-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L22E37DB+Gr8wAbplSOvPADhPF0KU1waYMFdXhTXENx405t4fQjTNe81Eh/dZLf5 beJILhclzlbpKAyGHxbwaw== 0001047469-98-029480.txt : 19980807 0001047469-98-029480.hdr.sgml : 19980807 ACCESSION NUMBER: 0001047469-98-029480 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980601 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980806 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY INC/DE CENTRAL INDEX KEY: 0000016343 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 940358820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-09319 FILM NUMBER: 98677980 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO DATE OF NAME CHANGE: 19970717 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA JOCKEY CLUB DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WYNDHAM INTERNATIONAL INC CENTRAL INDEX KEY: 0000715273 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 942878485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-09320 FILM NUMBER: 98677981 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO\DE DATE OF NAME CHANGE: 19970723 FORMER COMPANY: FORMER CONFORMED NAME: BAY MEADOWS OPERATING CO DATE OF NAME CHANGE: 19920703 8-K/A 1 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) June 2, 1998 COMMISSION FILE NUMBER 1-9319 PATRIOT AMERICAN HOSPITALITY, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE - ------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 94-0358820 - ------------------------------------------------------------------------------- (I.R.S. Employer Identification No.) 1950 STEMMONS FREEWAY, SUITE 6001 DALLAS, TEXAS 75207 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (214) 863-1000 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- COMMISSION FILE NUMBER 1-9320 WYNDHAM INTERNATIONAL, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE - ------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 94-2878485 - ------------------------------------------------------------------------------- (I.R.S. Employer Identification No.) 1950 STEMMONS FREEWAY, SUITE 6001 DALLAS, TEXAS 75207 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (214) 863-1000 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. ITEM 2. ACQUISITION OF ASSETS INTERSTATE MERGER On June 2, 1998, pursuant to the Agreement and Plan of Merger (the "Interstate Merger Agreement") dated as of December 2, 1997 by and among Patriot American Hospitality, Inc. ("Patriot"), Wyndham International, Inc. ("Wyndham" and, together with Patriot, the "Patriot Companies") and Interstate Hotels Company ("Interstate"), Interstate merged with and into Patriot with Patriot being the surviving corporation (the "Interstate Merger"). Pursuant to the Interstate Merger Agreement, stockholders of Interstate could elect to convert each of their shares of Interstate common stock into the right to receive either (i) $37.50 in cash (the "Cash Consideration"), subject to proration in certain circumstances, or (ii) 1.341 paired shares of Patriot common stock and Wyndham common stock ("Paired Shares"). The proration provisions of the Interstate Merger Agreement were designed to ensure that approximately 40% of the outstanding shares of Interstate common stock would be converted into the right to receive Cash Consideration and that the remaining approximately 60% of the outstanding shares of Interstate common stock would be converted into the right to receive Paired Shares. Because holders of more than 40% of the outstanding shares of Interstate common stock elected to receive Cash Consideration, holders of shares of Interstate common stock who duly elected to receive cash in lieu of Paired Shares received (i) $37.50 per share in Cash Consideration with respect to approximately 43.4% of such Interstate shares (rounded down to the nearest whole share) and (ii) Paired Shares (at the 1.341-for-one exchange ratio) with respect to the remaining approximately 56.6% of such Interstate shares (rounded up to the nearest whole share). Holders of Interstate common stock who did not make a cash election received Paired Shares (at the 1.341-for-one exchange ratio) with respect to all of their Interstate shares. In addition, former Interstate stockholders were entitled to receive a cash distribution (the "Special Interstate Dividend") of $0.429 on each share of Interstate common stock that was exchanged for Paired Shares in the Interstate Merger. As a result of the Interstate Merger, former stockholders of Interstate received an aggregate of 28,825,875 Paired Shares and approximately $525.4 million in cash as merger consideration and an additional approximately $9.2 million for the Special Interstate Dividend. In addition, Patriot assumed or refinanced all of Interstate's existing indebtedness, which totaled approximately $787.1 million and paid other transaction-related costs in the aggregate amount of approximately $67.6 million in connection with the Interstate Merger. In connection with the Interstate Merger, the Patriot Companies closed on the commitment from The Chase Manhattan Bank and Chase Securities, Inc. and PaineWebber Real Estate Securities, Inc. to increase Patriot's existing credit facilities to an aggregate of $2.7 billion (an increase of $1.45 billion from the prior $1.25 billion credit package). The increased credit facilities include a $900 million revolving credit facility (the "Revolving Credit Facility") that expires on July 18, 2000 and a series of term loans in the aggregate amount of up to $1.8 billion that expire beginning January 1, 1999 through March 21, 2003. Proceeds from the increased credit facilities were used to fund the cash portion of the Interstate Merger consideration, as well as to refinance certain outstanding indebtedness of the Patriot Companies. The increased credit facilities may be used to fund future acquisitions, for capital expenditures and for general working capital purposes. Interest rates will be based on Patriot's leverage ratio and may vary from 1.5% to 2.5% over LIBOR (depending on the Patriot Companies' leverage ratio). SUMMERFIELD ACQUISITION On June 5, 1998, pursuant to the terms and conditions of the Contribution Agreement, dated as of March 17, 1998 (the "Agreement"), by and among Patriot, Wyndham, Patriot American Hospitality Partnership, L.P., a subsidiary of Patriot (the "Patriot Partnership"), Wyndham International Operating Partnership, L.P. (formerly known as Patriot American Hospitality Operating Partnership, L.P.), a subsidiary of Wyndham International (the "Wyndham Partnership"), SF Hotel Company, L.P., a Kansas limited partnership ("Summerfield"), and certain individuals and entities who were partners of Summerfield (collectively, the "SFHC Partners"), Patriot, through the Patriot Partnership, acquired 100% of the partnership interests in Summerfield for aggregate consideration of approximately $298.9 million (the "Summerfield Acquisition"). The total purchase consideration for the Summerfield Acquisition consisted of approximately 3,223,795 units of limited partnership interest in the Patriot Partnership ("Patriot OP Units"), 3,223,795 units of limited partnership interest in the 2 Wyndham Partnership ("Wyndham OP Units"), 1,397,281 Paired Shares, cash of approximately $165.5 million and the assumption of debt in the amount of approximately $17.1 million. Pursuant to the terms and conditions of the Agreement, the SFHC Partners may also be entitled to receive additional payments of cash or pairs of Patriot OP Units and Wyndham OP Units if certain performance criteria are met based on (i) the market price of the Paired Shares through the end of 1998 and (ii) the achievement of certain performance criteria through 2001 for certain of the hotels under development by Summerfield. Prior to the Summerfield Acquisition, partners of various partnerships affiliated with Summerfield (the "Affiliated Partnerships") contributed each of their various partnership interests in a series of transactions to consolidate the assets and liabilities of such Affiliated Partnerships into Summerfield (the "Reorganization Transactions"). Summerfield, in turn, contributed to Summerfield Associates, L.P., a newly-formed entity owned primarily by former SFHC Partners ("SALP"), certain assets and liabilities of Summerfield which were to be excluded from the Summerfield Acquisition (the "Excluded Asset Distribution"). Pursuant to the Agreement, immediately following the consummation of the Reorganization Transactions and the Excluded Asset Distribution: (i) Patriot Partnership acquired all of the limited partnership interests in Summerfield from the former SFHC Partners; (ii) Patriot Partnership acquired all of the capital stock of Summerfield Hotel Corporation, the sole general partner of Summerfield, from Mr. Rolf E. Ruhfus, its sole stockholder; and (iii) PAH-summerfield Leasing, Inc. (in which Wyndham owns an approximate 1% controlling interest and Patriot owns a 99% non-voting interest) acquired 100% of the outstanding capital stock of Summerfield Hotel Leasing Corporation, the general partner of Summerfield Hotel Leasing Company, L.P. (the lessee of certain hotel properties), all of the partnership interests of which are held directly or indirectly by Patriot Partnership. In connection with the foregoing transactions, Summerfield Hotel Corporation sold its 1% general partner interest in Summerfield to PAH-Summerfield LLC, a single member limited liability company and a wholly owned subsidiary of PAH-Summerfield Holding Corporation (in which Wyndham owns an approximate 1% controlling interest and Patriot owns a 99% non-voting interest). As a result of the Summerfield Acquisition, Patriot, through its various subsidiaries, acquired four Summerfield Suites-R- hotels, leasehold and management interests in 24 Summerfield Suites-R-, Sierra Suites-R- and Sunrise Suites hotels, and management contracts for 12 additional Summerfield Suites-R- and Sierra Suites-R- hotels. Patriot has leased or sub-leased such hotels to Wyndham. In addition, Patriot acquired the development contracts for a number of hotels. CHCI MERGER On June 30, 1998, pursuant to an Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI Merger Agreement") between Patriot, Wyndham and CHC International, Inc. ("CHCI"), the hospitality-related businesses of CHCI merged with and into Wyndham with Wyndham being the surviving company (the "CHCI Merger"). CHCI's gaming operations were transferred to a new legal entity prior to the CHCI Merger and such operations were not a part of the transaction. As a result of the CHCI Merger, Wyndham, through its subsidiaries, acquired the remaining 50% investment interest in GAH-II, L.P. (Wyndham owned 50% prior to the CHCI Merger), the remaining 17 leases and 16 of the associated management contracts related to the Patriot hotels leased by CHC Lease Partners, 8 third-party management contracts, two third-party asset management contracts, the Grand Bay proprietary brand name and certain other hospitality management assets. By operation of the CHCI Merger, all issued and outstanding shares of common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain stock option rights were exchanged for an aggregate of 1,781,173 shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per share of Wyndham (the "Wyndham Series A Preferred Stock") and 1,781,181 shares of Series B Redeemable Convertible Preferred Stock par value $0.01 per share, of Wyndham (the "Wyndham Series B Preferred Stock"). In addition, Wyndham assumed CHCI's outstanding debt in the amount of approximately $16.6 million. 3 ITEM 5. OTHER EVENTS BUENA VISTA ACQUISITION On January 14, 1998, Patriot, through the Patriot Partnership, acquired an aggregate 95% equity interest in the Buena Vista Palace Hotel in Orlando, Florida for an aggregate purchase price of approximately $148 million, including the assumption of approximately $50.3 million of indebtedness (the "Buena Vista Acquisition"). As part of the agreement, Patriot was also granted an option to acquire the remaining 5% equity interest in the hotel. In addition, a participating note that also encumbers the hotel and which Wyndham had acquired in 1997 was modified to reflect an outstanding principal balance of $23.8 million (Wyndham's acquisition price). The Patriot Partnership leased the hotel to Wyndham pursuant to a three-year Participating Lease agreement. The hotel is being managed by a third party operator. ACQUISITION OF ARCADIAN INTERNATIONAL LIMITED On April 6, 1998, Patriot announced the completion of its acquisition of all of the issued and to-be-issued shares of Arcadian International Limited (formerly known as Arcadian International Plc, "Arcadian") for 60 pence per share. Including the exercise of all outstanding options to purchase shares, the assumption of debt and the acquisition of the remaining shares in the Malmaison Group, the total transaction cost was approximately L185.9 million (approximately $308.7 million U.S. based on exchange rates at the time of closing). As a result of the transaction, Patriot acquired ten owned hotels located throughout England; one owned hotel in Jersey; five owned and managed Malmaison Hotels; two resorts under development in Tuscany, Italy and Paris, France; and the proprietary Malmaison brand name. Patriot also acquired Arcadian's 50% partnership interest in the redevelopment of the luxury Great Eastern Hotel in London, to be branded as flagship Wyndham Hotel and operated by Wyndham once the development has been completed. Collectively, the transactions described above are referred to herein as the "Arcadian Acquisition." In connection with the Arcadian Acquisition, Patriot entered into a short-term financing agreement on April 15, 1998 with Paine Webber Real Estate Securities, Inc. ("Paine Webber Real Estate") whereby Paine Webber Real Estate loaned Patriot $160 million through April 15, 1999, at a rate equal to the borrowing rate on Patriot's Revolving Credit Facility. In addition, Patriot assumed approximately $112.6 million of debt and paid costs of approximately $36.9 million in connection with the Arcadian Acquisition. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Businesses Acquired or to be Acquired The index to the financial information for Interstate Hotels Company; Royal Palace Hotel Associates; SF Hotel Company, L.P.; the combined SC Suites Summerfield Partnerships; Arcadian International Limited; Malmaison Limited; and CHC International, Inc. Hospitality Division is included on page F-1 of this report. (b) Pro Forma Financial Information The index to the separate and combined pro forma financial information for Patriot American Hospitality, Inc. and Wyndham International, Inc. is included on page F-1 of this report. (c) Exhibits Exhibit Number Description ------- ----------- 23.1 Consent of PricewaterhouseCoopers. L.L.P.-Tampa, Florida 23.2 Consent of Ernst & Young LLP-Wichita, Kansas 23.3 Consent of Arthur Andersen-London, England 23.4 Consent of PricewaterhouseCoopers L.L.P.-Miami, Florida 4 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrants have duly caused the report to be signed on their behalf by the undersigned thereunto duly authorized. DATED: August 5, 1998 PATRIOT AMERICAN HOSPITALITY, INC. By: /s/ Lawrence S. Jones -------------------------------------------- Lawrence S. Jones Executive Vice President and Treasurer (Principal Financial and Accounting Officer) WYNDHAM INTERNATIONAL, INC. By: /s/ Lawrence S. Jones -------------------------------------------- Lawrence S. Jones Executive Vice President and Treasurer (Principal Accounting and Financial Officer) 5 PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC. INDEX TO FINANCIAL INFORMATION PAGE ---- PRO FORMA FINANCIAL INFORMATION COMBINED PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.: Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 1998 (unaudited) ...................................................... F-7 Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1997 (unaudited) ................................................... F-9 Pro Forma Condensed Combined Balance Sheet as of March 31, 1998 (unaudited) ....... F-12 PATRIOT AMERICAN HOSPITALITY, INC.: Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31, 1998 (unaudited) ................................................ F-15 Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1997 (unaudited) ................................................... F-18 WYNDHAM INTERNATIONAL, INC.: Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31, 1998 (unaudited) ................................................ F-21 Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1997 (unaudited) ................................................... F-24 HISTORICAL FINANCIAL INFORMATION INTERSTATE HOTELS COMPANY: Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998 (unaudited) ..................................................................... F-27 Consolidated Statements of Operations for the three months ended March 31, 1997 and 1998 (unaudited) ............................................................ F-28 Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1998 (unaudited) ............................................................ F-29 Notes to Consolidated Financial Statements (unaudited) ............................ F-30 ROYAL PALACE HOTEL ASSOCIATES: Report of Independent Accountants -- Coopers & Lybrand L.L.P. ..................... F-32 Balance Sheets as of December 31, 1997 and 1996 ................................... F-33 Statements of Income for the years ended December 31, 1997 and 1996 ............... F-34 Statements of Partners' Equity for the years ended December 31, 1997 and 1996 ..... F-35 Statements of Cash Flows for the years ended December 31, 1997 and 1996 ........... F-36 Notes to Financial Statements ..................................................... F-37 SF HOTEL COMPANY, L.P.: Report of Independent Auditors -- Ernst & Young LLP ............................... F-42 Consolidated Balance Sheets at January 2, 1998, January 3, 1997, March 27, 1998 (unaudited) and March 28, 1997 (unaudited) ................................. F-43 Consolidated Statements of Income for the years ended January 2, 1998 and January 3, 1997 and for the 12 weeks ended March 27, 1998 (unaudited) and March 28, 1997 (unaudited) ...................................................... F-45 Consolidated Statements of Partners' Equity for the years ended January 2, 1998 and January 3, 1997 and for the 12 weeks ended March 27, 1998 (unaudited) .. F-46 Consolidated Statements of Cash Flows for the years ended January 2, 1998 and January 3, 1997 and for the 12 weeks ended March 27, 1998 (unaudited) and March 28, 1997 (unaudited) ...................................................... F-47 Notes to Consolidated Financial Statements ........................................ F-49
F-1 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. INDEX TO FINANCIAL INFORMATION - (CONTINUED) PAGE ---- HISTORICAL FINANCIAL INFORMATION - (CONTINUED) SC SUITES SUMMERFIELD PARTNERSHIPS: Report of Independent Auditors - Ernst & Young LLP.................................. F-64 Combined Balance Sheets at January 2, 1998, January 3, 1997, March 27, 1998 (unaudited) and March 28, 1997 (unaudited)........................................ F-65 Combined Statements of Operations for the years ended January 2, 1998, January 3, 1997 and December 29, 1995 and the 12 weeks ended March 27, 1998 (unaudited) and March 28, 1997 (unaudited).................................................... F-67 Combined Statements of Partners' Deficit for the years ended January 2, 1998, January 3, 1997 and December 29, 1995 and the 12 weeks ended March 27, 1998 (unaudited)....................................................................... F-68 Combined Statements of Cash Flows for the years ended January 2, 1998, January 3, 1997 and December 29, 1995 and the 12 weeks ended March 27, 1998 (unaudited) and March 28, 1997 (unaudited).................................................... F-69 Notes to Combined Financial Statements............................................. F-71 ARCADIAN INTERNATIONAL LIMITED (FORMERLY ARCADIAN INTERNATIONAL PLC): Directors' Report................................................................... F-82 Auditors' Report -- Arthur Andersen................................................. F-86 Consolidated Profit and Loss Account for the years ended December 31, 1997 and 1996.......................................................................... F-87 Consolidated Statements of Total Recognised Gains and Losses for the years ended December 31, 1997 and 1996.................................................. F-88 Consolidated Balance Sheets as of December 31, 1997 and 1996........................ F-89 Consolidated Cash Flow Statement for the years ended December 31, 1997 and 1996..... F-90 Notes to Accounts................................................................... F-91 MALMAISON LIMITED: Directors' Report................................................................... F-122 Auditors' Report -- Arthur Andersen................................................. F-125 Consolidated Profit and Loss Account for the year ended December 31, 1997 and the 53-week period ended December 31, 1996........................................ F-126 Consolidated Balance Sheets as of December 31, 1997 and 1996........................ F-127 Consolidated Cash Flow Statement for the year ended December 31, 1997 and the 53-week period ended December 31, 1996............................................ F-128 Notes to Accounts................................................................... F-129 CHC INTERNATIONAL, INC. -- HOSPITALITY DIVISION: Report of Independent Certified Public Accountants -- Price Waterhouse, LLP......... F-146 Balance Sheets as of November 30, 1996 and 1997 and May 31, 1998 (unaudited)........ F-147 Statements of Operations for the years ended November 30, 1995, 1996 and 1997 and the three months and six months ended May 31, 1998 (unaudited)................ F-148 Statements of Changes in Stockholders' Equity (Deficit) for the years ended November 30, 1995, 1996 and 1997 and the six months ended May 31, 1998 (unaudited)....................................................................... F-149 Statements of Cash Flows for the years ended November 30, 1995, 1996 and 1997 and the six months ended May 31, 1998 (unaudited)................................. F-150 Notes to Financial Statements........................................................ F-152
F-2 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) BACKGROUND Patriot American Hospitality, Inc. ("Patriot") is a self-administered equity real estate investment trust ("REIT") whose shares of common stock are paired and trade together with the shares of common stock of Wyndham International, Inc. ("Wyndham") as a single unit pursuant to a stock pairing arrangement. These units, consisting of one share of common stock of Patriot paired with one share of common stock of Wyndham, are referred to herein as "Paired Shares." The term "Patriot Companies" as used herein includes Patriot, Wyndham and their respective subsidiaries. A substantial portion of the assets of Patriot are held by Patriot American Hospitality Partnership, L.P. (the "Patriot Partnership"). Patriot contributed such assets to the Patriot Partnership in exchange for units of limited partnership interest ("OP Units") of the Patriot Partnership. In addition, a substantial portion of the assets of Wyndham are held by Wyndham International Operating Partnership, L.P. (the "Wyndham Partnership," formerly known as Patriot American Hospitality Operating Partnership, L.P.). Wyndham contributed such assets to the Wyndham Partnership in exchange for OP Units of the Wyndham Partnership. Collectively, the Wyndham Partnership and the Patriot Partnership are referred to herein as the "Operating Partnerships." Patriot leases each of its hotels, except the 77 hotels which are separately owned through special purpose entities, to Wyndham or to other third party lessees (the "Lessees") that are responsible for operating hotels. The Lessees, in turn, have entered into separate agreements with hotel management entities (the "Operators") to manage the hotels. MERGERS AND ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997 WYNDHAM MERGER On January 5, 1998, pursuant to the Agreement and Plan of Merger dated as of April 14, 1997, as thereafter amended, (the "Wyndham Merger Agreement") between Patriot, Wyndham and Wyndham Hotel Corporation ("Old Wyndham"), Old Wyndham merged with and into Patriot, with Patriot being the surviving corporation (the "Wyndham Merger"). Patriot, as a result of the Wyndham Merger, acquired ownership of ten Wyndham hotels and 14 Clubhouse hotels and leased such hotels to Wyndham. Thirteen of the 14 hotel leases assumed by Patriot were sub-leased to Wyndham. Old Wyndham's remaining 52 management and franchise contracts (excluding 16 hotels that Old Wyndham managed that are owned by Patriot), the Wyndham and ClubHouse proprietary brand names, and the Wyndham hotel management company were transferred to corporate subsidiaries of Patriot (collectively, the "Non-Controlled Subsidiaries"). Patriot owns a 99% non-voting interest and Wyndham owns the 1% controlling voting interest in each of the Non-Controlled Subsidiaries. Therefore, the operating results of the Non-Controlled Subsidiaries are combined with those of Wyndham for financial reporting purposes. Patriot accounts for its investment in the Non-Controlled Subsidiaries using the equity method of accounting. The total purchase consideration for the Wyndham Merger of approximately $982,000 consisted of 21,594,137 Paired Shares and 4,860,876 shares of Series A Convertible Preferred Stock of Patriot (which are convertible on a one-for-one basis into Paired Shares), cash of approximately $339,000 to repay debt and pay Old Wyndham shareholders who elected to receive cash (which was financed with funds drawn on the Patriot Companies' $900,000 revolving credit facility (the "Revolving Credit Facility"), and the assumption of approximately $59,063 in debt. WHG TRANSACTIONS On January 16, 1998, pursuant to the Agreement and Plan of Merger dated as of September 30, 1997 (the "WHG Merger Agreement") between Patriot, Wyndham and WHG Casinos & Resorts Inc. ("WHG"), a subsidiary of Wyndham merged with and into WHG, with WHG being the surviving corporation (the "WHG Merger"). As a F-3 result of the WHG Merger, Wyndham acquired the 570-room Condado Plaza Hotel & Casino, a 50% interest in the partnership that owns the 389-room El San Juan Hotel & Casino and a 23.3% interest in the partnership that owns the 751-room El Conquistador Resort & Country Club (the "El Conquistador"), all of which are located in Puerto Rico. In addition, Wyndham acquired a 62% interest in Williams Hospitality Group, Inc., the management company for the three hotels and the Las Casitas Village at the El Conquistador. A total of 5,004,690 Paired Shares were issued in connection with the WHG Merger and approximately $21,327 of debt was assumed, resulting in total purchase consideration of approximately $159,363. Effective March 1, 1998, Patriot acquired from unaffiliated third parties a 40% interest in the El San Juan Hotel & Casino, an aggregate 68.62% equity interest in the El Conquistador and a 38% interest in Williams Hospitality Group, Inc. for approximately $31,000 in cash and issuance of 1,818,182 Paired Shares valued at approximately $49,227 (collectively, these transactions and the WHG Merger are referred to herein as the "WHG Transactions"). Wyndham owns the controlling general partner interest in the partnerships that own the El San Juan Hotel & Casino and the El Conquistador. Wyndham also holds voting control of Williams Hospitality Group, Inc. Therefore, the operating results and financial position of these entities are combined with those of Wyndham for financial reporting purposes. As a result, approximately $183,453 of debt related to the partnerships that own the El San Juan Hotel & Casino and the El Conquistador has also been reflected in the Patriot Companies' pro forma combined balance sheet. Patriot accounts for its investment in these entities using the equity method of accounting. BUENA VISTA ACQUISITION On January 14, 1998, Patriot, through the Patriot Partnership, acquired an aggregate 95% equity interest in the Buena Vista Palace Hotel in Orlando, Florida for an aggregate purchase price of approximately $148,002, including the assumption of approximately $50,324 of indebtedness and the issuance of 53,989 OP Units of the Operating Partnerships (the "Buena Vista Acquisition"). As part of the agreement, Patriot was also granted an option to acquire the remaining 5% equity interest in the hotel. In addition, a participating note that also encumbers the hotel and which Wyndham had acquired in 1997 (the "Participating Note") was modified to reflect an outstanding principal balance of $23,750 (Wyndham's acquisition price). The Patriot Partnership leased the hotel to Wyndham pursuant to a three-year lease agreement. The hotel is being managed by a third-party Operator. ACQUISITION OF ARCADIAN INTERNATIONAL LIMITED On April 6, 1998, Patriot announced the completion of its acquisition of all of the issued and to-be-issued shares of Arcadian International Limited ("Arcadian," formerly known as Arcadian International Plc) for 60 pence per share. Including the exercise of all outstanding options to purchase shares, the assumption of debt and the acquisition of the remaining shares in the Malmaison Group, the total transaction cost was approximately L185,900 (approximately $308,700 U.S. based on exchange rates at the time of closing). As a result of the transaction, Patriot acquired ten owned hotels located throughout England; one owned hotel in Jersey; five owned and managed Malmaison Hotels; two resorts under development in Tuscany, Italy and Paris, France; and the proprietary Malmaison brand name. Patriot also acquired Arcadian's 50% partnership interest in the redevelopment of the luxury Great Eastern Hotel in London, to be branded as a flagship Wyndham Hotel and operated by Wyndham once the development has been completed. Collectively, the transactions described above are referred to herein as the "Arcadian Acquisition." In connection with the Arcadian Acquisition, Patriot entered into a short-term financing agreement on April 15, 1998 with Paine Webber Real Estate Securities, Inc. ("Paine Webber Real Estate") whereby Paine Webber Real Estate loaned Patriot $160,000 through April 15, 1999, at a rate equal to the borrowing rate on Patriot's Revolving Credit Facility. In addition, Patriot assumed approximately $112,600 of debt and paid other costs of approximately $36,891 in connection with the Arcadian Acquisition. INTERSTATE MERGER On June 2, 1998, pursuant to an Agreement and Plan of Merger dated as of December 2, 1997, as thereafter amended, (the "Interstate Merger Agreement") between Patriot, Wyndham and Interstate Hotels Company ("Interstate"), Interstate merged with and into Patriot with Patriot being the surviving company (the "Interstate Merger"). Pursuant to the Interstate Merger Agreement, stockholders of Interstate could elect to convert each of their shares of Interstate common stock into the right to receive either (i) $37.50 in cash (the "Cash Consideration"), subject to proration in certain circumstances, or (ii) a number of Paired Shares of Patriot and Wyndham common F-4 stock based on an exchange ratio of 1.341 Paired Shares for each share of Interstate common stock not exchanged for cash (the "Interstate Exchange Ratio"). As a result of the Interstate Merger, Patriot acquired controlling interest in, or ownership of, 42 hotels representing over 12,000 rooms; leases for 84 hotels representing over 10,100 rooms and management or service agreements for 82 hotels representing over 20,400 rooms located throughout the United States and in Canada, the Caribbean and Russia. The total purchase consideration for the Interstate Merger of approximately $2,081,109 consisted of 28,825,875 Paired Shares, cash of approximately $525,385 to pay Interstate shareholders who elected to receive cash, approximately $787,117 in debt assumed or refinanced by Patriot and approximately $67,648 to pay other transaction-related costs. In addition, Interstate shareholders received rights to receive a cash distribution of $0.429 on each share of Interstate common stock that was converted into Paired Shares, aggregating approximately $9,138. In connection with the Interstate Merger, the Patriot Companies closed on the commitment from The Chase Manhattan Bank and Chase Securities, Inc. and PaineWebber Real Estate Securities, Inc. to increase Patriot's existing credit facilities to an aggregate of $2,700,000 (an increase of $1,450,000 from the prior $1,250,000 credit package). The increased credit facilities include the $900,000 Revolving Credit Facility and a series of term loans in the aggregate amount of up to $1,800,000 (the "Term Loans"). Proceeds from the increased credit facilities were used to fund the cash portion of the Interstate Merger consideration, as well as to refinance certain outstanding indebtedness of the Patriot Companies. In addition, the increased credit facilities will be used to fund future acquisitions and for general working capital purposes. Interest rates will be based on the Patriot Companies' leverage ratio and may vary from 1.5% to 2.5% over LIBOR. Patriot incurred approximately $27,405 in loan fees and other expenses associated with this financing arrangement. SUMMERFIELD ACQUISITION On June 5, 1998, Patriot, through the Patriot Partnership, acquired all of the partnership interests in SF Hotel Company, L.P. ("Summerfield") for approximately $298,915 (the "Summerfield Acquisition"). The total purchase consideration for the Summerfield Acquisition consisted of approximately 3,223,795 OP Units of the Operating Partnerships, 1,397,281 Paired Shares, cash of approximately $165,514 and assumption of debt in the amount of approximately $17,083. In addition, the purchase price is subject to future adjustment based on (i) the market price of the Paired Shares through the end of 1998 and (ii) achievement of certain performance criteria through 2001 for seven hotels that are currently under development. As a result of the Summerfield Acquisition, Patriot acquired four Summerfield Suites-Registered Trademark- hotels, leasehold and management interests in 24 Summerfield Suites-Registered Trademark-, Sierra Suites-Registered Trademark- and Sunrise Suites hotels and management contracts and franchise interests for 12 additional Summerfield Suites-Registered Trademark- and Sierra Suites-Registered Trademark-hotels. Patriot has leased or sub-leased such hotels to Wyndham. In addition, Patriot acquired the development contracts for a number of hotels. CHCI MERGER On June 30, 1998, pursuant to an Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI Merger Agreement") between Patriot, Wyndham and CHC International ("CHCI"), the hospitality-related businesses of CHCI merged with and into Wyndham with Wyndham being the surviving company (the "CHCI Merger"). CHCI's gaming operations were transferred to a new legal entity prior to the CHCI Merger and such operations were not a part of the transaction. As a result of the CHCI Merger, Wyndham, through its subsidiaries, acquired the remaining 50% investment interest in GAH-II, L.P. ("GAH"), the remaining 17 leases and 16 of the associated management contracts related to the Patriot hotels leased by CHC Lease Partners, 8 third-party management contracts, two third-party asset management contracts contracts, the Grand Bay proprietary brand name and certain other hospitality management assets. By operation of the CHCI Merger, all the issued and outstanding shares of common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain stock option rights were exchanged for an aggregate of 1,781,173 shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per share of Wyndham (the "Wyndham Series A Preferred Stock") and 1,781,181 shares of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share, of Wyndham (the "Wyndham Series B Preferred Stock"). In addition, Wyndham assumed CHCI's outstanding debt in the amount of approximately $16,600. F-5 SUMMARY As of July 1, 1998, the Patriot Companies held ownership interests in 183 hotels and resorts, held leasehold interests in 122 hotels, managed 174 hotels and franchised 9 hotels. Thirteen of Patriot's hotels are leased to independent Lessees, and 215 hotels are leased to Wyndham International, including hotels leased from third-party owners. The remaining 77 hotels are owned and operated through Non-Controlled Subsidiaries. Patriot held an approximate 89.7% ownership interest in the Patriot Partnership. Wyndham held an approximate 88.6% ownership interest in the Wyndham Partnership. The unaudited Pro Forma Financial Statements as of December 31, 1997 and March 31, 1998 reflect a 10.9% ownership interest in the Patriot Partnership and a 12.1% ownership interest in the Wyndham Partnership, which represents the estimated ownership interests after giving effect to the above-described transactions completed subsequent to March 31, 1998. The following unaudited Pro Forma Condensed Combined Statements of Operations for the three months ended March 31, 1998 and the year ended December 31, 1997 of Patriot and Wyndham are derived from the individual unaudited Pro Forma Condensed Consolidated Statements of Operations of Patriot and Wyndham which are located elsewhere in this Joint Current Report. Such pro forma information is based in part upon: (i) the Separate and Combined Statements of Operations of Patriot and Wyndham filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the three months ended March 31, 1998; (ii) the Separate and Combined Statements of Operations of Patriot and Wyndham filed with the Patriot Companies' Joint Annual Report on Form 10-K for the year ended December 31, 1997; (iii) the historical financial statements of Wyndham Hotel Corporation, WHG Resorts & Casinos, Inc., Posadas de San Juan Associates, WKA El Con Associates, and El Conquistador Partnership, L.P., and Interstate Hotels Company filed with the Patriot Companies' Joint Current Report on Form 8-K dated April 20, 1998 (filed April 22, 1998); and (iv) the historical financial statements of Interstate Hotels Company; Royal Palace Hotel Associates; SF Hotel Company, L.P.; the combined SC Suites Summerfield Partnerships; Arcadian International Limited; Malmaison Limited; and CHC International, Inc. Hospitality Division, included in this Joint Current Report. The following unaudited Pro Forma Condensed Combined Statements of Operations assume that the acquisition of 45 hotels, the mergers and other acquisition of hotel management related assets, and the various financing transactions completed by the Patriot Companies during 1997 had occurred as of January 1, 1997. The statements also assume that the Wyndham Merger, the WHG Transactions and the Buena Vista Acquisition (completed by the Patriot Companies during the first quarter of 1998) had occurred as of January 1, 1997. In addition, the Pro Forma Condensed Combined Statements of Operations assume the following transactions completed subsequent to March 31, 1998 had occurred as of January 1, 1997: (i) the Interstate Merger and the related transactions were consummated on terms set forth in the Interstate Merger Agreement; (ii) the Arcadian Acquisition was completed; (iii) the Summerfield Acquisition was completed; (iv) the Patriot Companies credit facilities were increased and modified as described above; and (v) the CHCI Merger was consummated on terms set forth in the CHCI Merger Agreement. In management's opinion, all material adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of Patriot and Wyndham would have been assuming such transactions had been completed as of the beginning of the period presented, nor do they purport to represent the results of operations for future periods. F-6 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------- PATRIOT WYNDHAM ELIMINATION PRO FORMA PRO FORMA PRO FORMA ENTRIES TOTAL ------------------------------------------------------ ------------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Hotel revenue............................................. $ -- $ 629,722 $ -- $629,722 Lease revenue............................................. 197,703 -- (194,842)(A) 2,861 Racecourse facility revenue............................... -- 23,048 -- 23,048 Management fee and service fee income..................... -- 23,881 (266)(B) 23,615 Interest and other income................................. 4,013 5,090 (5,162)(C) 3,941 --------------- --------------- ------------ --------- Total revenue..................................... 201,716 681,741 (200,270) 683,187 --------------- --------------- ------------ --------- Expenses: Hotel expenses............................................ 54,985 363,351 -- 418,336 Racecourse facility operations............................ -- 18,184 -- 18,184 General and administrative................................ 5,282 64,422 (24)(C) 69,680 Interest expense.......................................... 78,869 8,927 (5,138)(C) 82,658 (E) Depreciation and amortization............................. 47,218 22,419 -- 69,637 Lease payments............................................ -- 194,842 (194,842)(A) -- --------------- --------------- ------------ --------- Total expenses.................................... 186,354 672,145 (200,004) 658,495 --------------- --------------- ------------ --------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests ................................... 15,362 9,596 (266) 24,692 Equity in earnings of unconsolidated subsidiaries........................................... 8,656 43 (4,515)(D) 4,184 --------------- --------------- ------------ -------- Income (loss) before income tax provision and minority interests................................................. 24,018 9,639 (4,781) 28,876 Income tax provision...................................... (231) (4,053) -- (4,284) --------------- --------------- ------------ -------- Income (loss) before minority interests...................... 23,787 5,586 (4,781) 24,592 Minority interest in the Operating Partnerships........... (3,932) 95 -- (3,837) Minority interest in consolidated subsidiaries............ (1,548) (5,902) 4,515 (D) (2,935) --------------- --------------- ------------ -------- Net income (loss)............................................ $ 18,307 $ (221) $ (266) $ 17,820 (E) --------------- --------------- ------------ -------- --------------- --------------- ------------ -------- Basic net income per Paired Share (F)........................ $ 0.14 $ -- $ 0.14 (E) --------------- --------------- -------- --------------- --------------- -------- Diluted net income per Paired Share (F)...................... $ 0.13 $ -- $ 0.13 --------------- --------------- -------- --------------- --------------- --------
SEE NOTES ON FOLLOWING PAGE. F-7 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (A) Represents elimination of lease revenue and expense related to the hotels and the Racecourse facility leased by Patriot to Wyndham. (B) Represents elimination of design and construction fees related to the hotels leased by Patriot to Wyndham. (C) In connection with certain of the mergers and other transactions, Patriot (including the Patriot Partnership) subscribed for shares of Wyndham Common Stock or OP Units of the Wyndham Partnership and Wyndham subscribed for shares of Patriot Common Stock in order to effect the exchange of Paired Shares or pairs of OP Units of the Operating Partnerships in consummation of the transactions. These subscriptions for shares of common stock and OP Units were funded through the issuance of promissory notes (the "Subscription Notes") payable to Wyndham or Patriot, as the case may be. The Subscription Notes accrue interest at rates ranging from LIBOR plus 1% to a fixed rate of 8.7% per annum and mature on various dates through January 2001. The pro forma elimination entry consists of: Interest income and expense related to the Subscription Notes......................... $ 4,388 Interest income and expense related to the participating note held by Wyndham related to the Buena Vista Palace Hotel..................................... 457 Interest income and expense related to a note receivable issued to Old Patriot in connection with the sale of certain assets to PAH RSI, L.L.C., which assets were acquired by Wyndham............................................... 293 Other intercompany income and expense items........................................... 24 ------------- $ 5,162 ------------- -------------
(D) Represents elimination of Patriot's equity in the earnings of certain non-controlled subsidiaries that were formed in connection with the Wyndham Merger, the WHG Transactions, the Summerfield Acquisition, the Arcadian Acquisition and the Interstate Merger. The entities are controlled by Wyndham, and as a result, the operating results of these entities have been combined with those of Wyndham for pro forma financial reporting purposes. (E) The pro forma amounts presented assume an average interest rate of 7.939% per annum (representing LIBOR plus 2.25%) on the amounts outstanding under the Revolving Credit Facility and the Term Loans. (F) Pro forma basic earnings per Paired Share is computed based on 133,306 weighted average common Paired Shares outstanding for the period. Shares of common stock granted to officers and employees of Patriot and Wyndham are included in the computation only after the shares become fully vested. Pro forma diluted earnings per Paired Share is computed based on 144,625 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period, if dilutive. Diluted combined earnings per share includes dilutive common stock equivalents and options to purchase common stock which were outstanding during the period. The number of shares outstanding related to the options has been calculated by application of the "treasury stock" method. The number of shares used for the calculation also includes adjustments to reflect the impact of the conversion of shares of Patriot and Wyndham preferred stock into Paired Shares. F-8 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------- PATRIOT WYNDHAM ELIMINATION PRO FORMA PRO FORMA PRO FORMA ENTRIES TOTAL ------------------------------------------------ ------------ (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Hotel revenue............................................. $ -- $2,236,311 $ -- $2,236,311 Lease revenue............................................. 698,896 -- (680,779)(A) 18,117 Racecourse facility revenue............................... -- 48,882 -- 48,882 Management fee and service fee income..................... -- 128,868 -- 128,868 Interest and other income................................. 14,686 19,733 (20,342)(B) 14,077 ----------- ---------- ---------- ---------- Total revenue..................................... 713,582 2,433,794 (701,121) 2,446,255 ----------- ---------- ---------- ---------- Expenses: Hotel expenses............................................ 222,669 1,365,954 -- 1,588,623 Racecourse facility operations............................ -- 39,267 -- 39,267 General and administrative................................ 9,951 220,706 (24)(B) 230,633 Interest expense.......................................... 318,830 31,501 (20,318)(B) 330,013(D) Cost of acquiring leaseholds.............................. 54,499 -- -- 54,499 Depreciation and amortization............................. 211,597 68,947 -- 280,544 Lease payments............................................ -- 680,779 (680,779)(A) -- ----------- ---------- ---------- ---------- Total expenses.................................... 817,546 2,407,154 (701,121) 2,523,579 ----------- ---------- ---------- ---------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests.................................... (103,964) 26,640 -- (77,324) Equity in earnings of unconsolidated subsidiaries........................................... 11,337 -- (3,948)(C) 7,389 ----------- ---------- ---------- ---------- Income (loss) before income tax provision and minority interests................................................. (92,627) 26,640 (3,948) (69,935) Income tax provision...................................... (825) (12,330) -- (13,155) Income (loss) before minority interests...................... (93,452) 14,310 (3,948) (83,090) Minority interest in the Operating Partnerships........... 5,911 581 -- 6,492 Minority interest in consolidated subsidiaries............ (9,796) (7,642) 3,948 (C) (13,490) ----------- ---------- ---------- ---------- Net income (loss)............................................ $ (97,337) $ 7,249 $ -- $ (90,088)(D) ----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Basic net income (loss) per Paired Share (E)................. $ (0.73) $ 0.05 $ (0.68)(D) ----------- ---------- ---------- ----------- ---------- ---------- Diluted net income (loss) per Paired Share (E)............... $ (0.73) $ 0.05 $ (0.68) ----------- ---------- ---------- ----------- ---------- ----------
SEE NOTES ON FOLLOWING PAGE. F-9 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (A) Represents elimination of lease revenue and expense related to the hotels and Racecourse facility leased by Patriot to Wyndham. (B) In connection with certain of the mergers and other transactions, Patriot (including the Patriot Partnership) subscribed for shares of Wyndham Common Stock or OP Units of the Wyndham Partnership and Wyndham has subscribed for shares of Patriot Common Stock in order to effect the exchange of Paired Shares or pairs of OP Units of the Operating Partnerships in consummation of the transactions. These subscriptions for shares of common stock and OP Units were funded through the issuance of promissory notes (the "Subscription Notes") payable to Wyndham or Patriot, as the case may be. The Subscription Notes accrue interest at rates ranging from LIBOR plus 1% to a fixed rate of 8.7% per annum and mature on various dates through January 2001. The pro forma elimination entry consists of: Interest income and expense related to the Subscription Notes......................... $ 17,339 Interest income and expense related to the participating note held by Wyndham related to the Buena Vista Palace Hotel..................................... 1,809 Interest income and expense related to a note receivable issued to Old Patriot in connection with the sale of certain assets to PAH RSI, L.L.C., which assets were acquired by Wyndham............................................... 1,170 Other intercompany income and expense items........................................... 24 ------------- $ 20,342 ------------- -------------
(C) Represents elimination of Patriot's equity in the earnings of certain non-controlled subsidiaries that were formed in connection with the Wyndham Merger, the WHG Transaction, the Summerfield Acquisition, the Arcadian Acquisition and the Interstate Merger. These entities are controlled by Wyndham, and as a result, the operating results of these entities have been combined with those of Wyndham for pro forma financial reporting purposes. (D) The pro forma amounts presented assume an average interest rate of 7.6176% per annum (representing LIBOR plus 2.25%) on the amounts outstanding under the Revolving Credit Facility and the Term Loans. (E) Pro forma basic earnings per Paired Share is computed based on 133,306 weighted average common Paired Shares outstanding for the period. Shares of common stock granted to officers and employees of Patriot and Wyndham are included in the computation only after the shares become fully vested. Pro forma diluted earnings per Paired Share is computed based on 144,625 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period, if dilutive. Diluted combined earnings per share does not include common stock equivalents and options to purchase common stock which were outstanding during the period because they are antidilutive. The number of shares used for the calculation also excludes adjustments to reflect the impact of the conversion of shares of Patriot and Wyndham preferred stock into Paired Shares. F-10 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) The following unaudited Pro Forma Condensed Combined Balance Sheet assumes the following transactions have occurred as of March 31, 1998: (i) the Interstate Merger was consummated on the terms set forth in the Interstate Merger Agreement; (ii) the Patriot Companies have completed the Arcadian Acquisition; (iii) the Patriot Companies have completed the Summerfield Acquisition; and (iv) the CHCI Merger was consummated on the terms set forth in the CHCI Merger Agreement. In management's opinion, all material adjustments necessary to reflect the effect of these transactions have been made. The following unaudited Pro Forma Condensed Combined Balance Sheet is derived from Patriot's and Wyndham's Combined Balance Sheet as of March 31, 1998 and should be read in conjunction with the financial statements filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the three months ended March 31, 1998. The unaudited Pro Forma Condensed Combined Balance Sheet reflects adjustments for the purchase method of accounting whereby the assets and liabilities owned by Arcadian, Summerfield, Interstate and CHCI are adjusted to estimated fair market value and each of the companies' respective historical shareholders' equity is eliminated. The following Pro Forma Condensed Combined Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of March 31, 1998, nor does it purport to represent the future financial position of Patriot and Wyndham. F-11 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------- PATRIOT COMPANIES' COMBINED ARCADIAN SUMMERFIELD HISTORICAL ACQUISITION ACQUISITION (A) (B) (C) ---------------- ---------------- ---------------------- - ASSETS Net investment in real estate and related improvements and land held for development.............................. $ 3,150,712 $ 263,639 $ 99,164 Cash and cash equivalents.................................... 85,268 4,285 500 Restricted cash ............................................. 3,384 -- 4,473 Accounts and lease revenue receivable........................ 134,504 13,783 -- Investment in unconsolidated subsidiaries.................... 15,465 36,823 -- Mortgage notes and other receivables from unconsolidated subsidiaries................................ 73,465 -- -- Other notes and receivables.................................. 32,682 -- -- Management contract costs ................................... 90,879 -- 129,405 Trade names and franchise costs.............................. 95,540 9,424 13,198 Goodwill, net................................................ 471,096 16,753 (F) 35,478 (F) Deferred expenses, net....................................... 22,529 -- -- Deferred acquisition costs................................... 42,013 736 (15,000) Inventories.................................................. 16,059 1,360 -- Other assets................................................. 62,629 -- 21,506 ----------- ---------- ---------- Total assets........................................... $ 4,296,225 $ 346,803 $ 288,724 ----------- ---------- ---------- ----------- ---------- ---------- INTERSTATE CHCI MERGER MERGER PRO FORMA (D) (E) TOTAL ---------------------- ---------------------- ---------------- ASSETS Net investment in real estate and related improvements and land held for development.............................. $ 1,900,500 $ -- $ 5,414,015 Cash and cash equivalents.................................... 35,090 -- 125,143 Restricted cash ............................................. 7,395 -- 15,252 Accounts and lease revenue receivable........................ 57,865 -- 206,152 Investment in unconsolidated subsidiaries.................... 41,494 -- 93,782 Mortgage notes and other receivables from unconsolidated subsidiaries................................ -- -- 73,465 Other notes and receivables.................................. 11,687 -- 44,369 Management contract costs ................................... 130,331 16,308 366,923 Trade names and franchise costs.............................. -- 5,000 123,162 Goodwill, net................................................ 54,044 (F) 15,378 (F) 592,749 Deferred expenses, net....................................... 40,506 -- 63,035 Deferred acquisition costs................................... -- -- 27,749 Inventories.................................................. -- -- 17,419 Other assets................................................. 19,484 394 104,013 ----------- ---------- ---------- Total assets........................................... $ 2,298,396 $ 37,080 $ 7,267,228 ----------- ---------- ---------- ----------- ---------- ----------
SEE NOTES ON PAGE F-14. F-12 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------- PATRIOT COMPANIES' COMBINED ARCADIAN SUMMERFIELD HISTORICAL ACQUISITION ACQUISITION (A) (B) (C) ---------------- -------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under credit facility, term loans, mortgage notes and capital leases......................................... $ 1,842,992 $ 309,491 $ 167,598 Accounts payable and accrued expenses........................ 160,609 36,032 4,809 Dividends and distributions payable.......................... 72 -- -- Deposits..................................................... 22,656 -- -- Due to unconsolidated subsidiaries........................... 7,456 -- -- Deferred income tax liability................................ 75,684 -- -- Minority interest in the Operating Partnerships.............. 203,959 -- 81,146 (H) Minority interest in other consolidated subsidiaries......... 71,462 1,280 -- Shareholders' equity: Preferred stock............................................ 49 -- -- Common stock............................................... 2,154 -- 28 (H) Paid-in capital............................................ 1,991,803 -- 35,143 (H) Receivable from shareholders and affiliates................ (15,734) -- -- Unearned stock compensation, net........................... (16,227) -- -- Unrealized gain on securities available for sale........... 106 -- -- Distributions in excess of retained earnings............... (50,816) -- -- ----------- ---------- --------- Total shareholders' equity............................. 1,911,335 -- 35,171 ----------- ---------- --------- Total liabilities and shareholders' equity............ $ 4,296,225 $ 346,803 $ 288,724 ----------- ---------- --------- ----------- ---------- --------- INTERSTATE CHCI MERGER MERGER PRO FORMA (D) (E) TOTAL -------------- ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under credit facility, term loans, mortgage notes and capital leases......................................... $ 1,416,695 (G) $ 16,600 $ 3,753,376 Accounts payable and accrued expenses........................ 93,859 -- 295,309 Dividends and distributions payable.......................... -- -- 72 Deposits..................................................... -- -- 22,656 Due to unconsolidated subsidiaries........................... -- -- 7,456 Deferred income tax liability................................ 28,422 -- 104,106 Minority interest in the Operating Partnerships.............. -- 5,000 (I) 290,105 Minority interest in other consolidated subsidiaries......... 67,600 (J) -- 140,342 Shareholders' equity: Preferred stock............................................ -- 36 (L) 85 Common stock............................................... 577 (K) -- 2,759 Paid-in capital............................................ 691,243 (K) 82,070 (L) 2,800,259 Receivable from shareholders and affiliates................ -- -- (15,734) Unearned stock compensation, net........................... -- -- (16,227) Unrealized gain on securities available for sale........... -- -- 106 Distributions in excess of retained earnings............... -- (66,626)(M) (117,442) ----------- ----------- ------------ Total shareholders' equity............................. 691,820 15,480 2,653,806 ----------- ----------- ------------ Total liabilities and shareholders' equity............ $ 2,298,396 $ 37,080 $ 7,267,228 ----------- ----------- ------------ ----------- ----------- ------------
SEE NOTES ON FOLLOWING PAGE. F-13 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 1998 (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (A) Represents the historical combined financial position of Patriot and Wyndham as of March 31, 1998. (B) Represents adjustments to the Patriot Companies' combined financial position assuming the Arcadian Acquisition had been consummated as of March 31, 1998. (C) Represents adjustments to the Patriot Companies' combined financial position assuming the Summerfield Acquisition had been consummated as of March 31, 1998. (D) Represents adjustments to the Patriot Companies' combined financial position assuming the Interstate Merger had been consummated as of March 31, 1998. (E) Represents adjustments to the Patriot Companies' combined financial position assuming the CHCI Merger had been consummated as of March 31, 1998. (F) Represents the purchase consideration in excess of the fair market value of the net assets acquired. (G) The balance of $1,416,695 represents debt assumed in connection with the Interstate Merger of approximately $787,117, of which approximately $635,526 will be retired (including interest and other fees), and approximately $1,265,104 of additional funding under a series of new term loans. (H) Represents adjustments to record the issuance of 3,223,795 OP Units of the Operating Partnerships and 1,397,281 Paired Shares in connection with the Summerfield Acquisition. (I) Represents adjustment to record the issuance of 156,863 OP Units of the Operating Partnerships in connection with the CHCI Merger. (J) Represents the minority interest investment in Interstate's consolidated subsidiaries. (K) Represents adjustments to record the exchange of Interstate Common Stock for 28,825,875 Paired Shares. (L) Represents adjustments to record the exchange of CHCI Shares for an aggregate of approximately 3,562,354 shares of Wyndham Series A Preferred Stock and Wyndham Series B Preferred Stock. (M) Represents an adjustment for the write-off of the estimated cost to acquire the Participating Leases related to hotels leased by Patriot to CHC Lease Partners. In connection with the CHCI Merger, Wyndham will acquire the remaining 17 Participating Leases held by CHC Lease Partners. The cost of acquiring these leases will be recorded as an operating expense in Wyndham's results of operations. However, because the intent of the pro forma financial statements is to reflect, among other things, the expected continuing impact of the CHCI Merger on Wyndham, this adjustment has been excluded from the pro forma statement of operations and has been reflected as an adjustment to retained earnings for pro forma presentation purposes. F-14 PATRIOT AMERICAN HOSPITALITY, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------- FIRST PATRIOT QUARTER ARCADIAN HISTORICAL TRANSACTIONS ACQUISITION (A) (B) (C) ----------- ------------ ----------- Revenue: Lease revenue ................................. $ 109,649 $ 904 (F) $ 3,803 (F) Interest and other income ..................... 3,516 497 -- --------- -------- ------- Total revenue ......................... 113,165 1,401 3,803 --------- -------- ------- Expenses: Real estate and personal property taxes and casualty insurance........................... 11,923 104 468 Ground lease expense .......................... 6,558 229 (G) -- General and administrative..................... 5,282 -- -- Interest expense .............................. 34,251 1,767 (H) 6,708 (H) Depreciation and amortization.................. 20,497 819 (I) 2,120 (I) --------- -------- ------- Total expenses ........................ 78,511 2,919 9,296 --------- -------- ------- Operating income ................................. 34,654 (1,518) (5,493) Equity in earnings (losses) of unconsolidated subsidiaries ............................... 3,591 7,805 (J) (128)(K) --------- -------- ------- Income (loss) before income tax provision, minority interests and extraordinary item...... 38,245 6,287 (5,621) Income tax provision .......................... (371) (35)(N) -- --------- -------- ------- Income (loss) before minority interest and extraordinary item............................. 37,874 6,252 (5,621) Minority interest in Patriot Partnership....... (3,128) -- -- Minority interest in other consolidated subsidiaries ............................... (533) 27 (P) -- --------- -------- ------- Income (loss) before extraordinary item .......... 34,213 6,279 (5,621) Extraordinary loss from early extinguishment of debt ................................... (18,716) 18,716 (H) -- --------- -------- ------- Net income (loss) ................................ $ 15,497 $ 24,995 $(5,621) --------- -------- ------- --------- -------- ------- Income before extraordinary item............... $ 0.35 Extraordinary loss............................. (0.19) --------- Net income per common share.................... $ 0.16 --------- --------- Diluted earnings per common share (R): Income before extraordinary item .............. $ 0.32 Extraordinary loss............................. (0.18) --------- Net income per common share.................... $ 0.14 --------- --------- SUMMERFIELD INTERSTATE ACQUISITION MERGER PRO FORMA (D) (E) TOTAL ------------ ------------- ----------- Revenue: Lease revenue ................................. $ 16,471 (F) $ 66,876 (F) $ 197,703 Interest and other income ..................... -- -- 4,013 --------- -------- --------- Total revenue ......................... 16,471 66,876 201,716 --------- -------- --------- Expenses: Real estate and personal property taxes and casualty insurance........................... 912 5,318 18,725 Ground lease expense .......................... 10,428 (G) 19,045 (G) 36,260 General and administrative..................... -- -- 5,282 Interest expense .............................. 3,444 (H) 32,699 (H) 78,869 Depreciation and amortization.................. 2,680 (I) 21,102 (I) 47,218 --------- -------- --------- Total expenses ........................ 17,464 78,164 186,354 --------- -------- --------- Operating income ................................. (993) (11,288) 15,362 Equity in earnings (losses) of unconsolidated subsidiaries ............................... (175)(L) (2,437)(M) 8,656 --------- -------- --------- Income (loss) before income tax provision, minority interests and extraordinary item...... (1,168) (13,725) 24,018 Income tax provision .......................... -- 175 (N) (231) --------- -------- --------- Income (loss) before minority interest and extraordinary item............................. (1,168) (13,550) 23,787 Minority interest in Patriot Partnership....... 127 (O) (931)(O) (3,932) Minority interest in other consolidated subsidiaries ............................... -- (1,042)(Q) (1,548) --------- -------- --------- Income (loss) before extraordinary item .......... (1,041) (15,523) 18,307 Extraordinary loss from early extinguishment of debt ................................... -- -- -- --------- -------- --------- Net income (loss) ................................ $ (1,041) $(15,523) $ 18,307 --------- -------- --------- --------- -------- --------- Basic earnings per common share (R): Income before extraordinary item............... Extraordinary loss............................. Net income per common share.................... $ 0.14 --------- --------- Diluted earnings per common share (R): Income before extraordinary item............... Extraordinary loss............................. Net income per common share.................... $ 0.13 --------- ---------
F-15 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (A) Represents Patriot's historical results of operations for the three months ended March 31, 1998. (B) Represents adjustments to Patriot's results of operations assuming that the Buena Vista Acquisition, the Wyndham Merger, the WHG Transactions and the various financing transactions completed by the Patriot Companies during the first quarter of 1998 had occurred as of January 1, 1997. (C) Represents adjustments to Patriot's results of operations assuming the Arcadian Acquisition had been consummated as of January 1, 1997. (D) Represents adjustments to Patriot's results of operations assuming the Summerfield Acquisition had been consummated as of January 1, 1997. (E) Represents adjustments to Patriot's results of operations assuming the Interstate Merger and the related transactions had been consummated as of January 1, 1997. (F) Represents adjustments to lease revenue assuming the hotels and leasehold interests currently owned by Patriot and its subsidiaries had been leased to the Lessees or Wyndham as of January 1, 1997. (G) Represents pro forma ground lease payments to be made with respect to certain of the hotels, and hotel lease expense related to the hotels leased by Patriot from third-party owners, which Patriot sub-leases to Wyndham. (H) Interest expense consists of the following components:
First Quarter Arcadian Summerfield Interstate Transactions Acquisition Acquisition Merger ----------------- ----------------- ----------------- ----------------- Related to acquisition of hotels and hotel management businesses ......... $ 1,045 $ 6,308 $ 3,328 $ 28,143 Related to Subscription Notes payable to Wyndham ............................. 74 -- 116 752 Related to Participating Note payable to Wyndham ............................. 412 -- -- -- Related to amortization of deferred loan costs ............................... 236 400 -- 3,804 ---------- ---------- ---------- ---------- $ 1,767 $ 6,708 $ 3,444 $ 32,699 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Amortization of deferred loan costs is computed using the straight-line method (which approximates the interest method) over the term of the related loans. As a result of the closing of the repayment of debt assumed in connection with the Wyndham Merger, deferred loan costs related to the debt repaid were written off. In addition, Patriot incurred certain prepayment penalties related to the early repayment of certain debt. These amounts, net of the minority interest share, were reported as an extraordinary item in Patriot's historical results of operations and has been eliminated for pro forma presentation purposes. In addition, as a result of the increase in Patriot's existing credit facilities, additional deferred loan costs totaling approximately $27,405 have been included in the borrowings under the credit facility and mortgage notes in the pro forma financial statements. (I) Represents the following adjustments to depreciation and amortization:
First Quarter Arcadian Summerfield Interstate Transactions Acquisition Acquisition Merger ----------------- ----------------- ----------------- ----------------- Related to acquisition of hotels or investment interests in hotels ...... $ 819 $ 1,910 $ 893 $ 20,091 Related to amortization of leasehold costs ............................... -- -- 1,787 1,011 Related to amortization of goodwill .... -- 210 -- -- ---------- ---------- ---------- ---------- $ 819 $ 2,120 $ 2,680 $ 21,102 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
F-16 Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for hotel buildings and improvements, 7 years for the Racecourse facility and 5 to 7 years for furniture, fixtures and equipment ("FF&E"). These estimated useful lives are based on management's knowledge of the properties and the industry in general. Amortization of goodwill related to mergers and other acquisitions of businesses is computed using the straight-line method over estimated useful lives ranging from 20 to 40 years. (J) Represents Patriot's pro forma equity in earnings of the Non-Controlled Subsidiaries that own the Wyndham trade names and franchise related assets, the management and franchising contracts and the hotel management company and which are controlled by Wyndham. In addition, represents equity in losses of the partnerships that own the El San Juan Hotel & Casino and the El Conquistador and the WHG management company. These entities are also controlled by Wyndham. (K) Represents Patriot's pro forma equity in losses of the Non-Controlled Subsidiaries that own certain management-related assets acquired in the Arcadian Acquisition. Subsidiaries of Wyndham own the controlling interest in these entities. (L) Represents Patriot's pro forma equity in earnings of the Non-Controlled Subsidiaries that own the management contracts and hotel management business acquired in the Summerfield Acquisition. Subsidiaries of Wyndham own the controlling interest in these entities. (M) Represents Patriot's pro forma equity in losses of the Non-Controlled Subsidiaries that own the management contracts and hotel management business acquired in the Interstate Merger. Subsidiaries of Wyndham own the controlling interest in these entities. (N) Represents an adjustment for estimated state income tax liabilities. (O) Represents the adjustment to minority interest to reflect the estimated minority interest percentage subsequent to the assumed transactions of approximately 10.9%. (P) Represents the minority interest related to partnerships and limited liability companies that own certain of the hotels assuming such entities had been formed and the hotels owned by such entities had been acquired at January 1, 1997. (Q) Represents the minority interest in income of consolidated entities that were acquired by Patriot in connection with the Interstate Merger. (R) Patriot's pro forma basic earnings per share is computed based on 133,306 weighted average common shares outstanding for the period. Shares of common stock granted to officers and employees of Patriot are included in the computation only after the shares become fully vested. Pro forma diluted earnings per share is computed based on 144,625 weighted average common shares and common share equivalents outstanding for the period, if dilutive. Diluted earnings per share includes dilutive common stock equivalents and options to purchase common stock which were outstanding during the period. The number of shares outstanding related to the options has been calculated by application of the "treasury stock" method. The number of shares used for the calculation also includes adjustments to reflect the impact of the conversion of shares of Patriot and Wyndham preferred stock into paired shares of common stock. F-17 PATRIOT AMERICAN HOSPITALITY, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------- PATRIOT RECENT ARCADIAN HISTORICAL TRANSACTIONS ACQUISITION (A) (B) (C) ----------------- ---------------- ----------------- Revenue: Lease revenue............................................. $ 180,451 $ 197,409 (F) $ 15,586 (F) Interest and other income................................. 5,103 9,583 -- ------------- ------------ --------- Total revenue..................................... 185,554 206,992 15,586 ------------- ------------ --------- Expenses: Real estate and personal property taxes and casualty insurance..................................... 17,958 21,339 1,402 Ground lease expense...................................... 4,117 26,197 (G) -- General and administrative................................ 11,157 (1,206)(H) -- Interest expense.......................................... 51,000 101,017 (I) 26,614 (I) Cost of acquiring leaseholds.............................. 54,499 -- (J) -- Depreciation and amortization............................. 49,069 60,662 (K) 8,484 (K) ------------- ------------ --------- Total expenses.................................... 187,800 208,009 36,500 ------------- ------------ --------- Operating (loss) income...................................... (2,246) (1,017) (20,914) Equity in earnings of unconsolidated subsidiaries......... 6,015 (7,025)(L) (1,179)(M) ------------- ------------ --------- Income (loss) before income tax provision, minority interests and extraordinary item.......................... 3,769 (8,042) (22,093) Income tax provision...................................... -- (125)(P) -- ------------- ------------ --------- Income (loss) before minority interest and extraordinary item...................................................... 3,769 (8,167) (22,093) Minority interest in Patriot Partnership.................. (1,713) 9,525 (Q) -- (Q) Minority interest in other consolidated subsidiaries...... (1,674) (652)(R) -- ------------- ------------ --------- Income (loss) before extraordinary item...................... 382 47,392 (22,093) Extraordinary loss from early extinguishment of debt...... (2,534) 2,534 (K) -- ------------- ------------ --------- Net (loss) income............................................ $ (2,152) $ 3,240 $(22,093) ------------- ------------ --------- ------------- ------------ --------- Basic earnings per common share (T): Income before extraordinary item.......................... $ 0.01 Extraordinary loss........................................ (0.05) ------------ Net (loss) income per common share........................ $ (0.04) ------------ ------------ Diluted earnings per common share (T): Income before extraordinary item.......................... $ 0.01 Extraordinary loss........................................ (0.05) ------------ Net (loss) income per common share........................ $ (0.04) ------------ ------------ SUMMERFIELD INTERSTATE ACQUISITION MERGER PRO FORMA (D) (E) TOTAL ---------------- ---------------- --------------- Revenue: Lease revenue............................................. $ 57,983 (F) $ 247,467 (F) $ 698,896 Interest and other income................................. -- -- 14,686 ------------ ------------ ---------- Total revenue..................................... 57,983 247,467 713,582 ------------ ------------ ---------- Expenses: Real estate and personal property taxes and casualty insurance..................................... 3,144 23,294 67,137 Ground lease expense...................................... 40,244 (G) 84,974 (G) 155,532 General and administrative................................ -- -- 9,951 Interest expense.......................................... 14,875 (I) 125,324 (I) 318,830 Cost of acquiring leaseholds.............................. -- -- 54,499 Depreciation and amortization............................. 8,972 (K) 84,410 (K) 211,597 ------------ ------------ ---------- Total expenses.................................... 67,235 318,002 817,546 ------------ ------------ ---------- Operating (loss) income...................................... (9,252) (70,535) (103,964) Equity in earnings of unconsolidated subsidiaries......... 474 (N) 13,052 (O) 11,337 ------------ ------------ ---------- Income (loss) before income tax provision, minority interests and extraordinary item.......................... (8,778) (57,483) (92,627) Income tax provision...................................... -- (700)(P) (825) ------------ ------------ ---------- Income (loss) before minority interest and extraordinary item...................................................... (8,778) (58,183) (93,452) Minority interest in Patriot Partnership.................. 957 (Q) (2,858 (Q) 5,911 Minority interest in other consolidated subsidiaries...... -- (7,470 (S) (9,796) ------------ ------------ ---------- Income (loss) before extraordinary item...................... (7,821) (68,511) (97,337) Extraordinary loss from early extinguishment of debt...... -- -- -- ------------ ------------ ---------- Net (loss) income............................................ $ (7,821) $ (68,511) $ (97,337) ------------ ------------ ---------- ------------ ------------ ---------- Basic earnings per common share (T): Income before extraordinary item.......................... Extraordinary loss........................................ Net (loss) income per common share........................ $ (0.73) ----------- ----------- Diluted earnings per common share (T): Income before extraordinary item.......................... Extraordinary loss........................................ Net (loss) income per common share........................ $ (0.73) ------------- -------------
SEE NOTES ON FOLLOWING PAGE. F-18 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (A) Represents Patriot's historical results of operations for the year ended December 31, 1997. (B) Represents adjustments to Patriot's results of operations assuming that (i) the acquisition of 45 hotels, mergers and other acquisitions and the various financing transactions completed by the Patriot Companies during the 1997 fiscal year; (ii) the Buena Vista Acquisition, the Wyndham Merger, the WHG Transactions and the various financing transactions completed by the Patriot Companies during the first quarter of 1998; and (iii) the Arcadian Acquisition, the Interstate Merger, the Summerfield Acquisition and the CHCI Merger had occurred as of January 1, 1997. (C) Represents adjustments to Patriot's results of operations assuming the Arcadian Acquisition had been consummated as of January 1, 1997. (D) Represents adjustments to Patriot's results of operations assuming the Summerfield Acquisition had been consummated as of January 1, 1997. (E) Represents adjustments to Patriot's results of operations assuming the Interstate Merger and the related transactions had been consummated as of January 1, 1997. (F) Represents adjustments to lease revenue assuming the hotels and leasehold interests owned by Patriot and its subsidiaries had been leased to the Lessees or Wyndham as of January 1, 1997. (G) Represents pro forma ground lease payments to be made with respect to certain of the hotels and hotel lease expense related to the hotels leased by Patriot from third-party owners, which Patriot sub-leases to Wyndham. (H) Represents adjustment to the amortization of unearned stock compensation computed on the straight-line method over the 3 to 5-year vesting periods of $1,971 (primarily to allocate a portion of the costs to Wyndham), net of estimated incremental general and administrative expense of $765. (I) Interest expense consists of the following components:
Recent Arcadian Summerfield Interstate Transactions Acquisition Acquisition Merger -------------- --------------- --------------- ------------ Related to acquisition of hotels and hotel management businesses.......... $ 82,112 $ 25,014 $ 14,409 $ 107,097 Related to Subscription Notes payable to Wyndham.............................. 2,235 -- 466 3,009 Related to Participating Note payable to Wyndham.............................. 1,809 -- -- -- Related to amortization of deferred loan costs................................ 14,724 1,600 -- 15,218 Related to amortization of capitalized interest expense..................... 137 -- -- -- -------------- --------------- --------------- ------------ $ 101,017 $ 26,614 $ 14,875 $ 125,324 -------------- --------------- --------------- ------------ -------------- --------------- --------------- ------------
Amortization of deferred loan costs is computed using the straight-line method (which approximates the interest method) over the term of the related loans. As a result of the closing of Patriot's revolving credit facility, deferred loan costs totaling approximately $2,910 related to Patriot's old line of credit were written off. This amount, net of the minority interest share, was reported as an extraordinary item in Patriot's historical results of operations and has been eliminated for pro forma presentation purposes. In addition, as a result of the increase in Patriot's existing credit facilities, additional deferred loan costs totaling approximately $27,405 have been included in the borrowings under the credit facility and mortgage notes in the pro forma financial statements. (J) The costs incurred in connection with Patriot's acquisition of eight leasehold interests from CHC Lease Partners in 1997 were expensed as incurred. These non-recurring historical costs were not eliminated for pro forma presentation purposes because they are not directly affected by the transactions reflected herein. F-19 (K) Represents the following adjustments to depreciation and amortization:
Recent Arcadian Summerfield Interstate Transactions Acquisition Acquisition Merger ---------------- ----------------- ---------------- ----------------- Related to acquisition of hotels or investment interests in hotels....... $ 59,715 $ -- $ 1,837 $ 80,364 Related to amortization of leasehold costs................................ -- 7,642 7,135 4,046 Related to amortization of goodwill..... 947 842 -- -- -------------- --------------- --------------- ------------ $ 60,662 $ 8,484 $ 8,972 $ 84,410 -------------- --------------- --------------- ------------ -------------- --------------- --------------- ------------
Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for hotel buildings and improvements, 7 years for the Racecourse facility and 5 to 7 years for FF&E. These estimated useful lives are based on management's knowledge of the properties and the industry in general. Amortization of goodwill related to mergers and other acquisitions of businesses is computed using the straight-line method over estimated useful lives ranging from 20 to 40 years. (L) Represents Patriot's pro forma equity in losses of the Non-Controlled Subsidiaries that own the Wyndham trade names and franchise related assets, the management and franchising contracts and the hotel management company and which are controlled by Wyndham. In addition, represents equity in losses of the partnerships that own the El San Juan Hotel & Casino and the El Conquistador and the WHG management company. These entities are also controlled by Wyndham. (M) Represents Patriot's pro forma equity in losses of the Non-Controlled Subsidiaries that own certain management-related assets acquired in the Arcadian Acquisition. Subsidiaries of Wyndham own the controlling interest in these entities. (N) Represents Patriot's pro forma equity in earnings of the Non-Controlled Subsidiaries that own the management contracts and hotel management business acquired in the Summerfield Acquisition. Subsidiaries of Wyndham own the controlling interest in these entities. (O) Represents Patriot's pro forma equity in the earnings of the Non-Controlled Subsidiaries that own the management contracts and hotel management business acquired in the Interstate Merger. Subsidiaries of Wyndham own the controlling interest in these entities (P) Represents an adjustment for estimated state income tax liabilities. (Q) Represents the adjustment to minority interest to reflect the estimated minority interest percentage subsequent to the assumed transactions of approximately 10.9%. (R) Represents the minority interest related to partnerships and limited liability companies that own certain of the hotels assuming such entities had been formed and the hotels owned by such entities had been acquired at January 1, 1997. (S) Represents the minority interest in income of consolidated entities that were acquired by Patriot in connection with the Interstate Merger. (T) Patriot's pro forma basic earnings per share is computed based on 133,306 weighted average common shares outstanding for the period. Shares of common stock granted to officers and employees of Patriot are included in the computation only after the shares become fully vested. Pro forma diluted earnings per share is computed based on 144,625 weighted average common shares and common share equivalents outstanding for the period, if dilutive. Diluted earnings per share does not include dilutive common stock equivalents and options to purchase common stock which were outstanding during the period because they are antidilutive. The number of shares used for the calculation also excludes adjustments to reflect the impact of the conversion of shares of Patriot and Wyndham International preferred stock into paired shares of common stock because they are antidilutive. F-20 WYNDHAM INTERNATIONAL, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------- FIRST WYNDHAM QUARTER ARCADIAN SUMMERFIELD HISTORICAL TRANSACTIONS ACQUISITION ACQUISITION (A) (B) (C) (D) -------------- --------------- -------------- --------------- Revenue: Hotel revenue....................................... $ 290,644 $ 47,286 $ 16,426 $ 31,594 Racecourse facility revenue......................... 23,048 -- -- -- Management fee and service fee income............... 14,104 (1,833) -- 1,083 Interest and other income........................... 2,186 102 690 283 ------------- ------------- ------------- --------------- Total revenue............................... 329,982 45,555 17,526 32,960 ------------- ------------- ------------- --------------- Expenses: 10,484 Hotel expenses...................................... 182,371 26,709 10,136 -- Racecourse facility operations...................... 18,184 -- -- 5,163 General and administrative.......................... 12,023 11,268 3,142 781 (G) Depreciation and amortization....................... 15,106 1,758 (G) 118 (G) 16,471 (H) Lease payments...................................... 89,084 904 (H) 3,803 (H) -- Interest expense.................................... 5,699 2,899 (I) -- --------------- ------------- ------------- ------------- 32,899 Total expenses.............................. 322,467 43,538 17,199 --------------- ------------- ------------- ------------- 61 Operating income....................................... 7,515 2,017 (83) -- Equity in earnings of unconsolidated subsidiaries... 1,720 (1,677)(K) -- --------------- ------------- ------------- ------------- Income (loss) before income tax provision and 61 minority interests.................................. 9,235 340 (83) -- Income tax provision................................ (3,187) (543)(L) -- --------------- ------------- ------------- ------------- 61 Income (loss) before minority interest................. 6,048 (203) (83) (29) (M) Minority interest in Wyndham Partnership............ 73 684 (M) (5) (M) 175 (N) Minority interest in other consolidated subsidiaries........................................ (2,941) (5,451)(N) 128 (N) --------------- ------------- ------------- ------------- $ 207 --------------- --------------- Net income (loss)...................................... $ 3,180 $ (4,970) $ 40 ------------- ------------- ------------- ------------- ------------- ------------- Basic earnings (loss) per common share (P)............. $ 0.03 ------------- ------------- Diluted earnings (loss) per common share (P)........... $ 0.03 ------------- ------------- INTERSTATE CHCI MERGER MERGER PRO FORMA (E) (F) TOTAL ---------------- ---------------- -------------- Revenue: Hotel revenue....................................... $ 187,369 $ 56,403 $ 629,722 Racecourse facility revenue......................... -- -- 23,048 Management fee and service fee income............... 9,865 662 23,881 Interest and other income........................... 1,426 403 5,090 ---------------- ---------------- -------------- Total revenue............................... 198,660 57,468 681,741 ---------------- ---------------- -------------- Expenses: Hotel expenses...................................... 98,935 34,716 363,351 Racecourse facility operations...................... -- -- 18,184 General and administrative.......................... 29,245 3,581 64,422 Depreciation and amortization....................... 4,360 (G) 296 (G) 22,419 Lease payments...................................... 66,876 (H) 17,704 (H) 194,842 Interest expense.................................... -- 329 (J) 8,927 ---------------- ---------------- -------------- Total expenses.............................. 199,416 56,626 672,145 ---------------- ---------------- -------------- Operating income....................................... (756) 842 9,596 Equity in earnings of unconsolidated subsidiaries... -- -- 43 ---------------- ---------------- -------------- Income (loss) before income tax provision and minority interests.................................. (756) 842 9,639 Income tax provision................................ 1,745 (L) (2,068)(L) (4,053) ---------------- ---------------- -------------- Income (loss) before minority interest................. 989 (1,226) 5,586 Minority interest in Wyndham Partnership............ (806) (M) 178 (M) 95 Minority interest in other consolidated subsidiaries........................................ 2,437 (N) (250)(O) (5,902) ---------------- ---------------- -------------- Net income (loss)...................................... $ 2,620 $ (1,298) $ (221) ---------------- ---------------- -------------- ---------------- ---------------- -------------- Basic earnings (loss) per common share (P)............. $ -- --------------- --------------- Diluted earnings (loss) per common share (P)........... $ -- --------------- ---------------
SEE NOTES ON FOLLOWING PAGE. F-21 WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (A) Represents the historical results of operations of Wyndham for the three months ended March 31, 1998. (B) Represents adjustments to Wyndham's results of operations assuming that the Buena Vista Acquisition, the Wyndham Merger, the WHG Transactions and the various financing transactions completed by the Patriot Companies during the first quarter of 1998 had occurred as of January 1, 1997 and assuming that Wyndham leased or sub-leased 215 hotels from Patriot. (C) Represents adjustments to Wyndham's results of operations for the hotel leases and management contracts acquired as a result of the Arcadian Acquisition assuming such leases and management contracts had been acquired as of January 1, 1997. (D) Represents adjustments to Wyndham's results of operations for the hotel investments and management operations acquired by Wyndham as a result of the Summerfield Acquisition assuming such investments had been acquired as of January 1, 1997. (E) Represents adjustments to Wyndham's results of operations for the hotel leases and management contracts acquired as a result of the Interstate Merger, assuming such leases and management contracts had been acquired as of January 1, 1997. (F) Represents adjustments to Wyndham's results of operations for the hotel leases and management contracts acquired by Wyndham as a result of the CHCI Merger assuming such leases and management contracts had been acquired as of January 1, 1997. (G) Represents the following adjustments to depreciation and amortization:
First Quarter Arcadian Summerfield Interstate CHCI Transactions Acquisition Acquisition Merger Merger ---------------- ---------------- --------------- --------------- ---------------- Depreciation related to buildings and improvements.......... $ 1,317 $ -- $ -- $ -- $ -- Depreciation related to FF&E.................. -- -- 29 -- 296 Amortization of goodwill.............. 441 -- 443 675 -- Amortization of trade names................. -- 118 -- -- -- Amortization of management contract costs................. -- -- 309 3,685 -- ---------- ---------- --------- --------- --------- $ 1,758 $ 118 $ 781 $ 4,360 $ 296 ---------- ---------- --------- --------- --------- ---------- ---------- --------- --------- ---------
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 to 7 years for FF&E. Amortization of goodwill related to the Cal Jockey Merger is computed using the straight-line method over a 40-year estimated useful life. Amortization of goodwill related to the acquisition of the management operations other entities acquired is computed using the straight-line method over estimated useful lives of 20 to 35 years. Amortization of trade names is computed using the straight-line method over estimated useful lives of 20 to 35 years. Amortization of management contract costs is computed using the straight-line method over the estimated remaining term of the contracts. (H) Represents pro forma lease payments from Wyndham to Patriot calculated based upon the historical operating results of the hotels for the three months ended March 31, 1998. (I) Represents pro forma interest expense on debt and capital lease obligations related to the Condado Plaza Hotel, the El San Juan Hotel & Casino and the El Conquistador. As a result of the WHG Transactions, Wyndham acquired a controlling interest in the partnerships that own the El San Juan Hotel & Casino and the El Conquistador. As a result, the results of operations of these partnerships are included in Wyndham's consolidated operating results. These debt and capital lease obligations bear interest at rates ranging from LIBOR plus 0.9% (estimated as 6.589%) to 12.0% per annum. F-22 (J) Represents pro forma interest expense on debt obligations assumed in connection with the CHCI Merger. (K) Represents adjustment to eliminate Wyndham's equity in earnings of unconsolidated subsidiaries related to WHG. Subsequent to the WHG Transactions, these entities are consolidated with Wyndham. (L) Represents an adjustment to the estimated federal and state tax liability as a result of the pro forma adjustments to the operating results for the three months ended March 31, 1998. (M) Represents the adjustment to minority interest to reflect the estimated minority interest percentage in the Wyndham Partnership subsequent to the assumed transactions of approximately 12.1%. (N) Represents adjustments for Patriot's minority interest in the Non-Controlled Subsidiaries. These entities are controlled by Wyndham. (O) Represents adjustments for the acquisition of the minority interest in GAH upon consummation of the CHCI Merger. (P) Pro forma basic earnings per share is computed based on 133,306 weighted average common shares outstanding for the period. Shares of common stock granted to officers and employees of Wyndham are included in the computation only after the shares become fully vested. Pro forma diluted earnings per share is computed based on 144,625 weighted average common shares and common share equivalents outstanding for the period. Diluted earnings per share includes dilutive common stock equivalents and options to purchase common stock which were outstanding during the period. The number of shares outstanding related to the options has been calculated by application of the "treasury stock" method. The number of shares used for the calculation also includes adjustments to reflect the impact of the conversion of shares of Patriot and Wyndham preferred stock into paired shares of common stock. F-23 WYNDHAM INTERNATIONAL, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------- WYNDHAM RECENT ARCADIAN SUMMERFIELD HISTORICAL TRANSACTIONS ACQUISITION ACQUISITION (A) (B) (C) (D) ------------- ---------------- -------------- --------------- - Revenue: Hotel revenue....................................... $ 167,727 $ 998,713 $ 55,434 $ 111,960 Racecourse facility revenue......................... 26,344 22,538 -- -- Management fee and service fee income............... 7,088 63,065 573 6,351 Interest and other income........................... 2,975 8,329 -- 1,377 ------------- ------------- ------------- ------------ Total revenue............................... 204,134 1,092,645 56,007 119,688 ------------- ------------- ------------- ------------ Expenses: Hotel expenses...................................... 118,340 647,921 32,743 39,120 Racecourse facility operations...................... 24,245 15,022 -- -- General and administrative.......................... 6,001 95,957 8,229 18,725 Depreciation and amortization....................... 3,616 41,563 (G) 473 (G) 3,092 (G) Lease payments...................................... 50,626 255,432 (H) 15,586 (H) 57,983 (H) Interest expense.................................... 933 29,262 (I) -- -- ------------- ------------- ------------- ------------ Total expenses.............................. 203,761 1,085,157 57,031 118,920 ------------- ------------- ------------- ------------ Operating income....................................... 373 7,488 (1,024) 768 Equity in earnings of unconsolidated subsidiaries... -- -- -- -- ------------- ------------- ------------- ------------ Income (loss) before income tax provision and minority interest................................... 373 7,488 (1,024) 768 Income tax provision................................ (481) (5,056)(K) -- -- ------------- ------------- ------------- ------------ Income (loss) before minority interest................. (108) 2,432 (1,024) 768 Minority interest in Wyndham Partnership............ 29 (843)(L) (19) (L) (36) (L) Minority interest in other consolidated subsidiaries...................................... 59 6,505 (M) 1,179 (N) (474) (N) ------------- ------------- ------------- ------------ Net income (loss)...................................... $ (20) $ 8,094 $ 136 $ 258 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Basic earnings (loss) per common share (P)............. $ -- ------------- ------------- Diluted earnings (loss) per common share (P)........... $ -- ------------- ------------- INTERSTATE CHCI MERGER MERGER PRO FORMA (E) (F) TOTAL ---------------- ---------------- ---------------- Revenue: Hotel revenue....................................... $ 723,723 $ 178,754 $ 2,236,311 Racecourse facility revenue......................... -- -- 48,882 Management fee and service fee income............... 42,760 9,031 128,868 Interest and other income........................... 4,766 2,286 19,733 ---------------- ---------------- ---------------- Total revenue............................... 771,249 190,071 2,433,794 ---------------- ---------------- ---------------- Expenses: Hotel expenses...................................... 406,572 121,258 1,365,954 Racecourse facility operations...................... -- -- 39,267 General and administrative.......................... 70,077 21,717 220,706 Depreciation and amortization....................... 16,172 (G) 4,031 (G) 68,947 Lease payments...................................... 247,467 (H) 53,685 (H) 680,779 Interest expense.................................... -- 1,306 (J) 31,501 ---------------- ---------------- ---------------- Total expenses.............................. 740,288 201,997 2,407,154 ---------------- ---------------- ---------------- Operating income....................................... 30,961 (11,926) 26,640 Equity in earnings of unconsolidated subsidiaries... -- -- -- ---------------- ---------------- ---------------- Income (loss) before income tax provision and minority interest................................... 30,961 (11,926) 26,640 Income tax provision................................ (11,134) (K) 4,341 (K) (12,330) ---------------- ---------------- ---------------- Income (loss) before minority interest................. 19,827 (7,585) 14,310 Minority interest in Wyndham Partnership............ 307 (L) 1,143 (L) 581 Minority interest in other consolidated (13,052) (N) (1,859)(O) (7,642) subsidiaries...................................... ---------------- ---------------- ---------------- Net income (loss)...................................... $ 7,082 $ (8,301) $ 7,249 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Basic earnings (loss) per common share (P)............. $ 0.05 ---------------- ---------------- Diluted earnings (loss) per common share (P)........... $ 0.05 ---------------- ----------------
SEE NOTES ON FOLLOWING PAGE. F-24 WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (A) Represents the historical results of operations of Wyndham for the six months ended December 31, 1997. (B) Represents adjustments to Wyndham's results of operations assuming that (i) the acquisition of 45 hotels, mergers and other acquisitions and the various financing transactions completed by the Patriot Companies during the 1997 fiscal year; (ii) the Buena Vista Acquisition, the Wyndham Merger, the WHG Transactions and the various financing transactions completed by the Patriot Companies during the first quarter of 1998; and (iii) the Arcadian Acquisition, the Interstate Merger, the Summerfield Acquisition and the CHCI Merger had occurred as of January 1, 1997. (C) Represents adjustments to Wyndham's results of operations for the hotel leases and management contracts acquired as a result of the Arcadian Acquisition assuming such leases and management contracts had been acquired as of January 1, 1997. (D) Represents adjustments to Wyndham's results of operations for the hotel leases, management contracts and management operations acquired by Wyndham as a result of the Summerfield Acquisition assuming such investments had been acquired as of January 1, 1997. (E) Represents adjustments to Wyndham's results of operations for the hotel leases and management contracts acquired as a result of the Interstate Merger, assuming such leases and management contracts had been acquired as of January 1, 1997. (F) Represents adjustments to Wyndham's results of operations for the hotel leases and management contracts acquired by Wyndham as a result of the CHCI Merger assuming such leases and management contracts had been acquired as of January 1, 1997. (G) Represents the following adjustments to depreciation and amortization:
Recent Arcadian Summerfield Interstate CHCI Transactions Acquisition Acquisition Merger Merger ---------------- ---------------- --------------- --------------- ---------------- Depreciation related to buildings and improvements..........$ 9,570 $ -- $ -- $ -- $ -- Depreciation related to FF&E.................. 11,169 -- 117 -- -- Amortization of goodwill.............. 10,045 -- 1,774 1,434 519 Amortization of trade names................. 2,747 473 -- -- 250 Amortization of management contract costs................. 8,032 -- 1,201 14,738 3,262 ---------------- ---------------- --------------- --------------- ---------------- $ 41,563 $ 473 $ 3,092 $ 16,172 $ 4,031 ---------------- ---------------- --------------- --------------- ---------------- ---------------- ---------------- --------------- --------------- ----------------
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 to 7 years for FF&E. Amortization of goodwill related to the Cal Jockey Merger is computed using the straight-line method over a 40-year estimated useful life. Amortization of goodwill related to the acquisition of the management operations of other hotel management entities acquired (including Summerfield, Interstate and CHCI) is computed using the straight-line method over estimated useful lives of 20 to 35 years. Amortization of trade names is computed using the straight-line method over estimated useful lives of 20 to 35 years. Amortization of management contract costs is computed using the straight-line method over the estimated remaining term of the contracts. (H) Represents pro forma lease payments from Wyndham to Patriot calculated based upon the historical revenue of the hotels for the year ended December 31, 1997. (I) Represents pro forma interest expense on debt and capital lease obligations related to the Condado Plaza Hotel, the El San Juan Hotel & Casino and the El Conquistador. As a result of the WHG Transactions, Wyndham acquired a controlling interest in the partnerships that own the El San Juan Hotel & Casino and the El F-25 Conquistador. As a result, the results of operations of these partnerships are included in Wyndham's consolidated operating results. These debt and capital lease obligations bear interest at rates ranging from LIBOR plus 0.9% (estimated as 6.5176%) to 12.0% per annum. (J) Represents pro forma interest expense on debt obligations assumed in connection with the CHCI Merger. (K) Represents an adjustment to the estimated federal and state tax liability as a result of the pro forma adjustments to the operating results for the year ended December 31, 1997. (L) Represents the adjustment to minority interest to reflect the estimated minority interest percentage in the Wyndham Partnership subsequent to the assumed transactions of approximately 12.1%. (M) Represents adjustment for the minority interest in certain consolidated subsidiaries of Wyndham, including minority interests in the Non-Controlled Subsidiaries that are held by Patriot. (N) Represents adjustments for the minority interest in the Non-Controlled Subsidiaries related to each of these transactions that are held by Patriot. (O) Represents adjustments to reflect Wyndham's acquisition of the GAH minority interest upon consummation of the CHCI Merger. (P) Pro forma basic earnings per share is computed based on 133,306 weighted average common shares outstanding for the period. Shares of common stock granted to officers and employees of Wyndham are included in the computation only after the shares become fully vested. Pro forma diluted earnings per share is computed based on 144,625 weighted average common shares and common share equivalents outstanding for the period. Diluted earnings per share includes dilutive common stock equivalents and options to purchase common stock which were outstanding during the period. The number of shares outstanding related to the options has been calculated by application of the "treasury stock" method. The number of shares used for the calculation also includes adjustments to reflect the impact of the conversion of shares of Patriot and Wyndham preferred stock into paired shares of common stock. F-26 INTERSTATE HOTELS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------------- DECEMBER 31, MARCH 31, 1997 1998 ------------ ------------ (A) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 31,988 $ 35,090 Accounts receivable, net 40,827 57,865 Deferred income taxes 2,104 4,147 Prepaid expenses and other assets 13,837 15,337 ------------ ------------ Total current assets 88,756 112,439 Restricted cash 3,823 7,395 Property and equipment, net 1,153,911 1,201,291 Investments in hotel real estate 41,297 41,494 Officers and employees notes receivable 12,157 11,687 Intangible and other assets 73,519 72,664 ------------ ------------ Total assets $ 1,373,463 $ 1,446,970 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable--trade 16,015 15,037 Accounts payable--health trust 90 2,882 Accrued payroll and related benefits 21,861 16,369 Income taxes payable -- 3,814 Other accrued liabilities 40,730 54,046 Current portion of long-term debt 53,001 89,061 ------------ ------------ Total current liabilities 131,697 181,209 Long-term debt 747,123 706,657 Deferred income taxes 19,376 22,445 Other liabilities 1,715 1,711 ------------ ------------ Total liabilities 899,911 912,022 ------------ ------------ Minority interests 17,177 67,600 ------------ ------------ Shareholders' equity: Preferred stock, $.01 par value; 25,000 shares authorized; no shares outstanding -- -- Common stock, $.01 par value; 75,000 shares authorized; 35,504 shares issued and outstanding as of March 31, 1998 354 355 Paid-in capital 411,808 413,680 Retained earnings 45,018 54,110 Unearned compensation (805) (797) ------------ ------------ Total shareholders' equity 456,375 467,348 ------------ ------------ Total liabilities and shareholders' equity $ 1,373,463 $ 1,446,970 ------------ ------------ ------------ ------------
- ---------- (A) The year-end balance sheet information was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. F-27 INTERSTATE HOTELS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------------- THREE MONTHS ENDED MARCH 31, -------------------------- 1997 1998 ------------ ----------- Lodging revenues: Rooms $ 85,217 $ 131,863 Food and beverage 25,756 43,679 Other departmental 7,360 11,826 Management and related fees 11,523 9,865 ------------ ----------- 129,856 197,233 ------------ ----------- Lodging expenses: Rooms 19,136 29,890 Food and beverage 20,150 31,688 Other departmental 3,133 5,085 Property costs 34,649 53,275 General and administrative 2,788 4,889 Payroll and related benefits 4,741 6,549 Lease expense 12,568 18,771 Depreciation and amortization 8,388 12,878 Merger-related expenses -- 2,744 ------------ ----------- 105,553 165,769 ------------ ----------- Operating income 24,303 31,464 Other expense: Interest, net 7,355 15,276 Other, net 483 777 ------------ ----------- Income before income tax expense 16,465 15,411 Income tax expense 6,257 6,319 ------------ ----------- Net income $ 10,208 $ 9,092 ------------ ----------- ------------ ----------- Earnings per common share and common share equivalent: Basic $ .29 $ .26 ------------ ----------- ------------ ----------- Diluted $ .29 $ .25 ------------ ----------- ------------ ----------- Weighted average number of common shares and common share equivalents outstanding: Basic 35,222 35,437 ------------ ----------- ------------ ----------- Diluted 35,612 36,028 ------------ ----------- ------------ -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. F-28 INTERSTATE HOTELS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS) --------------- THREE MONTHS ENDED MARCH 31, --------------------------- 1997 1998 ------------ ------------ Cash flows from operating activities: Net income $ 10,208 $ 9,092 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,388 12,878 Minority interests' share of equity income from investments in hotel real estate 662 1,563 Deferred income taxes 1,908 1,026 Other (122) (570) Cash (used) provided by assets and liabilities: Accounts receivable, net (20,475) (17,038) Prepaid expenses and other assets 2,122 (1,558) Accounts payable 710 1,814 Income taxes payable 1,818 3,814 Accrued liabilities 11,700 7,824 ------------ ------------ Net cash provided by operating activities 16,919 18,845 ------------ ------------ Cash flows from investing activities: Change in restricted cash (12,416) (22,894) Acquisition of hotels, net of cash received (84,344) (18,071) Purchase of property and equipment, net (15,032) (25,427) Restricted funds used to purchase property and equipment 21,598 19,322 Investments in hotel real estate (6,417) 324 Change in notes receivable, net (854) 470 Other (3,812) (364) ------------ ------------ Net cash used in investing activities (101,277) (46,640) ------------ ------------ Cash flows from financing activities: Proceeds from long-term debt 75,500 66,500 Repayment of long-term debt (6,948) (85,475) Financing costs paid, net (334) (861) Contributions from minority interests 4,864 49,553 Distributions to minority interests (1,907) (693) Proceeds from issuance of Common Stock 16,090 1,873 ------------ ------------ Net cash provided by financing activities 87,265 30,897 ------------ ------------ Net increase in cash and cash equivalents 2,907 3,102 Cash and cash equivalents at beginning of period 32,323 31,988 ------------ ------------ Cash and cash equivalents at end of period $ 35,230 $ 35,090 ------------ ------------ ------------ ------------ Supplemental disclosure of cash flow information: Cash paid for interest $ 7,392 $ 16,142 Cash paid for income taxes 74 1,299 Supplemental disclosure of noncash investing and financing activities: Assumption of long-term debt related to a hotel acquisition $ 21,776 $ 14,569
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. F-29 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, DOLLARS IN THOUSANDS) --------------- 1. ORGANIZATION AND BASIS OF PRESENTATION: Interstate Hotels Company (the "Company) was formed in April 1996 in anticipation of an initial public offering of the Company's Common Stock in June 1996. At March 31, 1998, the Company owned, managed, leased or performed related services for a portfolio of 214 hotels with a total of 43,447 rooms. The Company owned or had a controlling interest in 41 of these hotels with 11,928 rooms (the "Owned Hotels"). In addition, the Company had entered into long-term operating leases for 79 hotels with 9,490 rooms (the "Leased Hotels") in connection with and since the acquisition of the management and leasing businesses affiliated with Equity Inns, Inc., a publicly traded real estate investment trust, in November 1996. The consolidated financial statements of the Company consist of the historical results of Interstate Hotels Corporation and Affiliates, the Company's predecessors, and the operations of the Owned Hotels from their respective acquisition dates. The working capital and operating results of the Leased Hotels are also included in the Company's consolidated financial statements since their respective inception dates because the operating performance associated with such hotels is guaranteed by the Company. The accompanying consolidated interim financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The consolidated interim financial statements should be read in conjunction with the financial statements, notes thereto and other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The accompanying unaudited consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. 2. ACQUISITIONS: During the three months ended March 31, 1998, the Company acquired a 98.0% interest in one Owned Hotel with 348 rooms for a total acquisition price of $31,900 with closing costs of $800. The acquisition was accounted for using the purchase method of accounting. In addition, an unrelated third party acquired a 47.8% interest in a partnership which owns three Owned Hotels in exchange for a capital contribution of $49,200. These transactions have not been presented in pro forma financial information of the Company as the pro forma presentation of these transactions would not differ materially the historical financial statements presented herein. 3. MERGER WITH PATRIOT AMERICAN HOSPITALITY, INC.: On December 2, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Patriot American Hospitality, Inc. ("Patriot") and Wyndham International, Inc. (formerly Patriot American Hospitality Operating Company and, together with Patriot, the "Patriot Companies") pursuant to which the Company would be merged with and into Patriot, with Patriot being the surviving corporation (the "Merger"). Pursuant to the Merger Agreement, each share of Company Common Stock is to be converted, at the election of the holder thereof, into the right to receive $37.50 in cash or 1.341 paired shares of common stock of the Patriot Companies (subject to proration to ensure that generally 40% of the shares of Company Common F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED (UNAUDITED, DOLLARS IN THOUSANDS) --------------- 3. MERGER WITH PATRIOT AMERICAN HOSPITALITY, INC.-CONTINUED Stock are converted into the right to receive cash and 60% of the shares of Company Common Stock are converted into the right to receive paired shares). The completion of the Merger is subject to various conditions. During the three months ended March 31, 1998, the Company incurred Merger- related expenses totaling $2,744. These expenses were incurred for legal and other professional fees, as well as other corporate expenditures, in connection with the proposed Merger. As a result of these expenses, a $761 income tax benefit was recorded during the three months ended March 31, 1998. On March 30, 1998, Marriott International, Inc. ("Marriott") filed a lawsuit in the United States District Court for the District of Maryland seeking to enjoin the Merger until the Company complies with certain rights of notification and first refusal which Marriott alleges would be triggered by the Merger. On May 4, 1998, an agreement in principle was reached with Marriott to settle the actions brought by Marriott. The agreement in principle is not a definitive settlement agreement and is not binding on any party. There can be no assurance that a definitive settlement will be reached, neither can any assurances be made regarding whether, or upon what terms, the Merger will be consummated. 4. SUBSEQUENT EVENT: In May 1998, the Company opened one limited-service hotel with 156 rooms that it had developed for a total cost of $12.7 million. F-31 [LOGO LETTERHEAD] REPORT OF INDEPENDENT ACCOUNTANTS Partners Royal Palace Hotel Associates Tampa, Florida We have audited the accompanying balance sheets of Royal Palace Hotel Associates (the Partnership) as of December 31, 1997 and 1996, and the related statements of income, partners' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Royal Palace Hotel Associates as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. Tampa, Florida January 23, 1998 F-32 ROYAL PALACE HOTEL ASSOCIATES BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS 1997 1996 Current assets: Cash and cash equivalents $ 105,699 $ 255,127 Restricted cash 4,863,239 2,826,659 Accounts receivable, less allowance for doubtful accounts of approximately $74,000 and $57,000 for 1997 and 1996, respectively 4,769,639 3,760,964 Inventories 515,622 413,086 Prepaid expenses: Insurance 43,943 43,943 Other 197,592 89,288 ------------ ------------ Total current assets 10,495,734 7,389,067 Property and equipment, less accumulated depreciation 71,557,251 71,636,939 Restricted cash designated for property and equipment 1,186,979 2,835,311 Deferred loan costs, net of accumulated amortization 1,337,808 1,411,391 Other 19,417 17,246 ------------ ------------ $ 84,597,189 $ 83,289,954 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,183,546 $ 1,146,048 Cash overdraft 640,006 0 Accounts payable 1,648,115 2,492,279 Accrued expenses: Ground lease rent 1,316,671 1,132,701 Other 2,651,378 2,277,612 Advance deposits 2,203,116 1,586,061 Deferred revenue 67,904 479,361 ------------ ------------ Total current liabilities 9,710,736 9,114,062 Long-term debt, less current portion 49,375,446 50,542,151 Commitments and contingencies (Note 6) Partners' equity 25,511,007 23,633,741 ------------ ------------ $ 84,597,189 $ 83,289,954 ------------ ------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-33 ROYAL PALACE HOTEL ASSOCIATES STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 Net revenue $ 68,633,056 $ 61,913,161 ------------- ------------- Departmental expenses: Cost of sales 6,606,931 6,267,339 Payroll and related expenses 14,526,133 13,400,453 Other expenses 6,204,121 5,392,038 ------------- ------------- 27,337,185 25,059,830 ------------- ------------- Gross operating income 41,295,871 36,853,331 ------------- ------------- Unallocated operating expenses: Payroll and related expenses 5,848,390 5,066,791 Other expenses 9,556,582 9,795,801 ------------- ------------- 15,404,972 14,862,592 ------------- ------------- Income before fixed charges 25,890,899 21,990,739 ------------- ------------- Fixed charges: Depreciation and amortization 4,549,843 4,246,044 Interest expense 4,751,487 4,797,247 Rent, property taxes and insurance 8,040,927 7,291,728 Loss on disposal of property and equipment 3,258 34,516 ------------- ------------- 17,345,515 16,369,535 ------------- ------------- Net income $ 8,545,384 $ 5,621,204 ------------- ------------- ------------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-34 ROYAL PALACE HOTEL ASSOCIATES STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 THE EQUITABLE LIFE ASSURANCE HOTEL VENTURE SOCIETY OF THE TOTAL PARTNERS, LTD. UNITED STATES ------------- -------------- -------------- Balance, January 1, 1996 $ 20,389,485 $ 6,919,967 $ 13,469,518 Distributions to partners (2,376,948) (1,069,627) (1,307,321) Net income 5,621,204 2,529,542 3,091,662 ------------- ------------ ------------- Balance, December 31, 1996 23,633,741 8,379,882 15,253,859 Distributions to partners (6,668,118) (3,000,652) (3,667,466) Net income 8,545,384 3,845,423 4,699,961 ------------- ------------ ------------- Balance, December 31, 1997 $ 25,511,007 $ 9,224,653 $ 16,286,354 ------------- ------------ ------------- ------------- ------------ -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-35 ROYAL PALACE HOTEL ASSOCIATES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 Cash flows from operating activities: Net income $ 8,545,384 $ 5,621,204 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,474,059 4,171,540 Amortization 75,784 74,504 Bad debt expense (73,870) (57,134) Loss on disposal of equipment 3,258 34,516 Increase (decrease) in cash due to changes in assets and liabilities: Restricted cash (2,036,580) (1,457,188) Accounts receivable (934,805) (1,334,828) Receivables from related parties 0 5,389 Inventories (102,536) (62,667) Prepaid insurance 0 59,243 Prepaid other (108,304) 30,098 Other assets 109,047 (560,155) Accounts payable (844,164) 162,778 Accrued ground lease rent 183,970 115,717 Accrued expenses, other 373,766 26,722 Advance deposits 617,055 298,210 Deferred revenue (411,457) (218,844) ----------- ----------- Total adjustments 1,325,223 1,287,901 ----------- ----------- Net cash provided by operating activities 9,870,607 6,909,105 ----------- ----------- Cash flows from investing activities: Proceeds from disposal of property and equipment 8,349 7,956 Payments made to acquire property and equipment (4,519,398) (5,005,278) Decrease in restricted cash designated for property and equipment 1,648,332 164,689 ----------- ----------- Net cash used in investing activities (2,862,717) (4,832,633) ----------- ----------- Cash flows from financing activities: Cash overdraft 640,006 0 Repayment of long-term debt (1,129,207) (815,323) Distributions to partners (6,668,118) (2,376,948) ----------- ----------- Net cash used in financing activities (7,157,319) (3,192,271) ----------- ----------- Net decrease in cash and cash equivalents (149,429) (1,115,799) Cash and cash equivalents, beginning of year 255,128 1,370,927 ----------- ----------- Cash and cash equivalents, end of year $ 105,699 $ 255,128 ----------- ----------- ----------- ----------- Supplemental information to cash flow information: Cash paid during the year for interest expense $ 4,747,042 $ 4,877,461 ----------- ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-36 ROYAL PALACE HOTEL ASSOCIATES NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS - The Partnership owns and operates a 1,013-room hotel in Lake Buena Vista, Florida known as the Buena Vista Palace. The hotel commenced operations in March 1983. CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. RESTRICTED CASH - Restricted cash consists of amounts required under the terms of the Partnership's mortgage debt facility more fully described in Note 4. Amounts classified as current will be used to fund current liabilities; restricted cash classified as long-term is designated for property and equipment. INVENTORIES - Inventories consist of food, beverage and attraction tickets and are stated at cost, which is determined on the first-in, first-out basis. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation is being provided for financial reporting purposes on the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred, while major renewals and betterments are capitalized. The cost and related allowance for depreciation or amortization of assets sold or otherwise disposed of are removed from the related accounts and the resulting gains or losses are reflected in income. Operating assets consist of china, glassware, silver and linen and are stated at cost, which is generally determined on the first-in, first-out basis. DEFERRED LOAN COSTS - Loan costs are stated at cost and are being amortized using the straight-line method over the term of the related indebtedness. DEFERRED REVENUE - Deferred revenue represents cancellation fees which, under agreements, may be used by the canceling parties as future credits for a given period. The Partnership will reduce deferred revenue as credits are used. Any remaining amount at the end of the agreement period will be recognized as revenue. INCOME TAXES - Partnership income and losses are allocated to the partners in accordance with the terms of the Partnership Agreement; accordingly, any income tax liability or benefit resulting from the operations of the Partnership is the responsibility of the Partners, and is not reflected in the accompanying financial statements. F-37 NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: CONCENTRATIONS OF CREDIT RISK - The Partnership has no instruments which subject it to off-balance-sheet risk. Financial instruments which potentially subject the Partnership to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Partnership maintains its temporary cash investments in highly liquid instruments with high credit quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Partnership's customer base and their dispersion across many different industries and geographies. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. PARTNERSHIP AGREEMENT: In accordance with the terms of the Partnership Agreement, profits are allocated 55 percent to the corporate partner and 45 percent to the non-corporate partner, while losses are allocated equally among the two partners (the Partners). 3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following: 1997 1996 Building $ 89,063,661 $ 88,760,494 Furniture and equipment 18,436,629 16,730,875 Land improvements 520,837 471,209 ------------ ------------ 108,021,127 105,962,578 Less accumulated depreciation (37,588,677) (35,563,860) ------------ ------------ 70,432,450 70,398,718 Operating assets 1,124,801 1,238,221 ------------ ------------ $ 71,557,251 $ 71,636,939 ------------ ------------ ------------ ------------
F-38 NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. LONG-TERM DEBT: Long-term debt consists of the following: 1997 1996 Mortgage note payable, with interest at 9.11%; monthly installments of principal and interest of $473,657 through November 2015; collateralized by substantially all property and equipment and accounts receivable $50,417,070 $51,355,362 Note payable, with interest at 12.5%; monthly installments of principal and interest of $12,545 through June 1998; remaining principal balance together with accrued interest thereon due June 15, 1998; collateralized by equipment 72,599 204,932 Note payable, with interest at 8.5%; monthly installments of principal and interest of $5,600 through January 1999; collateralized by equipment 69,323 127,905 ----------- ----------- 50,558,992 51,688,199 Less current portion (1,183,546) (1,146,048) ----------- ----------- $49,375,446 $50,542,151 ----------- ----------- ----------- -----------
Annual maturities of long-term debt subsequent to December 31, 1997 are as follows: Year ending December 31, - ------------------------ 1998 $ 1,183,546 1999 $ 1,153,671 2000 $ 1,258,762 2001 $ 1,380,078 2002 $ 1,513,086 2003 and thereafter $44,069,848
F-39 NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. LONG-TERM DEBT, CONTINUED: During 1995, the Partnership refinanced its mortgage note payable. The new loan contains certain financial covenants, the most restrictive of which requires the Partnership to maintain a minimum quarterly debt service coverage ratio of not less than 1.2 to 1.0, as defined, with other required ratios if the debt service ratio is not met. In addition, the Partnership is required to make monthly deposits into the following escrow accounts: Tax and Insurance Escrow Fund, Replacement Reserve Fund, Ground Lease Escrow Fund, and the Capital Reserve Fund, as defined. The deposits to these accounts are classified as restricted cash in the Partnership's balance sheet. (See Note 7.) 5. RELATED PARTY TRANSACTIONS: The hotel is managed by BVP Management Associates, which is affiliated with one of the general partners through common ownership. Terms of the management agreement provide for annual management fees equal to 3% of gross receipts each year plus an incentive fee, as defined. Management fees were approximately $1,677,000 for 1997 and 1996, of which approximately $42,000 were unpaid at December 31, 1996, and are included in accrued expenses in the accompanying balance sheets. The Partnership purchases medical insurance for its employees from Buena Vista Investment Fund, which is affiliated with one of the general partners through common ownership. Insurance expense was approximately $1,826,000 and $1,734,000 for the years ended December 31, 1997 and 1996, respectively. Certain management expenses common to hotel properties were shared by the Buena Vista Palace and other properties affiliated with one of the general partners through common ownership. These costs consisted principally of shared management salaries. The affiliated properties' share of such costs aggregated approximately $25,000 and $89,000 for 1997 and 1996, respectively, of which no amounts were due from the affiliates at December 31, 1997 and 1996. The management agreement is subordinate to the mortgage debt facility more fully described in Note 4. F-40 NOTES TO FINANCIAL STATEMENTS, CONTINUED 6. COMMITMENTS AND CONTINGENCIES: On December 11, 1980, simultaneous with the formation of the Partnership, the Partnership leased land on which the hotel is built (ground lease) from Lake Buena Vista Communities, Inc. The ground lease terminates on the earlier of (1) the 50th anniversary of the date of completion of the building, as defined, or (2) the 55th anniversary of the ground lease (defined as initial term). The lease agreement provides for an automatic 25-year extension at the expiration of the initial term. Rent under the ground lease is based on a percentage of net revenue, as defined, with minimum annual rental payments of $160,000. Such rent aggregated approximately $5,150,000 and $4,600,000 for 1997 and 1996, respectively. The Partnership is involved in certain legal actions and claims arising in the ordinary course of its business. It is the opinion of management (based on advice of legal counsel) that such litigation and claims will be resolved without material adverse effect on the Partnership's financial position. 7. SUBSEQUENT EVENTS: During January 1998, the partners of the Partnership entered into an agreement to transfer their interest in the Partnership to an independent third party for a total price of approximately $148 million. The third party will pay to the partners $91.25 million in cash and partnership units and will assume debt of approximately $56.75 million. Completion of the transaction was contingent upon certain closing conditions, adjustments, and prorations. Closing of the transaction was completed on January 15, 1998. F-41 Report of Independent Auditors The Board of Directors and Partners SF Hotel Company, L.P. We have audited the accompanying consolidated balance sheets of SF Hotel Company, L.P. as of January 2, 1998 and January 3, 1997, and the related consolidated statements of income, partners' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SF Hotel Company, L.P. at January 2, 1998 and January 3, 1997, 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 March 4, 1998 Wichita, Kansas F-42 SF Hotel Company, L.P. Consolidated Balance Sheets MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, 1998 1997 1998 1997 (UNAUDITED) (UNAUDITED) ----------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 6,695,195 $ 2,167,487 $21,877,650 $ 2,366,309 Replacement fund 261,387 169,724 4,378,387 239,159 Tax escrow 35,784 13,367 25,850 - Renovation escrow - - 20,447 - Accounts receivable: Trade 1,286,029 234,101 4,034,396 808,863 Management and incentive management fees (affiliates) 1,916,473 1,837,119 868,467 1,820,627 Affiliates 399,756 319,445 965,836 325,527 Employee advances 70,811 66,879 52,728 73,035 Other 394,088 17,531 1,667,122 - ----------------------------------------------------- Total accounts receivable 4,067,157 2,475,075 7,588,549 3,028,052 Notes receivable Limited partners 71,754 116,320 67,172 65,145 Affiliates 766,289 1,121,493 259,752 1,021,419 Other 100,238 - 100,238 - Advances to site partnerships 499,122 1,789,064 1,201,210 657,846 Site advances 877,029 594,161 1,673,365 866,981 Interest receivable 41,263 49,070 44,846 50,440 Inventory 12,820 - - 7,065 Prepaid expenses 488,015 106,679 3,209,952 81,827 ----------------------------------------------------- Total current assets 13,916,053 8,602,440 40,447,418 8,384,243 Property and equipment, at cost: Land 946,222 2,356,777 3,762,334 2,281,777 Buildings and components 8,042,214 10,528,045 8,721,592 13,925,034 Furniture, fixtures, and equipment 5,421,956 4,788,779 5,318,764 5,008,504 Construction in progress - 2,459,698 - - ----------------------------------------------------- 14,410,392 20,133,299 17,802,690 21,215,315 Less accumulated depreciation and amortization 3,037,414 2,196,826 2,931,393 2,371,631 ----------------------------------------------------- Net property and equipment 11,372,978 17,936,473 14,871,297 18,843,684 Other assets: Notes receivable: Limited partners 60,000 60,000 60,000 60,000 Affiliates 508,122 780,542 - 596,076 Employees - 25,000 - 25,000 Deposits 435,043 128,802 15,598,539 187,117 Other assets, principally Hotel preopening costs and deferred loan fees, net of accumulated amortization of $307,907 ($244,578 at January 3, 1997) 423,494 761,668 940,164 1,836,746 Investments in unconsolidated affiliates 18,940,515 7,056,723 18,737,550 10,726,468 Other investments 3,691,554 - 3,691,554 - Investment in Summerfield Safety Company 280,019 35,725 321,440 44,940 ----------------------------------------------------- Total other assets 24,338,747 8,848,460 39,349,247 13,476,347 ----------------------------------------------------- Total assets $49,627,778 $35,387,373 $94,667,962 $40,704,274 ----------------------------------------------------- -----------------------------------------------------
F-43 MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, 1998 1997 1998 1997 (UNAUDITED) (UNAUDITED) ----------------------------------------------------- LIABILITIES AND PARTNERS' EQUITY Current liabilities: Notes payable: Limited partners $ 1,117,643 $ 1,265,853 $ 285,479 $ 675,045 Affiliates 73,000 73,000 138,500 73,000 Unaffiliated - 800,000 18,083,333 800,000 Accounts payable 1,741,959 1,160,926 10,826,166 464,680 Accrued payroll 2,448,279 1,639,458 2,061,881 882,162 Accrued interest: General partner 2,079,679 2,233,624 2,160,064 2,311,729 Affiliates 284,036 182,539 235,405 315,160 Other - 16,022 30,628 - Banks 2,484 49,919 41,929 36,668 Customer room deposits 37,337 - 299,500 - Accrued expenses, including $847,012 due to affiliate ($403,494 at January 3, 1997) 1,014,863 897,343 296,954 315,137 Other current liabilities 63,564 - 4,050,184 - Accrued sales and occupancy tax 342,648 28,976 802,878 66,806 Deferred income 515,233 - 706,535 10,000 Notes payable to affiliate 597,412 - 298,706 - Line of credit - - - 3,695,000 Current portion of obligation under capital lease 34,078 22,630 25,551 16,973 Current portion of long-term debt 156,252 174,214 117,189 130,660 ----------------------------------------------------- Total current liabilities 10,508,467 8,544,504 40,460,882 9,793,020 Long-term debt 9,057,423 13,925,858 10,229,923 16,821,817 Obligation under capital lease 68,264 78,798 558,600 78,798 Advances payable to general partner and affiliate 4,109,316 4,109,316 4,109,316 4,109,316 Advances payable to affiliate 189,205 189,205 189,205 189,205 Advances payable to limited partner 403,538 375,451 403,538 375,451 Deferred income 8,137,805 549,454 18,552,462 630,513 Other liabilities 577,518 - 577,518 - Minority interest in subsidiaries 161,044 86,742 134,801 97,276 Partners' equity (deficit) General Partner 109,872 21,142 140,237 31,745 Limited Partners: Class A 7,601,765 5,739,013 8,330,530 5,961,683 Class B 4,412,023 (1,458,610) 6,385,760 (738,290) Special Class B 4,291,538 3,226,500 4,595,190 3,353,740 ----------------------------------------------------- Total partners' equity 16,415,198 7,528,045 19,451,717 8,608,878 ----------------------------------------------------- Total liabilities and partners' equity $49,627,778 $35,387,373 $94,667,962 $40,704,274 ----------------------------------------------------- -----------------------------------------------------
SEE ACCOMPANYING NOTES. F-44 SF Hotel Company, L.P. Consolidated Statements of Income YEAR ENDED 12 WEEKS ENDED ----------------------------------------------------- MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, 1998 1997 1998 1997 (UNAUDITED) (UNAUDITED) ----------------------------------------------------- Revenue (principally with affiliates) Development, acquisition and renovation fees $ 5,578,078 $ 2,858,493 $ 434,794 $ 889,557 Franchise fees 993,140 - 344,944 62,948 Management fees 10,544,762 10,627,274 2,013,896 1,835,303 Accounting and legal fees 723,876 691,763 180,420 176,237 Software income 194,035 154,089 42,406 41,894 Construction fees 505,502 255,104 380,710 141,992 Other 1,587,643 243,332 195,724 20,122 ---------------------------------------------------- Total revenue before hotel operations 20,127,036 14,830,055 3,592,894 3,168,053 Hotel operations: Hotel revenue 22,131,930 3,541,150 10,814,572 1,568,766 Less operating expenses for hotel operations 16,699,863 1,589,754 4,622,603 752,853 ---------------------------------------------------- Total hotel operations 5,432,067 1,951,396 6,191,969 815,913 Expenses Salaries and benefits 7,686,667 5,107,022 1,674,710 1,537,880 Professional fees 1,820,374 1,462,883 367,497 337,919 Travel and entertainment 721,128 641,688 145,092 182,160 Abandoned sites and loss provisions 580,379 29,095 10,613 53 Depreciation and amortization 1,924,091 1,163,799 358,277 397,654 General partners fees 340,046 115,000 57,000 32,000 Office 671,203 461,619 169,421 134,357 Lease 308,839 86,584 4,316,716 17,170 Other 677,383 726,260 713,427 124,597 ---------------------------------------------------- Total expenses 14,730,110 9,793,950 7,812,753 2,763,790 Other income (expense) Interest income: Partners 7,373 4,640 927 1,540 Affiliates 116,752 121,657 21,445 39,499 Unaffiliated entity 112,922 86,446 23,579 11,550 Interest expense: Partners (124,470) (162,572) (15,046) (17,582) Affiliates (374,353) (423,897) (93,158) (82,643) Unaffiliated individual (51,978) (69,118) - (11,995) Banks (1,661,893) (1,350,359) (160,819) (397,270) Other (55,079) (4,812) (32,831) (12,711) Amortization of deferred income 264,017 - 109,727 2,500 (Loss) gain on disposition of property and equipment (8,769) 4,561 (2,805) - Equity in net income (loss) of unconsolidated affiliates 1,405,063 515,196 1,231,430 318,692 ---------------------------------------------------- Income before minority interest in income of subsidiaries 10,458,578 5,709,243 3,054,559 1,071,756 Minority interest in income of subsidiaries (151,425) (82,735) (18,040) (11,423) ---------------------------------------------------- Net income $10,307,153 $ 5,626,508 $ 3,036,519 $1,060,333 ---------------------------------------------------- ----------------------------------------------------
SEE ACCOMPANYING NOTES. F-45 SF Hotel Company, L.P. Consolidated Statements of Partners' Equity SPECIAL LIMITED LIMITED LIMITED GENERAL PARTNER- PARTNER- PARTNER- PARTNER CLASS A CLASS B CLASS B TOTAL ----------------------------------------------------------------------- Balance at December 29, 1995 $(4,391,762) $5,611,185 $(1,956,302) $3,038,416 $ 2,301,537 Redeemed partnership interest - (400,000) - - (400,000) Net income 4,412,904 527,828 497,692 188,084 5,626,508 ----------------------------------------------------------------------- Balance at January 3, 1997 21,142 5,739,013 (1,458,610) 3,226,500 7,528,045 Distributions (14,342) (301,750) (952,588) (171,820) (1,440,500) Contributions - - 20,500 - 20,500 Net income 103,072 2,164,502 6,802,721 1,236,858 10,307,153 ----------------------------------------------------------------------- Balance at January 2, 1998 109,872 7,601,765 4,412,023 4,291,538 16,415,198 Net income (unaudited) 30,365 728,765 1,973,737 303,652 3,036,519 ----------------------------------------------------------------------- Balance at March 27, 1998 (unaudited) $ 140,237 $8,330,530 $ 6,385,760 $4,595,190 $19,451,717 ----------------------------------------------------------------------- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES. F-46 SF Hotel Company, L.P. Consolidated Statements of Cash Flows YEAR ENDED 12 WEEKS ENDED -------------------------------------------------------- MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, 1998 1997 1998 1997 (UNAUDITED) (UNAUDITED) -------------------------------------------------------- OPERATING ACTIVITIES Net income $10,307,153 $ 5,626,508 $ 3,036,519 $ 1,060,333 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,924,091 1,163,799 358,277 397,654 Equity in net loss (income) of unconsolidated affiliates, less distributions received (1,405,063) - (1,231,430) (318,692) (Gain) loss on disposition of property and equipment 8,769 (4,561) 2,805 - Abandoned sites and loss provisions 580,379 29,095 10,613 53 Minority interest in income of subsidiaries, net of distributions 74,302 48,799 (26,243) 10,534 Amortization of deferred income (264,017) - (109,727) (2,500) Net change in operating assets and liabilities: Accounts receivable (379,755) 149,604 (3,521,392) (552,977) Interest receivable 7,807 (35,919) (3,583) (1,370) Prepaid expenses and other (394,156) (11,375) (3,296,965) (1,280,140) Accounts payable 581,033 (200,139) 9,084,207 (696,246) Accrued payroll 808,821 343,143 (386,398) (757,296) Accrued interest - general partner (153,945) 391,230 80,385 78,105 Accrued interest - other 38,040 2,809 21,442 103,348 Accrued expenses and other liabilities 1,109,611 327,090 (59,080) (544,376) Deposits (306,241) (17,282) (163,496) (58,315) Deferred revenue - 74,833 15,232 93,559 Preopening costs (81,322) (161,384) - - Investment in Summerfield Safety Company, net (244,294) (15,406) (41,421) (9,215) Lease commitment fee received 900,000 - - - -------------------------------------------------------- Net cash provided by (used in) operating activities 13,111,213 7,710,844 3,769,745 (2,477,541) INVESTING ACTIVITIES Net change in site advances and advances to site partnerships 426,695 873,771 (1,509,037) 858,345 Purchases of property and equipment (4,429,782) (8,698,985) (3,297,887) (1,082,016) Increase in replacement reserve (91,663) (135,751) (4,117,000) (69,435) Replacement reserve received from lessor - - 4,050,184 - Net change in other assets (189,172) 41,711 - - Net change in tax and renovation escrow (22,417) (8,604) (10,513) 13,367 Proceeds from disposition of property and equipment 2,378,524 12,802 - - Net change in advance to affiliate 124,247 - - - Net change in notes receivable - limited partners, affiliates and employees 596,952 (871,322) 1,019,241 335,715 Purchases of short-term investments - (1,949,990) - - Sales of short-term investments - 1,949,990 - - Deposit on operating lease - - (15,000,000) - Contributions to unconsolidated affiliates (8,049,558) (3,917,700) (650,638) (5,389,300) Distributions and redemptions from unconsolidated affiliates 2,489,869 785,029 12,785,487 2,038,247 -------------------------------------------------------- Net cash used in investing activities (6,766,305) (11,919,049) (6,730,163) (3,295,077)
F-47 SF Hotel Company, L.P. Consolidated Statements of Cash Flows (continued) YEAR ENDED 12 WEEKS ENDED ---------------------------------------------------------- MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, 1998 1997 1998 1997 (UNAUDITED) (UNAUDITED) ---------------------------------------------------------- FINANCING ACTIVITIES Payments of obligation under capital lease $ (25,623) $ (22,724) $ (8,527) $ (5,657) Deferred loan costs (23,477) (236,455) - - Net change in advances from partners and affiliate (1,321,913) 32,645 - - Net change in notes payable - limited partners, affiliates, and unaffiliated individual (213,125) 31,263 17,017,963 (590,808) Renovation escrow deposit - 331,020 - - Proceeds from long-term debt 3,346,398 4,737,167 1,163,322 2,865,039 Payments of long-term debt (2,159,460) (155,363) (29,885) (12,634) Proceeds from line of credit 20,382,000 2,688,000 - 3,695,000 Payments on line of credit (20,382,000) (2,688,000) - - Redeemed partnership interest - (400,000) - - Contributions 20,500 500,000 - 20,500 Distributions (1,440,500) - - - ---------------------------------------------------------- Net cash (used in) provided by financing activities (1,817,200) 4,817,553 18,142,873 5,971,440 ---------------------------------------------------------- Increase in cash and cash equivalents 4,527,708 609,348 15,182,455 198,822 Cash and cash equivalents at beginning of year 2,167,487 1,558,139 6,695,195 2,167,487 ---------------------------------------------------------- Cash and cash equivalents at end of year $ 6,695,195 $ 2,167,487 $21,877,650 $2,366,309 ---------------------------------------------------------- ---------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 2,346,341 $ 1,633,273 $ 196,388 $ 288,159 SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES: Capital lease obligations incurred for equipment $ 26,537 $ - $ 490,336 $ - Other investments received from disposal of net operating assets 3,691,554 - - - Decrease in mortgage payable from disposal of net operating assets 6,073,335 - - - Issuance of notes payable to affiliate from purchase of accounts receivable 1,212,327 - - -
DISCLOSURE OF ACCOUNTING POLICY For purposes of the consolidated statements of cash flows, the Company considers cash and cash equivalents to include currency on hand, demand deposits and short-term investments with maturities of three months or less. Cash and cash equivalents do not include the replacement fund consisting primarily of an interest-bearing money market account since such funds are used primarily to replace or acquire capital assets. SEE ACCOMPANYING NOTES. F-48 SF Hotel Company, L.P. Notes to Consolidated Financial Statements January 2, 1998 and January 3, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of SF Hotel Company, L.P. (SFHC) and its majority owned subsidiaries, Summerfield Suites Development Company, L.P. (SSDC), Summerfield Suites Management Company, L.P. (SSMC), Summerfield Suites Lease Company, L.P. (SSLC), Summerfield Suites Construction Company, L.C. (SSCC), and Charlotte Summerfield Associates, L.P. (CSA), all such entities hereinafter collectively referred to as the Company. SSLC and CSA are collectively referred to as the Hotels. SSCC is a majority (99%) owned subsidiary of SSDC. All significant intercompany balances and transactions have been eliminated. SSLC was formed on May 8, 1997, to lease and operate nine all suite temporary lodging facilities (the Properties) located in five states under the names Summerfield Suites Hotel, Sunrise Suites Hotel and Sierra Suites Hotel. All of the Properties were previously owned by affiliated partnerships which sold their property, equipment and other operating assets to Innkeepers USA Limited Partnership (Innkeepers) effective June 20, 1997. The Partnership entered into separate lease agreements with Innkeepers for the lease of each Property dated June 20, 1997 and commenced operations on June 21, 1997. SFHC was a majority owner of Atlanta Cumberland Sierra Associates, L.P. (ACSA) and Phoenix Camelback Sierra Associates, L.P. (PCSA) which also sold their operating assets to Innkeepers. Upon completion of the sale to Innkeepers, the partners of ACSA and PCSA contributed their remaining net assets to SSLC in return for ownership units. Because ACSA, PCSA and SSLC are majority owned by SFHC, the contribution of the assets is considered to be a combination of entities under common control and is required to be accounted for similar to a pooling of interests. Accordingly, the net assets contributed to SSLC were recorded at historical cost at the date of contribution, and the consolidated financial statements were retroactively restated as if SSLC, ACSA and PCSA were combined at the beginning of the reporting period. The combined entity is herein after referred to as SSLC. In addition, the Company owns limited partnership interests in certain affiliated hotel operations. None of the ownership interests exceed 35%. The Company accounts for its investments using the equity method of accounting. F-49 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FISCAL YEAR The Company's fiscal year-end is the Friday closest to December 31. The Company's fiscal years ended January 2, 1998 and January 3, 1997, include 53 and 52 weeks of operations, respectively. LINE OF BUSINESS The Company is in the business of developing, renovating, managing, and owning hotels under the names Summerfield Suites Hotel and Sierra Suites Hotel. The Company's principal sources of revenue are development, renovation and management fees, equity interests in site partnerships which own hotels and suite revenue from hotel operations. CONCENTRATION OF CREDIT RISK The Company's financial instruments exposed to concentration of credit risk consist primarily of cash, cash equivalents, investment securities and receivables. The Company grants credit to customers, consisting primarily of individuals and companies throughout the country, and affiliates. The Company places its funds into high credit quality financial institutions and, at times, these funds may be in excess of the federal depository insurance limit. PROPERTY AND EQUIPMENT Depreciation is computed using both straight-line and accelerated methods over the estimated useful lives of the related assets. Useful lives are as follows: Building and components 31-39 years Furniture, fixtures, equipment and leasehold improvements 3-15 years
Repairs and maintenance are charged to expense as incurred; betterments and replacements are capitalized. OTHER INVESTMENTS Other investments consist of limited partnership units which are restricted as to their resale, and accordingly, are carried at cost. F-50 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER ASSETS Loan fees, closing, and other costs incurred in obtaining financing have been capitalized and are amortized over the term of the related debt. Salaries, training costs, premarketing expenses and other direct costs incurred prior to opening a hotel are deferred and amortized over a 12-month period commencing with the opening of the hotel. MANAGEMENT FEES SSMC manages hotels pursuant to agreements which generally require the hotel property owners to pay a base management fee equal to a determined percentage of the gross revenues of the hotel. In addition, SSMC may receive certain incentive management fees based upon the net operating profit of the hotel. Generally, these fees are recognized when earned; however, certain incentive fees are payable to SSMC on a cumulative basis only on the attainment of certain cash flow objectives. Because the receipt of these fees are subject to significant contingencies, they are recognized only when the contingencies have been substantially removed. The management agreements are generally for terms of 20 years and allow SSMC to extend the operating term for three consecutive extension periods of five years each. DEVELOPMENT FEES SSDC receives development fees from the site partnerships based on a fixed rate per hotel suite. SSDC enters into contracts to arrange for the development and construction of a hotel under conditions whereby SSDC guarantees the contract cost will not exceed specified contractual amounts. Revenue is recorded and profit is recognized on each contract using the percentage-of-completion method. Provisions for anticipated losses, if any, on all contracts are recognized as the amount of the loss is determinable. CONSTRUCTION AND RENOVATION FEES Pursuant to certain agreements, SSCC receives construction fees from certain site partnerships to act as the general contractor for specified construction projects; purchasing contractor to acquire furniture, fixtures and equipment; and renovation fees to act as a consultant to the site partnerships during specified renovation projects. Fees associated with these services are negotiated by SSCC and the site partnerships. Revenue related to the construction contracts is recorded and profit is recognized on each contract using the percentage-of-completion method. Provisions for anticipated losses, if any, on F-51 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) all construction contracts are recognized as the amount of the loss is determinable. SSCC records revenue related to renovation services according to the specified terms and conditions of the individual contracts. REPLACEMENT FUND A replacement fund, consisting of an interest-bearing money market account, is maintained by CSA for the primary purpose of funding the replacement of, and additions to, furniture, fixtures, equipment and other capital assets. An amount equal to the greater of (a) 3% to 4% of the gross revenues of the hotel operations of CSA, as defined, or (b) $80,000 per calendar year, increased by CPI as defined, is required to be deposited into the replacement fund on an annual basis. INCOME TAXES The accompanying financial statements do not include a provision or benefit for income taxes because the Company is not a taxpaying entity. The Company is comprised of partnerships and a limited liability company; therefore, income is taxed to the partners. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts reflected in the Company's 1996 financial statements have been reclassified to conform to the 1997 presentation. 2. DISPOSAL OF ASSETS AND PROPERTY LEASES Effective June 20, 1997, SSLC entered into a Contribution Agreement (the Agreement) with Innkeepers USA Limited Partnership (Innkeepers) for the sale of substantially all net operating assets. Under the terms of the Agreement, SSLC contributed all property and equipment and other operating assets and received proceeds of $12,223,000 consisting of F-52 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 2. DISPOSAL OF ASSETS AND PROPERTY LEASES (CONTINUED) cash, Innkeepers partnership units and the assumption of its then outstanding mortgage payables. In connection with the Agreement, SSLC incurred costs of $79,587 of which $78,932 was paid to SFHC. Commensurate with the Agreement, SSLC entered into separate Lease Agreements with Innkeepers to lease the assets purchased from SSLC and seven affiliated partnerships. The leases have an original term of 15 years with an optional extension period of an additional 15 years. The leases are accounted for as operating leases with lease payments recorded as operating expenses as incurred. Lease payments related to ACSA's and PCSA's properties represent formula based rentals, as defined in the Lease Agreements, over the entire lease term. For the remaining seven properties, lease payments during the first 18 months represent fixed base rentals. After the initial 18 month period, lease payments represent the greater of fixed base rentals or formula based rentals dependent on the level of gross suite revenues of each Property, as defined in the Lease Agreements. As SSLC's Contribution Agreement and Lease Agreements represent sale-leasebacks of its operating assets, the Company deferred the entire $2,602,797 gain realized on the sale. The deferred income will be amortized over the life of the related leases. As of January 2, 1998, the minimum lease payments due under the Lease Agreements were as follows: 1998 $14,512,840 1999 9,486,160 2000 9,486,160 2001 9,486,160 2002 9,486,160 Thereafter 94,861,600
In connection with the Lease Agreements, seven of the affiliated partnerships agreed to reimburse SSLC for any shortfall, and SSLC agreed to reimburse the affiliated partnerships for any excess, between fixed base rentals and formula based rentals, as defined in the Lease Agreements, for a period of 18 months. Any payments made or received are recorded as direct increases or reductions to lease expense, respectively. During the year ended January 2, 1998, SSLC received a net total of $286,682 in lease shortfall payments from affiliated partnerships which reflected as a decrease in lease expense in the accompanying consolidated statement of income. F-53 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 2. DISPOSAL OF ASSETS AND PROPERTY LEASES (CONTINUED) In connection with the Lease Agreements, SSLC received fees from the seven affiliated partnerships totaling $900,000 to mitigate a portion of the risks assumed by SSLC related to the commitment to pay fixed minimum based rentals over the term of the leases. This amount was recorded as deferred income and will be amortized over the lives of the related leases. SFHC received $1,138,166 from the seven affiliated partnerships as a performance fee, of which $119,182, representing SFHC's proportionate ownership in each affiliate, has been deferred and will be amortized over the lives of the related leases. The Company is a minority owner of the seven affiliated partnerships and accordingly, on a consolidated basis, deferred its pro-rata share of the gain recognized by each partnership, totaling $4,213,286. This amount will be amortized over the life of the related leases. 3. RELATED PARTY TRANSACTIONS The Company has significant related party transactions in the normal course of business, principally with its partners or affiliates and site partnerships in which the Company is also a limited partner. Related party revenue and (expense) incurred during the years ended January 2, 1998 and January 3, 1997 were as follows: 1997 1996 RELATED PARTY ------------------------------------------------------------------------ Development fees $ 5,578,078 $ 2,850,160 Site partnerships Franchise fees 993,140 - Site partnerships Renovation fees - 8,333 Site partnerships Management fees 10,544,762 10,627,274 Site partnerships Accounting and legal fees 723,876 691,763 Site partnerships Software income 194,035 154,089 Site partnerships Construction fees 505,502 255,104 Site partnerships Interest income 116,752 121,657 Affiliates Interest income 7,373 4,640 Partners Marketing fees (490,211) (75,636) Affiliated marketing fund Professional fees (911,248) (788,365) Shareholder of corporate general partner General partners fees (340,046) (115,000) General partners Interest expense (124,470) (162,572) Partners Interest expense (374,353) (423,897) Affiliates Insurance (75,957) (14,640) SSC
F-54 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 3. RELATED PARTY TRANSACTIONS (CONTINUED) Accounts receivable related to management fees at January 2, 1998 and January 3, 1997 are generally received one to three months subsequent to the month the amounts are earned. Amounts receivable related to development, construction and renovation fees are included in accounts receivable-affiliates in the accompanying consolidated balance sheets. The amounts are generally received within one year from when the site partnerships obtain proceeds from financing or from cash flows from operations. ADVANCES TO AND FROM AFFILIATES Advances to and from affiliates, including partners, are periodically made as working capital is available or is needed by the Company and affiliates. The advances are receivable or due on demand and bear interest at the WALL STREET JOURNAL prime rate (8.5% at January 2, 1998). All advances payable to partners and affiliates, totaling $4,147,059 and $4,673,972 at January 2, 1998 and January 3, 1997, respectively, have been classified as noncurrent on the accompanying consolidated balance sheets since the lenders have indicated it is not their intention to demand payment during 1998. NOTES RECEIVABLE On December 31, 1996, SSDC and SSCC converted amounts receivable from Chicago Downtown Hotel Associates, L.P. of $669,240 into notes receivable. The notes require monthly principal and interest payments and mature December 1, 2003. The notes bear interest at a fixed rate of 7.25%. Principal maturities for the next five years and thereafter are as follows: 1998 $ 81,387 1999 87,488 2000 94,046 2001 101,095 2002 110,529 Thereafter 114,964 -------- Total $589,509 -------- --------
F-55 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 3. RELATED PARTY TRANSACTIONS (CONTINUED) The Company has entered into various promissory notes with certain other affiliated entities. At January 2, 1998, the aggregate amount outstanding on these notes was $684,902. These promissory notes, which are payable on demand, bear interest at a variable rate equal to the WALL STREET JOURNAL prime rate (8.5% at January 2, 1998). A note receivable from a limited partner totaling $60,000 is noninterest bearing and will be repaid on the occurrence of certain future events. This note receivable was classified as noncurrent on the accompanying consolidated balance sheets since payment was not expected within one year from January 2, 1998. MARKETING FEES SSLC and CSA pay fees equal to 2 1/2% of gross suite revenues to the Summerfield Suites Marketing Association (SSMA) or Sierra Suites Marketing Association (SRMA), which are administered by SSMC. SSMA and SRMA provide general advertising and marketing services for all Summerfield and Sierra Suites. REDEEMED PARTNERSHIP INTEREST During 1996, certain limited partners redeemed $400,000, which was allocated to all remaining limited partners based on each partner's original ownership percentage. 4. ADVANCES TO SITE PARTNERSHIPS Site partnerships are generally formed shortly after a construction site for a hotel is approved. Advances to the site partnerships represent amounts advanced for site-related costs, including land and construction, for which SSDC is generally reimbursed by the site partnership from construction loan proceeds. 5. SITE ADVANCES Site advances represent directly identifiable site-related costs for prospective hotel development sites which, when approved for development, will be transferred to a site partnership or expensed if the site is abandoned. During 1997 and 1996, certain site advances were written off totaling $580,379 and $29,095, respectively, related to the abandonment of the sites. F-56 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 6. NOTES PAYABLE Notes payable at January 2, 1998 and January 3, 1997, consist of the following: 1997 1996 ------------------------- - - To limited partners Various notes payable to limited partners, unsecured, payable on demand, interest accrues at the WALL STREET JOURNAL prime rate (8.50% at January 2, 1998) $1,117,643 $1,265,853 ------------------------- ------------------------- - - To affiliates Various notes payable to affiliated corporations, unsecured, payable on demand, interest accrues at the WALL STREET JOURNAL prime rate (8.50% at January 2, 1998) $ 73,000 $ 73,000 ------------------------- ------------------------- - - To unaffiliated individual Note payable to unaffiliated individual, fully paid in 1997 $ - $ 800,000 ------------------------- -------------------------
F-57 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 7. LONG-TERM DEBT Long-term debt at January 2, 1998 and January 3, 1997, consists of the following: 1997 1996 ------------------------- Note payable to bank, secured by pledge and assignment of partnership interest in Charlotte Summerfield Associates, L.P., guaranteed by limited partner, and stock pledge by general partner, matures in 2000, interest accrues at 12% $3,183,000 $ 3,183,000 Note payable to bank, fully paid in 1997 - 2,000,000 Note payable to bank, secured by the office building payable in 55 monthly installments of $9,317, including interest through July 1, 2000 with a final installment of $759,727 on August 1, 2000 855,008 885,563 Mortgage payable to insurance company due in monthly installments of $47,780, including interest at a fixed rate of 8.64% through 2005 5,175,667 5,296,142 Mortgage payable to bank, fully paid in 1997 - 2,735,367 ------------------------- 9,213,675 14,100,072 Less current portion 156,252 174,214 ------------------------- $9,057,423 $13,925,858 ------------------------- -------------------------
In conjunction with a Hotel acquisition, CSA entered into a loan agreement dated July 31, 1995, with Lincoln National Life Insurance Company (LNLI). The loan provided for maximum borrowings up to $5,450,000. The loan matures on August 1, 2005. The mortgage payable is secured by a first mortgage of CSA's property. In connection with the construction of a hotel, ACSA entered into a loan agreement dated April 9, 1996, with Bank One Lexington, N.A. (Bank). The loan provides for maximum borrowings of up to $3,000,000. During 1997, the loan was assumed in full by Innkeepers in connection with the disposal of SSLC's operating assets. F-58 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 7. LONG-TERM DEBT (CONTINUED) In connection with the construction of a hotel, PCSA entered into a loan agreement dated May 31, 1996 with Bank One Arizona, N.A. The loan provides for maximum borrowings of up to $3,500,000. During 1997, the loan was assumed in full by Innkeepers in connection with the disposal of SSLC's operating assets. During 1997, the Company entered into a $10,000,000 revolving line of credit with a bank, of which no borrowings were outstanding at January 2, 1998. The line of credit bears interest at LIBOR plus 1 1/4% and requires an annual commitment fee of 1/4% of the committed amount. The line of credit contains certain restrictive covenants as defined in the agreement. During 1996, the Company entered into a $6,500,000 revolving promissory note with a bank, bearing a variable interest rate, of which no borrowings were outstanding at January 2, 1998 and January 3, 1997. During 1997, the maximum amount of the note was reduced to the balance of outstanding letters of credit secured by the note. As of January 2, 1998 and January 3, 1997, outstanding letters of credit backed by the revolving promissory note were $933,000 and $3,340,732, respectively. 8. DEFERRED REVENUE As described in NOTE 1, the Company owns limited partnership interests in certain affiliated hotel operations for which SSDC performs development services and SSCC acts as the general contractor for specified construction. To the extent of the Company's ownership interests in the partnerships, certain revenues earned by SSDC for its development services and SSCC for its general contractor services are deferred and recognized as income over the life of the hotel property or at the time the hotel property is sold. 9. CLASS A LIMITED PARTNERSHIP INTEREST The Class A Limited Partner shall have the right (the "Put Right") to require the Company (or, at the Company's election, any affiliate of the Company) to purchase all (but not less than all) of the Class A Limited Partner's interest in the Company. The Put Right may be exercised after July 31, 1999. The put price shall be equal to the excess of (i) an amount equal to the lesser of the fair market value of the Class A Limited Partner's specified interest as agreed to on the exercise date by the buyer and seller, or five times the most recent three-year average of the Company's net operating income, excluding F-59 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 9. CLASS A LIMITED PARTNERSHIP INTEREST (CONTINUED) proceeds from the sale or refinancing of the Company; over (ii) the total of all amounts distributed by the Company to the Class A Limited Partner between the Put Exercise Date and the Put Closing Date, as defined. 10. COMMITMENTS During 1996, the Company granted an option to an officer and employee whereby, for $400,000, the employee may purchase a 1% limited partnership interest in the Company at any time commencing on the date of grant and ending 90 days after the termination of his employment with the Company's general partner. Compensation expense associated with the grant of this option was not significant. During 1997, the Company repurchased the option for $100,000. 11. INVESTMENT IN SUMMERFIELD SAFETY COMPANY The Company is a limited partner in Summerfield Safety Company (SSC). SSC was formed as a means to provide a form of self-funded workers' compensation program for its partners, all of which are direct or indirect affiliates of Summerfield Hotel Corporation (SHC). SSC provides a risk-sharing arrangement for its partners as it is responsible for paying all workers' compensation claims and related expenses for its partners. SSC maintains coverage for losses in excess of $250,000 per occurrence and $850,000 in aggregate. The Company records its pro rata share of the losses incurred by SSC at the end of each four-week accounting period based on its proportionate share of SSC's total capital at the beginning of the measurement period. These losses are in substance expenses related to the management of the Company's workers' compensation risks and, accordingly, are included in operating expenses in the accompanying statement of income. The Company makes capital contributions to SSC on a formula basis which is based on the payments that the Company would be required to make if it were to be a participant in the local state workers' compensation pool. At January 2, 1998 and January 3, 1997, the Company's pro rata investment interest in SSC was approximately 3.36% and 4.45%, respectively. F-60 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 11. INVESTMENT IN SUMMERFIELD SAFETY COMPANY (CONTINUED) An analysis of activity of its investment in SSC is as follows: JANUARY 2, JANUARY 3, 1998 1997 ---------------------- Balance at beginning of year $ 35,725 $ 20,319 Contributions 320,251 38,362 Share of loss allocation (75,957) (14,640) SSCC refund - (8,316) ---------------------- Balance at end of year $280,019 $ 35,725 ---------------------- ----------------------
The principal assets of SSC at January 2, 1998 and January 3, 1997 were cash and cash equivalents. 12. CAPITAL LEASES The Company has entered into agreements to lease certain transportation equipment recorded as capital leases. Property, plant and equipment include the following property under capital leases: JANUARY 2, JANUARY 3, 1998 1997 ---------------------- Furniture, fixtures and equipment $154,128 $125,787 Less accumulated depreciation 97,361 44,930 ---------------------- $ 56,767 $ 80,857 ---------------------- ----------------------
Depreciation expense for the property under capital lease for the years ended January 2, 1998 and January 3, 1997, was $52,431 and $43,218, respectively. F-61 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 12. CAPITAL LEASES (CONTINUED) The following is a schedule of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments, as of January 2, 1998: 1998 $ 43,265 1999 33,434 2000 33,434 2001 10,878 -------- Total remaining lease payments 121,011 Less amount representing interest 18,669 -------- Present value of net minimum lease payments 102,342 Less current portion 34,078 -------- Obligation under capital lease - noncurrent portion $ 68,264 -------- --------
13. SUBSEQUENT EVENTS (UNAUDITED) Effective March 20, 1998, 15 affiliated hotel site partnerships entered into separate Purchase and Sale Agreements with Hospitality Properties Trust (HPT) for the sale of substantially all of the net operating assets of each partnership. Under the terms of the Agreements, the partnerships contributed substantially all operating assets for combined proceeds of $240,000,000 in cash. In connection with the agreements, the Company formed Summerfield HPT Lease Co. L.P. (SHPTLC) for the purpose of leasing and operating the properties sold to HPT. SHPTLC is a majority (99%) owned subsidiary of the Company. SHPTLC entered into a Master Lease Agreement with HPT to lease the assets purchased by HPT. The lease has an initial term of approximately 18 years with four optional 12-year renewal periods. The leases will be accounted for as operating leases with lease payments recorded as operating expenses incurred. Lease payments are structured as minimum monthly rentals plus an "additional rent" amount. Only minimum monthly rentals will be paid during fiscal 1998. Subsequent to 1998, additional rent will be paid in an amount equal to 7.5% of annual sales in excess of sales recorded in 1998. As SHPTLC's Lease Agreement with HPT represents a sale-leaseback of assets previously owned by affiliated partnerships, the Company deferred the entire gain of approximately $10,700,000 realized on the sale. The deferred income will be amortized over the life of the lease. F-62 SF Hotel Company, L.P. Notes to Consolidated Financial Statements (continued) 13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) The minimum lease payments due under the Master Lease Agreement are as follows: 1998 $ 19,556,458 1999 25,000,000 2000 25,000,008 2001 25,000,008 2002 25,000,008 Thereafter $325,000,104
Simultaneously, the Company entered into a Loan Agreement dated March 20, 1998, with Patriot American Hospitality Operating Partnership, L.P. (PAHOP) pursuant to which PAHOP loaned the Company $17,083,333 in exchange for a note convertible into a preferred partnership interest in the Company. The proceeds from the note were then contributed by the Company as a partnership interest in SHPTLC. SHPTLC then used $15,000,000 of the proceeds to finance a non-interest bearing deposit due to HPT at inception of the Master Lease Agreement with HPT that is refundable on lease termination. Additionally, effective June 4, 1998, the Company entered into a transaction with Patriot American Hospitality, Inc. (Patriot) whereby Patriot acquired a 100% ownership interest in the Company for approximately $180 million in cash and a combination of 4.62 million operating partnership units and Patriot American paired shares. Immediately prior to the transaction, the partners of the Company created Summerfield Associates, L.P. (SALP) with the same ownership structure as the Company. Certain net assets of the Company to be excluded from the transaction were contributed to the partners of the Company as a like-kind distribution prior to the effective date. The partners then contributed these net assets to SALP in exchange for partnership interests. F-63 Report of Independent Auditors The Partners SC Suites Summerfield Partnerships We have audited the accompanying combined balance sheets of SC Suites Summerfield Partnerships as of January 2, 1998 and January 3, 1997, and the related combined statements of operations, partners' deficit and cash flows for the three years in the period ended January 2, 1998. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of SC Suites Summerfield Partnerships at January 2, 1998 and January 3, 1997, and the combined results of their operations and their cash flows for the three years in the period ended January 2, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP February 3, 1998 Wichita, Kansas F-64 SC Suites Summerfield Partnerships Combined Financial Statements Balance Sheets MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, 1998 1997 1998 1997 (UNAUDITED) (UNAUDITED) ------------------------------------------------------- ASSETS Current assets: Cash $ 6,880,827 $ 6,247,374 $3,696,606 $ 4,928,089 Replacement fund 4,276,132 4,593,116 - 5,070,032 Accounts receivable 2,505,630 2,069,454 4,087,427 2,851,278 Prepaid expenses and other 458,486 436,887 36,715 582,967 ------------------------------------------------------- Total current assets 14,121,075 13,346,831 7,820,748 13,432,366 Property and equipment, at cost: Land 41,836,426 41,836,426 - 41,836,426 Buildings and components 111,788,042 110,470,089 - 111,779,775 Furniture, fixtures and equipment 42,864,891 41,025,004 - 41,974,626 Construction in progress - 1,057,956 - - ------------------------------------------------------- 196,489,359 194,389,475 - 195,590,827 Less accumulated depreciation 55,773,815 50,127,841 - 51,746,038 ------------------------------------------------------- Net property and equipment 140,715,544 144,261,634 - 143,844,789 Other assets: Organization costs, net of accumulated amortization of $17,881 ($13,674 at January 3, 1997) 3,156 7,363 - 6,392 Deferred loan costs, net of accumulated amortization of $5,204,045 ($4,536,044 at January 3, 1997) 45,792 713,793 - 578,350 Other, net of accumulated amortization of $330,628 ($291,000 at January 3, 1997) 631,552 656,825 618,552 647,731 Investment in Summerfield Safety Company 792,099 636,847 779,634 684,783 ------------------------------------------------------- Total other assets 1,472,599 2,014,828 1,398,186 1,917,256 ------------------------------------------------------- Total assets $156,309,218 $159,623,293 $9,218,934 $159,194,411 ------------------------------------------------------- -------------------------------------------------------
F-65 MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, 1998 1997 1998 1997 (UNAUDITED) (UNAUDITED) ------------------------------------------------------- LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Current liabilities: Accounts payable, including $579,745 due to affiliate ($481,472 at January 3, 1997) $ 826,865 $ 765,867 $ 782,262 $ 326,597 Accrued interest, including $675,404 due to affiliate ($742,542 at January 3, 1997) 1,190,753 1,228,175 - 1,082,082 Accrued property taxes 420,811 399,066 - 373,120 Accrued payroll and taxes 734,354 490,858 229,059 746,077 Accrued sales and occupancy taxes 807,378 621,385 634,913 721,217 Accrued primary incentive management fee 648,164 591,936 - 566,084 Accrued secondary incentive management fee 560,000 383,389 - 21,493 Accrued expenses, including $316,188 due to affiliate ($295,262 at January 3, 1997) 1,361,072 1,359,145 552,951 997,048 Customer room deposits 194,582 205,310 - 279,703 Notes payable - - - 78,000 Other 2,693 3,602 - 3,827 Current portion of obligations under capital lease 154,346 125,906 - 125,906 Current portion of mortgages payable 141,293,979 113,076,391 - 142,639,405 ------------------------------------------------------- Total current liabilities 148,194,997 119,251,030 2,199,185 147,960,559 Mortgages payable - 30,558,075 - - Subordinated loans 24,688,762 24,688,762 4,789,373 24,688,762 Obligations under capital lease 296,409 326,184 - 313,679 Partners' equity (deficit): Partners' capital 12,167,511 19,553,740 - 18,817,804 Accumulated earnings (deficit) (29,038,461) (34,754,498) 2,230,376 (32,586,393) ------------------------------------------------------- Net partners' equity (deficit) (16,870,950) (15,200,758) 2,230,376 (13,768,589) ------------------------------------------------------- Total liabilities and partners' equity (deficit) $156,309,218 $159,623,293 $9,218,934 $159,194,411 ------------------------------------------------------- -------------------------------------------------------
SEE ACCOMPANYING NOTES. F-66 SC Suites Summerfield Partnerships Combined Financial Statements Statements of Operations YEAR ENDED 12 WEEKS ENDED --------------------------------------------------------------------- MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, DECEMBER 29, 1998 1997 1998 1997 1995 (UNAUDITED) (UNAUDITED) --------------------------------------------------------------------- Revenue: Suite revenue $63,090,559 $58,927,355 $53,069,047 $ 13,529,539 $14,322,731 Other revenue, net 3,083,887 3,247,174 3,299,434 683,427 755,641 --------------------------------------------------------------------- Total revenue 66,174,446 62,174,529 56,368,481 14,212,966 15,078,372 Operating expenses: Rooms 14,082,497 13,217,647 11,723,034 3,228,550 3,232,235 General and administrative 5,075,212 5,201,529 4,908,423 1,292,399 1,207,774 Sales and promotion 3,598,887 3,483,684 3,445,174 768,134 834,493 Maintenance 2,605,897 2,631,817 2,463,785 565,430 586,516 Utilities 2,170,030 2,133,378 2,004,777 398,161 472,550 --------------------------------------------------------------------- Total operating expenses 27,532,523 26,668,055 24,545,193 6,252,674 6,333,568 --------------------------------------------------------------------- Gross operating profit 38,641,923 35,506,474 31,823,288 7,960,292 8,744,804 Other expenses (revenue): Management, franchise and accounting fees 9,089,626 9,061,316 7,967,447 1,668,457 1,334,344 Property taxes 2,436,628 2,266,391 2,106,128 532,005 554,556 Insurance 535,212 394,774 392,709 80,687 92,116 Other 387,694 263,837 289,487 84,612 76,952 Interest: Mortgage 9,434,545 10,053,244 10,790,323 2,031,798 2,167,354 Subordinated loan 2,575,323 2,624,848 2,575,323 3,668,383 594,303 Other 60,035 54,197 427,253 16,440 12,877 Loss (gain) on disposition of property and equipment 240,528 362,528 299,777 (95,221,540) (19,509) Depreciation 7,454,459 7,842,356 7,628,349 1,719,737 1,618,197 Amortization 711,836 799,093 875,704 53,249 145,509 --------------------------------------------------------------------- Total other expenses (revenue) 32,925,886 33,722,584 33,352,500 (85,366,172) 6,576,699 --------------------------------------------------------------------- Net income (loss) $ 5,716,037 $ 1,783,890 $(1,529,212) $ 93,326,464 $ 2,168,105 --------------------------------------------------------------------- ---------------------------------------------------------------------
SEE ACCOMPANYING NOTES. F-67 SC Suites Summerfield Partnerships Combined Financial Statements Statements of Partners' Equity (Deficit) GENERAL PARTNERS LIMITED PARTNERS ------------------------------------------------------- SUMMERFIELD SF SC SUITES OTHER HOTEL SUITES HOLDING LIMITED COMPANY CORP. CORPORATION PARTNERS L.P. TOTAL ------------------------------------------------------------------------ Balance at December 30, 1994 $ (2,779,257) $(8,620,079) $ (272,681) $ 1,049,866 $(10,622,151) Net loss (1,157,356) (361,260) (10,460) (136) (1,529,212) Contributions 1,785,183 23,802 - 571,259 2,380,244 Distributions (4,020,489) (14,875) (647) (356,666) (4,392,677) ------------------------------------------------------------------------ Balance at December 29, 1995 (6,171,919) (8,972,412) (283,788) 1,264,323 (14,163,796) Net income (loss) 1,424,377 (93,289) (16,740) 469,542 1,783,890 Contributions 1,785,182 23,803 - 571,258 2,380,243 Distributions (4,586,438) (24,576) (47,173) (542,908) (5,201,095) ------------------------------------------------------------------------ Balance at January 3, 1997 (7,548,798) (9,066,474) (347,701) 1,762,215 (15,200,758) Net income 4,475,180 224,163 67,238 949,456 5,716,037 Contributions 892,591 11,901 - 285,629 1,190,121 Distributions (7,068,824) (60,292) (353,558) (1,093,676) (8,576,350) ------------------------------------------------------------------------ Balance at January 2, 1998 (9,249,851) (8,890,702) (634,021) 1,903,624 (16,870,950) Net income (unaudited) 70,119,528 9,521,020 3,397,896 10,288,020 93,326,464 Redeemed partnership interest (unaudited) (21,876,459) (118,356) (93,029) (2,747,524) (24,835,368) Distributions (unaudited) (37,943,651) (457,844) (2,488,342) (8,499,933) (49,389,770) ------------------------------------------------------------------------ Balance at March 27, 1998 (unaudited) $ 1,049,567 $ 54,118 $ 182,504 $ 944,187 $ 2,230,376 ------------------------------------------------------------------------ ------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. F-68 SC Suites Summerfield Partnerships Combined Financial Statements Statements of Cash Flows YEAR ENDED 12 WEEKS ENDED ------------------------------------------------------------------------- MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, DECEMBER 29, 1998 1997 1998 1997 1995 (UNAUDITED) (UNAUDITED) ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 5,716,037 $ 1,783,890 $(1,529,212) $ 93,326,464 $ 2,168,105 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,166,295 8,641,449 8,504,053 1,772,986 1,763,706 Loss (gain) on disposition of property and equipment 240,528 362,528 299,777 (95,221,540) (19,509) Net change in operating assets and liabilities: Accounts receivable (436,176) (44,389) (153,975) (1,581,797) (781,824) Prepaid expenses and other (21,599) 55,634 (42,883) 421,771 (146,080) Accounts payable 60,998 544,919 (10,236) (44,603) (439,270) Accrued interest (37,422) (650,465) (564,091) (1,190,753) (146,093) Customer room deposits (10,728) 12,652 99,649 (194,582) 74,393 Other accrued expenses 685,091 (251,389) (307,487) (3,117,549) (420,515) Investment in Summerfield Safety Company, net (155,252) (335,085) (301,762) 12,465 (47,936) ------------------------------------------------------------------------- Net cash provided by (used in) operating activities 14,207,772 10,119,744 5,993,833 (5,817,138) 2,004,977 INVESTING ACTIVITIES Net change in other assets (14,355) (13,780) 1,853,322 8,699 - Increase in replacement fund (2,886,358) (2,684,379) (2,455,147 - (681,028) Withdrawals from replacement fund 3,203,342 4,412,010 1,496,224 4,276,132 204,112 Proceeds from disposition of property and equipment 41,782 43,661 84,238 240,145,155 24,019 Additions to property and equipment (4,058,199) (5,133,183) (2,122,901) (5,927,808) (1,205,863) ------------------------------------------------------------------------- Net cash provided by (used in) investing activities (3,713,788) (3,375,671) (1,144,264) 238,502,178 (1,658,760) FINANCING ACTIVITIES Net change in notes payable - - - (19,899,389) 78,000 Payment of mortgage payable (2,340,487) (3,850,243) (3,159,243) (141,293,979) (995,061) Payment of capital lease (133,815) (113,210) (97,343) (450,755) (12,505) Capital contributions 1,190,121 2,380,243 2,380,244 - - Capital distributions (8,576,350) (5,201,095) (4,392,677) (45,826,286) (735,936) Redeemed partnership interest - - - (28,398,852) - ------------------------------------------------------------------------- Net cash used in financing activities (9,860,531) (6,784,305) (5,269,019) (235,869,261) (1,665,502) Increase (decrease) in cash and cash equivalents 633,453 (40,232) (419,450) (3,184,221) (1,319,285) Cash and cash equivalents at beginning of year 6,247,374 6,287,606 6,707,056 6,880,827 6,247,374 ------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 6,880,827 $ 6,247,374 $ 6,287,606 $ 3,696,606 $ 4,928,089 ------------------------------------------------------------------------- -------------------------------------------------------------------------
F-69 SC Suites Summerfield Partnerships Combined Financial Statements Statements of Cash Flows (continued) YEAR ENDED 12 WEEKS ENDED ---------------------------------------------------------------------- MARCH 27, MARCH 28, JANUARY 2, JANUARY 3, DECEMBER 29, 1998 1997 1998 1997 1995 (UNAUDITED) (UNAUDITED) ---------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $12,105,688 $13,382,753 $14,356,998 $4,862,938 $2,920,627 SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES Capital lease obligation incurred for equipment $ 132,480 $ 67,280 $ 595,363 $ - $ -
DISCLOSURE OF ACCOUNTING POLICY For purposes of the statements of cash flows, the Partnerships consider cash and cash equivalents to include currency on hand, demand deposits and short- term investments with maturities of three months or less. Cash and cash equivalents do not include the replacement fund consisting primarily of an interest-bearing money market account since these funds are used primarily to replace or acquire capital assets. SEE ACCOMPANYING NOTES. F-70 SC Suites Summerfield Partnerships Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 1. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The accompanying combined financial statements include the accounts of the following limited partnerships under common ownership with each majority-owned by SC Suites Corp.: Atlanta Buckhead Summerfield Associates, L.P. Atlanta Perimeter Summerfield Associates, L.P. Chatsworth Summerfield Associates, L.P. Dulles Summerfield Associates, L.P. Malvern Summerfield Associates, L.P. Orlando/Cypress Pointe Summerfield Associates, L.P. Orlando International Summerfield Associates, L.P. Princeton Summerfield Associates, L.P. San Bruno Summerfield Associates, L.P. San Jose Summerfield Associates, L.P. Schaumburg Summerfield Associates, L.P. Somerset Summerfield Associates, L.P. Sunnyvale Summerfield Associates, L.P. Torrance Summerfield Associates, L.P. Westport Summerfield Associates, L.P. The combined entities will hereinafter collectively be referred to as the Partnerships. All significant inter-partnership accounts and transactions have been eliminated. The Partnerships were formed at various dates ranging from December 19, 1988 to July 18, 1990 to develop, construct and operate all-suite temporary lodging facilities throughout the country known as Summerfield Suites Hotels (the Hotels). The Partnerships commenced operations on various dates ranging from September 15, 1989 to October 1, 1993. The original partners (sometimes referred to as Summerfield Partners) included Summerfield Suites Holding Corporation (Holding Corporation) as general partner and SF Hotel Company, L.P. (SFHC) and various individuals as limited partners. On dates ranging from December 15, 1989 to January 28, 1993, the Partnerships amended and restated their limited partnership agreements (Partnership Agreements) and admitted SC Suites Corp. (SCS) as a general partner. F-71 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FISCAL YEAR The Partnerships' fiscal year end is the Friday closest to December 31. The Partnerships' fiscal years ended January 2, 1998, January 3, 1997 and December 29, 1995 include 52, 53 and 52 weeks of operations, respectively. CONCENTRATION OF CREDIT RISK The Partnerships' financial instruments exposed to concentration of credit risk consist primarily of cash, replacement funds and accounts receivable. The Partnerships provide credit to a large number of individual and corporate customers with no individual customer representing a significant portion of revenues or accounts receivable. The Partnerships do not require collateral or other security against accounts receivable. The Partnerships place their funds into high credit quality financial institutions, and at times, such funds may be in excess of the federal depository insurance limit. REPLACEMENT FUND Replacement funds, consisting of interest-bearing money market accounts, are maintained by the Partnerships for the primary purpose of funding the replacement of, and additions to, furniture, fixtures, equipment and other capital assets. An amount equal to 4% of the gross revenues of the Hotels, as defined, is required to be deposited into the replacement funds on an annual basis. PROPERTY AND EQUIPMENT Depreciation is computed using both straight-line and accelerated methods over the estimated useful lives of the related assets. Useful lives are as follows: Buildings and components 31-39 years Furniture, fixtures and equipment 5-15 years
Property and equipment include interest costs and property taxes incurred during the construction period as well as loan fees and closing costs directly related to the development and construction of the Hotels. Normal repairs and maintenance are charged to expense as incurred; betterments and replacements are capitalized. F-72 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED LOAN COSTS Loan fees, closing and other costs incurred in obtaining mortgage financing have been capitalized and are amortized over the term of the mortgages payable. OTHER ASSETS Other noncurrent assets consist primarily of purchased software which is amortized over a three-year period and long-term deposits. INCOME TAXES The accompanying combined financial statements do not include a provision for income taxes because the Partnerships are not taxpaying entities. Each partner includes its proportionate share of the Partnerships' taxable income or loss in its individual tax returns. Differences between income or loss reported for financial reporting and income tax purposes primarily result from certain costs capitalized for reporting purposes and expensed for tax purposes and certain costs capitalized for both reporting and tax purposes, but amortized using different methods and useful lives. FINANCIAL INSTRUMENTS The Partnerships' financial instruments consist of cash, replacement fund, accounts receivable and notes payable for which the carrying values approximate fair values. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-73 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 2. RELATED PARTY TRANSACTIONS The following represents related party expenses incurred during the years ended January 2, 1998, January 3, 1997 and December 29, 1995: YEAR ENDED ------------------------------------- JANUARY 2, JANUARY 3, DECEMBER 29, RELATED 1998 1997 1995 PARTY ---------------------------------------------- Management fees $2,718,573 $2,556,634 $2,326,815 SSMC Primary incentive management fees 2,410,255 2,240,990 1,994,324 SSMC Secondary incentive management fees 3,044,862 3,834,692 3,236,807 SSMC Accounting fees 443,625 429,000 409,501 SSMC Franchise fees 472,311 - - SSMC Marketing fees 1,577,263 1,405,431 1,257,727 SSMA Insurance 413,290 284,174 78,165 SSC
MANAGEMENT AGREEMENT The Partnerships have entered into separate management agreements with Summerfield Suites Management Company, L.P. (SSMC) to manage and operate the Hotels. As manager and operator, SSMC is to receive a base management fee equal to 4% of gross revenues of the Hotels. In addition, SSMC may receive incentive management fees (IMFs) with two components: (a) the "Primary IMF" and (b) the "Secondary IMF." These fees are equal to 7 1/2% of the net operating profit of the Hotels, as defined. SSMC's right to receive the fees shall be cumulative; however, the payment of the fees is subject to deferral as provided in the agreement. The Primary IMF is accrued as an expense on an annual basis as earned. The Secondary IMF is recorded as an expense in the period prior to which such amounts are expected to be paid or, at the time the Hotels are sold or refinanced, as payment of the Secondary IMF is contingent upon the Hotels attaining certain cash flow objectives. Payment of the Secondary IMF is to be made only after net available cash has been distributed to repay other priority payments as outlined in NOTE 5. During the years ended January 2, 1998, January 3, 1997 and December 29, 1995, the Partnerships incurred Secondary IMFs of $3,044,862, $3,834,692 and $3,236,807, respectively. At January 2, 1998 and January 3, 1997, SSMC had earned cumulative, unrecorded and unpaid F-74 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 2. RELATED PARTY TRANSACTIONS (CONTINUED) Secondary IMFs of $1,699,329 and $2,333,935 respectively. These Secondary IMFs will be charged to expense in the future when the contingencies for payment have been substantially removed. FRANCHISE FEES During 1997, the Partnerships entered into separate franchise agreements with SSMC which allow them to operate as "Summerfield Suites Hotels." Under the agreements, the Hotels pay SSMC a fee ranging from 1% to 4% of the gross suite revenues. MARKETING FEES The Hotels pay a fee equal to 2 1/2% of their gross suite revenues to the Summerfield Suites Marketing Association (SSMA), which is administered by SSMC. SSMA provides general advertising and marketing services for all Summerfield Suites Hotels. DEVELOPMENT AGREEMENT Summerfield Suites Development Company, L.C. (SSDC), an affiliate, was responsible for managing the construction of an addition to the San Jose Summerfield Associates, L.P. Hotel (SJSA). For such services, SJSA agreed to pay SSDC a development fee of $117,600. As of January 2, 1998 and January 3, 1997, $117,600 and $88,200 of this fee has been earned and paid, respectively. This amount has been capitalized as property and equipment in the accompanying balance sheets. 3. MORTGAGES PAYABLE The Partnerships entered into separate loan agreements with various lenders (primary lenders), which provide for maximum borrowings of $151,155,668. Pursuant to the agreements, the Partnerships have several options of selecting interest rates. The rates are defined in the agreements and essentially are determined by the primary lenders' applicable base rates for certificates of deposit, Eurodollar rates and Federal Funds rates. In addition, the Partnerships have the right to convert, from time to time, any portion or all of the loans to fixed rates as determined by the lenders at the time of the individual Partnership's election to convert such loan amounts. The election of interest rates may be for period intervals of one, three, six, or 12 months or three years with the exception that once a fixed-rate election is effective it will remain in effect until maturity. F-75 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 3. MORTGAGES PAYABLE (CONTINUED) Interest (ranging from 6.99% to 7.19% at January 2, 1998 and from 6.45% to 6.52% at January 3, 1997) is payable monthly. The loans have maturities ranging from March 26, 1998 to September 30, 1998 and are secured by substantially all of the Partnerships' assets and contract rights. The Partnerships intend to refinance the full amount of the mortgages payable on a long-term basis during 1998. The Partnerships are currently reviewing various options for such refinancing but have not yet entered into any financing agreements. Accordingly, the mortgages payable balance has been classified in the accompanying balance sheets as a current liability. 4. SUBORDINATED LOANS SCS has provided subordinated loans aggregating $24,688,762 to the Partnerships, which remain outstanding at January 2, 1998. The individual Partnership Agreements provide the subordinated loan is repayable solely out of the proceeds of a sale, refinancing or liquidation of the Hotels, and interest payments shall be required only from the Partnerships' net available cash as outlined in NOTE 5. The subordinated loan agreements, as amended, provide the loans shall bear interest at the greater of the rate equal to the average interest rate accrued on the mortgages payable to the primary lenders (primary interest rate) or the preferred return rate (ranging from 10.0% to 10.5% at January 2, 1998, and January 3, 1997); however, the payment of such interest is subject to two different preference levels based on net available cash. The first level of interest (primary interest) is payable from the first priority of net available cash. The primary interest is generally paid on a monthly basis. The second level of interest (incremental interest), which represents the difference between the primary interest and the preferred return rate, stands behind the Primary IMF in order of payment priority. Interest on the subordinated loans is charged to expense as incurred based on the applicable rate in effect during the period. The subordinated loans are secured by substantially all of the Partnerships' assets and contract rights; however, their lien is subordinate to that of the primary lenders. F-76 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 5. DISTRIBUTION TO PARTNERS The Partnerships' net available cash, as defined, will be distributed from time to time generally in the following manner: - First, to pay any accrued and unpaid primary interest on the subordinated loans - next, any accrued and unpaid Primary IMFs - next, any unpaid incremental interest and preferred returns, as defined - next, any accrued and unpaid interest and principal repayment in connection with special capital loans should they be required - next, any accrued and unpaid Secondary IMFs and - next, PARI PASSU to the partners in proportion to their respective residual percentage interests. In the event of a sale, refinancing or liquidation of the Hotels, the distributions are generally the same as previously described except the unpaid minimum return amounts, subordinated loan amounts and unreturned capital contributions are to be repaid prior to any accrued and unpaid Secondary IMFs and any accrued and unpaid interest and principal repayment in connection with special capital loans. F-77 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 5. DISTRIBUTION TO PARTNERS (CONTINUED) Unpaid and unaccrued minimum returns were as follows: SC SUITES CORP. -------------------------- SUBORDINATED SUMMERFIELD LOAN CAPITAL PARTNERS ----------------------------------------- Unpaid and unaccrued minimum returns at December 29, 1995 $ 2,434,505 $ 6,806,900 $ 589,026 Minimum returns 3,011,354 3,976,795 444,729 Interest incurred (2,624,848) - - Distributions - (4,554,539) (253,733) ----------------------------------------- Unpaid and unaccrued minimum returns at January 3, 1997 2,821,011 6,229,156 780,022 Minimum returns 2,954,535 4,090,786 496,361 Interest incurred (2,575,323) - - Distributions - (4,486,906) (370,748) ----------------------------------------- Unpaid and unaccrued minimum returns at January 2, 1998 $ 3,200,223 $ 5,833,036 $ 905,635 ----------------------------------------- -----------------------------------------
At January 2, 1998 and January 3, 1997, the Partnerships had paid distributions to Summerfield Partners in excess of the minimum return by $1,611,788 and $475,010, respectively. In addition, at January 2, 1998 and January 3, 1997, the Partnerships had paid distributions to SC Suites Corp. in excess of the minimum return by $2,613,817 and $31,899, respectively. 6. ALLOCATION OF INCOME AND LOSS Income and loss are allocated among the partners in accordance with the provisions of the individual Partnership Agreements. In general, income and loss are allocated based on the respective residual percentage interests of the partners. However, the first priority for the allocation of income is in proportion to, and to the extent of, the amount by which the cumulative allocation of losses previously made to the partners plus certain distributions to the partners, which are in effect distributions of preference returns, exceed the cumulative income previously allocated to the partners. F-78 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 7. INVESTMENT IN SUMMERFIELD SAFETY COMPANY Each of the Partnerships are partners in Summerfield Safety Company (SSC). SSC was formed as a means to provide a form of self-funded workers' compensation program for its partners, all of which are direct or indirect affiliates of Summerfield Hotel Corporation (SHC). SSC provides a risk-sharing arrangement for its partners as it is responsible for paying all workers' compensation claims and related expenses for its partners. SSC maintains coverage for losses in excess of $250,000 per occurrence and $850,000 in aggregate. The Partnerships record their pro rata share of the losses incurred by SSC at the end of each four-week accounting period based on their proportionate share of SSC's total capital at the beginning of the measurement period. The losses are in substance expenses related to the management of the Partnerships' workers' compensation risks and, accordingly, are included in operating expenses in the accompanying combined statements of operations. The Partnerships make capital contributions to SSC on a formula basis which is based on the payments the Partnerships would be required to make if they were to be participants in local state workers' compensation pools. At January 2, 1998 and January 3, 1997, the Partnerships' pro rata investment interest in SSC was approximately 49.27% and 59.94%, respectively. An analysis of activity of the Partnerships' combined investment is as follows: JANUARY 2, JANUARY 3, 1998 1997 -------------------------- Balance at beginning of year $ 636,847 $ 301,762 Contributions 568,542 619,259 Share of loss allocation (413,290) (284,174) -------------------------- Balance at end of year $ 792,099 $ 636,847 -------------------------- --------------------------
The principal assets of SSC at January 2, 1998 and January 3, 1997 were cash and cash equivalents. 8. CAPITAL LEASES The Partnerships have entered into agreements to lease certain guest transportation and entertainment equipment recorded as a capital leases. F-79 SC Suites Summerfield Partnerships Notes to Combined Financial Statements (continued) 8. CAPITAL LEASES (CONTINUED) Property and equipment include the following property under capital leases: JANUARY 2, JANUARY 3, 1998 1997 ------------------------- Furniture, fixtures and equipment $ 757,779 $ 650,707 Less accumulated depreciation (426,649) (313,056) ------------------------- $ 331,130 $ 337,651 ------------------------- -------------------------
Depreciation expense for the property under capital leases for the years ended January 2, 1998, January 3, 1997 and December 29, 1995 was $132,862, $153,014 and $168,117, respectively. Following is a schedule of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments, as of January 2, 1998: 1998 $193,269 1999 164,908 2000 103,559 2001 57,791 2002 6,000 -------- Total remaining lease payments 525,527 Less amount representing interest 74,772 -------- Present value of net minimum lease payments 450,755 Less current portion 154,346 -------- Obligation under capital lease - noncurrent portion $296,409 -------- --------
9. SUBSEQUENT EVENT (UNAUDITED) Each of the Partnerships entered into a Purchase and Sale Agreement consummated March 20, 1998 with Hospitality Properties Trust for the sale of substantially all of the net operating assets of the Partnerships for a combined sales price of $240,000,000 received in cash. The transaction resulted in a combined gain of approximately $95,110,000 which is reflected in the 12-week period ended March 27, 1998. Subsequent to the sale, the net operating assets will be leased to and operated by an affiliate of SFHC. F-80 ARTHUR ANDERSEN Arcadian International Limited (formerly Arcadian International Plc) and subsidiary undertakings Accounts 31 December 1997 together with directors' and auditors' reports Registered number: 409293 F-81 Directors' report The directors present their report on the affairs of Arcadian International Limited ("Arcadian" or "the company") and its subsidiary undertakings ("the group"), together with the accounts and auditors' report, for the year ended 31 December 1997. PRINCIPAL ACTIVITIES The group's principal activities were the development, owning and operating of hotels and leisure facilities. During 1998 these activities have changed as set out below. RESULTS AND DIVIDENDS Group results, dividends and the movement on group profit and loss account are shown below:
L000 Profit and loss account at 31 December 1996 1,582 Profit for the financial year 1,997 Ordinary dividends - paid (206) Net loss on translation of overseas investments (1,436) ------ Profit and loss account at 31 December 1997 1,937 ------ ------
SUBSEQUENT EVENTS On 6 April 1998 Patriot American Hospitality, Inc. ("Patriot") completed the acquisition of all the share capital of the company. Each shareholder received 60 pence in cash per ordinary share. Immediately following the completion of the transaction application was made to the Stock Exchange for delisting and to the Registrar of companies to change the name of the company from Arcadian International plc to Arcadian International Limited. In a related but separate transaction Patriot entered into an option agreement with the other shareholders of Malmaison Limited to purchase the balance of share capital and loan stock of that company not already owned by Arcadian. The benefit of this option was passed from Patriot to the company. The option was exercised on 8 April 1998. The management contract with Malmaison Management Limited was terminated on the same day. Patriot is a US Real Estate Investment Trust or 'REIT' whose shares are paired and trade as a single unit with those of Wyndham International, Inc. ('Wyndham'). Subsequent to the transaction, the trading stock and business of the group's hotels were sold to Wyndham and its subsidiaries Arcadian Hotels Limited and Malmaison Hotels Limited (together "the Wyndham UK Group") for book value at the transaction dates. The group continues to own the freehold and long leasehold interests in the hotels which have been leased to the Wyndham UK Group. 1 ARCADIAN INTERNATIONAL LIMITED F-82 Directors' report (continued) DIRECTORS' RESPONSIBILITIES Company law requires the directors to prepare accounts for each financial period which give a true and fair view of the state of affairs of the company and group and of the profit or loss of the group for the period. In preparing those accounts, the directors are required to: - - select suitable accounting policies and then apply them consistently; - - make judgements and estimates that are reasonable and prudent; - - state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and - - prepare the accounts on the going concern basis unless it is inappropriate to presume that the group will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and group and to enable them to ensure that the accounts comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 2 ARCADIAN INTERNATIONAL LIMITED F-83 Directors' report (continued) DIRECTORS AND THEIR INTERESTS The directors who served during the year and changes since then are as shown below. The directors who held office at 31 December 1997 had no interests in the company or its subsidiaries other than those shown below:
Ordinary shares of 25p ------------------------------ 31 December 31 December 1997 1996 Sir Peter Parker (Non-Executive chairman) 162,554 162,554 R.R.A. Breare (chief Executive) 353,486 353,486 J. Bohlmann (Non-Executive) (appointed 17 April 1998) - - M.L. Dunning (Operations) - - W. W. Evans III (Non-Executive) (appointed 17 April 1998) - - A.B.M. Good (Non-Executive) 1,383,333 1,383,333 S. Harrison (Sales and Marketing) 66,666 66,666 R.T.L. Kanter (Non-Executive) 144,172 144,172 P.J.D. McNally (Non-Executive) (resigned 29 May 1997) - 74,666 P.A. Nussbaum (Non-Executive) (appointed 17 April 1998) - _ J.R. Priestley (Deputy Chief Executive) 353,486 353,486 I.D.W. Robertson (Executive) (appointed 26 February 1997) 27,537 20,000 C.G. Upton (Finance) - -
All interests were held beneficially. Upon the completion of the acquisition of the entire issued share capital of the company by Patriot on 6 April 1998 the above interests were sold to Patriot (see note 26a)). CHARITABLE AND POLITICAL CONTRIBUTIONS During the year ended 31 December 1997 the group made contributions to charitable organizations of L6,545 (1996 - L1,200). There were no political contributions (1996 - Lnil). AUDITORS The directors will place a resolution before the Annual General Meeting to reappoint Arthur Andersen as auditors for the ensuing year. 3 ARCADIAN INTERNATIONAL LIMITED F-84 Directors' report (continued) EMPLOYEE CONSULTATION The group places considerable value on the involvement of its employees and has continued its previous practice of keeping them informed on matters affecting them as employees and on the various factors affecting the performance of the group. DISABLED PERSONS The group training, development and promotion policies provide for equal opportunities for minority groups, including the disabled, and all job applications are considered on merit. By order of the Board, /s/ Richard JM Bonella R.J.M. Bonella Secretary Gafton Place, St Matthew's Road Redhill Surrey RH1 1TA 22 July 1998 4 ARCADIAN INTERNATIONAL LIMITED F-85 ARTHUR ANDERSEN Auditors' report _______________________ London To the Shareholders of Arcadian International Limited: We have audited the accounts on pages 6 to 39 which have been prepared under the historical cost convention as modified by the revaluation of hotels and the accounting policies set out on pages 10 to 13. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page 2 the company's directors are responsible for the preparation of the accounts. It is our responsibility to form an independent opinion, based on our audit, on those accounts and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the company's and the group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. OPINION In our opinion the accounts give a true and fair view of the state of affairs of the company and of the group as at 31 December 1997 and of the group's profit and cash flows for the year then ended and have been properly prepared in accordance with the Companies Act 1985. /s/ Arthur Andersen Arthur Andersen Chartered Accountants and Registered Auditors 1 Surrey Street London WC2R 2PS 22 July 1998 5 ARCADIAN INTERNATIONAL LIMITED F-86 Consolidated profit and loss account For the year ended 31 December 1997
Notes 1997 1996 L'000 L'000 Turnover 2 31,782 30,453 Cost of sales (15,825) (14,400) ------- ------- GROSS PROFIT 15,957 16,053 Administrative expenses before exceptional costs (net) (11,055) (10,559) Exceptional administrative costs 3 (1,495) - ------- ------- Administrative expenses after exceptional costs (12,550) (10,559) ------- ------- OPERATING PROFIT 3,407 5,494 (Loss) profit on disposal of fixed assets 4 (11) 380 Share of operating losses of associated undertakings 12 (372) (369) Interest receivable and similar income 5 1,533 265 Interest payable and similar charges 6 (2,552) (2,117) ------- ------- PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 7 2,005 3,653 Tax on profit on ordinary activities 9 (52) (484) ------- ------- PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION 1,953 3,169 Minority interest 17 44 (33) ------- ------- PROFIT FOR THE FINANCIAL YEAR 1,997 3,136 Dividends paid and proposed on equity and non equity shares 10 (206) (1,929) ------- ------- RETAINED PROFIT FOR THE YEAR 1,791 1,207 ------- ------- ------- ------- RETAINED PROFIT FOR THE YEAR The company 1,491 797 Group undertakings 672 779 Associated undertakings (372) (369) ------- ------- 1,791 1,207 ------- ------- ------- -------
All operations of the group continued throughout both years and no operations were acquired or discontinued. A statement of movements on reserves is given in note 20. The accompanying notes are an integral part of this consolidated profit and loss account 6 ARCADIAN INTERNATIONAL LIMITED F-87 Consolidated statement of total recognized gains and losses For the year ended 31 December 1997
Group ------------------------- 1997 1996 L'000 L'000 Profit for the financial year 1,997 3,136 Unrealized surplus on revaluation of fixed assets 6,238 4,697 Loss on foreign currency translation (1,436) (1,277) ------- ------- TOTAL RECOGNIZED GAINS AND LOSSES FOR THE YEAR 6,799 6,556 ------- ------- ------- -------
The accompanying notes are an integral part of this consolidated statement of total recognized gains and losses. 7 ARCADIAN INTERNATIONAL LIMITED F-88 Balance sheets 31 December 1997
Group Company ----------------------------------------------------------- Notes 1997 1996 1997 1996 L'000 L'000 L'000 L'000 FIXED ASSETS Intangibles 11 641 - - - Tangible assets 11 87,281 77,180 Investments 12 17,523 7,928 71,385 61,648 --------- -------- -------- -------- 105,445 85,108 71,385 61,648 --------- -------- -------- -------- CURRENT ASSETS Stocks 13 26,933 23,381 - - Debtors - - due within one year 14 6,359 7,212 38,906 29,324 - - due after one year 14 - 639 - - Cash at bank and in hand 1,421 2,362 14 20 --------- -------- -------- -------- 34,713 33,594 38,920 29,344 CREDITORS: Amounts falling due within one year 15 (17,258) (21,033) (18,296) (14,923) --------- -------- -------- -------- NET CURRENT ASSETS 17,455 12,561 20,624 14,421 --------- -------- -------- -------- TOTAL ASSETS LESS CURRENT LIABILITIES 122,900 97,669 92,009 76,069 CREDITORS: Amounts falling due after more than one year 16 (41,206) (22,215) (36,280) (21,831) --------- -------- -------- -------- NET ASSETS 81,694 75,454 55,729 54,238 --------- -------- -------- -------- --------- -------- -------- -------- CAPITAL AND RESERVES Called-up ordinary share capital 18 36,869 36,869 36,869 36,869 Share premium 20 13,392 13,392 13,392 13,392 Revaluation reserve 20 21,400 15,162 - - Capital reserve 20 7,531 7,627 - - Goodwill write-off reserve 20 (246) (137) 1,750 1,750 Profit and loss account 20 1,937 1,582 3,718 2,227 --------- -------- -------- -------- EQUITY SHAREHOLDERS' FUNDS 21 80,883 74,495 55,729 54,238 MINORITY INTEREST 17 811 959 - - --------- -------- -------- -------- TOTAL CAPITAL EMPLOYED 81,694 75,454 55,729 54,238 --------- -------- -------- -------- --------- -------- -------- --------
SIGNED ON BEHALF OF THE BOARD /s/ C. G. Upton Director The accompanying notes are an integral part of these balance sheets. 8 ARCADIAN INTERNATIONAL LIMITED F-89 Consolidated cash flow statement For the year ended 31 December 1997
1997 1996 ---------------------------------------------------------- L'000 L'000 L'000 L'000 Net cash flow from operating activities 22a 1,149 5,568 Return on investments and servicing of finance 22b (3,215) (3,340) Taxation 22b (581) (115) Capital expenditure 22b (13,240) (3,330) Acquisitions and disposal 22b - (15,273) Equity dividends paid (1,799) (1,128) --------- -------- CASH OUTFLOW BEFORE FINANCING (17,686) (17,618) Financing - - issue of ordinary shares (net of costs) - 15,777 - - redemption of preference shares - (2,000) - - increase in debt (net) 18,219 3,683 --------- -------- 22b 18,219 17,460 --------- -------- INCREASE (DECREASE) IN CASH IN THE YEAR 22c 533 (158) --------- -------- --------- --------
Reconciliation of net cash flow to movement in net debt For the year ended 31 December 1997
Notes 1997 1996 ---------------------------------------------------------- L'000 L'000 L'000 L'000 INCREASE (DECREASE) IN CASH IN THE YEAR 22c 533 (158) Cash inflow from debt 22c (18,219) (3,683) --------- -------- Change in net debt resulting from: - - Cash flows (17,686) (3,841) - - New finance leases (145) (657) - - Foreign exchange translation differences 96 377 -------- -------- MOVEMENT IN NET DEBT IN THE YEAR (17,735) (4,121) NET DEBT AT STAFF OF YEAR 22c (29,542) (25,421) --------- -------- NET DEBT AT END OF YEAR 22c (47,277) (29,542) --------- -------- --------- --------
The accompanying notes are an integral part of this consolidated cash flow statement. 9 ARCADIAN INTERNATIONAL LIMITED F-90 Notes to accounts For the year ended 31 December 1997 1 ACCOUNTING POLICIES A summary of the principal accounting policies is set out below. All accounting policies have been applied consistently throughout the year and the preceding year. a) ACCOUNTING CONVENTION The accounts are prepared under the historical cost convention modified to include the revaluation of hotels and in accordance with the provisions of the Companies Act 1985 and with applicable accounting standards except in relation to the absence of provision for the depreciation of freehold and long leasehold buildings, as set out in c), below. b) BASIS OF CONSOLIDATION The group accounts consolidate the accounts of Arcadian International Limited and all its subsidiary and associated undertakings made up to 31 December 1997. The acquisition method of accounting has been adopted whereby the results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal. For acquisitions completed prior to 31 December 1996 goodwill arising on consolidation or on the acquisition of a business (representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired) has been written off against reserves. ln accordance with Financial Reporting Standard No 10, for acquisitions completed since 1 January 1997, goodwill arising on consolidation or on the acquisition of a business is capitalised and amortised over its estimated useful life. Any excess of the aggregate of the fair value of the separable net assets acquired over the fair value of the consideration given is credited directly to reserves. On disposal of previously acquired businesses, any attributable amount of goodwill previously written off is included in determining the profit or loss on disposal. No profit and loss account is presented for Arcadian International Limited, as provided by section 230 of the Companies Act 1985. The company's profit for the financial year, determined in accordance with the Act, was L1,697,000 (1996 - L2,726,000). In the company's accounts, investments in subsidiary undertakings are stated at cost less amounts written off. Only interest and dividends received and receivable are credited to the company's profit and loss account. c) TANGIBLE FIXED ASSETS Freehold hotel properties and hotel properties on leases with 25 years or more to run at the balance sheet date are revalued annually and the resultant valuation is included in the balance sheet unless the surplus or deficit is immaterial. Where a material surplus or deficit arises, this is taken to the revaluation reserve to the extent available. Any permanent diminution in the value of such properties is charged to the profit and loss account. 10 ARCADIAN INTERNATIONAL LIMITED F-91 Notes to accounts (continued) 1 ACCOUNTING POLICIES (CONTINUED) c) TANGIBLE FIXED ASSETS (CONTINUED) In accordance with normal practice within the hotel industry, no depreciation is provided on freehold hotel properties or on hotel properties on leases with 25 years or more to run at the balance sheet date. The group's properties are maintained at all times in sound condition and to a high standard. Accordingly, the directors are of the opinion that the length of lives and residual values (based on prices prevailing at the time of acquisition or subsequent valuation) of these properties are such that any provision for depreciation would not be material Interest on capital employed on land under development and on the costs of construction and refurbishment of hotels incurred until these projects are completed is, where appropriate, capitalised as part of the costs of construction. Costs of construction include an allocation of direct overheads, including internal labor and overhead costs. Leasehold properties are amortised over the unexpired period of the lease where this is less than 25 years. Depreciation is provided on a straight line basis as follows:
Motor vehicles 4 years Office equipment 4 years Furniture, fittings and equipment 5-10 years Plant and machinery 10-15 years
d) FIXED ASSET INVESTMENTS Investments are shown at cost less amounts written off. Provision is made for any permanent diminution in value. Income is included (together with the related tax credit) in the consolidated accounts of the year in which it is receivable. e) INTERESTS IN ASSOCIATED UNDERTAKINGS Associated undertakings are entities in which the group has a participating interest and over whose operating and financial policy it exercises a significant influence. They do not include subsidiary undertakings. These investments are dealt with by the equity method of accounting on consolidation. That is, the consolidated profit and loss account includes the appropriate share of these companies' profits less losses and the group's share of post-acquisition retained losses and reserves is added to the cost of investment in the consolidated balance sheet (see note 12). Goodwill included in the acquisition cost of associated undertakings on acquisitions completed prior to 31 December 1996 has been written off against reserves on acquisition. In accordance with Financial Reporting Standard No 10, goodwill on acquisitions of associated undertakings completed since 1 January 1997 is capitalised and amortised over its estimated useful life. Where transactions are entered into with associated undertakings, any element of unrealized profit or loss is eliminated on consolidation to the extent of the group's interest in that undertaking. 11 ARCADIAN INTERNATIONAL LIMITED F-92 Notes to accounts (continued) 1 ACCOUNTING POLICIES (CONTINUED) f) STOCKS Stocks comprise pre-construction costs, hotel development sites and hotel operating stocks. They are stated at the lower of cost and net realizable value. Pre-construction costs represent the cost of land, contractors' and professional fees, interest and an allocation of other direct and project overheads including internal labor and overhead costs. Costs are capitalised from the date at which the group acquires and maintains an interest in, or an option to acquire an interest in, a development site. g) TAXATION Corporation tax payable is provided on taxable profits at the current rate. Advance corporation tax payable on dividends paid or provided for in the period is written off, except when recoverability against corporation tax payable is considered to be reasonably assured in the short term. Credit is taken for advance corporation tax written off in previous years when it is recovered against corporation tax liabilities. The taxation liabilities of certain group companies are reduced wholly or in part by the surrender of losses by fellow group companies. Deferred taxation has been calculated using the liability method. Deferred taxation is provided on timing differences which will probably reverse, at the rates of tax likely to be in force at the time of the reversal. Deferred tax is not provided on timing differences which, in the opinion of the directors, will probably not reverse. h) PENSION COSTS Pension costs represent contributions in respect of the year made by the group by reference to a uniform percentage of salary into employees' personal pension schemes. These costs are charged to the profit and loss account as they fall due. i) FOREIGN CURRENCY In the accounts of individual undertakings, transactions denominated in foreign currencies are recorded in the local currency at actual exchange rates as of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported at the rates of exchange prevailing at the year end. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the profit and loss account. For the purposes of consolidation and application of the equity method of accounting the closing rate method is used, under which translation gains or losses are shown as a movement on reserves. Profit and loss accounts of overseas subsidiary and associated undertakings are translated at the closing exchange rate. j) TURNOVER i) Hotels Turnover comprises amounts receivable for goods and services provided, net of VAT and similar sales taxes. 12 ARCADIAN INTERNATIONAL LIMITED F-93 Notes to accounts (continued) 1 ACCOUNTING POLICIES (CONTINUED) j) TURNOVER (CONTINUED) ii) Project development Turnover comprises project management fees and fees in relation to site procurement. k) LEASES The group enters into operating and finance leases. Assets held under finance leases are initially reported at the fair value of the asset, with an equivalent liability categorized under creditors due within or after one year as appropriate. The asset is depreciated over the shorter of the lease term and its useful economic life. Finance charges are allocated to accounting periods over the period of the lease to produce a constant rate of return on the outstanding balance. Rentals are apportioned between finance charges and reduction of the liability. Hire purchase transactions are dealt with similarly, except that assets are depreciated over their useful lives. Rentals under operating teases are charged on a straight-line basis over the lease term and commitments are provided for in the balance sheet at the time the rental payments fall due. Further information on charges in the period and future commitments is given in note 25c). l) GOVERNMENT GRANTS Government grants relating to tangible fixed assets are treated as deferred income and credited to the profit and loss account by equal annual installments over the period to which the grant relates. m) CAPITAL INSTRUMENTS Capital instruments are classified as liabilities if they contain an obligation to transfer economic benefits and if they are not included in shareholders' funds. Capital instruments are initially stated at the amount of the net proceeds after the deduction of issue costs. The finance cost recognized in the profit and loss account in respect of capital instruments other than equity shares is calculated so as to give a constant rate of return on the outstanding balance. 2 SEGMENT INFORMATION The group is classified into two segments: Hotels - relates to the operation and management of hotels. Project development - relates to site and pre-construction costs, investment in resort developments and project management and co-ordination fees. In the opinion of the directors, the disclosure of information for these segments would be prejudicial to the interests of the Group. 13 ARCADIAN INTERNATIONAL LIMITED F-94 3 EXCEPTIONAL COSTS Exceptional costs were incurred in 1997 in relation to the acquisition of the group by Patriot American Hospitality, Inc. ("Patriot") which completed on 6 April 1998 (see note 26a)). 4 (LOSS) PROFIT ON DISPOSAL OF FIXED ASSETS Loss on disposal of fixed assets of L11,000 relates to the sale of Hunstrete House on 4 March 1997. These assets contributed Lnil (1996 - Lnil) to the group's profit from continuing operations during the year. No tax charge arose on this sale. Profits of L380,000 in 1996 arose on the sale of land adjoining a hotel. 5 INTEREST RECEIVABLE AND SIMILAR INCOME Investment income comprises:
1997 1996 L'000 L'000 Interest from associated undertakings (note 12a) 1,355 70 Interest from other participating interests (note 12) 17 48 Interest from short term bank deposits 54 19 Interest - other 107 128 ------ ------ 1,533 265 ------ ------ ------ ------
6 INTEREST PAYABLE AND SIMILAR CHARGES Interest payable and similar charges comprise:
1997 1996 L'000 L'000 On bank loans, overdrafts and other loans repayable within five years - - by installments 3,684 2,195 - - not by installments 87 693 On all other loans 88 47 Write off of facility fees and costs following refinancing - 233 ------ ------ 3,859 3,168 Less: Amounts capitalised on pre-construction costs and hotel development (notes 11 and 13) (1,307) (1,051) ------ ------ 2,552 2,117 ------ ------ ------ ------
Included in the above is the interest element of charges payable under finance leases contracts amounting to L88,000 (1996 - L47,000). 14 ARCADIAN INTERNATIONAL LIMITED F-95 Notes to accounts (continued) 7 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Profit on ordinary activities before taxation is stated after crediting:
1997 1996 L'000 L'000 a) Amortisation of government grants - 71 b) Profit on sale of database access - 750 c) Fee for site introduction to associate undertaking 256 365 d) Foreign exchange gains, net 144 - ------ ----- ------ ----- and after charging: a) Depreciation of tangible fixed assets - owned 1,102 963 - held under hire purchase contracts and finance leases 252 188 b) Amortisation of intangible fixed asset 4 67 c) Rental payable, net 216 109 d) Other operating lease rentals 34 37 e) Auditors' remuneration - audit fees 175 154 f) Foreign exchange losses, net - 204 g) Provision for costs of unlet commercial property 200 - h) Provision against development project - 234 i) Staff costs (note 8) 10,677 9,338 ------ ----- ------ -----
In addition, in the year ended 31 December 1997, the auditors received L165,000 for non-audit services provided during the year (1996 - L400,000) of which L62,000 related to costs associated with the sale of the company to Patriot. 8 INFORMATION REGARDING DIRECTORS AND EMPLOYEES Particulars of employees are as shown below:
1997 1996 L'000 L'000 Employee costs during the year (excluding directors) amounted to: Wages and salaries 9,834 8,588 Social security costs 700 623 Other pension costs 143 127 ------ ----- 10,677 9,338 ------ ----- ------ -----
15 ARCADIAN INTERNATIONAL LIMITED F-96 Notes to accounts (continued) 8 INFORMATION REGARDING DIRECTORS AND EMPLOYEES (CONTINUED) The average weekly number of persons employed by the group during the year (including executive directors) was as follows:
Number Number Hotel operations 1,132 1,024 Direct property operations 8 7 General and financial administration 15 12 ----- ----- 1,155 1,043 ----- ----- ----- -----
REMUNERATION
1997 1996 L'000 L'000 Emoluments 712 707 Fees to third parties in respect of directors' services 70 42 ------ ----- 782 749 Compensation for loss of office 15 - ------ ----- 797 749 ------ ----- ------ -----
The above amounts do not include any gains made on the exercise of share options or the value of any shares or share options received under long-term incentive schemes. No directors exercised share options in the year (1996.- nil) and no shares were received or receivable under long-term incentive schemes by any of the directors. Further details regarding payments made under these schemes subsequent to the year end in connection with the acquisition of the company by Patriot are given in note 19 and 25b)ii). HIGHEST-PAID DIRECTOR The above amounts for remuneration include the following in respect of the highest paid director.
1997 1996 L'000 L'000 Emoluments and long-term incentive schemes 178 221 ------ ----- ------ -----
16 ARCADIAN INTERNATIONAL LIMITED F-97 Notes to accounts (continued) 9 TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES The tax charge is based on the profit for the year and comprises:
1997 1996 L'000 L'000 ACT written off 52 484 ------ ----- ------ -----
The group has tax losses which may be available to carry forward against future profits. Certain of these losses may be relieved only against future trading profits. A potential liability on deferred chargeable gains of L11,461,000 (1996-L5,700,000) exists following the revaluation of certain properties and the roll over of chargeable gains in prior years. This liability is not expected to crystallize in the foreseeable future as the directors do not intend to dispose of these assets. Consequently, no deferred taxation provision has been made in this respect. 10 DIVIDENDS PAID AND PROPOSED
1997 1996 L'000 L'000 Equity dividends on ordinary shares: Interim paid 0.14p (1996 - 0.12p) 206 133 Final proposed nil (1996 - 1.08p) - 1,593 ------ ----- 206 1,726 Non-equity dividend on preference shares: 6% cumulative redeemable preference dividend - 203 ------ ----- 206 1,929 ------ ----- ------ -----
The dividend arising on the preference shares was accrued from the date of issue to 31 December 1996 when the shares were redeemed and the accrued dividend was paid. 17 ARCADIAN INTERNATIONAL LIMITED F-98 11 INTANGIBLE AND TANGIBLE FIXED ASSETS The movement in the year was as follows:
Intangible fixed assets Tangible fixed assets ------------ -------------------------------------------------- GROUP Leasehold Fittings, Total properties equipment tangible Freehold over and fixed Goodwill properties 25 years vehicles assets L'000 L'000 L'000 L'000 L'000 COST OR VALUATION Beginning of year - 58,069 13,703 7,636 79,408 Additions 645 3,785 1,224 2,809 7,818 Revaluations - 4,779 699 - 5,478 Disposal - (1,489) (60) (476) (2,025) -------- ---------- --------- --------- ------- End of year 645 65,144 15,566 9,969 90,679 -------- ---------- --------- --------- ------- - ------------------------------------------------------------------------------------------------------- At valuation 1997 - 63,744 15.566 - 79,310 At Cost 645 1,400 - 9,969 11,369 - ------------------------------------------------------------------------------------------------------- DEPRECIATION AND AMORTISATION Beginning of year - - - 2,228 2,228 Charge - - continuing activities 4 - - 1,354 1,354 Disposals - - - (184) (184) -------- ---------- --------- --------- ------- End of year 4 - - 3,398 3,398 -------- ---------- --------- --------- ------- NET BOOK VALUE Beginning of year - 58,069 13,703 5,408 77,180 -------- ---------- --------- --------- ------- -------- ---------- --------- --------- ------- End of year 641 65,144 15,566 6,571 87,281 -------- ---------- --------- --------- ------- -------- ---------- --------- --------- ------- At historical cost 641 49,826 11,873 6,571 68,270 -------- ---------- --------- --------- ------- -------- ---------- --------- --------- -------
LEASED ASSETS AND ASSETS HELD ON FINANCE LEASES INCLUDED IN THE ABOVE: NET BOOK VALUE BEGINNING OF YEAR 615 615 --------- ------- --------- ------- END OF YEAR 1,059 1,059 --------- ------- --------- -------
Intangible fixed assets relate to goodwill arising on the acquisition of a 20% interest in Beleggingsmaatschappij Stako II B.V. ('Stako') (note 12a). Goodwill relating to this acquisition is being amortised over 20 years. 18 ARCARDIAN INTERNATIONAL LIMITED F-99 11 INTANGIBLE AND TANGIBLE FIXED ASSETS (CONTINUED) Additions to assets in course of construction include interest capitalised of L33,000 (1996 - L4,000). Cumulative interest capitalised included in the cost of tangible fixed assets amounts to L122,000 (1996 - L89,000). Freehold and leasehold properties are included at valuation. The valuations were carried out by Weatherall Green & Smith, Chartered Surveyors, on an open market value at 30 September 1997 for existing use basis, inclusive of fittings and equipment and with the benefit of licenses where applicable. The valuations are recorded after deducting the net book value of fittings and equipment. On a historical cost basis, the net book amount of tangible fixed assets at 31 December 1997 would be L66,812,000 and the depreciation charge would not be materially different. 12 FIXED ASSET INVESTMENTS The following are included in the net book value of fixed asset investments:
GROUP Other participating Associated undertakings interests ----------------------- ------------------- Shares Loans Shares Loans Other Total L'000 L'000 L'000 L'000 L'000 L'000 Beginning of year 241 5,429 1,455 303 500 7,928 Additions 1,673 7,228 - - - 8,901 Interest accrued - 94 - 17 36 147 Transfer to current asset investment - - (105) - - (105) Transfer from current asset receivables - - - 955 - 955 Unrealized profits on transactions with associated undertakings (310) - - - - (310) Share of losses (372) - - - - (372) Share of fixed asset revaluations 760 - - - - 760 Loss on translation of overseas equity investments (86) (295) - - - (381) ------ ------ ----- ----- ----- ------ End of year 1,906 12,456 1,350 1,275 536 17,523 ------ ------ ----- ----- ----- ------ ------ ------ ----- ----- ----- ------
19 ARCADIAN INTERNATIONAL LIMITED F-100 Notes to accounts (continued) 12 FIXED ASSET INVESTMENTS (CONTINUED)
COMPANY Other Subsidiary Associated participating undertakings undertakings interests Other Total L'000 L'000 L'000 L'000 L'000 SHARES AT COST Beginning of year 48,342 232 1,458 315 50,347 Additions 194 2,319 - - 2,513 Transfer 105 - (105) - - ------------ ------------ ------------ ----- ------ End of year 48,641 2,551 1,353 315 52,860 ------------ ------------ ------------ ----- ------ AMOUNTS WRITTEN OFF ------------ ------------ ------------ ----- ------ Beginning and end of year (247) - - - (247) ------------ ------------ ------------ ----- ------ LOANS Beginning of year 7,980 2,866 303 399 11,548 Advanced during year - 7,078 - - 7,078 Interest accrued - 94 17 35 146 ------------ ------------ ------------ ----- ------ End of year 7,980 10,038 320 434 18,772 ------------ ------------ ------------ ----- ------ NET BOOK VALUE Beginning of year 56,075 3,098 1,761 714 61,648 ------------ ------------ ------------ ----- ------ ------------ ------------ ------------ ----- ------ End of year 56,374 12,589 1,673 749 71,385 ------------ ------------ ------------ ----- ------ ------------ ------------ ------------ ----- ------
Additions to subsidiary undertakings are comprised of additional costs relating to acquisitions completed in 1996. 20 ARCADIAN INTERNATIONAL LIMITED F-101 Notes to accounts (continued) 12 FIXED ASSET INVESTMENTS (CONTINUED) The principal subsidiary undertakings are shown below:
COUNTRY OF PROPORTION OF ORDINARY INCORPORATION SHARE CAPITAL AND VOTING SUBSIDIARY UNDERTAKING AND OPERATION PRINCIPAL ACTIVITY RIGHTS HELD BY THE GROUP Arcadian International Resorts Limited England Leisure development and 100% project management Arcadian UK Developments Limited England Property investment and 100% project management Arcadian France SA France Leisure development 100% Arcadian Group Services Limited England Management services 100% Hotel L'Horizon Limited Jersey Hotel operations 100% Arcadian Hotels (UK) Limited England Hotel operations 100% Chateau de Bessy SA France Leisure development 54.7% Ettington Park Group Limited England Hotel operations 100% The Mollington Banastre Hotel Limited England Hotel operations 100% Tillian Limited England Leasehold property owner 100% and lessor Chilston Park Limited England Hotel operations 100% Fattoria Villa Saletta Srl Italy Leisure development 100% Malmaison Management Limited England Hotel operations and 50% project management Stone Development SA France Leisure development 100%
The results of all subsidiary undertakings are included in the group accounts. A complete list of subsidiary undertakings will be annexed to the next annual return to the Registrar of Companies. a) ASSOCIATED UNDERTAKINGS HOTEL GRESSY SNC The group has a 25% stake in the ordinary share capital of Hotel Gressy SNC ("Gressy"), a company registered in France. The total carrying value of the group's investment is L1,393,000 at 31 December 1997 (1996 - L1,755,000). The principal asset of Gressy is the hotel Le Manoir de Gressy, which completed its fourth year of trading in 1997. The directors are of the opinion, having consulted with their professional advisors, that on achievement of mature levels of trading the value of the group's share of Gressy exceeds the carrying value of the group's investment by a substantial margin. The joint venture partner in Gressy has an option, exercisable in January 1999, to require the group to buy the partner's 75% shareholding in Gressy for a fixed consideration of Ffr 40 million (see note 25b)i)). The directors are of the opinion that due to the uncertainty regarding the exercise of this option it is only appropriate to account for the group's 25% holding in Gressy at this stage. 21 ARCADIAN INTERNATIONAL LIMITED F-102 Notes to accounts (continued) 12 FIXED ASSET INVESTMENTS (CONTINUED) a) ASSOCIATED UNDERTAKINGS (CONTINUED) MALMAISON LIMITED As at the balance sheet date the company held a 27% (1996 - 27%) stake in the ordinary share capital of Malmaison Limited ("Malmaison"), a company registered in England, at a carrying value of L232,000 (1996 - L232,000). ln addition the company has L5,062,000 (1996 - L4,103,000) of subordinated loan stock and L3,000,000 (1996 - Lnil) of other subordinated loans receivable from Malmaison. Interest on the subordinated loan stock is charged at 20% p.a. and is payable by equal half yearly installments from 30 June 1998. The principal amounts under the loan stock instruments are redeemable in installments due on 31 December 2003, 2004 and 2005. Interest on the other subordinated loans is charged at 10% p.a. payable quarterly. Interest on these loans has, where appropriate, been capitalised by Malmaison. Cumulative interest capitalised by Malmaison on these and on its other loans at 31 December 1997 was L1,679,000 (1996 - L98,000). The company also holds 4,246,925 (1996 - 1,410,810) warrants to subscribe for ordinary shares in Malmaison of 1p each at par. Full subscription of these and other warrants issued by Malmaison would have increased the company's interest in Malmaison to 33% (note 25b) iv) and v)). On 8 April 1998, the company purchased all the outstanding share capital and loan stock of Malmaison not held by the company (see note 26b)). GREAT EASTERN HOTEL COMPANY LIMITED The company owns 50% of the ordinary share capital of the Great Eastern Hotel Company Limited ("Great Eastern"), a company registered in England, at a carrying value of L50,000 (1996- Lnil). ln addition the company has L3,032,000 (1996 - Lnil) of subordinated loan stock receivable from Great Eastern. Interest on the subordinated loan stock is charged at 10% and is payable by equal half yearly installments from 31 December 1999. The principal amount under the loan stock is redeemable at par on 30 June 2007. 22 ARCADIAN INTERNATIONAL LIMITED F-103 Notes to accounts (continued) 12 FIXED ASSET INVESTMENTS (CONTINUED) a) ASSOCIATED UNDERTAKINGS (CONTINUED) BELEGGINGSMAATSCHAPPIJ STAKO II B.V ("STAKO") On 9 October 1997 the company acquired 18.2% and the right to a further 1.8% investment in the ordinary share capital of Stako, a company registered in the Netherlands for a total consideration of L1,965,000, of which L465,000 was deferred until June 1998. Other costs relating to this acquisition of L303,000 were incurred. Goodwill arising on the acquisition of L645,000 has been taken to intangible fixed assets and is being amortised over 20 years. The table below sets out the preliminary fair value of the net assets of Stako at the date of acquisition and the effect on the consolidated balance sheet:
Stako ------------------ Book Fair Value Value L'000 L'000 Fixed assets 3,255 5,235 Current assets 6,329 6,329 Current liabilities (2,604) (2,604) Long term liabilities (845) (845) ------ ------ Net assets 6,135 8,115 ------ ------ Group equity share 20% 1,623 Goodwill 645 ------ Total acquisition cost 2,268 ------ ------
The fair value adjustments made to the book value of Stako related to the revaluation of its land and buildings. 23 ARCADIAN INTERNATIONAL LIMITED F-104 Notes to accounts (continued) 12 FIXED ASSET INVESTMENTS (CONTINUED) a) ASSOCIATED UNDERTAKINGS (CONTINUED) The assets and liabilities of the associated undertakings, together with a summary of their income statements, as adjusted to bring their accounts into line with Arcadian group accounting policies, are as follows:
Great Eastern Stako Malmaison Gressy ------- ------- ------------------ --------------------- 1997 1997 1997 1996 1997 1996 L'000 L'000 L'000 L'000 L'000 L'000 Intangible fixed assets - - 1,525 1,349 - - Tangible fixed assets 6,643 5,697 19,940 3,453 11,022 12,342 Investments - 101 - - - - Capital work in progress - 440 13,313 5,106 - - Current assets - - stocks - 2,324 67 14 63 81 - - debtors 256 2,953 2,369 670 545 603 - - cash 112 261 908 1,068 - 40 Creditors - - amounts falling due within one year (848) (2,631) (7,032) (740) (1,784) (1,075) - - amounts falling due after more than one year - (1,091) (12,897) - (5,194) (6,071) - - shareholders loans falling due after more than one year (6,063) - (16,276) (10,827) (4,458) (4,958) ------ ------ ------- ------- ------- ------ Net assets 100 8,054 1,917 93 194 962 ------ ------ ------- ------- ------- ------ ------ ------ ------- ------- ------- ------ GROUP'S SHARE OF EQUITY INTEREST 50% 20% 27% 27% 25% 25% Group's share of net assets of associated undertaking 50 1,611 518 25 48 241 ------ ------ ------- ------- ------- ------ ------ ------ ------- ------- ------- ------
24 ARCADIAN INTERNATIONAL LIMITED F-105 Notes to accounts (continued) 12 FIXED ASSET INVESTMENT (CONTINUED) a) ASSOCIATED UNDERTAKINGS (CONTINUED)
Great Eastern Stako Malmaison Gressy Total ------- ----- ------------- -------------- -------------- 1997 1997 1997 1996 1997 1996 1997 1996 L'000 L'000 L'000 L'000 L'000 L'000 L'000 L'000 - -------------------------------------------------------------------- TURNOVER - 1,160 2,687 168 2,662 2,381 PROFIT (LOSS) BEFORE TAXATION - 155 (958) (90) (671) (1,375) - -------------------------------------------------------------------- Group share of operating profit (loss) - 31 (235) (20) (168) (349) (372) (369) Interest income from associated undertaking 94 - 1,261 70 - - 1,355 70
The group's interest in Great Eastern and Stako arose during 1997. Results for Great Eastern and Stako shown above are for the period post acquisition. b) OTHER PARTICIPATING INTERESTS ALJARAFE GOLF SA ("ALJARAFE") The group owns a 10% stake in the ordinary share capital of Aljarafe, a company incorporated in Spain. This company, through its subsidiary, Club Zaudin Golf SA, operates a golf and country club in Seville and is in development of a 250 home residential scheme on adjacent land. The total cost of this equity investment is L1,311,000 (1996 - L1,311,000). The group also holds L955,000 of receivables which were reclassified from current asset receivables to fixed asset investments during the year in contemplation of a rights issue due to take place in 1998. MENTMORE GOLF & COUNTRY CLUB PLC The group has a 9% stake in the ordinary share capital of Mentmore Golf & Country Club Plc, a company registered in England and Wales. This stake was acquired on 31 July 1991 at a cost of L4,000. The group also holds L230,000 of secured subordinated loan stock 1999. Interest is charged at base rate plus 2% and paid on the earlier of the repayment date 30 June 1999, or any earlier date Mentmore Golf & Country Club Plc may elect. This loan stock and accrued interest receivable has been classified as loans owed by other participating interests. 25 ARCADIAN INTERNATIONAL LIMITED F-106 Notes to accounts (continued) 13 STOCKS The following are included in the net book value of stocks:
Group -------------- 1997 1996 L'000 L'000 Hotel operating stocks 749 801 Capital work in progress 243 502 Pre-construction costs 25,941 22,078 ------ ------ 26,933 23,381 ------ ------ ------ ------
The movement in stock includes capitalised interest of L1,274,000 (1996-L1,047,000). Cumulative interest capitalised included in stocks amounts to L3,300,000 (1996-L2,026,000). a) Capital work in progress represents uncompleted development work being carried out on hotels. b) Pre-construction costs, which relate principally to land or interests in land for which the group has options which are subject to time limits, comprise costs incurred in identifying and progressing leisure and resort opportunities until other project investors are found with whom to complete the development. It is in the nature of development projects that the timing and scale of any realization is uncertain and may depend on factors beyond the control of the directors. The status of each project and its carrying value are regularly reviewed by the directors who remain confident that a programme of realizations will be achieved at above carrying value. An analysis of the constituent projects is shown below:
1997 1996 L'000 L'000 DEVELOPMENT PROJECT Villa Saletta 16,227 14,732 Chateau de Bessy 7,048 4,965 Villeneuve le Comte 2,031 799 Malmaison - 16 Great Eastern - 621 Other 635 945 ------ ------ 25,941 22,078 ------ ------ ------ ------
During the year the group acquired additional land at Chateau de Bessy for FFR 8,000,000 partly funded by forgiveness of a receivable. Land at Villeneuve le Comte was acquired during the year for FFR 9,000,000. 26 ARCADIAN INTERNATIONAL LIMITED F-107 Notes to accounts (continued) 13 STOCKS (CONTINUED) The costs capitalised against the Great Eastern were transferred to the company's interest in the Great Eastern Hotel Company Limited during the year (see note 12a)). 14 DEBTORS The following are included in debtors:
Group Company -------------- --------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Amounts falling due within one year: Trade debtors 1,803 2,286 - - Amounts due from subsidiary undertakings - - 35,393 27,856 Amounts due from associated undertakings 2,420 475 1,220 - Amounts due from other participating interests - 485 - - Dividends due from subsidiary undertakings - - 300 875 VAT recoverable 746 95 1,200 - Prepayments and accrued income - - ACT recoverable on intragroup dividend - - - 175 - - other 582 1,126 169 210 Other debtors 808 2,745 624 208 ----- ----- ------ ------ 6,359 7,212 38,906 29,324 Amounts falling due after more than one year: Amounts due from other participating interests - 639 - - ----- ----- ------ ------ 6,359 7,851 38,906 29,324 ----- ----- ------ ------ ----- ----- ------ ------
Amounts due from associated undertakings comprise L2,337,000 (1996-L436,000) due from Malmaison Limited and L83,000 (1996 - L39,000) from Hotel Gressy SNC. 27 ARCADIAN INTERNATIONAL LIMITED F-108 Notes to accounts (continued) 15 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR The following amounts are included in creditors falling due within one year:
Group Company ---------------- ---------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Obligations under finance leases 430 290 - - Bank loans and overdrafts 6,749 9,155 6,542 3,798 Trade creditors 2,969 3,262 201 119 Amounts owed to other group undertakings - - 9,562 7,967 Other creditors - - ACT 73 602 52 602 - - VAT 1,238 935 - - - - social security and PAYE 438 436 - - - - other creditors 1,975 2,448 - - Proposed final dividend - 1,593 - 1,593 Accruals and deferred income 3,386 2,312 1,939 844 ------ ------ ------ ------ 17,258 21,033 18,296 14,923 ------ ------ ------ ------ ------ ------ ------ ------
Included in accruals and deferred income is L465,000 in respect of deferred consideration relating to the company's investment in Stako (see note 12a). 16 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR The following amounts are included in creditors falling due after more than one year:
Group Company ---------------- ---------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Bank loans and overdrafts 40,505 21,831 36,280 21,831 Obligations under finance leases 701 384 - - ------ ------ ------ ------ 41,206 22,215 36,280 21,831 ------ ------ ------ ------ ------ ------ ------ ------
The company has loan facilities of L44,500,000 (1996 - L40,500,000) of which L42,100,000 (1996 - L26,500,000) were drawn down at the year end. These facilities comprise term loan facilities of L24,000,000, a revolving facility of L18,000,000 and an overdraft facility of L2,000,000. The term loans and revolving facilities bear interest at between 1.25% and 1.75% above LIBOR, and the overdraft at 1.25% over Base rate. All are secured by a first charge on the group's hotels and other assets and are subject to financial covenants. 28 ARCADIAN INTERNATIONAL LIMITED F-109 16 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (CONTINUED) In addition, the group has loan facilities in Italy of L8,600,000 (1996 - L4,751,000) of which L4,225,000 (1996 - L4,751,000) was drawn down at year end. These facilities are for the specific purpose of financing the group's interest in the Villa Saletta project. This loan is secured solely against the assets of this development project. 50% of it is guaranteed by the company. In addition, at 31 December 1997 the company has entered into interest swap agreements which have fixed the LIBOR rate at 6.03% on borrowings of L3,400,000 and 7.71% on borrowings of L10,000,000 and an interest rate cap agreement at 7.5% on borrowings of L6,600,000. ANALYSIS OF BORROWINGS Borrowings, gross of issue costs, are repayable as follows:
Group Company ---------------- ---------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Due within five years - - within 1 year - finance leases 430 290 - - - bank loans 6,842 9,180 6,842 3,823 - - within 1-2 years - finance leases 273 251 - - - bank loans 5,141 5,000 5,000 5,000 - - within 2-5 years - finance leases 428 133 - - - bank loans 32,345 17,000 31,500 17,000 - - more than 5 years - bank loans 3,239 - - - ------ ------ ------ ------ 48,698 31,854 43,342 25,823 ------ ------ ------ ------ ------ ------ ------ ------
Of this total, amounts due within one year are included within creditors due within one year. 17 MINORITY INTEREST
1997 1996 L'000 L'000 Beginning of year 959 1,450 (Loss) profit on ordinary activities after tax (44) 33 Disposal of subsidiary - (358) Purchase of minority interest (10) - Exchange movement (94) (166) --- ----- End of year 811 959 --- ----- --- -----
During the year the group acquired the remaining 10% of the share capital of Stone Development SA. All minority interests relate to equity interests. 29 ARCADIAN INTERNATIONAL LIMITED F-110 Notes to accounts (continued) 18 SHARE CAPITAL
1997 1996 L'000 L'000 AUTHORISED 225,000,000 (1996 - 225,000,000) ordinary shares of 25p each 56,250 56,250 ------- ------- 56,250 56,250 ------- ------- ------- ------- ALLOTTED, CALLED-UP AND FULLY-PAID 147,475,845 (1996 - 147,475,845) ordinary shares of 25p each 36,869 36,869 ------- ------- 36,869 36,869 ------- ------- ------- -------
19 SHARE OPTIONS AND WARRANTS Under the Arcadian International Plc Executive Share Option Scheme, adopted on 13 September 1988 and approved on 22 September 1988 by the Board of the Inland Revenue, a number of employees and directors held options to subscribe for ordinary shares in the company. During the year 18,213 share options were cancelled, the holder having retired from the board and 259,870 new share options were issued. No share options were exercised during the year. The total number of options issued to directors as at 31 December 1997 was 4,094,588 (1996 - 4,112,801). The number of share options issued to offer employees as at 31 December 1997 was 1,812,811 (1996 - 1,552,941). These options were exercisable between June 1997 and November 2007 at a price of between 35p and 55p. As part of the Clipper Hotel Limited acquisition in 1993 the company issued warrants to subscribe for 1,250,000 new ordinary shares at 75 pence per share at any time before 31 December 2000. Upon the acquisition of the company by Patriot, the warrants were cancelled and all the share options were either exercised or cancelled for consideration. The aggregate net proceeds to the directors of such exercise and or cancellation was L866,000. 30 ARCADIAN INTERNATIONAL LIMITED F-111 Notes to accounts (continued) 20 RESERVES Of total reserves shown in the balance sheet as equity shareholders finds, the following amounts are regarded as distributable or otherwise:
Company ----------------- 1997 1996 L'000 L'000 DISTRIBUTABLE - - profit and loss account 3,718 2,227 NON-DISTRIBUTABLE - - share premium account 13,392 13,392 - - goodwill write-off reserve 1,750 1,750 -------- -------- Total reserves 18,860 17,369 -------- -------- -------- --------
Share Goodwill premium Revaluation Capital write-off Profit and account reserve reserve reserve loss account Total GROUP L'000 L'000 L'000 L'000 L'000 L'000 Beginning of year 13,392 15,162 7,627 (137) 1,582 37,626 Retained profit for the year - - - - 1,791 1,791 Exchange differences - - - - (1,436) (1,436) Goodwill written off - - (96) (109) - (205) Revaluation of fixed assets - 6,238 - - - 6,238 ------- ---------- ------- -------- ---------- ------- End of year 13,392 21,400 7,531 (246) 1,937 44,014 ------- ---------- ------- -------- ---------- ------- ------- ---------- ------- -------- ---------- -------
Share Goodwill premium Revaluation Capital write-off Profit and account reserve reserve reserve loss account Total COMPANY L'000 L'000 L'000 L'000 L'000 L'000 Beginning of year 13,392 - - 1,750 2,227 17,369 Retained profit for the year - - - - 1,491 1,491 ------- ---------- ------- -------- ---------- ------- End of year 13,392 - - 1,750 3,718 18,860 ------- ---------- ------- -------- ---------- ------- ------- ---------- ------- -------- ---------- -------
The cumulative amount of goodwill written off to reserves is L1,996,000 (1996 - - L1,887,000). The cumulative amount of discount on acquisition taken to capital reserve is L7,531,000 (1996 - L7,627,000) Non equity preference share capital and accrued dividends were repaid on 31 December 1996. 31 ARCADIAN INTERNATIONAL LIMITED F-112 Notes to accounts (continued) 21 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Group Company ------------------- ------------------ 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Profit for the financial year 1,997 3,136 1,697 2,726 Other recognized gains and losses relating to the year, net 4,802 3,420 - - ------- ------- ------- ------ 6,799 6,556 1,697 2,726 Ordinary dividends paid (206) (1,726) (206) (1,726) Preference shares and dividends paid - (2,677) - (2,677) Fair value adjustments on acquisition - 6,982 - - Goodwill eliminated, (net) (205) (335) - - New share capital subscribed, net - 15,192 - 15,192 ------- ------- ------- ------ Net addition to shareholders' funds 6,388 23,992 1,491 13,515 Opening shareholders' funds 74,495 50,503 54,238 40,723 ------- ------- ------- ------ Closing shareholders' funds 80,883 74,495 55,729 54,238 ------- ------- ------- ------ ------- ------- ------- ------
22 CASH FLOW INFORMATION a) RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOWS FROM OPERATING ACTIVITIES
1997 1996 L'000 L'000 Operating profit 3,407 5,494 Depreciation and amortisation 1,358 1,218 Increase in stocks (3,067) (2,216) Increase in debtors (70) (1,406) (Decrease) increase in creditors (479) 2,549 Amortisation of grant income - (71) ------- ------- NET CASH INFLOW FROM CONTINUING OPERATING ACTIVITIES 1,149 5,568 ------- ------- ------- -------
32 ARCADIAN INTERNATIONAL LIMITED F-113 Notes to accounts (continued) 22 CASH FLOW INFORMATION (CONTINUED) b) ANALYSIS OF CASHFLOWS FOR HEADINGS NETTED IN THE CASHFLOW STATEMENT
1997 1996 L'000 L'000 RETURN ON INVESTMENT AND SERVICING OF FINANCE Interest received 377 242 Interest paid (3,592) (2,905) Preference dividend paid - (677) -------- ------- NET CASH OUTFLOW ON INVESTMENTS AND SERVICING OF FINANCE (3,215) (3,340) -------- ------- -------- ------- Taxation (581) (115) -------- ------- CASH OUTFLOW ON TAXATION (581) (115) -------- ------- -------- ------- CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Purchase of tangible fixed assets (7,022) (2,657) Disposal of tangible fixed assets 1,857 - Purchas/e of investments (1,554) (289) Loans to associates and other participating interests (6,521) (384) -------- ------- NET CASH OUTFLOW FOR CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT (13,240) (3,330) -------- ------- -------- ------- ACQUISITIONS AND DISPOSALS Purchase of unincorporated business - (6,335) Purchase of subsidiary - (9,814) Cash and overdrafts acquired - 242 Disposal of part interest in associated undertaken - 634 -------- ------- NET CASH OUTFLOW ON ACQUISITIONS AND DISPOSALS - (15,273) -------- ------- -------- ------- FINANCING Issue of ordinary share capital - 16,587 Issue costs - (810) Redemption of preference share capital - (2,000) Debt due within a year - - increase in borrowings - 4,692 - - repayment of borrowings (5,818) (6,976) Debt beyond a year - - increase in borrowings 23,725 22,000 - - repayment of borrowings - (15,856) Capital element of finance lease rental payments (370) (177) Proceeds of sale and lease back agreements 682 - -------- ------- NET CASH INFLOW FROM FINANCING 18,219 17,460 -------- ------- -------- -------
33 ARCADIAN INTERNATIONAL LIMITED F-114 Notes to accounts (continued) 22 CASH FLOW INFORMATION (CONTINUED) c) ANALYSIS OF NET DEBT
At At 31 December Other Exchange 31 December 1996 Cashflow (non-cash) movement 1997 L'000 L'000 L'000 L'000 L'000 Cash 2,362 (941) - - 1,421 Overdraft (3,316) 1,474 - - (1,842) -------- INCREASE IN CASH IN THE YEAR 533 -------- Debt within a year (5,914) 5,818 (5,000) 96 (5,000) Debt after a year (22,000) (23,725) 5,000 - (40,725) Finance leases (674) (312) (145) - (1,131) -------- CASH INFLOW FROM DEBT (18,219) -------- -------- ------ ----- ------- (29,542) (17,686) (145) 96 (47,277) -------- -------- ------ ----- ------- -------- -------- ------ ----- -------
d) MAJOR NON-CASH TRANSACTIONS i) During the year the group entered into finance lease arrangements in respect of assets with a total capital value at the inception of the leases of L145,000 (1996 - L657,000). ii) During the year the group acquired land relating to the Chateau de Bessy development project through the forgiveness of Ffr 7.7m receivable. 23 ACQUISITIONS a) EFFECT OF ACQUISITIONS ON THE GROUP CASH FLOW. i) Analysis of the net outflow of cash and cash equivalents in respect of the purchase of subsidiary undertakings.
1997 1996 L'000 L'000 Cash consideration - (10,430) Cash at bank and in hand acquired - 242 Bank overdrafts of acquired subsidiary undertakings - - Amounts not yet paid - 616 ------- ------- Net cash outflow in respect of subsidiary undertakings - (9,572) ------- ------- ------- -------
34 ARCADIAN INTERNATIONAL LIMITED F-115 Notes to accounts (continued) 23 ACQUISITIONS (CONTINUED) b) EFFECT OF ACQUISITIONS ON THE GROUP CASH FLOW (CONTINUED) ii) Analysis of the net outflow of cash and cash equivalents in respect of the purchase of unincorporated businesses.
1997 1996 L'000 L'000 Cash consideration - (6,553) Amounts paid in prior year - 218 ------- ------- Net cash outflow in respect of unincorporated businesses - (6,335) ------- ------- ------- -------
24 DISPOSALS a) BUSINESSES DISPOSED On 4 March 1997 the group disposed of the Hunstrete House Hotel, near Bath, for a consideration of L1,860,000. b) EFFECT OF DISPOSALS ON GROUP CASH FLOW
1997 1996 L'000 L'000 Cash 1,860 - Disposal costs (3) - ------ ------ Total consideration 1,857 - ------ ------ ------ ------
The business sold during the year contributed Lnil (1996 - L60,000) to the group's net operating cash flow. 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS a) CAPITAL COMMITMENTS At the end of the year, capital commitments contracted for but not provided for were L150,000 (1996 - L1,930,000). b) CONTINGENT LIABILITIES i) The group has a 25% shareholding in Hotel Gressy SNC ("Gressy") through a subsidiary undertaking, Arcadian France S.A. The shareholders of Gressy are jointly and severally liable in respect of the liabilities of Gressy to the extent that such liabilities are not met from the assets of Gressy. Gross liabilities of Gressy, as at 31 December 1997 amounts to FFR 69,000,000. Arcadian France S.A. is a limited liability undertaking which has as its only assets an investment in Gressy and amounts receivable from Gressy. 35 ARCADIAN INTERNATIONAL LIMITED F-116 Notes to accounts (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (CONTINUED) b) CONTINGENT LIABILITIES (CONTINUED) Within the above amount the company has guaranteed leasing obligations of approximately FFR 2,250,000 Worms et Cie. the joint venture partner, has given a similar guarantee and arrangements are in place between the company and Worms et Cie. pursuant to which the respective liabilities of the company and Worms et Cie. are limited to 38% and 62% respectively of the amount guaranteed. The directors are of the opinion that no provision should be made in respect of this contingent liability. The group has granted an option to the joint venture partner in Gressy, exercisable January 1999, to require the group to buy the partner's 75% shareholding in Gressy, together with the current account balance at that time, for a fixed consideration of Ffr 40,000,000 million payable in whole or in part in either cash or shares in the company, at the group's election. The directors' are of the opinion that, due to the uncertainty regarding the exercise of this option, it is inappropriate to recognize a liability in respect of this option. ii) At the balance sheet date the company's directors and certain senior executives had interests in a long term incentive scheme. These interests are triggered in the event of a takeover of the company. The amount payable is based on the difference between the takeover share price and the price at which the interests in the scheme are granted. Following the acquisition by Patriot a payment of L1,180,000 was made under this scheme (see note 26a)). iii) The company has provided two forms of guarantee to Malmaison Limited's senior lenders. The first relates to the overrun of construction costs of the hotels and is limited to the repayment of Malmaison Limited's senior debt of L9.5 million plus accrued interest thereon. The second relates to the repayment of L1.5 million of principal of the senior debt in the period to 31 December 1999 and the payment of any interest on the senior debt in that period. Should either guarantee be called, the company would be issued with additional 'A' loan stock in Malmaison Limited with a preferred return. iv) The group entered into an agreement with Malmaison Limited on 19 November 1996 under which it agreed to provide a committed subordinated loan facility of 5,750,000 and a committed revolving credit facility of up to 500,000. The loan facility is to be repaid on 31 December 2006 and the revolving credit facility on 31 December 1999. As at year end L3,000,000 (1996 - Lnil) was outstanding under this agreement (see note 12). 36 ARCADIAN INTERNATIONAL LIMTIED F-117 Notes to accounts (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (CONTINUED) b) CONTINGENT LIABILITIES (CONTINUED) v) The company has granted to certain holders of A loan stock issued by Malmaison Limited the right to require the company to purchase 50%, (or on change of control of the company, 100%) of the A loan stock held by them (amounting to L4,440,000 together with any unpaid interest). The company has the option to settle the consideration in cash or by the issue of ordinary shares in the company or a combination of both. ln the event of the allotment of ordinary shares the number to be issued is limited to 19.7 million at market price subject to a minimum of 40p per share. Patriot purchased all of the outstanding loan stock in Malmaison Limited on 8 April 1998. vi) Great Eastern Hotel Company Limited The Great Eastern Hotel Company Limited ("Great Eastern"), of which the company owns 50% of the issued share capital, entered into an agreement to take a 125 year lease of the Great Eastern Hotel in the City of London from a subsidiary of The British Land Company plc ("British Land") which has itself a similar agreement to take a lease of the hotel from Railtrack Plc. As part of the agreement British Land undertakes to provide L30,000,000 of funding towards Great Eastern's redevelopment costs. The company and its joint venture partner, Cowan Holdings Limited ("Cowan"), have jointly and severally guaranteed Great Eastern's performance of its redevelopment obligations to British Land and the company's liability under this performance guarantee is capped at L16,500,000. This figure is reduced by the amount of equity and loan stock funding to be provided by the company for the purpose of the redevelopment of up to L6,500,000. At the balance sheet date L3,082,000 had been funded (1996 - Lnil). c) LEASE COMMITMENTS The group has entered into non-cancelable operating leases in respect of property and hire purchase contracts in respect of furniture, fittings and equipment, the payments for which extend over a period of up to five years. The rents payable under the operating leases are subject to renegotiation at intervals specified in the leases. The group pays all insurance, maintenance and repairs of the properties so leased. 37 ARCADIAN INTERNATIONAL LIMITED F-118 Notes to accounts (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (CONTINUED) c) LEASE COMMITMENTS (CONTINUED) The minimum annual rentals under the foregoing leases are as follows:
Group Company --------------------- -------------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Operating leases which expire - - within 1 year 70 69 33 40 - - within 2-5 years 147 105 57 67 - - after 5 years 165 199 100 100 ------- ------- ------- ------ 382 373 190 207 ------- ------- ------- ------ ------- ------- ------- ------
L279,000 (1996 - L134,000) of the above minimum annual rentals has been either sublet in full to third parties or provided for as a shortfall in the sublease paid by those third parties. There are no commitments in respect of finance leases entered into before 31 December 1997 but due to commence after that date. 26 SUBSEQUENT EVENTS a) On 6 April 1998 Patriot completed its acquisition of all the share capital of the company. Each shareholder received 60 pence in cash per ordinary share. Immediately following the completion of the transaction application was made to the Stock Exchange for delisting and to the Registrar of Companies to change the name of the company from Arcadian International plc to Arcadian International Limited. b) In a related but separate transaction Patriot entered into an option agreement with the other shareholders of Malmaison Limited to purchase the balance of share capital and loan stock of Malmaison Limited not already owned by the company. The benefit of this option was passed from Patriot to the company. The option was exercised on 8 April 1998. The management contract with Malmaison Management Limited was terminated on the same day. c) Patriot is a US Real Estate Investment Trust or `RElT' whose shares are paired and trade as a single unit with those of Wyndham International, Inc. (`Wyndham'). Subsequent to the transaction, the trading stock and business of the group's hotels was sold to Wyndham and its subsidiaries Arcadian Hotels Limited and Malmaison Hotels Limited together ("the Wyndham UK Group") for book value at the transaction dates. The group continues to own the freehold and long leasehold interests in the hoteL which have been leased to the Wyndham UK Group. d) Patriot has confirmed its intention of providing continued financial support to the group to enable it to meet its liabilities as they fall due, for a period of at least twelve months from the date of signing these accounts. 38 ARCADIAN INTERNATIONAL LIMITED F-119 Notes to accounts (continued) 27 RELATED PARTY TRANSACTIONS The nature of the group's investment in its associated undertakings is set out in note 12. The group had the following transactions with these associate undertakings, all of which were rendered on commercial terms were as follows: a) MALMAISON
1997 1996 L'000 L'000 Management fees 471 229 Loan stock interest 917 70 Mezzanine debt interest 423 - Finders fees 350 500 Finance facility arrangement fee 150 - --------- -------- --------- --------
Finders fees were charged in respect of the identification, and negotiation to purchase land sites. Subsequent to the balance sheet date Malmaison became a subsidiary of the company (see note 26b). b) GRESSY
1997 1996 L'000 L'000 Management fees 136 62 -------- -------- -------- -------- c) GREAT EASTERN 1997 1996 L'000 L'000 Project development fees 50 50 Loan stock 94 - -------- -------- -------- --------
39 ARCADIAN INTERNATIONAL LIMITED F-120 ARTHUR ANDERSEN Malmaison Limited and subsidiary undertakings Financial statements 31 December 1997 together with directors' and auditors' reports Registered number: 3141385 F-121 Directors' report For the year ended 31 December 1997 The directors present their annual report on the affairs of Malmaison Limited ("the company") and its subsidiary undertakings ("the group"), together with the accounts and auditors' report, for the year ended 31 December 1997. PRINCIPAL ACTIVITY AND BUSINESS REVIEW The principal activity of the group was the ownership and operation of hotels. During 1998 the activities of the group changed as set out below. On 8 April 1998 Patriot American Hospitality, Inc., through its wholly owned subsidiary, Arcadian International Limited ("Arcadian"), acquired all the outstanding share capital and loan stock in the company not already owned by Arcadian. Outstanding warrants and deferred shares were also acquired by Patriot together with all rights to the accrued interest on the loan stock. The management contract with the Malmaison Management Limited was terminated on the same day. Patriot is a US Real Estate Investment Trust or 'REIT' whose shares are paired and trade as a single unit with those of Wyndham International, Inc. (`Wyndham'). Subsequent to the transaction, the trading stock and business of the group's hotels was sold to the Wyndham group for book value at the transaction dates. The group continues to own the freehold interests in the hotels which have been leased to a Wyndham's subsidiary, Malmaison Hotels Limited. Details of this and other important events affecting the group which have taken place since the end of the current financial year are given in note 20 to the accounts. RESULTS AND DIVIDENDS
1997 1996 L'000 L'000 Group loss for the year after taxation 958 90 ------ ------ ------ ------
The directors do not recommend the payment of a dividend. 1 MALMAISON LIMITED F-122 Director's report (continued) DIRECTORS AND THEIR INTERESTS The directors who served during the year are as shown below. The directors who held office at 31 December 1997 had no interests (including options) in the shares of group companies other than those shown below.
Ordinary shares of 1p Warrants --------------------------- ---------------------------- 31 December 31 December 31 December 31 December 1997 1996 1997 1998 S.D. Bate (resigned 8 April 1998) - - - - R.K. Black (resigned 8 April 1998) 211,745 211,745 86,273 - R.R.A. Breare - - - - A.G. Dodd (resigned 8 April 1998) 937,500 937,500 148,168 - A. Haining (resigned 8 April 1998) 199,753 199,753 72,829 - K.W. McCulloch 1,035,000 1,035,000 416,380 - C.G. Upton - - - - P.A. Nussbaum (appointed 8 April 1998) - - - - J. Bohlmann (appointed 8 April 1998) - - - - W.W. Evans III (appointed 8 April 1998) - - - -
R.R.A. Breare and C.G. Upton are directors of, and at 31 December 1997, had interests in the share capital of, Arcadian International Limited, formerly Arcadian International Plc, which held 4,750,000 ordinary shares (1996 - 4,750,000) in the company and 4,246,925 warrants convertible into ordinary shares (1996 - 1,410,811). R.K. Black and A. Haining are directors of Botts Capital Nominees Limited which held as nominee 7,500,000 ordinary shares in the company, and 4,492,285 warrants convertible into ordinary shares (1996: nil) including their personal interests shown above. EMPLOYEE CONSULTATION The group places considerable value on the involvement of its employees and keeps them informed on matters affecting them as employees and on the various factors affecting the performance of the group. AUDITORS The directors will place a resolution before the annual general meeting to reappoint Arthur Andersen as auditors for the ensuing year. 2 MALMAISON LIMITED F-123 Directors' report (continued) STATEMENT OF DIRECTORS' RESPONSIBILITIES Company law requires the directors to prepare accounts for each financial period which give a true and fair view of the state of affairs of the company and group and of the profit or loss of the group for that period. In preparing those accounts, the directors are required to: (i) select suitable accounting policies and then apply them consistently; (ii) make judgements and estimates that are reasonable and prudent; (iii) state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and (iv) prepare the accounts on the going concern basis unless it is inappropriate to presume that the group will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and group and enable them to ensure that the accounts comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. By order of the Board, /s/ Richard J M Bonella R.J.M Bonella Secretary Gatton Place St Matthew's Road Redhill Surrey RH1 1TA 17 July 1998 3 MALMAISON LIMITED F-124 ARTHUR ANDERSEN Auditors' report ____________________ London TO THE SHAREHOLDERS OF MALMAISON LIMITED: We have audited the accounts on pages 5 to 24 which have been prepared under the historical cost convention as modified by the revaluation of hotels and the accounting polices set out on pages 8 to 10. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page 3 the company's directors are responsible for the preparation of the accounts. It is our responsibility to form an independent opinion, based on our audit, on those accounts and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the company's and the group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. OPINION In our opinion the accounts give a true and fair view of the state of affairs of the company and of the group as at 31 December 1997 and of the group's loss and cash flows for the year then ended and have been properly prepared in accordance with the Companies Act 1985. /s/ Arthur Andersen Arthur Andersen Chartered Accountants and Registered Auditors 1 Surrey Street London WC2R 2PS 17 July 1998 4 MALMAISON LIMITED F-125 Consolidated profit and loss account For the year ended 31 December 1997
53 week period Year ended ended 31 December 31 December Notes 1997 1996 L'000 L'000 TURNOVER 2 2,687 168 Cost of sales (1,245) (81) ---------- ----------- Gross profit 1,442 87 Administration expenses (net) (1,098) (71) ---------- ----------- OPERATING PROFIT 2 344 16 Investment income 3 69 8 Interest payable and similar charges 3 (1,371) (114) ---------- ----------- Loss on ordinary activities before taxation 4 (958) (90) Tax on loss on ordinary activities 6 - - ---------- ----------- Loss on ordinary activities after taxation (958) (90) ---------- ----------- RETAINED LOSS FOR THE PERIOD (958) (90) ---------- ----------- ---------- ----------- RETAINED LOSS FOR THE PERIOD The company (22) (30) Group undertakings (936) (60) ---------- ----------- (958) (90) ---------- ----------- ---------- -----------
All operations of the group continued throughout both periods and no operations were acquired or discontinued. Consolidated statement of total recognized gains and losses For the year ended 31 December 1997
53 week period Year ended ended 31 December 31 December 1997 1996 L'000 L'000 Loss for the period (958) (90) Unrealized surplus on revaluation of fixed assets 2,791 - ----------- ----------- Total recognized gains and losses for the period 1,833 (90) ----------- ----------- ----------- -----------
A statement of movements on reserves is given in note 15. The accompanying notes are an integral part of these statements. 5 MALMAISON LIMITED F-126 Balance sheets 31 December 1997
Group Company ---------------------------- ------------------------ Notes 1997 1996 1997 1996 L'000 L'000 L'000 L'000 FIXED ASSETS Intangible assets 7 1,525 1,274 - - Tangible assets 8 33,253 8,851 141 - Investments 9 - - 4,904 4,960 -------- -------- -------- ------- 34,778 10,125 5,045 4,960 -------- -------- -------- ------- CURRENT ASSETS Stocks 10 67 13 - - Debtors 11 2,181 959 11,276 5,100 Cash at bank and in hand 908 1,068 3,237 961 -------- -------- -------- ------- 3,156 2,040 14,513 6,061 CREDITORS: Amounts falling due within one year 12 (7,032) (1,405) (3,160) (201) -------- -------- -------- ------- Net current (liabilities) assets 21 (3,876) 635 11,353 5,860 -------- -------- -------- ------- TOTAL ASSETS LESS CURRENT LIABILITIES 30,902 10,760 16,398 10,820 CREDITORS: Amounts falling due after more than one year 13 (28,985) (10,688) (16,276) (10,688) -------- -------- -------- ------- NET ASSETS 1,917 72 122 132 -------- -------- -------- ------- -------- -------- -------- ------- CAPITAL AND RESERVES Called-up share capital 14 174 162 174 162 Profit and loss account 15 (1,048) (90) (52) (30) Revaluation reserve 15 2,791 - - - -------- -------- -------- ------- TOTAL EQUITY SHAREHOLDERS' FUNDS 16 1,917 72 122 132 -------- -------- -------- ------- -------- -------- -------- -------
SIGNED ON BEHALF OF THE BOARD /s/ C. G. Upton Director 17 July 1998 The accompanying notes are an integral part of these balance sheets. 6 MALMAISON LIMITED F-127 Consolidated cash flow statement For the year ended 31 December 1997
53 weeks Year ended Period ended 31 December 31 December Notes 1997 1996 L'000 L'000 Net cash inflow (outflow) from operating activities 17a 1,205 (206) Returns on investments and servicing of finance 17b (1,231) 8 Capital expenditure and financial investment 17b (18,052) (2,978) Acquisitions 17b (247) (757) ----------- ------------ Cash outflow before financing (18,325) (3,933) Financing - - issue of shares 17b - 103 - - increase in debt 17b 18,165 4,898 ----------- ------------ (DECREASE) INCREASE IN CASH IN THE PERIOD 17c (160) 1,068 ----------- ------------ ----------- ------------
Reconciliation of net cash flow to movement in net debt For the year ended 31 December 1997
53 weeks Year ended Period ended 31 December 31 December Notes 1997 1996 L'000 L'000 (Decrease) increase in cash in the period (160) 1,068 Cash inflow from increase in debt 17c (18,165) (4,898) ---------- ------------ Change in debt resulting from cash flows (18,325) (3,830) Undistributed loan stock - (1,238) Loan stock issued for non-cash consideration - (4,340) New finance leases 17c (238) - ---------- ------------ Movement in net debt in the period (18,563) (9,408) NET DEBT AT START OF YEAR (9,408) - ---------- ------------ NET DEBT AT END OF YEAR 17c (27,971) (9,408) ---------- ------------ ---------- ------------
The accompanying notes are an integral part of these statements. 7 MALMAISON LIMITED F-128 Notes to accounts 31 December 1997 1 ACCOUNTING POLICIES A summary of the principal accounting policies is set out below. All accounting policies have been applied consistently throughout the year and during the preceding period. a) ACCOUNTING CONVENTION The accounts are prepared under the historical cost convention, modified to include the revaluation of hotels, and in accordance with the provisions of the Companies Act 1985 and with applicable accounting standards except in relation to the absence of provision for the depreciation of freehold and long leasehold buildings, as set out in d) below. b) BASIS OF CONSOLIDATION The group accounts consolidate the accounts of Malmaison Limited and all its subsidiary undertakings to 31 December 1997. The acquisition method of accounting has been adopted whereby the results of subsidiary undertakings acquired or disposed of in the period are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal. Goodwill arising on consolidation or on the acquisition of a business (representing the excess of the fair value of the consideration given over the fair view of the separable net assets acquired) is capitalised and amortised over a 20 year period. Any excess of the aggregate of the fair value of the separable net assets acquired over the fair value of the consideration given is credited directly to reserves. No profit and loss account is presented for Malmaison Limited, as provided by section 230 of the Companies Act 1985. The company's loss for the year, determined in accordance with the Act, was L22,000 (1996 - L30,000) In the company's accounts, investments in subsidiary undertakings are stated at cost less amounts written off. Only interest and dividends received or receivable are credited to the company's profit and loss account. c) INTANGIBLE FIXED ASSETS (i) The Malmaison brand is carried at cost less amounts written off. Provision is made for any permanent diminution in value. The directors having considered the residual value and useful economic life of the brand, believe any provision for amortisation would not be material. (ii) Pre-opening and marketing expenses incurred up to the commencement of full trading by hotels are deferred and written off over three years. d) TANGIBLE FIXED ASSETS Freehold hotel properties and hotel properties on leases with 25 years or more to run at the balance sheet date are revalued periodically and the resultant valuation is included in the balance sheet unless the surplus or deficit is immaterial. Where a material surplus or deficit arises, this is taken to the revaluation reserve to the extent available. Any permanent diminution in the value of such properties is charged to the profit and loss account. 8 MALMAISON LIMITED F-129 Notes to accounts (continued) 1 ACCOUNTING POLICIES (CONTINUED) d) TANGIBLE FIXED ASSETS (CONTINUED) In accordance with normal practice within the hotel industry, no depreciation is provided on freehold hotel properties or on hotel properties on leases with 25 years or more to run at the balance sheet date. The group's properties are maintained at all times in sound condition and to a high standard. Accordingly, the directors are of the opinion that the length of lives and residual values (based on prices prevailing at the time of acquisition or subsequent valuation) of these properties are such that any provision for depreciation would not be material. Work in progress comprises hotel development sites in the course of construction. It is stated at cost, which represents the cost of land, contractors' costs, professional fees, interest and an allocation of other direct and project overheads. Costs are capitalised from the date on which the group acquires an interest in a development site. Interest on capital employed on land under development and on the cost of construction of hotels incurred until these projects are completed may, where appropriate, be capitalised as part of the costs of construction. Depreciation is provided on a straight line basis over the following periods: Office equipment 4 years Furniture, fittings and equipment 5-10 years Plant and machinery 10-15 years
e) FIXED ASSET INVESTMENTS Investments are shown at cost less amounts written off. Provision is made for any permanent diminution in value. f) STOCKS Stocks are valued at the lower of cost and net realizable value. g) TAXATION Corporation tax payable is provided on taxable profits at the current rate. The taxation liabilities of certain group companies are reduced wholly or in part by the surrender of losses by fellow group companies. Deferred taxation has been calculated on the liability method. Deferred taxation is provided on timing differences which will probably reverse, at the rates of tax likely to be in force at the time of reversal. Deferred tax is not provided on timing differences which, in the opinion of the directors, will probably not reverse. h) TURNOVER Turnover comprises amounts receivable for goods and services provided, net of VAT and similar sales taxes. 9 MALMAISON LIMITED F-130 Notes to accounts (continued) 1 ACCOUNTING POLICIES (CONTINUED) i) LEASES Assets held under finance leases are initially reported at the fair value of the asset, with an equivalent liability categorized under creditors due within or after one year as appropriate. The asset is depreciated over the shorter of the lease term or its useful economic life. Finance charges are allocated to accounting periods over the period of the lease to produce a constant rate of return on the outstanding balance. Rentals are apportioned between finance charges and reduction of the liability. Hire purchase transactions are dealt with similarly, except that assets are depreciated over their useful economic lives. Rentals under operating leases are charged on a straight-line basis over the lease term and commitments are provided for in the balance sheet at the time the rental payments fall due. j) GOVERNMENT GRANTS Government grants relating to tangible fixed assets are treated as deferred income and credited to the profit and loss account by equal installments over the period to which the grant relates. Where any grant repayments are required under the terms of the grant, such repayments are recorded in the profit and loss account in the period to which they relate. k) CAPITAL INSTRUMENTS Capital instruments are classified as liabilities if they contain an obligation to transfer economic benefit and if they are not included in shareholders' funds. Capital instruments are initially stated at the amount of the net proceeds after the deduction of issue costs. The finance cost recognized in the profit and loss account in respect of capital instruments other than equity shares is calculated so as to give a constant rate of return on the outstanding balance. 2 SEGMENT INFORMATION All of the group's turnover and operating profit arise from the operation of hotels, all of which are in the UK. 3 INVESTMENT INCOME AND INTEREST PAYABLE
53 week Year ended period to 31 December 31 December 1997 1996 L'000 L'000 Investment income comprises: - - interest on cash at bank 69 8 ----------- ----------- ----------- ----------- Interest payable comprises - - subordinated loan stock 2,275 212 - - senior debt 326 - - - mezzanine debt 409 - ----------- ----------- 3,010 212 Less interest capitalised (1,639) (98) ----------- ----------- 1,371 114 ----------- ----------- ----------- -----------
10 MALMAISON LIMITED F-131 Notes to accounts (continued) 4 LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION Loss on ordinary activities before taxation is stated after charging/(crediting):
53 week Year ended period to 31 December 31 December 1997 1996 L'000 L'000 Staff costs (note 5) 723 41 Amortisation and amounts written off - - goodwill 22 4 - - pre-opening expenses 65 5 Depreciation of tangible fixed assets - - owned 81 6 - - held under hire purchase contracts and finance leases 26 - Amortisation of grants (10) - Auditors remuneration - - audit services 35 16 ----------- ---------- ----------- ----------
11 MALMAISON LIMITED F-132 Notes to accounts (continued) 5 STAFF COSTS Particulars of employees (including executive directors) are shown below:
53 week Year ended period to 31 December 31 December 1997 1996 L'000 L'000 Employee costs during the period amounted to: Wages and salaries 673 37 Social security costs 50 4 ----------- ---------- 723 41 ----------- ---------- ----------- ---------- The average monthly number of persons employed by the group for the periods were as follows: 1997 1996 Number Number Hotel operations 65 38 Administration 2 2 ----------- ---------- 67 40 ----------- ---------- ----------- ----------
Directors' remuneration: No director received any remuneration for their services to any group company during the year. 6 TAX ON LOSS ON ORDINARY ACTIVITIES There is no taxable profit in the current year, and accordingly, no charge to tax arises. A potential liability on deferred chargeable gains of L1,300,000 (1996 - L450,000) exists following the revaluation of property. In addition a further L240,000 (1996 - L63,000) of deferred tax liabilities is present within the group. These amounts are unprovided for due to the existence of brought forward tax losses. Such losses may be relieved only against future trading profits. 12 MALMAISON LIMITED F-133 Notes to accounts (continued) 7 INTANGIBLE FIXED ASSETS The movement in the year was as follows:
Pre-opening Total GROUP Brand Goodwill expenses L'000 L'000 L'000 L'000 COST Beginning of year 800 436 47 1,283 Additions - - 394 394 Adjustment of goodwill (see note 9) - (56) - (56) -------- -------- -------- -------- End of year 800 380 441 1,621 -------- -------- -------- -------- AMOUNTS WRITTEN OFF Beginning of year - 4 5 9 Amortisation - 22 65 87 -------- -------- -------- -------- End of year - 26 70 96 -------- -------- -------- -------- NET BOOK VALUE Beginning of year 800 432 42 1,274 -------- -------- -------- -------- -------- -------- -------- -------- End of year 800 354 371 1,525 -------- -------- -------- -------- -------- -------- -------- --------
13 MALMAISON LIMITED F-134 Notes to accounts (continued) 8 TANGIBLE FIXED ASSETS The movement in the year was as follows:
Freehold Furniture, land and Work in fixtures & buildings progress equipment Total L'000 L'000 L'000 L'000 GROUP COST OR VALUATION Beginning of year 3,058 5,410 389 8,857 Additions 8,799 10,958 1,961 21,718 Reclassification 3,055 (3,055) - - Revaluations 2,791 - - 2,791 -------- -------- -------- -------- End of year 17,703 13,313 2,350 33,366 -------- -------- -------- -------- - ------------------------------------------------------------------------------------ At valuation 17,703 - - 17,703 At cost - 13,313 2,350 15,663 - ------------------------------------------------------------------------------------ DEPRECIATION Beginning of year - - 6 6 Charge - - 107 107 -------- -------- -------- -------- End of year - - 113 113 -------- -------- -------- -------- -------- -------- -------- -------- NET BOOK VALUE Beginning of year 3,058 5,410 383 8,851 -------- -------- -------- -------- -------- -------- -------- -------- End of year 17,703 13,313 2,237 33,253 -------- -------- -------- -------- -------- -------- -------- -------- LEASED ASSETS AND ASSETS HELD ON FINANCE LEASES INCLUDED IN THE ABOVE: NET BOOK VALUE BEGINNING OF YEAR - - - - -------- -------- -------- -------- -------- -------- -------- -------- END OF YEAR - - 212 212 -------- -------- -------- -------- -------- -------- -------- --------
Additions to work in progress include interest capitalised of L1,639,000 (1996 - L98,000). Cumulative interest capitalised included in the cost of tangible fixed assets amounts to L1,737,000 (1996 - L98,000). Freehold properties are included at valuation. The valuations were carried out by Edward Symmons (Hotel & Leisure) Limited, Chartered Surveyors, on an open market value at 31 December 1997 for existing use basis, inclusive of fittings and equipment and with the benefit of licenses where applicable during the year. The valuations are recorded after deducting the net book value of fittings and equipment is recorded against freehold land and buildings. Additions made subsequent to the valuations are recorded at cost. On a historical cost basis, the net book amount of tangible fixed assets at 31 December 1997 would be L30,462,000, and the depreciation charge would not be materially different. 14 MALMAISON LIMITED F-135 Notes to accounts (continued) 8 TANGIBLE FIXED ASSETS (CONTINUED)
Work in progress Company L'000 Cost Beginning of year - Additions 141 ------- End of year 141 ------- -------
9 FIXED ASSET INVESTMENTS
Company --------------------- 1997 1996 L'000 L'000 Subsidiary undertakings 4,904 4,960 ------- -------- ------- --------
The movement in the year relates to actual professional fees being less than estimated on the subsidiaries acquired in 1996. In the group accounts, goodwill has been reduced accordingly (see note 7). a) PRINCIPAL GROUP INVESTMENTS The principal subsidiary undertakings are shown below:
Proportion of ordinary share Country of capital and incorporation Principal voting rights held SUBSIDIARY UNDERTAKINGS and operation Activity by the group The Malmaison Hotel (Glasgow) Limited Scotland Hotel operations 100% The Malmaison Hotel (Newcastle) Limited England Hotel operations 100% The Malmaison Hotel (Manchester) Limited England Hotel operations 100% The Malmaison Hotel (Leeds) Limited England Hotel operations 100% Malmaison Brand Limited Scotland Brand ownership 100%
b) ACQUISITION OF SUBSIDIARY UNDERTAKINGS On 15 April 1997 the company formed The Malmaison Hotel (Leeds) Limited. 15 MALMAISON LIMITED F-136 Notes to accounts (continued) 10 STOCKS
Group ------------------------- 1997 1996 L'000 L'000 Hotel operating stocks 67 13 -------- ------- -------- -------
11 DEBTORS
Group Company ------------------------------ --------------------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Amounts falling due within one year: Trade debtors 287 34 - - Amounts owed by subsidiary undertakings - - 10,646 4,743 VAT 507 590 273 357 Other debtors 1,251 27 256 - Prepayments and accrued income 136 14 101 - Prepaid facility fees - 294 - - ------- ------ ------- ------ 2,181 959 11,276 5,100 ------- ------ ------- ------ ------- ------ ------- ------
Included in other debtors above is L247,500 relating to a deposit made by the company on the acquisition of the Malmaison hotel in Edinburgh (see note 20). 12 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Group Company --------------------- -------------------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Bank loans and Senior debt 550 - - - Trade creditors 1,447 448 202 49 Accrued interest 2,677 - 2,677 - Other creditors 197 19 - 12 VAT 34 - - - Grants 564 - - - Accruals and deferred income 1,563 938 281 140 ------- ----- ----- ------ 7,032 1,405 3,160 201 ------- ----- ----- ------ ------- ----- ----- ------
16 MALMAISON LIMITED F-137 Notes to accounts (continued) 13 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Group Company -------------------------- --------------------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Senior debt 10,602 - - - Mezzanine debt 3,000 - 3,000 - Subordinated debt 13,276 10,476 13,276 10,476 Grants 1,974 - - - Other 133 212 - 212 ------ ------ ------ ------ 28,985 10,688 16,276 10,688 ------ ------ ------ ------ ------ ------ ------ ------
During the year the group was awarded a L2,400,000 grant in relation to the Malmaison Manchester property and a L148,000 grant in relation to the Malmaison Glasgow property. SENIOR DEBT At 31 December 1997 the group had senior borrowing facilities of L22,300,000 (1996 - L9,500,000) of which L12,389,000 (1996 - Lnil) was drawn down. Borrowings are repayable on a quarterly basis from 31 March 1998, incur interest at 2.5% p.a. above LIBOR, are secured by a first fixed and floating charge on the group's hotels and other assets, and are subject to financial covenants. Amounts shown for senior debt are net of facility fees L1,237,000 (1996 - Lnil). MEZZANINE DEBT The company has entered into a mezzanine loan facility agreement of L5,750,000 and a working capital facility of L500,000 with Arcadian International Limited. The loan facility incurs interest at 10% and is repayable on 31 December 2006 and the working capital facility incurs interest at 3% above The Royal Bank of Scotland Plc base rate and is repayable on 31 December 1999. These facilities are secured by second charges on the group's hotel properties. Drawings under these facilities at 31 December 1997 were L3,000,000 and Lnil respectively (1996 Lnil and Lnil). SUBORDINATED DEBT The loan stock is unsecured, bears interest at 20% per annum, and is repayable in installments between 2003 and 2005 (see note 19). At 31 December 1997 issued loan stock was as follows:
1997 1996 L'000 L'000 'A' loan stock 5,873 5,873 'B' loan stock 4,603 4,603 'C' loan stock 2,800 - ------ ------ 13,276 10,476 ------ ------ ------ ------
17 MALMAISON LIMITED F-138 Notes to accounts (continued) 13 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (CONTINUED) On 15 April 1997 the company issued L1,700,000 of 'C' loan stock in connection with interalia the purchase of a development site in Leeds. On 10 December 1997 the company issued a further L1,100,000 of 'C' loan stock in connection with interalia the part repayment of the mezzanine loan with Arcadian International Limited, a related party. The A, B and C loan stock rank pari passu in all respects with the exception of the winding up of the company. In this case the C loan stock is subordinated to the A and B loan stock. The B loan stock is subordinated to the A loan stock and all classes of loan stock are subordinated to the claims of all other creditors. ANALYSIS OF BORROWINGS Borrowings are repayable as follows:
Group Company ------------------------ -------------------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Due within five years - - within 1 year - finance leases 78 - - - - bank loans 600 - - - - - within 1-2 years - finance leases 78 - - - - bank loans 1,400 - - - - - within 2-5 years - finance leases 56 - - - - bank loans 6,300 - - - More than 5 years - bank loans 4,089 - - - - mezzanine loan 3,000 - 3,000 - - subordinated loan stock 13,276 10,476 13,276 10,476 ------ ------- ------ ------ 28,877 10,476 16,276 10,476 ------ ------- ------ ------ ------ ------- ------ ------
14 CALLED-UP SHARE CAPITAL
1997 1996 L'000 L'000 AUTHORISED 25,100,000 (1996 - 19,100,000) ordinary shares of 1p each 251 191 1,900,000 (1996 - 1,900,000) 'B' deferred convertible shares of 1p each 19 19 ----- ----- 270 210 ----- ----- ----- ----- ALLOTTED, CALLED-UP AND FULLY-PAID 17,400,000 (1996 - 16,150,000) ordinary shares of 1p each 174 162 ----- ----- ----- -----
18 MALMAISON LIMITED F-139 Notes to accounts (continued) 14 CALLED-UP SHARE CAPITAL (CONTINUED) During the year the company issued 1,250,000 shares as part consideration for the acquisition of The Malmaison Hotel (Manchester) Limited in 1996. Arcadian International Limited and K.W. McCulloch have the right before 31 December 2005, to subscribe for a number of deferred shares, which are convertible into ordinary shares at par upon the sale of a substantial part of the assets of the group, the admission of the ordinary shares of the company to the London Stock Exchange or control of the company passing to one shareholder. The number of deferred shares subject to this right is determined by the value attributable to the group in the transaction. Upon the acquisition of the share capital of the company by Patriot American Hospitality, Inc. ("Patriot"), K.W. McCulloch transferred the right to 1,390,581 deferred shares to Patriot (see note 20). As at 31 December 1996 the company had in issue warrants to subscribe for 1,410,811 ordinary shares exercisable at par. On 15 April 1997 the company issued warrants to subscribe for 4,949,026 ordinary shares exercisable at par. On 10 December 1997 the company issued warrants to subscribe for 3,202,311 ordinary shares exercisable at par. All the warrants in issue were acquired by Patriot on the 8 April 1998 (see note 20). 15 RESERVES Of total reserves shown in the group and company's balance sheets, the following amounts are regarded as distributable or otherwise:
Group Company ----------------------- --------------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Distributable - - profit and loss account (1,048) (90) (52) (30) Non distributable - - revaluation reserve 2,791 - - - ------ ----- ----- ----- TOTAL RESERVES 1,743 (90) (52) (30) ------ ----- ----- ----- ------ ----- ----- -----
19 MALMAISON LIMITED F-140 Notes to accounts (continued) 15 RESERVES (CONTINUED)
Revaluation Profit and reserve loss account Total L'000 L'000 L'000 GROUP Beginning of the year - (90) (90) Accumulated loss for the year - (958) (958) Revaluation of operating hotels 2,791 - 2,791 ------- ------- ----- End of year 2,791 (1,048) 1,743 ------- ------- ----- ------- ------- ----- COMPANY Beginning of the year - (30) (30) Accumulated loss for the year - (22) (22) ------- ------- ----- End of year - (52) (52) ------- ------- ----- ------- ------- -----
16 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Group Company -------------------- --------------------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Loss for the financial year (958) (90) (22) (30) ----- ---- ---- ---- Other recognized gains and losses relating to the year 2,791 - - - New share capital subscribed 12 162 12 162 ----- --- ---- --- Net addition to (reduction in) shareholders' funds 1,845 72 (10) 132 ----- --- ---- --- Opening shareholders' funds 72 - 132 - ----- --- ---- --- Closing shareholders' funds 1,917 72 122 132 ----- --- ---- --- ----- --- ---- ---
F-141 Notes to accounts (continued) 17 CASH FLOW INFORMATION a) RECONCILIATION OF OPERATING PROFIT TO OPERATING CASHFLOWS
53 week Year ended period to 31 December 31 December 1997 1996 L'000 L'000 Operating profit 344 16 Depreciation and amortisation charges 194 15 Increase in stocks (54) (1) Increase in debtors (343) (748) Increase in creditors 1,074 512 Amortisation of grant income (10) - ----- ---- NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES 1,205 (206) ----- ---- ----- ----
b) ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
53 week Year ended period to 31 December 31 December 1997 1996 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE L'000 L'000 Interest received 69 8 Interest and facility fees paid (1,300) - ------- ------ (1,231) 8 ------- ------ CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Expenditure on tangible fixed assets (19,270) (2,978) Expenditure on intangible fixed assets (394) - Grants received 1,612 - ------- ------ (18,052) (2,978) ------- ------ ACQUISITIONS Purchase of subsidiary undertakings - (410) Deposits to purchase subsidiary undertaking (247) - Cash acquired - 53 Purchase of brand name - (400) ------- ------ NET CASH OUTFLOW FOR ACQUISITIONS (247) (757) ------- ------ ------- ------ FINANCING Issue of ordinary share capital - 103 Repayment of finance leases (24) - Debt due within one year 600 - Debt due greater than one year 17,589 4,898 ------- ------ CASH INFLOW FROM FINANCING 18,165 5,001 ------- ------ ------- ------
21 MALMAISON LIMITED F-142 Notes to accounts (continued) 17 CASH FLOW INFORMATION (CONTINUED) c) ANALYSIS OF NET DEBT
Beginning of Other year Cash flow (non-cash) End of year L'000 L'000 L'000 L'000 Cash on hand and at bank 1,068 (160) - 908 Finance leases - 24 (238) (214) Debt due within one year - (600) - (600) Debt due after 1 year (10,476) (17,589) - (28,065) ------- ------- ---- ------- (9,408) (18,325) (238) (27,971) ------- ------- ---- ------- ------- ------- ---- -------
d) MAJOR NON-CASH During the year the group entered into finance lease arrangements in respect of assets with a total capital value at the inception on the leases of L238,000 (1996 - Lnil). 18 GUARANTEES AND OTHER FINANCIAL COMMITMENTS a) CAPITAL COMMITMENTS At the end of the year capital commitments were:
Group Company ----------------------- ----------------------- 1997 1996 1997 1996 L'000 L'000 L'000 L'000 Contracted for but not provided for 3,614 13,441 - - ----- ------ ---- ---- ----- ------ ---- ----
b) CONTINGENT LIABILITIES The company has guaranteed and secured by a floating charge on its own assets overdrafts and other liabilities of certain subsidiary undertakings, the amount outstanding at 31 December 1997 being L12,389,000 (1996 - Lnil). 22 MALMAISON LIMITED F-143 Notes to accounts (continued) 19 RELATED PARTY TRANSACTIONS a) A. Haining and R.K. Black, both shareholders in the company during the year, are directors of Botts & Company Limited and financial advisers to the company. During the year Botts & Company Limited received fees of L160,000 (1996 - - L119,000). In addition, as at 31 December 1997, Botts & Company Limited held 4,439,955 (1996 - L2,925,000) subordinated loan stock (see note 14). b) R.R.A. Breare and C.G. Upton are both directors of Arcadian International Limited ("Arcadian"), a shareholder of the company. During the year Arcadian received fees of L500,000 (1996 - L500,000). In addition, as at 31 December 1997, Arcadian held 5,061,972 (1996 - L4,102,500) subordinated, loan stock (see note 14). c) K.W. McCulloch a shareholder of the company during the year, is also a director of and the majority shareholder in MHM Limited. Arcadian and MHM Limited have a joint venture, Malmaison Management Limited, which has a ten year management contract for the group's hotels. Management fees payable for the year ended 31 December 1997 under this contract were L143,000 (1996 - L9,000). In addition, as at 31 December 1997, K.W. McCulloch held 1,090,081 (1996 - - L1,024,650) subordinated loan stock (see note 14). In 1996 Malmaison Management Limited entered into project co-ordination agreements with the group to assist with the development of its hotels. Amounts payable in the year ended 31 December 1997 under these agreements were L471,000 (1996 - L240,000). d) Arcadian and K.W. McCulloch, as shareholders in Malmaison Management Limited, have the right to subscribe for deferred shares in the company in the event of a realization of the assets of the group before 31 December 2005. Further details are given in note 14. e) In 1996 Arcadian entered into two forms of guarantee on behalf of a syndicate of banks, led by Coutts & Company, in favor of the banks. The first relates to the overrun of construction costs of the hotels and is limited to the amount of the group's senior debt of L9.5 million plus accrued interest thereon. The second relates to the repayments of L1.5 million of principal of the senior debt in the period to 31 December 1999 and the payment of any interest on the senior debt in that period. Should any payments be made by Arcadian under the terms of either guarantee, Arcadian would receive additional A loan stock in the company to the value of any such payment. 23 MALMAISON LIMITED F-144 Notes to accounts (continued) 20 SUBSEQUENT EVENTS On 18 March 1998 the company acquired the trade and assets of the Malmaison Hotel in Edinburgh for a cash consideration of L4,949,000 for which the company had paid a deposit of L247,500 before year end. MHM Limited, a related company (see note 19c), held a management contract with this hotel. On 8 April 1998 Arcadian International Limited ("Arcadian"), acquired all the outstanding share capital and loan stock in the company not already owned by Arcadian. Outstanding warrants and deferred shares were also acquired together with ali rights to the accrued interest on the loan stock. The management contract with the Malmaison Management Limited was terminated on the same day. Patriot is a US Real Estate Investment Trust or 'REIT' whose shares are paired and trade as a single unit with those of Wyndham International, Inc. ('Wyndham'). Subsequent to the transaction, the trading stock and business of the group s hotels was sold to the Wyndham group for book value at the transaction dates. The group continues to own the freehold interests in the hotels which have been leased to Wyndham's subsidiary, Malmaison Hotels Limited. 21 NET CURRENT LIABILITY POSITION The net current liabilities of the group at 31 December 1997 are L3,876,000 (1996 - net assets L635,000). Arcadian International Limited has confirmed its intention of providing continued financial support to the group to enable it to meet its liabilities as they fall due, for a period of at least twelve months from the date of signing these accounts. 24 MALMAISON LIMITED F-145 Report of Independent Certified Public Accountants To the Board of Directors and Shareholders of CHC International, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of the hospitality division of CHC International, Inc. at November 30, 1996 and 1997, and the results of its operations and its cash flows for the years ended November 30, 1995, 1996 and 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements were prepared on the basis of presentation as described in Note 1. /s/ Price Waterhouse, LLP Miami, Florida February 27, 1998 F-146 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) November 30, -------------------- May 31, 1996 1997 1998 -------- -------- ----------- ASSETS (unaudited) Current Assets Cash and cash equivalents $ 1,627 $ 8,634 $ 12,958 Trade accounts receivable, net of allowance for doubtful accounts of $699, $669 and $573 at 1996, 1997 and 1998, respectively 1,482 7,817 9,336 Trade accounts receivable - affiliates, net of allowance for doubtful accounts of $716, $1,135 and $1,256 at 1996, 1997 and 1998, respectively 1,108 1,244 885 Notes receivable - affiliates and officers 480 2,463 3,458 Marketable securities - - 4,189 Deferred income tax - 9,386 9,513 Inventories 121 1,487 1,481 Other current assets 800 632 522 -------- -------- -------- Total current assets 5,618 31,663 42,342 Property and equipment, net 669 1,718 1,683 Investments in and advances to affiliates 8,457 8,424 4,990 Receivables, net 1,900 1,950 1,950 Receivables - affiliates and officers - 2,656 2,179 Intangibles, net 6,047 5,472 5,185 Other assets 3,548 4,400 4,475 -------- -------- -------- Total Assets $ 26,239 $ 56,283 $ 62,804 -------- -------- -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable $ 672 $ 4,333 $ 3,658 Due to affiliates and officers 2,005 12,894 18,265 Deferred compensation plan liability - 5,374 5,510 Accrued expenses 5,904 18,417 18,366 Current portion of long-term debt and capital lease obligations 11,857 13,457 12,382 -------- -------- -------- Total current liabilities 20,438 54,475 58,181 Deferred compensation plan liability 6,102 2,494 2,493 Long-term debt 1,921 1,360 1,208 Due to affiliates 3,750 1,245 1,161 Other liabilities 108 179 332 -------- -------- -------- Total liabilities 32,319 59,753 63,375 -------- -------- -------- Commitments and contingencies (Note 12) - - - Stockholders' Equity (Deficit) Preferred stock, $.01 par value; 1,000 shares authorized; no shares issued or outstanding - - - Common stock, $.005 par value; 20,000 shares authorized; 10,621 shares issued and outstanding at 1996, 1997 and 1998, respectively 53 53 53 Additional paid-in capital 13,853 16,112 17,781 Accumulated deficit (12,012) (11,936) (13,244) Notes receivable stock purchases - affiliates (7,675) (7,675) (7,675) Unearned compensation (299) (24) - Net unrealized gains on marketable securities - - 2,514 -------- -------- -------- Total stockholders' equity (deficit) (6,080) (3,470) (571) -------- -------- -------- Total liabilities and stockholders' equity (deficit) $ 26,239 $ 56,283 $ 62,804 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. F-147 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION STATEMENTS OF OPERATIONS (IN THOUSANDS) Three Six Year Ended Months Months November 30, Ended Ended ------------------------------ May 31, May 31, 1995 1996 1997 1998 1998 ------- ------- -------- ----------- ----------- (unaudited) (unaudited) Revenues Rooms $ 4,638 $ 5,282 $ 25,331 $22,537 $40,241 Food and beverage 3,907 4,351 15,953 11,439 21,582 Management service fees - affiliates 5,212 4,284 5,703 493 1,071 Management service fees - non-affiliates 5,391 4,748 4,773 1,090 1,984 ------- ------- -------- ------- ------- Total revenues 19,148 18,665 51,760 35,559 64,878 ------- ------- -------- ------- ------- Operating Expenses Rooms 1,075 1,223 5,553 4,816 8,874 Food and beverage 2,386 2,772 8,883 6,180 12,213 Participating lease payments - - 10,251 11,009 18,799 Management service and operating costs 14,455 14,097 26,849 13,570 25,647 Depreciation and amortization 832 853 1,045 323 619 ------- ------- -------- ------- ------- Total operating expenses 18,748 18,945 52,581 35,898 66,152 ------- ------- -------- ------- ------- Income (loss) from operations before equity in net earnings (losses) of affiliates 400 (280) (821) (339) (1,274) Equity in net earnings (losses) of affiliates 355 1,003 (346) (107) (317) ------- ------- -------- ------- ------- Income (loss) from operations 755 723 (1,167) (446) (1,591) ------- ------- -------- ------- ------- Other Income (Expense) Interest income 1,720 686 846 253 585 Interest expense (2,365) (3,304) (2,340) (495) (953) Loss on impairment of notes receivable (4,431) - - - - Transaction and other costs (Note 1) - - (9,073) (400) (571) Other income (expense) (104) 29 1,298 1,188 1,236 ------- ------- -------- ------- ------- Total other income (expense) (5,180) (2,589) (9,269) 546 297 Minority interests 148 163 108 - - ------- ------- -------- ------- ------- Income (loss) before provision (benefit) for income taxes (4,277) (1,703) (10,328) 100 (1,294) Provision (benefit) for income taxes 131 92 (10,404) (2,054) 14 ------- ------- -------- ------- ------- Net income (loss) $(4,408) $(1,795) $ 76 $ 2,154 $(1,308) ------- ------- -------- ------- ------- ------- ------- -------- ------- -------
The accompanying notes are an integral part of these financial statements. F-148 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED NOVEMBER 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED MAY 31, 1998 (UNAUDITED) (IN THOUSANDS) Notes Net Receivable Unrealized Total Common Stock Additional Stock Gains on Stockholders' ---------------- Paid-in Accumulated Purchases- Unearned Marketable Equity Shares Amount Capital Deficit Affiliates Compensation Securities (Deficit) ------- ------- ------- ----------- ---------- ------------ ---------- ----------- Balance, November 30, 1994 10,355 $ 52 $22,645 $ (5,809) $(7,350) $ (523) $ - $ 9,015 Receipts from notes receivable stock purchases - affiliates - - - - 664 - - 664 Amortization of unearned compensation - - - - - 116 - 116 Net change in gaming division - - (5,595) - - - - (5,595) intercompany account Net loss - - - (4,408) - - - (4,408) ------- ------- ------- -------- ------- ------- ------- ------- Balance, November 30, 1995 10,355 52 17,050 (10,217) (6,686) (407) - (208) ------- ------- ------- -------- ------- ------- ------- ------- Additional common shares issued 266 1 2,999 - (3,000) - - - Receipts from notes receivable stock purchases - affiliates - - - - 2,011 - - 2,011 Amortization of unearned compensation - - - - - 108 - 108 Net change in gaming division intercompany account - - (6,196) - - - - (6,196) Net loss - - - (1,795) - - - (1,795) ------- ------- ------- -------- ------- ------- ------- ------- Balance, November 30, 1996 10,621 53 13,853 (12,012) (7,675) (299) - (6,080) ------- ------- ------- -------- ------- ------- ------- ------- Amortization of unearned compensation - - - - - 275 - 275 Net change in gaming division intercompany account - - 2,259 - - - - 2,259 Net income - - - 76 - - - 76 ------- ------- ------- -------- ------- ------- ------- ------- Balance, November 30, 1997 10,621 53 16,112 (11,936) (7,675) (24) - (3,470) ------- ------- ------- -------- ------- ------- ------- ------- Amortization of unearned compensation - - - - - 24 - 24 Net change in gaming division intercompany account - - 1,669 - - - - 1,669 Change in market value of marketable securities, net - - - - - - 2,514 2,514 Net Loss - - - (1,308) - - - (1,308) ------- ------- ------- -------- ------- ------- ------- ------- Balance, May 31, 1998 (unaudited) 10,621 $ 53 $17,781 $(13,244) $(7,675) $ - $ 2,514 $ (571) ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- -------
The accompanying notes are an integral part of these financial statements. F-149 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION STATEMENTS OF CASH FLOWS (IN THOUSANDS) (PAGE 1 OF 2) Year Ended Six Months Ended November 30, May 31, ------------------------------- ---------------- 1995 1996 1997 1998 ---- ---- ---- ---- (unaudited) Cash flows from operating activities: Net income (loss) $ (4,408) $ (1,795) $ 76 $ (1,308) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Provision (benefit) for losses or impairments on receivables and equity investments 5,765 (212) 96 876 Depreciation and amortization 832 853 1,045 619 Amortization of deferred charges 844 1,533 949 26 Undistributed equity in net (earnings) losses of affiliates (355) (1,003) 346 317 Deferred income taxes - - (10,500) (20) Minority interests (148) (163) (108) - Gain on sale of hotel investments - - (1,245) Gain on sale of marketable securities - (1,130) Change in assets and liabilities: (Increase) decrease in: Trade accounts receivable (292) 313 (450) (1,871) Trade accounts receivable - affiliates (796) 227 (999) 3,933 Inventories (10) (64) 736 6 Other assets and other receivables (982) (1,727) 1,027 (97) Increase (decrease) in: Accounts payable (667) (231) (249) (569) Accrued expenses (202) (478) 5,889 (254) Deferred compensation plan liability 600 565 1,766 203 Other liabilities (34) 56 181 153 -------- -------- -------- -------- Net cash provided (used) by operating activities 147 (2,126) (1,440) 884 -------- -------- -------- -------- Cash flows from investing activities: Sales of notes receivable - 7,200 - - Purchases of property and equipment (168) (134) (1,470) (263) Investments in and advances to affiliates (2,645) (50) (1,089) (538) Cash and cash equivalents from consolidation of affiliate - - 8,830 - Sales of or distributions from investments in affiliates 959 834 1,959 99 Project loans and advances (1,900) - (2,160) - Sale of marketable securities 1,895 -------- -------- -------- -------- Net cash (used) provided by investing activities (3,754) 7,850 6,070 1,193 -------- -------- -------- -------- Cash flows from financing activities: Receipts from notes receivable stock purchases - affiliates 7,756 2,011 - - Increase (decrease) in due to affiliates (1,145) 408 (919) (1,195) Borrowings 2,900 500 2,880 3,500 Payments of debt and capital lease obligations and other deferred charges (577) (1,925) (1,843) (1,727) Net change in gaming division intercompany account (5,595) (6,196) 2,259 1,669 -------- -------- -------- -------- Net cash provided (used) by financing activities 3,339 (5,202) 2,377 2,247 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (268) 522 7,007 4,324 Cash and cash equivalents at beginning of year 1,373 1,105 1,627 8,634 -------- -------- -------- -------- Cash and cash equivalents at end of year $ 1,105 $ 1,627 $ 8,634 $ 12,958 -------- -------- -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. F-150 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION STATEMENTS OF CASH FLOWS (IN THOUSANDS) (PAGE 2 OF 2) Year Ended Six Months Ended November 30, May 31, ------------ -------- 1995 1996 1997 1998 ---- ---- ---- ---- (unaudited) Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 1,626 $ 1,718 $ 1,438 $ 639 ------- ------- -------- ------- ------- ------- -------- ------- Cash paid during the period for income taxes $ 96 $ 89 $ 40 $ 16 ------- ------- -------- ------- ------- ------- -------- ------- Cash received during the period for income taxes $ 29 $ 36 ------- -------- ------- -------- Supplemental Schedule of noncash investing and financing activities: Common Stock Issued: Notes receivable stock purchase-affiliates $ 3,000 ------- ------- Investments in Affiliates: Loan for purchase of interest in GAH-II, L.P. $ 3,750 Loan for investment in CHC Lease Partners 1,088 Operating partnership units received as payment of interest 572 Operating partnership units received as payment of notes receivable stock purchases - affiliates 388 ------- Total investments in affiliates $ 5,798 ------- ------- Consolidation of affiliate: Cash and cash equivalents $ 8,830 Non-cash assets 14,459 Liabilities (17,401) -------- Net assets 5,888 Net assets distributed to Gencom Lessee, L.P. (2,944) -------- Net assets consolidated $ 2,944 -------- -------- Other: Capital leases and license agreements $ 166 $ 41 ------- ------- ------- ------- Change in market value of marketable securities, net $ 3,648 ------- ------- Satisfaction of due to affiliates with operating partnership units $ 1,088 ------- -------
The accompanying notes are an integral part of these financial statements. F-151 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION CHC International, Inc.'s ("CHC") major operations consist of (i) the hospitality division which manages, leases and invests in hotel and resort properties and (ii) the gaming division which owns, manages and develops casino properties. The financial statements of CHC - Hospitality Division (the "Company") have been prepared pursuant to the Agreement and Plan of Merger by and among Wyndham International, Inc. (formerly Patriot American Hospitality Operating Company) ("Wyndham"), Patriot American Hospitality, Inc. ("PAH") and CHC dated as of September 30, 1997 (the "Merger Agreement"). The Merger Agreement contemplates, subject to appropriate approvals, (i) CHC's contribution of its gaming division to a wholly-owned subsidiary ("Spinco"), (ii) CHC's distribution of all of the common stock of Spinco to the stockholders of CHC pro rata based on their ownership in CHC, (iii) CHC's retention of its hospitality business and (iv) CHC merging into Wyndham subsequent to the distribution of Spinco. The foregoing transactions will be consummated at closing of the Merger Agreement (the "Closing"). The financial statements have been prepared as if the Company has operated as an independent, stand alone entity for all periods presented and give no effect to the net changes of assets and liabilities contemplated by the Merger Agreement. Such financial statements have been prepared using the historical basis of accounting and include all of the assets, liabilities, revenues and expenses previously included in CHC's consolidated financial statements prior to the transactions contemplated by the Merger Agreement, except for all the assets, liabilities (including contingent liabilities), revenues and expenses of the gaming division of CHC and its subsidiaries. Consequently, these financial statements include certain balances for goodwill and other assets and liabilities related to the Company that were previously included in CHC's consolidated financial statements including (i) the allocation of certain fixed assets and related depreciation expense, (ii) notes receivable and borrowings and related interest income and expense and (iii) other liabilities and related expenses. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 55 ("SAB 55"), the Company's financial statements exclude certain corporate expenses incurred by CHC on the gaming division's behalf. All significant intercompany balances and transactions have been eliminated. Investments in less than majority-owned non-gaming businesses, in which a significant equity ownership interest is held, are accounted for on the equity method. F-152 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with generally accepted accounting principles. Significant accounting policies are summarized below. Certain amounts in the financial statements and notes thereto have been reclassified for comparative purposes. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Hotel room and food and beverage revenues and expenses from leased hotel operations are included in the statements of operations during the lease term. Revenues from rooms and food and beverage sales are recognized at the time the related service is performed. Revenues from management service fees for management of hotels are based upon contracted terms and are recognized when the services are performed. Included in management service fees - affiliates is a $2,000 termination fee received in connection with the termination of the Company's management agreement with an affiliated hotel during the year ended November 30, 1997. REIMBURSED OPERATING EXPENSES The Company is fully reimbursed by certain managed hotels for salaries and related costs for hotel personnel employed by the Company in accordance with management contract terms and the administration of services consisting primarily of sales, marketing and reservations. These costs amounted to $47,324, $50,237 and $50,644 for the years ended November 30, 1995, 1996, and 1997, respectively. All such costs and related reimbursements have been netted in the statements of operations, with reimbursable amounts and accrued salaries and related costs reflected as trade accounts receivable and accrued expenses, respectively, in the balance sheets. During the year ended November 30, 1995 the Company was reimbursed for $1,400 of costs incurred in conjunction with an unconsummated transaction previously expensed in the statements of operations during the period inception (February 3, 1994) to November 30, 1994. F-153 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) TRANSACTION AND OTHER COSTS The Company's costs in the amount of $9,073 incurred as a result of the transactions contemplated by the Merger Agreement including investment banking, legal, accounting and employee severance have been expensed in the statement of operations during the year ended November 30, 1997 (See Note 14). STOCK BASED COMPENSATION The Company, during fiscal 1997, adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation" which establishes a fair value based method of accounting for stock based compensation plans, the effect of which can either be disclosed or recorded. The Company has chosen to retain its intrinsic value method of accounting for stock based compensation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include short-term investments with original purchase maturities of 90 days or less. TRADE ACCOUNTS RECEIVABLE AND TRADE ACCOUNTS RECEIVABLE - AFFILIATES Trade accounts receivable are from non-affiliated hotels under management and lease, and hotel customers. Trade accounts receivable - affiliates are receivables from hotel or other entities in which the Company, its stockholders or officers have an investment interest. The Company provides an allowance for doubtful accounts based upon a periodic review of outstanding receivables and evaluation of aggregate collectibility. INVENTORIES Inventories, consisting of food, beverages, china, linens, silverware and glassware, are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over estimated useful lives of the assets. Useful lives range from three to five years. Expenditures for repairs and maintenance are charged to expenses as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing equipment, are capitalized and depreciated. Equipment held under capital leases is amortized over the lesser of useful life or lease term. F-154 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INVESTMENTS IN AND ADVANCES TO AFFILIATES Investments in and advances to affiliates include units of limited partnership interest ("OP Units") in the Patriot American Hospitality Partnership, L.P. ("Patriot REIT Partnership"). The OP Units are subject to redemption rights which became exercisable, subject to certain restrictions, on October 2, 1996. The redemption rights require the Patriot REIT Partnership to redeem each OP Unit for cash equal to the value of a share of PAH common stock or, at PAH's election, for one share of PAH common stock. The OP Units are stated at cost which is based upon the fair market value of PAH common stock at the date of issue with an appropriate discount for restrictions imposed on the OP Units. DEFERRED CHARGES Costs incurred in connection with the Company's term loan are recorded as deferred charges and are amortized over the term of the loan. Trademark and organization costs are amortized on a straight line basis over 40 and 5 years, respectively. Deferred charges consist of the following at November 30,: 1996 1997 -------- -------- Deferred debt costs $ 3,197 $ 3,097 Trademark and organization costs 1,110 1,114 -------- -------- 4,307 4,211 Accumulated amortization (2,698) (3,278) -------- -------- Deferred charges, net $ 1,609 $ 933 -------- -------- -------- --------
INTANGIBLES Goodwill is amortized on a straight line basis over 30 to 40 years. Management contract intangibles are amortized on a straight-line basis over 9 to 25 years. The Company periodically assesses the future benefit associated with management contract intangibles through a review on a contract by contract basis of estimated undiscounted future operating cash flow. Any impairment of intangible assets is charged to operations and reflected as a reduction of the related intangible asset account. INCOME TAXES Income taxes are provided based on the liability method of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are recorded to reflect tax consequences on future years' differences between tax bases of assets and liabilities and their financial reporting amounts at each year-end as if the Company were a stand alone taxpayer. F-155 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTERIM UNAUDITED FINANCIAL INFORMATION The financial statements for the three and six months ended May 31, 1998 are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended May 31, 1998 are not necessarily indicative of the results that may be expected for a fully year. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk exist principally in cash balances with banks in excess of Federal Deposit Insurance Corporation ("FDIC") insured limits, receivable balances and investments in OP Units. The Company places its cash with high quality financial institutions; however, at November 30, 1997, the Company has cash balances with financial institutions in excess of FDIC insured limits. Management believes the credit risk related to these deposits is minimal. The Company provides its services to the hotel industry. Hotel management services are contracted for terms normally ranging from 1 to 20 years, and in limited instances on a month-to-month basis. To reduce credit risk, the Company, through its management of such hotels, monitors the hotels' financial condition. Concentrations of credit risk with respect to accounts receivable from hotel customers are limited due to the large number of customers and their dispersion across many hotels and geographies. The Company does not generally require collateral from customers. Five management contracts accounted for 26%, 26% and 41% of management service fees revenues for the years ended November 30, 1995, 1996 and 1997, respectively. The Company has a note receivable from the Rhode Island Convention Center Authority in conjunction with agreements to develop and operate a hotel. To reduce credit risk with respect to the note receivable from the Rhode Island Convention Center Authority, the Company, through its management of the property, which is the primary source of repayment, monitors the hotel's financial condition, and management believes the credit risk related to the receivable is minimal. The Company has notes receivable from certain stockholders for the purchase of the Company's common stock and notes receivable from certain limited partnerships owned by all stockholders which have invested in a hotel and adjacent retail complex. Management believes the concentration of credit risk with respect to the notes from certain stockholders (see Note 13) and certain affiliated limited partnerships is minimal (see Note 14). The estimated fair value of financial instruments have been determined by the Company using available market and effective interest rate information for such instruments. The carrying amounts of such financial instruments, except the OP Units, approximate their fair value. Included in investments and advances to affiliates in the balance sheet are OP Units with a book value of $3,638. The recorded value of the OP Units is estimated based upon the quoted market price of F-156 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PAH common stock less an appropriate discount for the restrictions imposed on the OP Units. The estimated fair value of the OP Units at November 30, 1997 is $10,000. LIQUIDITY The Company has short-term liquidity and capital resource requirements which will need to be met prior to Closing of the Merger Agreement, including income tax obligations resulting from the planned distribution of the common stock of Spinco to the stockholders of the Company, debt service requirements and other transaction related costs. Management expects these liquidity and capital resource requirements to be funded by stockholders capital contributions and OP unit sales. Management believes that sufficient sources of capital will be available to fund these short-term liquidity and capital resource requirements. NOTE 2 - RECEIVABLES Receivables consist of a $1,900 note receivable from the Rhode Island Convention Center Authority with an interest rate equal to the lesser of manager share of net cash flow as defined or 11% (effective interest rate of 1.0% and 4.5% as of November 30, 1996 and 1997, respectively) payable annually, interest only, with principal due on earlier of December 30, 2024 or the date the management agreement is terminated. The Company owned nonrecourse subordinated notes in the amount of $12,500 ("Notes Receivable Crystal Palace") secured by a leasehold interest in the Crystal Palace Hotel. The Company originally recorded a discount of $1,000 on the Notes Receivable Crystal Palace. On December 29, 1995, The Company sold its interest in the Notes Receivable Crystal Palace to the issuer for $7,200, plus accrued interest. The Company recorded a loss on the impairment in value for the Notes Receivable Crystal Palace of $4,431 during the year ended November 30, 1995. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consists of the following at November 30,: 1996 1997 ------ -------- Furniture, fixtures and other equipment $ 615 $ 1,893 Leasehold improvements 198 132 Equipment under capital leases 384 379 ------ -------- 1,197 2,404 Accumulated depreciation and amortization (528) (686) ------ -------- Property and equipment, net $ 669 $ 1,718 ------ -------- ------ --------
Depreciation expense was $82, $129 and $422 for the years ended November 30, 1995, 1996 and 1997, respectively. F-157 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 4 - LEASES Capital Leases The Company leases certain equipment under capital leases. Minimum rentals under such capital leases are as follows at November 30, 1997: Year ending November 30,: ------------------------- $ 68 1999 62 2000 55 2001 9 ----- Total minimum lease payments 194 Less amount representing interest 32 ----- Net obligations 162 Less current portion 52 ----- Long-term portion $ 110 ----- -----
The long-term portion of capital lease obligations is included in long-term debt. OPERATING LEASES The Company leases office and warehouse space under operating lease agreements. The Company also leases office space from a partnership owned 58% by certain of its officers under an operating lease whose term runs through April 30, 2004 (see Note 14). The Company entered into an agreement to lease and operate the Washington Duke Inn, located in Durham, North Carolina. The initial lease term, which was through July 31, 1997 includes payment of $95 on or before August 1, 1996 and a monthly rent of $134 plus 6% of gross revenues through July 31, 1996; $134 plus 7% of gross revenues through July 31, 1997; and $155 plus 7% of gross revenues from August 1, 1997 through July 31, 1998. Effective January 1, 1997, the Company entered into a new agreement to lease and operate the Washington Duke Inn which supersedes the previous agreement. The term, which is through December 31, 2002 includes rent for each year of 22% of gross revenues up to $10,000, adjusted annually, plus 30% of gross revenues in excess of $10,000, adjusted annually, provided in any event a minimum rent of $1,800. Rent is payable monthly. In addition, the Company purchased $1,505 of furniture, fixtures and equipment in exchange for a promissory note and is required to fund a reserve account for furniture, fixtures and equipment expenditures in an amount not less than 3% of gross revenues in 1997 and 4% of gross revenues thereafter (see Note 9). F-158 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Future minimum lease payments, for all operating leases with non-cancellable terms in excess of one year are as follows at November 30, 1997: Year ending November 30,: ------------------------- 1998 $ 2,199 1999 2,180 2000 2,164 2001 2,164 2002 2,164 Thereafter 665 ------- Total minimum lease payments $11,536 ------- -------
Rental expense amounted to $2,143, $2,437 and $3,027 for the years ended November 30, 1995, 1996 and 1997, respectively. NOTE 5 - INVESTMENTS IN AND ADVANCES TO AFFILIATES On October 2, 1995, CHC Lease Partners was formed as the initial lessee to lease and operate certain hotels owned by the Patriot REIT Partnership, a majority-owned subsidiary of PAH. CHC Lease Partners, a general partnership, at formation was owned jointly by CHC REIT Lessee Corp. ("CHCR"), a wholly-owned subsidiary of the Company and by Gencom Lessee, L.P. ("Gencom Lessee"), an affiliate of a principal of the Gencom group of companies (which included GAH - - II, L.P. ("GAH") noted below). At inception, each partner contributed to CHC Lease Partners cash of $2,000 and OP Units which, after an appropriate discount from the fair market value of PAH common stock, were valued at $2,550. The Company, also on October 2, 1995, purchased a 50% ownership interest in GAH, a Houston, Texas based hotel management business, from Patriot American Hospitality, L.P. for a nonrecourse note in the amount of $3,750 (See Note 9) and also contributed $150 to GAH. CHC Lease Partners began operating twenty hotels on October 2, 1995 and during 1996 and 1997, entered into substantially similar operating leases for a total of five additional hotels acquired by the Patriot REIT Partnership. The hotels leased by the Patriot REIT Partnership to CHC Lease Partners under separate participating lease agreements contain cross-default provisions. These leases, requiring CHC Lease Partners to maintain minimum levels of net worth and working capital, have terms ranging from ten to twelve years and require payment of the greater of (1) minimum base rent or (2) participating rent. CHC Lease Partners then entered into separate management agreements with a wholly-owned subsidiary of the Company or GAH, to manage the leased hotels. Management fees earned F-159 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) under such agreements are subordinate to CHC Lease Partners' obligations to the Patriot REIT Partnership under the participating lease agreements. On September 30, 1997, CHC Lease Partners distributed eight participating lease agreements to Gencom Lessee and declared distributions of its working capital and OP Units equally to CHCR and Gencom Lessee. Accordingly, the Company became the sole owner of the remaining participating lease agreements, assets and liabilities and continues to do business as CHC Lease Partners. The Company accounted for CHC Lease Partners using the equity method through August 31, 1997 and began consolidating CHC Lease Partners on September 1, 1997. Simultaneous with the distribution of the eight participating lease agreements, the requirement to maintain certain minimum levels of net worth was amended. The amendment also removed the requirement to maintain certain special collateral, allowing CHC Lease Partners to distribute to its partners the OP Units originally used to capitalize CHC Lease Partners. Summarized balance sheet and statement of operations information for CHC Lease Partners, accounted for using the equity method, at November 30, 1996 and the period from inception (October 2, 1995) to November 30, 1995, the year ended November 30, 1996 and the nine months ended August 31, 1997 are as follows: SUMMARIZED BALANCE SHEET INFORMATION November 30, ------------ 1996 ----- Current assets $ 25,245 Investments 5,100 Other assets 391 --------- Total assets $ 30,736 --------- --------- Current liabilities $ 19,376 Long-term liabilities 2,369 --------- Total liabilities 21,745 --------- Net assets $ 8,991 --------- ---------
F-160 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARIZED STATEMENT OF OPERATIONS INFORMATION November 30, ------------------- August 31, 1995 1996 1997 ------- -------- ---------- Revenues $22,807 $156,086 $135,758 ------- -------- -------- ------- -------- -------- Income before lessee income (expense) $ 957 $ 2,921 $ 477 ------- -------- -------- ------- -------- -------- Lessee income (expense) $ (639) $ (2,258) $ (1,547) ------- -------- -------- ------- -------- -------- Net income (loss) $ 318 $ 663 $ (1,070) ------- -------- -------- ------- -------- --------
The Company received cash distributions from CHC Lease Partners of $545 and $1,500 for the year ended November 30, 1996 and nine months ended August 31, 1997, respectively, and made cash contributions to CHC Lease Partners of $250 for the nine months ended August 31, 1997. CHC Lease Partners at November 30, 1997 has future lease commitments to the Patriot REIT Partnership under participating lease agreements through the year 2008. Minimum future rental payments under these non-cancellable operating leases are as follows: Year Ending November 30, ------------------------ 1998 $ 27,070 1999 27,273 2000 27,478 2001 27,684 2002 27,892 Thereafter 113,557 -------- $250,954 -------- --------
Summarized balance sheet and statement of operations information for GAH, which is accounted for using the equity method, at December 31, 1996 and the period date of acquisition (October 2, 1995) to December 31, 1995 and the year ended December 31, 1996 is as follows: SUMMARIZED BALANCE SHEET INFORMATION December 31, 1996 ----------------- Current assets $1,983 Other assets 1,077 ------ Total assets $3,060 ------ ------ Current liabilities $1,586 Long-term liabilities 107 ------ Total liabilities 1,693 ------ Net assets $1,367 ------ ------
F-161 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARIZED STATEMENT OF OPERATIONS INFORMATION December 31, ------------------- 1995 1996 ------ ------ Revenues $1,149 $7,284 ------ ------ ------ ------ Income (loss) before minority interest $ (30) $1,211 ------ ------ ------ ------ Net income (loss) $ (33) $1,194 ------ ------ ------ ------
The cost of the Company's initial investment in excess of its interest in the net assets has been assigned to management contracts and goodwill, which are being amortized on a straight-line basis over 12 and 30 years, respectively. The unamortized excess of the Company's investment over the Company's interest in GAH is $3,425 and $3,187 at November 30, 1996 and 1997, respectively. During the year ended November 30, 1997, the Company recognized, included in other income (expense) in the statement of operations, $1,245 of gains previously deferred, related to sales of two hotel investments to the Patriot REIT Partnership. The Company's remaining investments in and advances to affiliates in the aggregate are not significant. F-162 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 6 - INTANGIBLES Intangibles consist of the following at November 30, : 1996 1997 ------- ------- Management contract intangibles $ 4,226 $ 4,226 Goodwill 5,919 5,919 ------- ------- 10,145 10,145 Accumulated amortization (4,098) (4,673) ------- ------- Intangibles, net $ 6,047 $ 5,472 ------- ------- ------- -------
Amortization expense, net was $638, $669 and $566 for the years ended November 30, 1995, 1996 and 1997, respectively. The Company has included in amortization the write-off of $35 and $83 of management contract intangibles related to terminated contracts for the years ended November 30, 1995 and 1996, respectively. NOTE 7 - EMPLOYEE BENEFIT PLANS The Company maintains a non-qualified deferred compensation plan which covers most management employees and provides two levels of participation (i) for pre- 1992 participants an annual retirement benefit, after twenty-five years of service, equal to 50% of the participant's average last five years pay, reduced by social security benefits and further reduced for years of service less than twenty-five, on a pro rata basis and (ii) for post-1992 participants an annual contribution equal to 5% of the participant's annual pay. Benefits, except for the benefits for participants severed in conjunction with the Merger Agreement which vested immediately, are vested on an eleven year cliff basis and earn 7% annually on any unfunded amounts. Assets designated to cover plan liabilities include cash, accounts receivable, life insurance policies on the lives of certain participants, short-term investments and a loan to an officer. While it is the intention of management to utilize the assets designated for the deferred compensation plan to pay plan benefits, such assets have not been placed in trust and are not otherwise restricted and accordingly, they are available for general corporate purposes. Under the terms of the life insurance policies, the Company receives the cash surrender value if the policies are terminated or all benefits due upon the death of the insured. In addition, the Company can borrow against the available net cash surrender value of the policies. F-163 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following is a summary of the assets designated for the deferred compensation plan which are included in other assets at November 30,: 1996 1997 ------- ------- Gross cash surrender value of insurance policies $ 1,225 $ 1,299 Less policy loans (1,157) (1,242) ------- ------- Cash surrender value of insurance policies, net 68 57 Accounts receivable 82 82 Cash and cash equivalents 614 614 Loan to officer 1,077 1,147 ------- ------- Total assets designated for the deferred compensation plan $ 1,841 $ 1,900 ------- ------- ------- -------
Deferred compensation plan costs, net of forfeitures, included in the combined statements of operations for the years ended November 30, 1995, 1996 and 1997 were approximately $569, $374 and $1,357, respectively. The earnings rate for the deferred compensation plan benefit liability was 7% for the years ended November 30, 1995, 1996 and 1997. Deferred compensation plan costs, net of forfeitures, for the years ended November 30, 1995, 1996 and 1997, include the following components: 1995 1996 1997 ---- ---- ------ Service cost $381 $142 $1,005 Interest cost on projected benefit obligation 188 232 352 ---- ---- ------ Deferred compensation plan costs $569 $374 $1,357 ---- ---- ------ ---- ---- ------
The following table details the status of the plan at November 30: 1996 1997 ------- ------- Actuarial present value of benefit obligations: Vested benefits $ 5,016 $ 7,844 Non-vested benefits 1,086 24 ------- ------- Projected benefit obligations $ 6,102 $ 7,868 ------- ------- ------- ------- Plan assets less than projected benefit obligations $(6,102) $(7,868) ------- ------- ------- -------
On January 1, 1998, the Company adopted a new non-qualified defined contribution secured savings plan ("Secured Savings Plan") for management employees, which provides for contributions equal to a certain percentage of the participants pay. Benefits under the deferred compensation plan of (i) $5,374 will be paid to participants or transferred to the Secured Savings Plan and funded by November 30, 1998 and (ii) $2,494 funded over a three year period. F-164 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 8 - INCOME TAXES The Company files income tax returns as part of CHC's consolidated group. Income taxes in the accompanying financial statements are computed as if the Company had been a separate taxable entity. The Company's provision (benefit) for income taxes attributable to continuing operations is comprised of the following for the years ended November 30,: 1995 1996 1997 ---- ---- -------- CURRENT State $ 81 $52 $ (3) Foreign 50 40 99 ---- --- -------- Total current tax expense 131 92 96 DEFERRED Deferred tax benefit - - (10,500) ---- --- -------- Total provision (benefit) for income taxes $131 $92 $(10,404) ---- --- -------- ---- --- --------
The Company has accumulated tax net operating loss carryforwards of approximately $7,400 as of November 30, 1997. Approximately $1,100, $4,000 and $2,300 of the net operating loss carryforwards will expire in the years 2009, 2010 and 2011, respectively. The tax net operating loss carryforward is generally available to offset future taxable earnings. The difference between the taxes provided for continuing operations at the U.S. federal statutory rate and the Company's actual tax provision is reconciled below for the years ended November 30,: 1995 1996 1997 ---- ---- -------- Taxes provided at statutory rate $ - $ - $ - Reduction in valuation allowance - - (10,500) State tax expense (benefit), net of federal benefit 81 52 (3) Foreign tax expense 50 40 99 ---- --- -------- Total provision (benefit) for income taxes $131 $92 $(10,404) ---- --- -------- ---- --- --------
Pursuant to SFAS No. 109, the Company recognized $10,500 of certain deferred tax assets during the year ended November 30, 1997, since it has been determined that net operating and capital loss carryforwards, as well as the reversal of other deferred tax assets will be utilized to offset future taxable income, primarily resulting from the Spinco transaction described in Note 1. The residual deferred tax assets are fully reserved at November 30, 1997. The ultimate realization of the remaining deferred tax assets will be carried forward to future years for possible utilization. Management believes that the valuation allowance at November 30, 1997 is appropriate, given the probability of the future reversal of these taxable temporary differences. F-165 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The approximate effect of the Company's temporary differences and carryforwards that give rise to deferred tax balances at November 30, were as follows: 1995 1996 1997 ------- ------- ------- Net operating loss carryforwards $ - $ - $ 2,957 Capital loss carryforwards - - 2,069 Deferred compensation plan liability - - 2,480 Transaction costs - - 2,286 Other, net - - (406) ------- ------- ------- Current deferred tax asset $ $ - $ 9,386 ------- ------- ------- ------- ------- ------- 1995 1996 1997 ------- ------- ------- Net operating loss carryforwards $ 224 $ 1,688 $ - Capital loss carryforwards - - - Deferred compensation plan liability 2,106 2,330 1,114 Bad debt reserve 559 800 658 Notes receivable reserve 1,772 - - Other, net 1,275 878 1,428 ------- ------- ------- 5,936 5,696 3,200 Valuation allowance (5,936) (5,696) (2,086) ------- ------- ------- Noncurrent deferred tax asset $ - $ - $ 1,114 ------- ------- ------- ------- ------- -------
F-166 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9 - LONG-TERM DEBT Long-term debt is comprised of the following as of November 30,: 1996 1997 -------- -------- Variable-rate term loan (effective interest rate of 10.0% and 8.375% at November 30, 1996 and 1997, respectively) interest payable quarterly and principal payable in quarterly installments of 2.5% of the principal amount outstanding commencing June 30, 1997 with balance due June 30, 1998 $ 11,500 $ 10,925 Variable-rate loan (effective interest rate of 10.25% and 10.50% at November 30, 1996 and 1997, respectively) interest payable monthly and principal payable in annual installments of $190 with balance due December 30, 1997 1,710 1,520 7% note payable - interest and principal payable monthly with balance due December 31, 2002 - 1,350 Variable-rate unsecured demand loans (effective interest rate of 9.50% at November 30, 1997) interest payable monthly. - 500 8% note payable - interest payable annually and principal payable in annual installments of $120 through October 10, 1999 360 360 Capital lease obligations (see Note 4) 208 162 -------- -------- Total debt 13,778 14,817 Current portion (11,857) (13,457) -------- -------- Total long-term debt $ 1,921 $ 1,360 -------- -------- -------- --------
Aggregate principal payments for the long-term debt including capital lease obligations are as follows at November 30, 1997: Year ending November 30: ------------------------ 1998 $13,457 1999 408 2000 304 2001 281 2002 291 Thereafter 76 ------- Total $14,817 ------- -------
F-167 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The Company's variable-rate term loan (the "Term Loan"), as amended, with $11,500 and $10,925 outstanding as of November 30, 1996 and 1997, respectively, (i) bears interest at the bank's base lending rate plus 2.0% or, at the Company's option, London Interbank Market Rate (LIBOR) plus 4 1/2%, (ii) is secured by substantially all of the Company's assets and (iii) initially matured February 28, 1997. On February 28, 1997, the Term Loan was further amended whereby the Term Loan (i) bears interest at the bank's lending rate plus 1.5% or, at the Company's option, LIBOR plus 2.5% and (ii) matures in quarterly installments of 2.5% of the principal amount outstanding commencing June 30, 1997 with the balance due June 30, 1998. The Company has also agreed to pay the lender a fee equal to 1.5% of the fair market value of the Company, but in no event less than $2,500 or more than $6,000. The fee is payable at the lender's option at any time during the ten-year period commencing February 28, 1997. Interest expense for the years ended November 30, 1995, 1996 and 1997 include $500, $1,200 and $435, respectively, related to the lender fee. The Company's variable-rate loan agreement with a commercial bank with $1,710 and $1,520 outstanding as of November 30, 1996 and 1997, respectively, bears interest at the bank prime rate plus 2% per annum payable monthly. Principal is payable in annual installments of $190 in December 1995 and 1996, with the balance due in December 1997. The balance due December 1997 has been extended to March 30, 1998. The Company's unsecured $750 line of credit with a commercial bank guaranteed by two shareholders of CHC with $500 outstanding as of November 30, 1997, bears interest at the bank rate plus 1% per annum payable monthly. Principal is payable on demand. In January 1997, in connection with the agreement to lease and operate the Washington Duke Inn, the Company purchased $1,505 of furniture, fixtures and equipment in exchange for a promissory note with $1,350 outstanding as of November 30, 1997. The loan bears interest at 7% per annum. Principal and interest are payable monthly with balance due December 31, 2002. The loan is secured by the furniture, fixtures and equipment and limits the sale or encumbrance of the furniture, fixtures and equipment. In connection with the expiration of the lease, the Company has the right to resell the furniture, fixtures and equipment to the original seller and the original seller has the right to repurchase the furniture, fixtures and equipment for $1,505. F-168 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) RELATED PARTY BORROWINGS In October 1995, the Company borrowed 53,314 OP Units from certain shareholders. As permitted by the securities loan agreement, the OP Units, valued after an appropriate discount at $1,088, were contributed by the Company to CHC Lease Partners (see Note 5). The Company must return OP Units to the shareholders on demand and pay to the shareholders interest equal to distributions received by the Company from the OP Units. In October 1995, in connection with the Company's purchase of a 50% interest in GAH (see Note 5), the Company entered into a nonrecourse loan agreement with the seller in the amount of $3,750. The loan bears interest at the lesser of 9.0% and the maximum non-usurious amount permissible. Interest and principal are payable quarterly commencing January 25, 1996 from 25% of GAH net cash flow, as defined, continuing until the earlier of October 2, 2000 or the date all amounts outstanding under the nonrecourse term loan are paid in full. As of both November 30, 1996 and 1997, $3,750 is outstanding under the loan. In connection with the Merger Agreement all amounts outstanding under the nonrecourse term loan are due at Closing of the Merger Agreement and are reflected as due to officers and affiliates - current as of November 30, 1997 in the balance sheet. In August 1997, CHC established a $750 line of credit on an unsecured basis with Carnival Corporation. Advances under the line of credit bear interest at prime rate plus 1% payable monthly. Principal is payable at maturity August 27, 1998. As of November 30, 1997 no amounts are outstanding under the line of credit. In September 1997, CHC established a $7,000 line of credit on an unsecured basis with Patriot American Hospitality Operating Partnership, L.P. in conjunction with the Merger Agreement. Advances under the line of credit bear interest at base rate loans rate as defined plus 1% payable monthly. Principal is payable at maturity, the Closing of the Merger Agreement. As of November 30, 1997 no amounts are outstanding under the line of credit. Related party borrowings are included in due to affiliates and officers in the balance sheets. The Company's financing agreements contain customary financial covenants. NOTE 11 - MINORITY INTEREST The Company owns a 75% interest in the TCC-Registry Joint Venture (the "Registry Venture"). The Company's financial statements include 100% of the assets, liabilities and operations of the Registry Venture. The effects of the minority interests have been reflected in the statements of operations. Minority interests in the Registry Venture of $108 as of November 30, 1996 are included in other liabilities in the balance sheets. At November 30, 1997, accumulated losses have eliminated all minority interests. F-169 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 12 - COMMITMENTS AND CONTINGENCIES In the ordinary course of its business, the Company is named as defendant in legal proceedings resulting from incidents taking place at hotels it manages, or in which it has an ownership interest. The Company maintains comprehensive liability insurance and also requires hotel owners to maintain adequate insurance coverage. Management believes such coverage to be of a nature and amount sufficient to ensure that the Company is adequately protected from any material financial loss as a result of such claims. The Company owns a 30% interest in Plaza Associates Limited Partnership ("Plaza Associates") which owns and operates the Holiday Inn - Dayton Mall in Dayton, Ohio. The Company has joint and severally guaranteed partial payment of two Plaza Associates notes payable. The joint and several guaranty is mitigated by a contribution agreement among Plaza Associates partners which reduced the Company's obligation to 30% of the guaranty. The total maximum potential liability to the Company under the guaranty after giving effect to the contribution agreement is as follows: through December 31, 1999 up to $375; January 1, 2000 to December 31, 2002 up to $225; January 1, 2003 to March 1, 2004 up to $150 and zero thereafter. In addition, The Company has joint and severally guaranteed payment of certain other Plaza Associates obligations, the maximum potential liability to the Company is $733. NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIT) As a result of the basis of presentation as outlined in Note 1, including the allocation of certain assets and liabilities to the gaming division, the Company's equity (deficit) includes balances arising from the net change in the gaming division's intercompany account with the Company. In June 1994, the Company granted to an executive officer 155,000 shares of common stock valued at $3.75 per share, subject to forfeiture if employment is terminated prior to vesting. The stock grant originally scheduled to vest over five years has been accelerated and now vests 50% of the shares of common stock in January 1997 and 50% of the shares of common stock in January 1998. Compensation expense for the stock grant was $116, $108 and $275 for the years ended November 30, 1995, 1996 and 1997, respectively. Pursuant to the terms of a stock purchase agreement dated November 30, 1994 between the Company and Carnival Corporation and certain shareholders, the Company agreed to sell an aggregate of 4,000,000 shares of common stock at $6.25 per share. The aggregate purchase price of $25,000 was satisfied by the conversion of a $10,000 Carnival Corporation revolving credit loan, $9,350 in installment notes payable and the balance in cash. The notes bear interest at 7.1% payable annually with principal installments due annually of $2,337. The installments due on November 30, 1995 and 1996 were paid and the installments due on November 30, 1997 and 1998 plus accrued interest have been extended so all obligations under the notes are payable in full F-170 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) fifteen months after the Closing of the Merger Agreement. The notes are secured by a pledge of all purchased shares of common stock. Pursuant to the terms of a stock purchase agreement dated November 29, 1996 between the Company and CHC Investor Partners, L.P. ("CHC Investor"), a Texas limited partnership, whose general partner, is controlled by a principal owner of the Gencom group of companies, the Company sold 265,513 shares of common stock at $11.30 per share and granted non-qualified stock options to purchase 61,130 shares of common stock at a per share exercise price of $11.30. The aggregate purchase price of $3,000 was satisfied with a note. The note bears interest at 7.1% payable annually and was originally due in installments of $500 on November 29, 1997 and $2,500 on November 29, 1998. The installments due on November 29, 1997 and 1998 have been extended so obligations under the note, plus accrued interest, are payable $1,500 at the Closing of the Merger Agreement, but in no event later than November 30, 1998, and $1,500 on November 30, 1998. The Company has an Employee Stock Option Plan (the "Plan") which provides for the grant to employees of both incentive stock options (within the meaning of Section 422 of the Internal Revenue Code) and non-statutory stock options to eligible employees (including officers and directors) and non-employee directors. A total of 1,700,000 shares of common stock has been reserved for issuance under the Plan. The table below summarizes the status of the Company's Plan as of and for the years ended November 30, 1995, 1996 and 1997: 1995 1996 1997 -------------------------- ---------------------------- ---------------------------- SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE - ------- ------- ---------------- --------- ---------------- --------- ---------------- Outstanding at beginning of year 988,052 $6.25 988,052 $ 6.25 1,221,805 $ 7.24 Granted - - 264,317 11.45 231,932 11.30 Returned - - (30,564) 11.50 - - ------- --------- --------- Outstanding at end of year 988,052 6.25 1,221,805 7.24 1,453,737 7.89 ------- --------- --------- ------- --------- --------- Options excercisable at year-end 197,610 419,672 646,996 Weighted-average fair value of options granted during the year $ - $5.90 $5.82
F-171 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes information about options outstanding at November 30, 1997: OPTIONS OUTSTANDING OPTIONS EXCERCISABLE ----------------------------------------------------- --------------------------------- WEIGHTED-AVERAGE RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXCERCISABLE EXERCISE PRICE - --------------- ----------- ---------------- ---------------- ------------ ----------------- $6.25 988,052 7.0 years $ 6.25 592,831 $ 6.25 $11.30 - 11.50 465,685 8.9 11.37 54,165 11.36 --------- ------- 1,453,737 7.6 7.89 646,996 6.68 --------- ------- --------- -------
All options issued were granted at the fair market value of CHC's common stock on the date of grant, have a term of ten years, and generally become exercisable with respect to 20% of the covered shares commencing one year after grant, and are generally exercisable with respect to an additional 20% of the covered shares after each additional year until fully exercisable. The fair value of each option grant was estimated on the date of the grant using the minimum value method with the following assumptions for the years ended November 30, 1995, 1996 and 1997; risk-free interest rate of 7.5%, no dividend yield, expected lives of 10 years and no volatility. The Company applies Accounting Principals Board No. 25 and related interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's Plan been determined based upon the fair value at the grant dates for awards under the Plan consistent with the method of SFAS No. 123, the Company's pro forma net loss would have been $5,044, $2,575 and $462 for the years ended November 30, 1995, 1996 and 1997, respectively. NOTE 14 - RELATED PARTY TRANSACTIONS AND ALLOCATIONS The Company provides services and pays certain costs which are reimbursable under management agreements with hotels, which are affiliated with the Company by virtue of common ownership. Total fees earned from affiliated hotels for the years ended November 30, 1995, 1996 and 1997 were $5,212, $4,284 and $5,703, respectively. Total fees and reimbursable expenses due from affiliated hotels were $1,108 and $1,244 at November 30, 1996 and 1997, respectively. In March, 1994, CHC and Carnival Corporation entered into a 20 year Trademark License Agreement providing for CHC's use of the "Carnival" trademark so that CHC may conduct business as "Carnival Hotels and Casinos" (and the Company may do business as "Carnival Hotels and Resorts"). Fees due under the agreement are the greater of $100, or 1% of CHC's revenues, as defined. The trademark license fees for the Company the years ended November 30, 1995, 1996 and 1997 were $115, $150 and $134, respectively. F-172 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Certain of the Company's officers hold a 58% interest in a partnership which owns the office building in which the Company's executive offices are located. Under this lease, rental expense for the years ended November 30, 1995, 1996 and 1997 were $401, $375 and $417, respectively. The Company provides accounting services, at cost, to certain entities owned and controlled by certain of its officers. The entities are obligated to reimburse the Company for such services provided. The cost of such services were $175, $145 and $155 for the years ended November 30, 1995, 1996 and 1997, respectively. The Company has an agreement with a principal owner of the Gencom group of companies to equally share certain of the costs incurred as a result of the transactions contemplated by the Merger Agreement. The portion of costs to be shared by the principal owner of the Gencom group of companies is $1,427 as of November 30, 1997. Concurrent with the Merger Agreement, the Company also entered into a Hospitality Advisory, Asset Management and Support Services Agreement with Wyndham whereby Wyndham will provide certain hospitality advisory, asset management and support services to the Company for base fees aggregating $350 per month plus 50% of the amount of gross management fees, leakage and other income in excess of $350. The cost of such services were $1,466 during the year ended November 30, 1997. CHC has allocated a portion of its corporate expenses to the gaming division. These expenses include management and corporate overhead; benefit administration; risk management/insurance administration, and other support and executive functions. Allocations and charges were based on either a direct cost pass through or a percentage allocation for such services provided based on factors such as revenues, management time, or headcount. Such allocations and charges totaled $3,734, $3,720 and $4,451 for the years ended November 30, 1995, 1996 and 1997, respectively. Management believes that the basis used for allocating corporate services is reasonable and that the terms of these transactions would not materially differ from those that would result from transactions among unrelated parties. Pursuant to the terms of a stock purchase agreement dated November 30, 1994, certain shareholders agreed to buy from Carnival Corporation at $6.25 per share, 2,610,000 shares of Company common stock. The aggregate purchase price of $16,313 was paid in promissory notes due November 30, 1998 subject to certain condition as defined in the stock purchase agreement. The notes bear interest at 6.0% payable at maturity. The stock purchase agreement provides certain shareholders a put option which requires Carnival Corporation to repurchase at $6.25 per share plus a rate of return of 6.1% per annum, all of the 2,610,000 shares of Company common stock, by November 30, 1998. The stock purchase agreement also requires Carnival Corporation to reduce its ownership in the Company's common stock (assuming exercise of the put option) to less than 25% of the F-173 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Company's outstanding common stock no later than November 30, 1998, as defined in the stock purchase agreement (See Note 13). Pursuant to the terms of a stock purchase agreement dated November 29, 1996, CHC Investor agreed to buy from certain shareholders at $11.30 per share, 265,513 shares of Company common stock from certain shareholders for $3,000 in cash (See Note 13). In October 1997 the Company loaned $2,110 to a partnership owned by the Company's shareholders, the proceeds of such loans were invested in a hotel and adjacent retail complex located in Miami, Florida. The note, secured by an interest in a limited partnership, bears interest at 5.6% with interest and principal payable at maturity October 31, 1999. The Company entered into borrowing arrangements with certain shareholders and affiliates (See Note 9). **************************** F-174 EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Joint Registration Statements on Form S-3 and Form S-8 of Patriot American Hospitality, Inc. and Wyndham International, Inc. of our report dated January 23, 1998, on our audit of the financial statements of Royal Palace Hotel Associates, included in this Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. /s/ PricewaterhouseCoopers LLP Tampa, Florida July 31, 1998 EX-23.2 3 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the (a) Joint Registration Statement on Form S-3 (Files No. 333-46307 and No. 333-46307-01) and related Prospectus for $1,000,000,000 of paired common stock and preferred stock of Patriot American Hospitality, Inc. and Wyndham International, Inc. and (b) Joint Registration Statement on Form S-8 (Files No. 333-56315 and No. 333-56315-01) for the registration of an additional 6,411,516 shares of paired common stock of Patriot American Hospitality, Inc. and Wyndham International, Inc. of our reports (i) dated March 4, 1998, with respect to the consolidated financial statements of SF Hotel Company, L.P.; and (ii) dated February 3, 1998 with respect to the combined financial statements of SC Suites Summerfield Partnerships; each of which is included in the Joint Current Report on Form 8-K/A No. 1 of Patriot American Hospitality, Inc. and Wyndham International, Inc., dated June 2, 1998. /s/ ERNST & YOUNG LLP Wichita, Kansas July 31, 1998 EX-23.3 4 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF CHARTERED ACCOUNTANTS AND REGISTERED AUDITORS As Chartered Accountants and Registered Auditors, we hereby consent to the incorporation by reference in the Joint Registration Statement on Form S-3, dated June 8, 1998, and Form S-8, dated May 4, 1998, of Patriot American Hospitality, Inc. and Wyndham International, Inc. of our reports dated July 22, 1998 and July 17, 1998, respectively, of the financial statements of Arcadian International Limited (formerly Arcadian International Plc) and subsidiary undertakings and Malmaison Limited and subsidiary undertakings, which are included in the Joint Current Report on Form 8-K/A of Patriot American Hospitality, Inc. and Wyndham International, Inc., dated June 2, 1998. /s/ Arthur Andersen 1 Surrey Street London WC2R 2PS 4 August 1998 EX-23.4 5 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Joint Registration Statements on Form S-3 and Form S-8 of Patriot American Hospitality, Inc. and Wyndham International, Inc. of our report dated February 27, 1998, on our audit of the financial statements of CHC International, Inc. Hospitality Division as of November 30, 1997, and for the year then ended, included in the Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. dated April 20, 1998. /s/ PricewaterhouseCoopers LLP Miami, Florida July 31, 1998 -----END PRIVACY-ENHANCED MESSAGE-----