotel occurred on December 31, 1996. The acquisition of these hotel
properties was financed primarily with funds drawn on the Company's line of
credit in the aggregate amount of $23,491.
F-6
<PAGE>
(B) Represents adjustments to the Company's financial position assuming the
acquisition of the Carefree Resorts had occurred on December 31, 1996. The
acquisition was primarily financed with funds drawn of the Company's line
of credit of $160,507, the issuance of 1,295,077 OP units valued at
approximately $58,662 and the assumption of approximately $28,489 of debt
and certain liabilities. Adjustments include reclassification to apply the
proceeds of a $10,000 escrow deposit included in prepaid expenses and other
assets at December 31, 1996 to the purchase of the Carefree Resorts.
(C) Represents promissory notes issued to the Operating Partnership by PAH RSI
Lessee in consideration for the sale of certain assets including the right
to receive certain royalty fees.
(D) Represents investment in PAH Boulders, Inc. In connection with the
acquisition of the Carefree Resorts, certain assets were transferred to PAH
Boulders, Inc., a corporation owned by certain executive officers of the
Company (who hold voting common stock representing a 1% economic interest)
and the Operating Partnership (who holds non-voting common stock
representing a 99% economic interest).
(E) Represents deferred loan costs incurred in connection with the new debt
financing obtained related to the Bourbon Orleans Hotel and the
modification of the line of credit agreement to increase the maximum amount
available under the line of credit to $475,000.
(F) The adjustment related to the Recent Acquisitions represents approximately
$23,491 of funds drawn on the line of credit related to the acquisition of
the Recent Acquisitions. The adjustment also includes the repayment of
approximately $13,388 on the line of credit and a bank loan of
approximately $13,500 related to the refinancing of debt on the Bourbon
Orleans Hotel. The adjustment related to the Carefree Resorts acquisition
represents approximately $160,507 of funds drawn on the line of credit and
the assumption of approximately $28,489 of debt.
(G) The adjustment related to the Carefree Resorts acquisition represents the
issuance of 1,295,077 OP Units valued at $58,662.
F-7
<PAGE>
COMBINED LESSEES
PRO FORMA CONDEDSED COMBINED STATEMENTS OF OPERATIONS
The combined Lessees' (CHC Lease Partners, NorthCoast, Doubletree Lessee,
Wyndham Lessee, PAH RSI Lessee, Metro Lease Partners and Grand Heritage Lessee
combined) unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1996 is presented as if (i) the acquisition of 24 hotel
properties which occurred in 1996, (ii) the acquisition of the Recent
Acquisitions in 1997, and (iii) the acquisition of Carefree Resorts had occurred
on January 1, 1996, and the hotels (except the Crowne Plaza Ravinia Hotel and
the Marriott WindWatch Hotel) had been leased to the Lessees pursuant to the
Participating Leases. The pro forma information is based in part upon the
Statements of Operations of CHC Lease Partners and the Statements of Operations
of NorthCoast filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made.
The Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel are not
leased to a Lessee but are managed directly by Holiday Inns, Inc. and Marriott
International, Inc., respectively. Therefore, the results of operations of the
Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel are not included in
the Pro Froma Condensed Combined Statement of Operations.
The unaudited Pro Forma Condensed Combined Statement of Operations is not
necessarily indicative of what the actual results of operations of the Combined
Lessees would have been assuming such transactions had been completed as of the
beginning of the period presented, nor does it purport to represent the results
of operations for future periods.
F-8
<PAGE>
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Combined
Hotels Recent
Historical Adjustments Acquisitions Carefree Pro Forma
(A) (B) (C) Resorts (D) Total
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room.................. $155,856 $61,770 $ 8,368 $29,251 $255,245
Food and beverage..... 56,833 26,989 2,578 17,356 103,756
Conference center..... 2,354 -- -- -- 2,354
Golf/Club revenue..... -- -- -- 22,135 22,135
Club membership....... -- -- -- 4,277 4,277
Shopping center....... -- -- -- 1,730 1,730
Spa revenue........... -- -- -- 2,575 2,575
Telephone and other... 14,467 7,300 324 9,979 32,070
-------- ------- ------- ------- --------
Total revenue.... 229,510 96,059 11,270 87,303 424,142
-------- ------- ------- ------- --------
Expenses:
Departmental costs and
expenses......... 86,614 40,961 4,879 42,175 174,629
General and
administrative....... 20,051 10,780 833 5,876 37,540
Ground lease expense.. 818 1,246 -- -- 2,064
Repair and maintenance 10,963 5,130 591 7,386 24,070
Utilities............. 10,059 5,182 662 3,480 19,383
Marketing............. 20,135 8,488 914 5,589 35,126
Interest expense...... 3 -- -- 1,170 (E) 1,173
Insurance............. 1,394 794 135 492 2,815
Participating lease
payments............. 75,893 27,111 (F) 2,904 (F) 17,643 (F) 123,551
-------- ------- ------- ------- --------
Total expenses... 225,930 99,692 10,918 83,811 420,351
-------- ------- ------- ------- --------
Income (loss) before lessee
income (expense)...... 3,580 (3,633) 352 3,492 3,791
Dividend and interest
income.................... 1,543 (G) -- -- -- 1,543
Management fees............ (4,603) (2,280) (H) (237) (H) (2,971) (H) (10,091)
Lessee general and
administrative........ (1,528) (150) (I) (15) (I) (352) (I) (2,045)
-------- ------- ------- ------- --------
Net income (loss).......... $ (1,008) $(6,063) $ 100 $ 169 $ (6,802)
======== ======= ======= ======= ========
- ------------------------------------
</TABLE>
(A) Represents the combined historical results of operations of CHC Lease
Partners and Metro Lease Partners for the year ended December 31,
1996, and NorthCoast, Doubletree Lessee, Wyndham Lessee and Grand Heritage
Lessee for the period from their respective inception of operations through
December 31, 1996.
(B) Represents adjustments to the Lessees' results of operations assuming the
44 hotels leased to the Lessees as of December 31, 1996 had been leased at
the beginning of the period presented.
(C) Represents adjustments to the Lessees' results of operations assuming
the Radisson Overland Park Hotel and the Radisson Northbrook Hotel had been
leased to one of the Lessees at the beginning of the period presented.
(D) Represents adjustments to the Lessees' results of operations assuming the
Carefree Resort properties had been leased to PAH RSI Lessee at the
beginning of the period presented.
(E) Represents interest expense on promissory notes issued in connection with
the acquisition of certain assets by PAH RSI Lessee assuming the notes were
outstanding at the beginning of the period presented.
F-9
<PAGE>
(F) Represents Participating Lease payments calculated on a pro forma basis by
applying the provisions of the Participating Leases to the historical
revenue of the hotels assuming January 1, 1996 was the beginning of the
lease term.
(G) Includes dividend income on approximately 250,000 OP Units and 31,074 OP
Units in the Operating Partnership which form a portion of the required
capitalization of CHC Lease Partners and NorthCoast, respectively. Pro
forma amounts exclude additional dividend income earned on the OP Units
held by certain Lessees, and pro forma interest income earned on invested
cash balances.
(H) Represents adjustments to management fees paid to the Operators under the
terms of their respective management agreements with the Lessees.
Management fees paid to certain Operators are subordinate to the Lessees'
obligations to the Company under the Participating Lease agreements.
(I) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
F-10
<PAGE>
Report of Independent Auditors
The Partners of
Resorts Limited Partnership
We have audited the accompanying consolidated balance sheets of Resorts Limited
Partnership 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 consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated 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 audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Resorts
Limited Partnership at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
March 14, 1997
F-11
<PAGE>
Resorts Limited Partnership
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
_______________ _____________
<S> <C> <C>
ASSETS
Properties:
Income producing properties $108,560,453 $109,144,723
Land held for development 14,830,472 15,399,073
Land held for lease 860,310 869,648
--------------- -------------
124,251,235 125,413,444
Resort property joint ventures 25,553,666 26,133,536
Other:
Cash and cash equivalents 29,300,567 21,021,022
Restricted cash 399,429 673,878
Accounts receivable, net 6,306,319 4,743,048
Notes receivable 121,475 257,594
Club memberships 1,881,294 3,153,509
Tradenames, net 2,752,582 2,816,229
Other assets, net 2,301,196 2,293,378
--------------- -------------
$192,867,763 $186,505,638
=============== =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and other
liabilities $ 6,637,323 $ 5,681,939
Advance deposits 3,509,337 2,934,214
Notes payable 55,777,147 55,961,987
Minority interest 1,261,372 1,131,737
--------------- -------------
67,185,179 65,709,877
Partners' capital 125,682,584 120,795,761
--------------- -------------
$192,867,763 $186,505,638
=============== =============
</TABLE>
See accompanying notes.
F-12
<PAGE>
Resorts Limited Partnership
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
OPERATING REVENUES
Income producing properties $53,932,425 $46,783,183
Development properties 11,728,953 17,409,214
----------------------------
65,661,378 64,192,397
OPERATING EXPENSES
Income producing properties 41,017,749 36,478,913
Development properties 9,932,491 14,108,801
----------------------------
50,950,240 50,587,714
----------------------------
Gross operating profit 14,711,138 13,604,683
NONOPERATING (INCOME) EXPENSE
Interest expense 4,176,339 4,097,659
Depreciation and amortization 5,021,250 3,694,373
Royalty income (1,476,984) (1,243,719)
Interest income (755,877) (430,846)
Other expenses 1,489,514 885,996
----------------------------
8,454,242 7,003,463
----------------------------
Income before minority interest and
equity in income (losses) of resort
property joint ventures 6,256,896 6,601,220
Minority interest in income
of partnership 129,635 120,242
----------------------------
Income before equity in income (losses)
of resort property joint ventures 6,127,261 6,480,978
Equity in income (losses) of resort
property joint ventures 1,162,130 (1,074,406)
----------------------------
Net income $ 7,289,391 $ 5,406,572
============================
</TABLE>
See accompanying notes.
F-13
<PAGE>
Resorts Limited Partnership
Consolidated Statements of Partners' Capital
<TABLE>
<CAPTION>
LIMITED PARTNERS
GENERAL --------------------------------------------------------
PARTNER CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------
AT&T
CAREFREE MASTER OTHER
RESORTS PENSION PENSION VARIOUS
CORPORATION TRUST TRUSTS INDIVIDUALS TOTAL
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Partners' capital
December 31, 1994 $1,131,385 $60,282,522 $32,394,379 $21,580,903 $115,389,189
Net income 53,011 2,824,544 1,517,842 1,011,175 5,406,572
--------------------------------------------------------------------------------------------------
Partners' capital
December 31, 1995 1,184,396 63,107,066 33,912,221 22,592,078 120,795,761
Capital distributions (23,558) (1,255,168) (674,497) (449,345) (2,402,568)
Net income 71,473 3,808,180 2,046,424 1,363,314 7,289,391
--------------------------------------------------------------------------------------------------
Partners' capital
December 31, 1996 $1,232,311 $65,660,078 $35,284,148 $23,506,047 $125,682,584
==================================================================================================
</TABLE>
See accompanying notes
F-14
<PAGE>
Resorts Limited Partnership
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,289,391 $ 5,406,572
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation and amortization 5,021,250 3,694,373
Interest expense added to
notes payable 815,160 758,225
Minority interest in income
of partnership 129,635 120,242
Equity in (income) losses
of resort property joint ventures (1,162,130) 1,074,406
Changes in operating assets
and liabilities:
Accounts receivable, net (1,563,271) (273,860)
Club memberships 1,272,215 2,255,997
Land held for development 568,601 5,133,231
Other assets, net (403,597) (534,904)
Accounts payable and
other liabilities 955,384 383,994
Advance deposits 575,123 839,836
--------------------------
Net cash provided by operating
activities 13,497,761 18,858,112
</TABLE>
See accompanying notes.
F-15
<PAGE>
Resorts Limited Partnership
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
INVESTING ACTIVITIES
Decrease in restricted cash 274,449 233,476
Additions to income producing
properties (3,956,863) (8,445,638)
Purchase of golf and racquet
club, net of cash acquired - (1,476,897)
Payments received from notes
receivable 136,119 92,740
Distribution proceeds from
resort property joint ventures 1,742,000 -
Additional investments in resort
property joint ventures - (3,415,428)
Additional investment in
tradenames (11,353) (41,229)
---------------------------
Net cash used in investing
activities (1,815,648) (13,052,976)
FINANCING ACTIVITIES
Capital distributions (2,402,568) -
Principal payments on notes payable (1,000,000) (1,000,000)
---------------------------
Net cash used in financing activities (3,402,568) (1,000,000)
---------------------------
Increase in cash and cash equivalents 8,279,545 4,805,136
Cash and cash equivalents at beginning
of year 21,021,022 16,215,886
---------------------------
Cash and cash equivalents at end of
year $ 29,300,567 $ 21,021,022
===========================
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITY
Purchase of the Lodge financed by
notes payable (Note 3) $ - $ 26,830,000
============ ============
</TABLE>
See accompanying notes.
F-16
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements
December 31, 1996
1. THE PARTNERSHIP
Resorts Limited Partnership (RLP, the Partnership) was formed on June 17, 1992,
for the purpose of acquiring and operating resort and hotel properties.
Carefree Resorts Corporation (Carefree), an Arizona Corporation, is general
partner; AT&T Master Pension Trust is Class A Limited Partner, other pension
trusts are Class B Limited Partners, and various individuals are Class C Limited
Partners.
In accordance with the Partnership Agreement, a series of transactions occurred
upon the Partnership's formation whereby the partners contributed cash and
certain resort and hotel properties as initial capital contributions. This
series of transactions resulted in the following Partnership ownership
percentages:
Carefree, as general partner 0.98050%
Class A Limited Partner:
AT&T Master Pension Trust 52.24278
Class B Limited Partners, in the aggregate 28.07401
Class C Limited Partners, in the aggregate 18.70271
---------
100.00000%
=========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Boulders Joint Venture, a
97.56216 percent owned partnership, as well as the Lodge at Ventana Canyon, an
operating unit of the Partnership. The Partnership's consolidated statements of
operations include the operating results of the Lodge at Ventana Canyon since
the purchase date of March 1, 1995.
F-17
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in noninterest bearing checking
accounts, interest bearing money market accounts, and U.S. Treasury Bills
maturing within one month of purchase.
RESTRICTED CASH
Restricted cash consists of cash reserved for future capital improvements
relating to the Boulders Resort and Club and the Lodge.
PROPERTIES
Income producing properties and land held for lease are recorded at amounts
which approximated fair market value at the date the Partnership was formed.
Subsequent additions have been recorded at cost. Land held for development is
recorded at cost.
Buildings and improvements are depreciated using 20 to 40 years as an estimate
of useful lives. Furniture and equipment is depreciated using 5 to 10 years as
an estimate of useful lives.
During 1996, the Partnership adopted FASB 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 such as residential land held for
sale. At December 31, 1996, the Partnership does not hold any assets that meet
the impairment criteria of Statement 121.
INVENTORIES
Inventories, consisting primarily of food, beverage, gift and golf shop
merchandise, are carried at the lower of cost or market using the first-in,
first-out cost method and are included in income producing properties on the
balance sheet.
RESORT PROPERTY JOINT VENTURES
Resort property joint ventures are accounted for using the equity method.
F-18
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CLUB MEMBERSHIPS
Club memberships of the Boulders Joint Venture were recorded at the estimated
fair market value of the unsold memberships at the date of partnership
formation. As memberships are sold the membership fee is recorded in operating
revenue, and a corresponding amount, based on the original amount allocated to
each membership, is expensed in operating expenses. No amount is recorded for
the Lodge at Ventana Canyon club memberships as there were no unsold memberships
available at the date of acquisition.
TRADENAMES
Tradenames are stated at the agreed upon value determined by the partners at the
date of formation. Subsequent additions have been recorded at cost. Tradenames
are amortized using the straight line method over a 40 year estimated useful
life.
INCOME TAXES
Under the Internal Revenue Code, a partnership is not a taxable entity and,
accordingly, no provision for income taxes has been included in the accompanying
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.
Management believes that the actual results will not differ materially from the
estimates used in preparing the financial statements.
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the classifications used in the 1996 consolidated
financial statements.
F-19
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
3. INCOME PRODUCING PROPERTIES
Income producing properties consist of the following:
DECEMBER 31
1996 1995
----------------------------
The Boulders $ 71,727,556 $ 71,848,718
El Pedregal 6,983,761 7,372,354
The Lodge 29,849,136 29,923,651
----------------------------
$108,560,453 $109,144,723
============================
A detailed description of the individual components of income producing
properties follows.
THE BOULDERS
The Boulders Resort and Club (the Boulders) consists of a 160 casita resort, two
18-hole championship golf courses, restaurants, golf and gift shops, and a golf
and tennis clubhouse, located in Carefree, Arizona. Assets of the Boulders are
as follows:
DECEMBER 31
1996 1995
--------------------------
Land and improvements $20,181,277 $20,102,191
Buildings and improvements 45,710,277 45,105,165
Furniture, fixtures and
equipment 13,944,583 11,999,886
Inventories 1,602,482 1,420,841
--------------------------
81,438,619 78,628,083
Accumulated depreciation
and amortization 9,711,063 6,779,365
--------------------------
$71,727,556 $71,848,718
==========================
F-20
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
3. INCOME PRODUCING PROPERTIES (CONTINUED)
EL PEDREGAL
The El Pedregal Shopping Center (El Pedregal) consists of a 120,000 square foot
high-end specialty retail center located adjacent to the Boulders. Assets of El
Pedregal are as follows:
DECEMBER 31
1996 1995
--------------------------
Land and Improvements $ 856,253 $ 856,253
Buildings and improvements 6,594,641 6,542,029
Tenant improvements 1,314,130 1,287,464
--------------------------
8,765,024 8,685,746
Accumulated depreciation
and amortization 1,781,263 1,313,392
--------------------------
$6,983,761 $7,372,354
==========================
THE LODGE
On March 1, 1995, the Partnership purchased all of the operating assets and
assumed all of the operating liabilities of the Lodge at Ventana Canyon (the
Lodge) from FINOVA Capital Corporation (formerly known as Greyhound Financial
Corporation) for $28,942,827. The amount paid to FINOVA consisted of the
following:
Cash $2,112,827
Senior Note Payable
(Note 8) 18,000,000
Junior Note Payable
(Note 8) 8,830,000
----------
$28,942,827
==========
F-21
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
3. INCOME PRODUCING PROPERTIES (CONTINUED)
The Lodge, located in Tucson, Arizona, consists of a 49 suite luxury resort, two
18-hole championship golf courses and golf clubhouse, and 12 tennis courts.
Income producing assets of the Lodge are as follows:
December 31,
1996 1995
----------- -----------
Land and improvements $ 7,041,435 $ 6,969,090
Buildings and improvements 20,678,314 20,682,496
Furniture, fixtures and equipment 2,975,998 2,647,629
Inventories 363,108 360,808
----------- -----------
31,058,855 30,660,023
Accumulated depreciation 1,877,936 736,372
----------- -----------
29,180,919 29,923,651
Construction in progress 668,217 -
----------- -----------
$29,849,136 $29,923,651
=========== ===========
Income producing properties' operating revenues consist of the following:
1996 1995
------------------------
The Boulders $37,367,375 $32,714,510
The Lodge 11,775,769 8,421,602
Club memberships 3,059,222 4,123,506
El Pedregal 1,730,059 1,523,565
------------------------
$53,932,425 $46,783,183
========================
Income producing properties' operating expenses consist of the following:
1996 1995
------------------------
The Boulders $28,361,063 $25,164,174
The Lodge 10,602,844 8,115,351
Club memberships 1,304,604 2,486,696
El Pedregal 749,238 712,692
------------------------
$41,017,749 $36,478,913
========================
F-22
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
4. LAND HELD FOR DEVELOPMENT
Land held for development consists of the following:
DECEMBER 31
1996 1995
-------------------------
Commercial land $ 5,795,000 $ 6,100,000
Residential land 7,372,706 7,768,803
Construction in process 1,662,766 1,530,270
-------------------------
$14,830,472 $15,399,073
=========================
Commercial land consists of approximately 25 acres located adjacent to the
Boulders. This land is currently undeveloped.
Residential land consists of developed, partially developed, and undeveloped
residential land located within the Boulders Community and includes capitalized
land development costs of $3,460,000 and $2,750,000 at December 31, 1996 and
1995, respectively.
Construction in process consists of single-family homes under construction
within the Boulders Community.
5. RESORT PROPERTY JOINT VENTURES
The Partnership has ownership interests in two resort property joint ventures:
CV Ranch Limited Partnership and Telluride Resort and Spa Limited Partnership.
CV RANCH LIMITED PARTNERSHIP (CVRLP)
CVRLP was formed on October 18, 1993, under the laws of the State of Delaware,
for the purpose of acquiring and operating the Carmel Valley Ranch Resort. The
Partnership, along with its general partner, Carefree, established a
partnership, Resorts Limited Partnership II (RLP II), for the sole purpose of
acquiring a partnership interest in CVRLP. RLP II is owned by the Partnership
(99.9 percent) as general partner and Carefree (0.1 percent) as limited partner.
RLP II and its wholly owned subsidiary, CV Ranch - RLP II, Inc., a California
corporation, effectively own 50 percent of CVRLP.
F-23
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
5. RESORT PROPERTY JOINT VENTURES (CONTINUED)
RLP II, The Morgan Stanley Real Estate Fund, L.P. (Morgan Stanley), CV Ranch -
RLP II, Inc., and MS California Corporation (wholly-owned by Morgan Stanley)
each own the following CVRLP partnership interests:
RLP II 49.5%
Morgan Stanley 49.5
CV Ranch - RLP II, Inc. 0.5
MS California Corporation 0.5
----------
100.0%
==========
Carmel Valley Ranch Resort, located in Carmel, California, consists of a 100
suite luxury resort, a semi-private 18-hole championship golf course and
clubhouse, a private tennis club and clubhouse, and approximately 300 acres of
undeveloped residential land surrounding the Resort.
TELLURIDE RESORT AND SPA LIMITED PARTNERSHIP (TRSLP)
TRSLP was formed on September 15, 1993, under the laws of the State of Delaware,
for the purpose of acquiring and operating The Peaks at Telluride. The
Partnership established a wholly owned subsidiary, RLP Telluride, Inc., to
acquire a minor partnership interest in TRSLP. The Partnership, along with
Morgan Stanley, RLP Telluride, Inc., MS Colorado Corporation (wholly-owned by
Morgan Stanley), and Resorts Services, Inc., each own the following TRSLP
partnership interests:
Morgan Stanley 49.5%
RLP 49.1
RLP Telluride, Inc. 0.5
MS Colorado Corporation 0.5
Resorts Services, Inc. 0.4
----------
100.0%
==========
The Peaks at Telluride, located in Telluride, Colorado, consists of a 177 suite
luxury resort, 7 residential condominiums, and a 42,000 square-foot world-class
health spa.
F-24
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
5. RESORT PROPERTY JOINT VENTURES (CONTINUED)
SUMMARY INFORMATION
A summary of the resort property joint ventures at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
CVRLP TRSLP TOTAL
-------------------------------------------
<S> <C> <C> <C>
Investment balance at January 1, 1996 $12,278,588 $13,854,948 $26,133,536
Capital distributions (750,000) (992,000) (1,742,000)
Equity in income of resort property
joint ventures 695,759 466,371 1,162,130
-------------------------------------------
Investment balance at December 31, 1996 $12,224,347 $13,329,319 $25,553,666
===========================================
</TABLE>
A summary of the resort property joint ventures at December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
CVRLP TRSLP TOTAL
--------------------------------------------
<S> <C> <C> <C>
Investment balance at January 1, 1995 $ 9,598,835 $14,193,679 $23,792,514
Capital contributions 2,995,000 420,428 3,415,428
Equity in losses of resort property
joint ventures (315,247) (759,159) (1,074,406)
--------------------------------------------
Investment balance at December 31, 1995 $12,278,588 $13,854,948 $26,133,536
============================================
</TABLE>
Summarized financial information relating to the resort property joint ventures
at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
December 31, 1996 DECEMBER 31, 1995
CVRLP TRSLP CVRLP TRSLP
----------------------------- --------------------------
<S> <C> <C>
Total assets $26,569,404 $30,181,464 $26,485,345 $31,146,237
Partners' capital 24,448,694 26,873,627 24,557,177 27,933,363
Net income (loss) for the period 1,391,517 940,264 (630,493) (1,530,563)
</TABLE>
F-25
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
6. NOTES RECEIVABLE
The Partnership generated notes receivable in conjunction with the sale of
residential property. These notes require periodic principal and interest
payments until various dates in 1999, at which time all remaining principal and
unpaid interest becomes due. Interest income generated from these notes was
approximately $15,000 and $44,000 in 1996 and 1995, respectively.
7. TRADENAMES
The Partnership is the owner or licensee of certain tradenames, the rights under
which are licensed to a related party (see Note 10). Tradenames are included in
the Partnership's balance sheet net of accumulated amortization, which totals
$300,000 and $225,000 at December 31, 1996 and 1995, respectively.
8. NOTES PAYABLE
The following is a summary of notes payable at December 31, 1996 and 1995:
DECEMBER 31
1996 1995
--------------------------------
Line of credit payable to Bank One
Arizona, N.A. $27,373,762 $28,373,762
Notes and deferred interest payable
to FINOVA Capital Corporation 28,403,385 27,588,225
--------------------------------
$55,777,147 $55,961,987
================================
BANK ONE ARIZONA, N.A.
The line of credit payable to Bank One Arizona, N.A. requires monthly interest
payments of prime plus 0.25 percent, although the Partnership may fix the
interest rate for all or a portion of the principal balance at any time at the
London Interbank Market Interest Rate plus 2.75 percent. Principal payments of
$500,000 are due semi-annually beginning June 1, 1995 until December 1999, at
which time all remaining principal and outstanding interest is due. The line of
credit is collateralized by certain real property held by the Partnership. At
December 31, 1996, the Partnership has $10,626,238 available on this line of
credit. Draws are available under the terms of the agreement.
F-26
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE (CONTINUED)
The Partnership has entered into an interest rate cap agreement which hedges its
interest rate exposure on the variable interest rate line of credit payable to
Bank One Arizona, N.A. The agreement, which expires on December 10, 1997,
exchanges the Partnership's variable interest rate obligation for a fixed
interest rate (10 percent) when the variable rate exceeds 10 percent. At
December 31, 1996 the notional principal amount relating to this agreement was
$30,000,000. No amounts were received under the terms of this agreement during
1996 or 1995. The $147,000 premium paid for this interest rate cap agreement is
included in other assets and is being amortized over the term of the agreement.
FINOVA CAPITAL CORPORATION
Amounts payable to FINOVA are summarized as follows:
1996 1995
----------- -----------
Senior note payable to FINOVA $18,758,225 $18,000,000
Junior note payable to FINOVA 8,830,000 8,830,000
Interest payable to FINOVA 815,160 936,793
----------- -----------
28,403,385 27,766,793
Less current portion of interest
included in accounts payable and
other liabilities - (178,568)
----------- -----------
$28,403,385 $27,588,225
=========== ===========
The senior and junior notes payable to FINOVA were originated in connection with
the purchase of the Lodge on March 1, 1995 and are collateralized by the Lodge's
property and equipment. All unpaid principal and interest is payable upon
maturity on March 1, 2005. Both FINOVA notes provide for annual interest to
accrue at a rate of 6.5 percent (computed based on stated interest payment
amounts); however, during each of the initial three years of the term of the
notes, actual interest paid is dependent on the attainment of certain levels of
annual Lodge cash flows. Any interest which accrues on the notes which is unpaid
during each of the first three years is added to the senior note balance. In the
event that the Partnership sells the Lodge after March 1, 2000 and distributes
the Net Sales Proceeds (as defined) to FINOVA in accordance with the terms
specified in the purchase agreement, any remaining unpaid balance on the junior
note may be deemed discharged.
The Partnership also has a construction loan available from FINOVA in
conjunction with the purchase of the Lodge. Under the terms of the construction
loan agreement, FINOVA is required to loan to the Partnership a maximum of
$4,500,000 (approximately 60 percent of budgeted construction cost) for the
planned expansion of the Lodge. No funds have been drawn under this agreement
by the Partnership as of December 31, 1996, as the Partnership is currently in
the planning and approval stage of the planned expansion.
F-27
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE (CONTINUED)
Total interest paid on all of the Partnership's notes payable was approximately
$3,434,000 and $3,128,000 in 1996 and 1995, respectively.
Principal maturities on notes payable at December 31, 1996 are as follows:
1997 $ 1,000,000
1998 1,000,000
1999 25,373,762
2000 -
2001 -
Thereafter 28,403,385
-----------
$55,777,147
===========
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" requires that the Partnership disclose estimated
fair values of financial instruments. Cash and cash equivalents, restricted
cash, accounts receivable, notes receivable, accounts payable and other
liabilities, and advance deposits, are carried at amounts that reasonably
approximate their fair values. The Partnership believes the fair value of
the notes payable equals $53,677,147 at December 31, 1996.
The estimated fair value of financial instruments were determined by management
using available market information and appropriate valuation methodologies,
including, in the case of notes payable, information obtained from the January
1997 sale of the Partnership (see Note 12). Judgment is necessary to interpret
market data and develop estimated fair value. Accordingly, management's
estimates are not necessarily indicative of the amounts the Partnership could
realize on disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies could have a material effect on the
estimated fair value amounts.
F-28
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS
MANAGEMENT AGREEMENTS
The Partnership has management agreements with Resorts Services, Inc., (RSI) a
related affiliate, in which RSI manages and operates the Boulders and the Lodge.
Management fees incurred under these agreements totaled approximately $2,223,000
and $1,833,000 in 1996 and 1995, respectively.
The Partnership, which is the owner or licensee of certain tradenames, is
subject to an exclusive license agreement with RSI for the use of the
tradenames. Certain royalties may be paid to the Partnership by RSI if adjusted
gross receipts, as defined, of RSI exceed certain thresholds. Royalties earned
in conjunction with this agreement were approximately $1,477,000 and $1,244,000
in 1996 and 1995, respectively.
The Partnership is also subject to various agreements, whereby management fees
are paid by the Boulders and the Lodge to RSI based on asset disposition, asset
acquisitions, development projects and club membership sales. Management fees
incurred during 1996 and 1995 under these agreements were approximately $261,000
and $499,000, respectively.
OTHER
The Lodge has an agreement with the Loew's Ventana Canyon Resort (Loew's) (an
unaffiliated adjacent resort property) that allows Loew's guests to use one of
the golf courses. The green fees and cancellation fees generated belong
entirely to the Lodge. This arrangement affords Loew's the ability to offer the
golf amenity to its guests and provides the Lodge with an additional revenue
source. Green fees collected from Loew's guests (per annum) must equal at
least 75% of the prior year or else Loew's owes the shortfall to the
Partnership. During 1996 and 1995, the Partnership recognized golf-oriented
revenue under this agreement of approximately $2,196,000 and $1,626,000,
respectively.
11. LEASES
El Pedregal leases have remaining terms that range from 1 to 5 years.
The leases generally provide for minimum annual rental amounts that may be
subject to cost of living increases, and for reimbursement by tenants for common
area environmental costs. Rental income, net of common area reimbursements, was
approximately $1,068,000 and $946,000 in 1996 and 1995, respectively.
Land held for lease consists of 2.26 acres of land and land improvements, net of
accumulated depreciation, adjacent to the Boulders. The lease calls for annual
payments of $60,000, plus 25 percent of gross rental income received, as
defined, and expires in 2053. Rental income was approximately $87,000 and
$60,000 in 1996 and 1995, respectively.
F-29
<PAGE>
Resorts Limited Partnership
Notes to Consolidated Financial Statements (continued)
11. LEASES (CONTINUED)
At December 31, 1996, approximate future minimum lease payments receivable under
noncancelable operating leases are as follows:
1997 $1,147,000
1998 726,000
1999 508,000
2000 225,000
2001 60,000
Thereafter 3,120,000
----------
$5,786,000
==========
12. SUBSEQUENT EVENT (UNAUDITED)
On January 16, 1997, the Partnership was sold in its entirety to Patriot
American Hospitality, Inc. for approximately $210 million.
F-30
<PAGE>
Report of Independent Auditors
The Partners of CV Ranch Limited Partnership
We have audited the accompanying balance sheets of CV Ranch Limited Partnership
as of December 31, 1996 and 1995 and the related statements of operations,
changes in partners' capital 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 audits 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 CV Ranch Limited Partnership at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
February 13, 1997
F-31
<PAGE>
CV Ranch Limited Partnership
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,195,133 $1,487,644
Restricted cash 213,586 -
Accounts receivable, net 934,642 1,146,359
Inventories 338,641 304,021
Prepaid expenses and other current assets 286,154 97,444
Notes receivable 660,250 549,500
----------------------------
3,628,406 3,584,968
Property and equipment:
Land and land improvements 4,887,038 4,837,266
Buildings and improvements 9,679,614 9,457,051
Furniture and equipment 6,183,073 5,841,798
China, silver, glass and linen 191,013 144,841
----------------------------
20,940,738 20,280,956
Less accumulated depreciation (2,231,388) (1,305,518)
-----------------------------
18,709,350 18,975,438
Construction in progress 1,030,249 395,398
-----------------------------
19,739,599 19,370,836
Intangible assets, net 117,203 242,094
Residential land held for sale 3,084,196 3,287,447
-----------------------------
$ 26,569,404 $26,485,345
=============================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 184,985 $ 162,287
Accrued expenses and other liabilities 1,027,781 817,257
Advance deposits 765,038 735,483
Deferred revenue 142,906 213,141
----------------------------
2,120,710 1,928,168
Partners' capital 24,448,694 24,557,177
----------------------------
$26,569,404 $26,485,345
============================
</TABLE>
See accompanying notes.
F-32
<PAGE>
CV Ranch Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
REVENUES:
Rooms $ 6,918,891 $ 4,969,385
Food and beverage 2,558,284 2,118,892
Club 4,426,910 2,692,427
Other 386,577 612,949
----------------------------
14,290,662 10,393,653
DIRECT DEPARTMENT EXPENSES:
Rooms 2,008,506 1,584,736
Food and beverage 2,619,271 2,244,813
Club 2,084,720 1,502,498
Other 203,025 178,453
----------------------------
6,915,522 5,510,500
----------------------------
Gross operating profit 7,375,140 4,883,153
UNALLOCATED OPERATING EXPENSES:
Administrative and general 1,602,367 1,528,630
Marketing 1,195,405 1,094,323
Energy costs 501,914 484,104
Property operation and maintenance 2,181,192 1,924,560
----------------------------
5,480,878 5,031,617
----------------------------
Operating profit (loss) 1,894,262 (148,464)
REAL ESTATE:
Real estate sales 1,080,000 -
Cost of real estate sales (346,288) -
----------------------------
733,712 -
OTHER INCOME:
Club initiation fees 558,940 1,034,019
Food and beverage income 422,188 420,100
-----------------------------
981,128 1,454,119
OTHER EXPENSES:
Depreciation and amortization 1,046,930 792,913
Management fees 850,909 731,908
Property taxes and insurance 263,172 399,262
Other 56,574 12,065
-----------------------------
2,217,585 1,936,148
-----------------------------
Net income (loss) $ 1,391,517 $ (630,493)
=============================
</TABLE>
See accompanying notes.
F-33
<PAGE>
CV Ranch Limited Partnership
Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
GENERAL PARTNERS LIMITED PARTNERS
--------------------------------------------------------------
THE MORGAN
MS RESORTS STANLEY REAL
CV RANCH CALIFORNIA LIMITED ESTATE FUND
RLP II, INC. CORPORATION PARTNERSHIP II L.P. TOTAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Partners' capital,
January 1, 1995 $ 95,989 $ 95,989 $ 9,502,846 $ 9,502,846 $ 19,197,670
Capital contributions 29,950 29,950 2,965,050 2,965,050 5,990,000
Net loss (3,152) (3,152) (312,095) (312,094) (630,493)
-----------------------------------------------------------------------------
Partners' capital,
December 31, 1995 122,787 122,787 12,155,801 12,155,802 24,557,177
Capital distributions (7,500) (7,500) (742,500) (742,500) (1,500,000)
Net income 6,958 6,958 688,801 688,800 1,391,517
-----------------------------------------------------------------------------
Partners' capital,
December 31, 1996 $ 122,245 $ 122,245 $ 12,102,102 $ 12,102,102 $ 24,448,694
=============================================================================
</TABLE>
See accompanying notes.
F-34
<PAGE>
CV Ranch Limited Partnership
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,391,517 $ (630,493)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,046,930 792,913
Changes in operating assets and
liabilities:
Accounts receivable 211,717 (609,255)
Inventories (34,620) 64,024
Prepaid expenses and other current assets (188,710) 58,062
Notes receivable (110,750) (549,500)
Real estate held for sale 203,251 (16,765)
Accounts payable 22,698 (344,788)
Accrued expenses and other liabilities 210,524 154,604
Advance deposits 29,555 305,850
Deferred revenue (70,235) 90,688
------------ ------------
Net cash provided by (used in) operating activities 2,711,877 (684,660)
INVESTING ACTIVITIES
Increase in restricted cash (213,586) -
Additions to property and equipment (1,290,802) (4,495,739)
------------ ------------
Net cash used in investment activities (1,504,388) (4,495,739)
FINANCING ACTIVITIES
Capital contributions - 5,990,000
Capital distributions (1,500,000) -
------------ ------------
Net cash (used in) provided by financing activities (1,500,000) 5,990,000
------------ ------------
Increase (decrease) in cash (292,511) 809,601
Cash, beginning of year 1,487,644 678,043
------------ ------------
Cash, end of year $ 1,195,133 $ 1,487,644
============ ============
</TABLE>
See accompanying notes
F-35
<PAGE>
CV Ranch Limited Partnership
Notes to Financial Statements
December 31, 1996
1. THE PARTNERSHIP
CV Ranch Limited Partnership (the Partnership) was formed on October 18, 1993,
under the laws of the State of Delaware, for the purpose of acquiring and
operating the Carmel Valley Ranch Resort. Resorts Limited Partnership II, The
Morgan Stanley Real Estate Fund, L.P., CV Ranch - RLP II, Inc., and MS
California Corporation each contributed cash as initial capital contributions in
exchange for partnership interests, which are as follows:
<TABLE>
<CAPTION>
Ownership
Percentage
--------------
<S> <C>
Resorts Limited Partnership II 49.5%
The Morgan Stanley Real Estate Fund, L.P. 49.5
CV Ranch - RLP II, Inc. 0.5
MS California Corporation 0.5
--------------
100.0%
==============
</TABLE>
MS California Corporation, a Delaware corporation, is wholly owned by The Morgan
Stanley Real Estate Fund, L.P., a Delaware limited partnership. CV Ranch - RLP
II, Inc., a California corporation, is wholly owned by Resorts Limited
Partnership II, a Delaware limited partnership. Resorts Limited Partnership II
is owned by Resorts Limited Partnership (99.9 percent) as general partner and
Carefree Resorts Corporation (0.1 percent) as limited partner.
Income, losses, and distributions are allocated to partners in the same
proportion as their respective ownership percentages.
Carmel Valley Ranch Resort (the Resort), located in Carmel, California, consists
of a 100 suite luxury resort hotel, a semi-private 18-hole championship golf
course and clubhouse, a private tennis club and clubhouse, and approximately 300
acres of undeveloped residential land surrounding the Resort.
F-36
<PAGE>
CV Ranch Limited Partnership
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash consists of noninterest bearing checking accounts, interest bearing
money market accounts and highly-liquid investments maturing in less than 90
days.
RESTRICTED CASH
Restricted cash consists of cash reserved for future capital improvements
relating to the Resort.
INVENTORIES
Inventories, consisting primarily of food, beverage, golf shop, and gift shop
merchandise are carried at the lower of cost or market using the first-in,
first-out cost method.
BUILDINGS, IMPROVEMENTS AND RESIDENTIAL LAND HELD FOR SALE
Buildings and improvements are recorded at cost, and are depreciated using the
straight-line method over their estimated useful lives. Residential land held
for sale is recorded at cost.
During 1996, the Partnership adopted FASB 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 such as residential land held for
sale. At December 31, 1996, the Partnership does not hold any assets that meet
the impairment criteria of Statement 121.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost, and are depreciated using the
straight line method over the estimated useful lives of the assets.
CONSTRUCTION IN PROGRESS
Construction in progress is stated on the basis of cost and is reclassified to
the appropriate property and equipment account upon completion, at which time it
will be depreciated using the straight-line method over its estimated useful
life.
F-37
<PAGE>
CV Ranch Limited Partnership
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHINA, SILVER, GLASS AND LINEN
China, silver, glass and linen are stated on the basis of cost and amortized
using the straight-line method over their estimated useful lives until 50
percent amortized. Periodic cost of replacements is expensed as incurred.
INTANGIBLE ASSETS
Intangible assets are primarily comprised of organization costs and pre-opening
expenses, stated on the basis of cost, and are amortized over their estimated
useful lives.
REAL ESTATE SALES
The Partnership accounts for real estate sales under the accrual method of
accounting pursuant to the recognition criteria prescribed in FASB Statement No.
66 "Accounting for Sales of Real Estate."
INCOME TAXES
Under provisions of the Internal Revenue Code, a Partnership is not a taxable
entity; accordingly, taxable income or losses are allocated to the partners for
inclusion in their respective income tax returns. No provision for income taxes
has been included in the accompanying financial statements.
F-38
<PAGE>
CV Ranch Limited Partnership
Notes to Financial Statements (continued)
2. 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 amount reported in the financial statements and accompanying notes.
Management believes that the actual results will not differ materially from the
estimates used in preparing the financial statements.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the classifications used in the 1996 financial statements.
3. NOTES RECEIVABLE
The Partnership generated notes receivable in conjunction with the sale of club
memberships. Notes receivable totaled $660,250 and $549,500 at December 31, 1996
and 1995, respectively. These notes are noninterest bearing, with principal
payments due annually in two equal installments.
4. COMMITMENTS/RELATED PARTY TRANSACTIONS
The Resort is managed by Resort Services, Inc., (RSI) an affiliate of the
Partnership. RSI is currently managing the property under a Management Agreement
(the Agreement). The Agreement requires compensation to RSI based on a
percentage of the Resort's gross revenues, as defined in the Agreement and
subsequent amendment. Management fees were $850,909 and $731,908 during 1996 and
1995, respectively.
The Agreement specifies that RSI is responsible for the operations of the food
and beverage department of the Resort, including the club. RSI guarantees a net
profit equal to 10 percent of food and beverage gross revenues. The Partnership
records the actual revenues and related expenses of the department in the
statement of operations. During 1996 and 1995, a total of $422,188 and $420,100,
respectively was recognized by the Partnership to adjust the net profit to 10
percent, which is included in other income.
The Partnership also capitalized $50,302 and $203,789 of development fees paid
to RSI as construction in progress or in the respective asset categories at
December 31, 1996 and 1995, respectively.
F-39
<PAGE>
CV Ranch Limited Partnership
Notes to Financial Statements (continued)
5. LEASES
The Partnership leases equipment under a 5 year term. Future minimum lease
payments under this noncancelable lease agreement at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 65,000
1998 65,000
1999 65,000
2000 11,000
----------
$206,000
==========
6. OTHER
Included in residential land held for sale at December 31, 1996 are four single-
family lots with a total basis of $362,201 to which title has transferred to
various purchasers. However, in accordance with FASB Statement No. 66,
"Accounting for Sales of Real Estate," the Partnership has not recognized
revenue for these sales since no cash down payments have been received and there
are certain contingencies affecting future receipt of contract amounts.
</TABLE>
7. SUBSEQUENT EVENT (UNAUDITED)
During mid-January 1997, Patriot American Hospitality, Inc. acquired all of the
partnership interests of the Partnership, along with other properties/interests
related to Resorts Limited Partnership and/or The Morgan Stanley Real Estate
Fund, L.P.
F-40
<PAGE>
Report of Independent Auditors
The Partners of Telluride Resort and Spa Limited Partnership
We have audited the accompanying balance sheets of Telluride Resort and Spa
Limited Partnership as of December 31, 1996 and 1995, and the related statements
of operations, changes in partners' capital 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 audits 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 Telluride Resort and Spa
Limited Partnership at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
February 12, 1997
F-41
<PAGE>
Telluride Resort and Spa Limited Partnership
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Cash $ 1,286,669 $ 732,667
Accounts receivable, net 1,998,386 768,307
Inventories 461,966 423,203
Prepaid expenses and other current assets 303,403 70,822
--------------- --------------
4,050,424 1,994,999
Property and equipment:
Land 2,600,000 2,600,000
Buildings and improvements 17,483,012 17,347,073
Furniture and equipment 4,350,143 3,960,534
China, silver, glass, and linen 293,921 256,035
--------------- --------------
24,727,076 24,163,642
Less accumulated depreciation (3,180,563) (2,152,199)
--------------- --------------
21,546,513 22,011,443
Construction in progress 8,792 13,059
--------------- --------------
21,555,305 22,024,502
Preopening expenses, net 259,173 388,773
Real estate held for sale 4,316,562 6,737,963
--------------- --------------
$30,181,464 $ 31,146,237
=============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 573,805 $ 746,988
Accrued expenses and other liabilities 1,555,818 1,111,021
Advance deposits 1,178,214 1,313,128
Capital lease obligation - 41,737
--------------- --------------
3,307,837 3,212,874
Partners' capital 26,873,627 27,933,363
--------------- --------------
$ 30,181,464 $ 31,146,237
=============== ==============
</TABLE>
See accompanying notes.
F-42
<PAGE>
Telluride Resort and Spa Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
---------------------------------
<S> <C> <C>
REVENUES:
Rooms $ 7,868,403 $ 6,731,238
Food and beverage 3,152,672 2,451,247
Spa 2,575,433 1,926,994
Other 3,006,007 1,736,253
--------------- --------------
16,602,515 12,845,732
DIRECT DEPARTMENT EXPENSES:
Rooms 2,877,304 2,350,221
Food and beverage 3,098,836 2,846,223
Spa 1,850,721 1,632,532
Other 1,316,094 1,113,671
--------------- --------------
9,142,955 7,942,647
--------------- --------------
Gross operating profit 7,459,560 4,903,085
UNALLOCATED OPERATING EXPENSES:
Administrative and general 1,585,748 1,513,748
Marketing 1,599,922 1,328,571
Energy costs 942,015 841,447
Property operation and maintenance 847,074 832,021
--------------- --------------
4,974,759 4,515,787
--------------- --------------
Operating profit 2,484,801 387,298
REAL ESTATE:
Real estate sales 3,171,695 822,089
Cost of real estate sales 2,627,017 615,458
--------------- --------------
544,678 206,631
OTHER EXPENSES:
Depreciation and amortization 1,157,964 1,143,445
Management fees 319,361 256,915
Property taxes and insurance 494,903 492,815
Other 116,987 231,317
--------------- --------------
2,089,215 2,124,492
--------------- --------------
Net income (loss) $ 940,264 $ (1,530,563)
=============== ==============
</TABLE>
See accompanying notes.
F-43
<PAGE>
Telluride Resort and Spa Limited Partnership
Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------------------------------------------------------------------------------
The Morgan
Resorts Stanley Real Resorts
RLP MS Colorado Limited Estate Fund, Services,
Telluride, Inc. Corporation Partnership L.P. Inc. Total
---------------- -------------- ------------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
Partners' capital,
December 31, 1994 $ 143,080 $ 143,080 $ 14,050,599 $ 14,165,064 $ 114,467 $ 28,616,290
Capital contributions 4,238 4,238 416,190 419,580 3,390 847,636
Net loss (7,653) (7,653) (751,506) (757,629) (6,122) (1,530,563)
-------------------------------------------------------------------------------------------------------
Partners' capital,
December 31, 1995 139,665 139,665 13,715,283 13,827,015 111,735 27,933,363
Capital distributions (10,000) (10,000) (982,000) (990,000) (8,000) (2,000,000)
Net income 4,701 4,701 461,670 465,430 3,762 940,264
-------------------------------------------------------------------------------------------------------
Partners capital,
December 31, 1996 $ 134,366 $ 134,366 $ 13,194,953 $ 13,302,445 $ 107,497 $ 26,873,627
=======================================================================================================
</TABLE>
See accompanying notes.
F-44
<PAGE>
Telluride Resort and Spa Limited Partnership
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 940,264 $ (1,530,563)
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,157,964 1,143,445
Changes in operating assets and
liabilities:
Accounts receivable (1,230,079) 55,731
Inventories (38,763) (58,892)
Prepaid expenses and other current
assets (232,581) 205,734
Real estate held for sale 2,421,401 182,876
Accounts payable (173,183) (610,184)
Accrued expenses and other
liabilities 444,797 (342,261)
Advance deposits (134,914) 167,290
----------- ------------
Net cash provided by (used in)
operating activities 3,154,906 (786,824)
INVESTING ACTIVITIES
Additions to property and equipment (559,167) (192,592)
----------- ------------
Net cash used in investing activities (559,167) (192,592)
FINANCING ACTIVITIES
Capital contributions - 847,636
Capital distributions (2,000,000) -
Principal payments on capital lease
obligation (41,737) (66,518)
----------- ------------
Net cash (used in) provided by
financing activities (2,041,737) 781,118
----------- ------------
Increase (decrease) in cash 554,002 (198,298)
Cash at beginning of year 732,667 930,965
----------- ------------
Cash at end of year $ 1,286,669 $ 732,667
=========== ============
</TABLE>
See accompanying notes.
F-45
<PAGE>
Telluride Resort and Spa Limited Partnership
Notes to Financial Statements
December 31, 1996
1. THE PARTNERSHIP
Telluride Resort and Spa Limited Partnership (the Partnership) was formed on
September 15, 1993, under the laws of the State of Delaware, for the purpose of
acquiring and operating The Peaks at Telluride. The Morgan Stanley Real Estate
Fund, L.P., Resorts Limited Partnership, RLP Telluride, Inc., MS Colorado
Corporation, and Resorts Services, Inc. each contributed cash as initial capital
contributions in exchange for their respective partnership interests, which are
as follows:
<TABLE>
<CAPTION>
OWNERSHIP
PERCENTAGE
------------------
<S> <C>
The Morgan Stanley Real Estate Fund, L.P. 49.5%
Resorts Limited Partnership 49.1
RLP Telluride, Inc. 0.5
MS Colorado Corporation 0.5
Resorts Services, Inc. 0.4
------------------
100.0%
==================
</TABLE>
MS Colorado Corporation, a Delaware corporation, is wholly owned by The Morgan
Stanley Real Estate Fund, L.P., a Delaware limited partnership. RLP Telluride,
Inc., an Arizona corporation, is wholly owned by Resorts Limited Partnership, a
Delaware limited partnership. Resorts Services, Inc., an Arizona corporation,
is owned by various individuals affiliated with Resorts Limited Partnership.
Income, losses and distributions are allocated to partners in the same
proportion as their respective ownership percentages.
The Peaks at Telluride (the Resort), located in Telluride, Colorado, consists of
a 177 suite luxury resort hotel, residential condominiums, residential land, and
a 42,000 square-foot world-class health spa.
F-46
<PAGE>
Telluride Resort and Spa Limited Partnership
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH
Cash consists of cash in noninterest bearing checking accounts and interest
bearing money market accounts.
INVENTORIES
Inventories, consisting primarily of food, beverage, and gift shop merchandise
are carried at the lower of cost or market using the first-in, first-out cost
method.
BUILDINGS, IMPROVEMENTS AND REAL ESTATE HELD FOR SALE
Buildings and improvements are recorded at cost, and are depreciated using the
straight-line method over their estimated useful lives. Real estate held for
sale is recorded at cost.
During 1996, the Partnership adopted FASB 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 such as real estate held for sale. At
December 31, 1996, the Partnership does not hold any assets that meet the
impairment criteria of Statement 121.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Equipment leased under a capital
lease is stated on the basis of cost. Furniture and equipment is depreciated
using the straight-line method over the estimated useful lives of the assets.
CONSTRUCTION IN PROGRESS
Construction in progress is stated on the basis of cost and is reclassified to
the appropriate property and equipment account upon completion, at which time it
will be depreciated using the straight-line method over its estimated useful
life.
F-47
<PAGE>
Telluride Resort and Spa Limited Partnership
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHINA, SILVER, GLASS, AND LINEN
China, silver, glass and linen are stated on the basis of cost and amortized
using the straight-line method over their estimated useful lives until 50
percent amortized. Periodic cost of replacements is expensed as incurred.
PREOPENING EXPENSES
Preopening expenses are stated on the basis of cost and are amortized over a
five-year period.
REAL ESTATE SALES
The Partnership accounts for real estate sales under the accrual method of
accounting pursuant to the recognition criteria prescribed in FASB Statement
No. 66 "Accounting for Sales of Real Estate."
INCOME TAXES
Under provisions of the Internal Revenue Code, a Partnership is not a taxable
entity; accordingly, taxable income or losses are allocated to the partners
for inclusion in their respective income tax returns. No provision for income
taxes has been included in the accompanying financial statements.
F-48
<PAGE>
Telluride Resort and Spa Limited Partnership
Notes to Financial Statements (continued)
2. 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 amount reported in the financial statements and accompanying notes.
Management believes that the actual results will not differ materially from the
estimates used in preparing the financial statements.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the classifications used in the 1996 financial statements.
3. REAL ESTATE HELD FOR SALE
Real estate held for sale consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------- -------------
<S> <C> <C>
Residential land $ 762,779 $ 762,779
Residential condominium units 3,553,783 5,975,184
------------- -------------
$4,316,562 $6,737,963
============= =============
</TABLE>
Residential land consists of approximately 0.75 acres located adjacent to the
Resort. This land is currently undeveloped.
Residential condominium units consist of 7 condominium units held for sale
which are located on the upper levels of the Resort.
4. COMMITMENTS/RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENTS
The Resort is managed by Resort Services, Inc. (RSI), an affiliate of the
Partnership. RSI is currently managing the property under a Management Agreement
(the Agreement) dated August 26, 1993. The Agreement requires compensation to
RSI based on a percentage of the Resort's gross revenues and adjusted gross
operating profit, as defined in the Agreement. In connection with this
Agreement, the Partnership incurred management fees of $319,361 during 1996 and
$256,915 during 1995.
F-49
<PAGE>
Telluride Resort and Spa Limited Partnership
Notes to Financial Statements (continued)
4. COMMITMENTS/RELATED PARTY TRANSACTIONS (CONTINUED)
The Partnership capitalized approximately $117,000 of development fees paid to
RSI as construction in progress or in the respective asset categories at
December 31, 1995; no such amounts were incurred in 1996.
OTHER
The Partnership has an agreement with Club Telluride Company-I, L.L.C. (CTC),
the developer of the adjacent Franz Klammer Lodge, which requires that CTC pay
the Partnership amounts equal to 3% of the gross sales price of each of CTC's
sales of vacation club memberships or interval ownership interests, as defined,
in primary consideration for the Partnership granting the release of a
previously agreed-to non-competition covenant. Revenue recognized under this
agreement totaled $657,508 for 1996 and is included in other revenues; no such
revenues were recognized during 1995.
5. CONTINGENCY
In connection with the initial acquisition of the Peaks at Telluride in 1993,
the Partnership has been assessed an additional sales tax by state and county
taxing authorities which is estimated at approximately $240,000, including
interest, as of December 31, 1996. Management has filed a formal appeal with
such taxing authorities. Due to the current uncertainty as to the resolution of
this matter, the Partnership has not accrued any amounts relating to this
potential liability as of December 31, 1996.
6. SUBSEQUENT EVENT
During mid-January 1997, Patriot American Hospitality, Inc. acquired all of the
partnership interests of the Partnership, along with other properties/interests
related to Resorts Limited Partnership and/or The Morgan Stanley Real Estate
Fund, L.P.
F-50
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-10317) pertaining to the 1995 Incentive Plan and Non-Employee
Directors' Incentive Plan of Patriot American Hospitality, Inc. (the "Company")
and the Registration Statement on Form S-3 (No. 333-12973) of the Company and
the related Prospectus of our reports (a) dated March 14, 1997 with respect to
the Consolidated Financial Statements of Resorts Limited Partnership for the
years ended December 31, 1996 and 1995; (b) dated February 13, 1997 with respect
to the Financial Statements of CV Ranch Limited Partnership for the years ended
December 31, 1996 and 1995; and (c ) dated February 12, 1997 with respect to the
Financial Statements of Telluride Resort and Spa Limited Partnership for the
years ended December 31, 1996 and 1995; all of which are included in the
Company's Current Report on Form 8-K/A, Amendment No. 3, dated January 16,
1997.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
April 7, 1997
