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EXHIBIT 99.1
Report of Independent Auditors
The Stockholders
ClubHouse Hotels, Inc.
We have audited the accompanying consolidated balance sheets of ClubHouse
Hotels, Inc. (the "Company") as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young L.L.P.
Kansas City, Missouri
April 8, 1997, except for Note 11, as
to which the date is July 31, 1997
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ClubHouse Hotels, Inc.
Consolidated Balance Sheets
DECEMBER 31 JUNE 30
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,401,162 $ 5,899,195 $ 5,684,524
Accounts receivable 487,326 505,989 610,560
Due from affiliates 286,968 276,978 217,233
Prepaid expenses and other current assets 473,467 823,586 1,421,889
Note receivable from affiliate 386,500 -- --
------------ ------------ ------------
Total current assets 8,035,423 7,505,748 7,934,206
Property and equipment, net 28,705,277 38,722,912 39,753,009
Other assets:
Investment in unconsolidated affiliates 577,285 719,383 713,328
Repair and replacement fund 746,352 828,097 1,593,269
Intangible assets, net 1,453,949 1,444,768 1,203,868
Land held for development or sale 1,439,954 612,296 618,151
Deferred income taxes -- 492,999 492,999
Other assets 71,270 49,150 110,755
------------ ------------ ------------
Total other assets 4,288,810 4,146,693 4,732,370
------------ ------------ ------------
Total assets $ 41,029,510 $ 50,375,353 $ 52,419,585
============ ============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 429,555 $ 1,352,803 $ 652,756
Due to affiliates 65,086 40,066 67,909
Accrued property taxes 311,271 354,978 515,190
Accrued interest 52,912 84,662 41,996
Accrued liabilities 685,054 578,022 721,782
Deferred revenue 34,250 34,250 34,250
Income taxes payable 597,129 196,338 830,958
Current portion of long-term debt 1,221,821 1,448,165 1,371,332
------------ ------------ ------------
Total current liabilities 3,397,078 4,089,284 4,236,173
Long-term debt 39,140,515 44,966,584 44,929,105
------------ ------------ ------------
Total liabilities 42,537,593 49,055,868 49,165,278
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $1; authorized,
10,000,000 shares; issued and outstanding,
451,000 shares 451,000 451,000 451,000
Retained earnings (deficit) (1,959,083) 868,485 2,803,307
------------ ------------ ------------
Total stockholders' equity (deficit) (1,508,083) 1,319,485 3,254,307
------------ ------------ ------------
Total liabilities and stockholders'
equity (deficit) $ 41,029,510 $ 50,375,353 $ 52,419,585
============ ============ ============
See accompanying notes
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Clubhouse Hotels, Inc.
Consolidated Statements of Income
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE 30
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Revenues:
Room revenue $ 15,723,615 $ 17,046,376 $ 18,066,099 $ 8,606,893 $ 10,670,486
Other hotel revenue 1,256,330 1,418,947 1,363,556 637,201 805,453
Management fees 132,093 92,912 106,412 40,197 43,404
Management fees - affiliates 610,299 679,807 721,115 352,450 386,504
Royalties 164,453 177,400 177,083 86,417 93,300
Royalties - affiliates 599,423 626,697 641,371 320,473 323,680
Assessment revenues 103,817 109,161 106,911 53,574 55,373
Assessment revenues - affiliates 353,929 356,776 346,684 179,029 172,933
Rental revenues 94,148 166,615 218,793 110,272 110,683
Rental revenues - affiliates 13,463 13,463 13,463 6,731 6,731
------------ ------------ ------------ ------------ ------------
Total revenues 19,051,570 20,688,154 21,761,487 10,393,237 12,668,547
Operating costs and expenses:
Hotel room expenses 3,972,045 4,216,494 4,440,649 2,064,960 2,593,478
Other hotel expenses 817,492 916,977 886,840 399,441 467,900
Administrative and general 2,636,179 2,949,764 3,237,778 1,249,033 1,554,928
Development and management 1,106,928 1,087,742 1,172,803 401,434 832,114
Marketing 1,568,586 1,602,927 1,670,275 759,420 737,200
Property operation and maintenance 1,640,927 1,908,992 1,811,973 855,959 1,015,697
Property taxes and insurance 705,127 708,389 739,251 383,593 529,771
Depreciation and amortization 2,602,179 2,230,620 2,307,871 1,047,188 1,416,585
------------ ------------ ------------ ------------ ------------
Total operating expenses 15,049,463 15,621,905 16,267,440 7,161,028 9,147,673
------------ ------------ ------------ ------------ ------------
Income from operations 4,002,107 5,066,249 5,494,047 3,232,209 3,520,874
Other income (expense):
Interest income 160,168 265,060 298,677 140,414 148,024
Interest expense (3,026,257) (3,441,402) (3,143,890) (1,498,043) (1,770,470)
Equity in net income of
unconsolidated affiliates 352,200 82,456 445,073 238,395 240,562
Other 11,296 21,320 12,757 11,800 286
------------ ------------ ------------ ------------ ------------
Total other expense (2,502,593) (3,072,566) (2,387,383) (1,107,434) (1,381,598)
------------ ------------ ------------ ------------ ------------
Income before income taxes and
extraordinary items 1,499,514 1,993,683 3,106,664 2,124,775 2,139,276
Income tax benefit (expense) 59,675 (532,081) (186,491) (352,005) (550,108)
------------ ------------ ------------ ------------ ------------
Income before extraordinary items 1,559,189 1,461,602 2,920,173 1,772,770 1,589,168
Extraordinary items:
Gain on early retirement of debt, net
of income taxes of $192,278 for the
year ended December 31, 1995 and
$167,146 (unaudited) for the six
months ended June 30, 1997 -- 1,352,544 -- -- 482,854
Gain on troubled debt restructuring,
net of income taxes of $-0- 4,723,768 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income $ 6,282,957 $ 2,814,146 $ 2,920,173 $ 1,772,770 $ 2,072,022
============ ============ ============ ============ ============
Income before extraordinary
item per common share $ 3.46 $ 3.24 $ 6.47 $ 3.93 $ 3.52
Extraordinary item 10.47 3.00 -- -- 1.07
------------ ------------ ------------ ------------ ------------
Net income per common share $ 13.93 $ 6.24 $ 6.47 $ 3.93 $ 4.59
============ ============ ============ ============ ============
See accompanying notes
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ClubHouse Hotels, Inc.
Consolidated Statements of Changes
in Stockholders' Equity (Deficit)
COMMON STOCK
---------------------------- RETAINED
NUMBER EARNINGS
OF SHARES AMOUNT (DEFICIT) TOTAL
------------ ------------ ------------ ------------
Balance, December 31, 1993 451,000 $ 451,000 $(10,989,253) $(10,538,253)
Net income -- -- 6,282,957 6,282,957
------------ ------------ ------------ ------------
Balance, December 31, 1994 451,000 451,000 (4,706,296) (4,255,296)
Distributions to minority interests -- -- (66,933) (66,933)
Net income -- -- 2,814,146 2,814,146
------------ ------------ ------------ ------------
Balance, December 31, 1995 451,000 451,000 (1,959,083) (1,508,083)
Distributions to minority interests -- -- (92,605) (92,605)
Net income -- -- 2,920,173 2,920,173
------------ ------------ ------------ ------------
Balance, December 31, 1996 451,000 451,000 868,485 1,319,485
Distributions to minority interests
(unaudited) -- -- (137,200) (137,200)
Net income (unaudited) -- -- 2,072,022 2,072,022
------------ ------------ ------------ ------------
Balance, June 30, 1997 (unaudited) 451,000 $ 451,000 $ 2,803,307 $ 3,254,307
============ ============ ============ ============
See accompanying notes.
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ClubHouse Hotels, Inc.
Consolidated Statements of Cash Flows
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
1994 1995 1996 1997
------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,282,957 $ 2,814,146 $ 2,920,173 $ 2,072,022
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary gain on early retirement of debt -- (1,544,822) -- (650,000)
Extraordinary gain on restructuring of long-term debt (4,723,768) -- -- --
Equity in net income of unconsolidated affiliates (352,200) (82,456) (445,073) (240,562)
Depreciation and amortization 2,602,179 2,230,620 2,307,871 1,416,585
Loss on disposal of property and equipment 92,167 65,824 125,883 --
Change in operating assets and liabilities:
Accounts receivable (32,431) (124,903) (18,663) (104,571)
Due from affiliates (61,213) (30,167) 9,990 59,745
Prepaid expenses and other current assets 116,712 (132,723) (350,119) (598,303)
Other assets 19,600 99,173 22,120 (61,605)
Accounts payable (102,040) 167,292 41,188 182,013
Due to affiliates (81,218) 52,318 (25,020) 27,843
Accrued property taxes (112,852) 37,679 43,707 160,212
Accrued interest 13,030 (116,546) 31,750 (42,666)
Accrued liabilities (253,113) 170,972 (107,032) 143,760
Deferred revenue -- (15,000) -- --
Income taxes payable (92,582) 674,200 (893,790) 634,620
------------ ------------ ------------ ------------
Net cash provided by operating activities 3,315,228 4,265,607 3,662,985 2,999,093
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (2,379,255) (1,371,978) (10,444,855) (2,982,724)
Investment in land held for development or sale (7,532) (1,016,044) (16,103) (5,855)
Note receivable from affiliate -- -- 386,500 --
Investment in unconsolidated affiliates (2,450) (215,192) -- --
Distributions from unconsolidated affiliates 483,008 232,112 302,975 246,617
Investment in intangible assets -- -- (118,033) (105,118)
Net change in the repair and replacement fund (524,776) 653,650 (81,745) (765,172)
------------ ------------ ------------ ------------
Net cash used in investing activities (2,431,005) (1,717,452) (9,971,261) (3,612,252)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,000,000 21,000,000 7,240,173 3,338,017
Repayment of long-term debt (1,079,117) (20,008,564) (1,187,760) (2,802,329)
Repayment of advances from affiliate 120,000 4,131 -- --
Investment in intangible assets (317,973) (1,166,252) (153,499) --
Distributions to minority investors -- (66,933) (92,605) (137,200)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (277,090) (237,618) 5,806,309 398,488
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 607,133 2,310,537 (501,967) (214,671)
Cash and cash equivalents, beginning of period 3,483,492 4,090,625 6,401,162 5,899,195
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 4,090,625 $ 6,401,162 $ 5,899,195 $ 5,684,524
============ ============ ============ ============
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ClubHouse Hotels, Inc.
Consolidated Statements of Cash Flows (continued)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
1994 1995 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
Cash paid for interest $3,209,039 $4,028,190 $3,152,414 $1,813,136
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Land held for development moved to construction
in process in 1996 for the construction of the
ClubHouse Inn in St. Louis $ 843,761
==========
Accounts payable at December 31, 1996 for
construction in process $ 882,060
==========
See accompanying notes.
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. BASIS OF PRESENTATION
NATURE OF OPERATIONS
ClubHouse Hotels, Inc. (formerly Clubhouse Enterprises, Inc.) (CHI) and its
subsidiaries (the Company) are engaged in the franchising, development,
ownership and management of hotels under the "ClubHouse Inns" brand name. The
hotels are located throughout the United States. The Company also holds
interests in partnerships which own and operate ClubHouse Inns hotels. Revenues
are primarily generated from hotel operations, hotel management and hotel
franchising. Hotel revenues are primarily dependent upon the individual
business traveler and small business groups.
The following subsidiaries which own and operate Clubhouse Inn hotels are
included in the consolidated financial statements:
Knoxville C.I. Associates, L.P.
Omaha C.I. Associates, L.P.
Overland Park C.I. Associates, L.P.
Atlanta C.I. Associates II, L.P.
Tenth Street C.I., Inc.
Airport C.I., Inc.
Richardson C.I. Associates, L.P.
St. Louis C.I. Associates, L.P.
All significant intercompany accounts and transactions have been eliminated in
the preparation of the consolidated financial statements.
The Company's hotel properties are all managed by ClubHouse Inns of America,
Inc. (CIA), a wholly owned subsidiary of CHI. As a result, the Company has both
voting and operational control over its subsidiaries. In addition, CIA provides
marketing, development and other services to affiliated and unaffiliated hotel
property owners. As of December 31, 1996, hotel properties located in 10 states
were under management or franchise contracts.
The Company has general partner investments ranging from 0.5% to 13.36% in
eight affiliate limited partnerships and a 50% interest in a joint venture. All
such entities own and operate ClubHouse Inn brand hotels located throughout the
United States. Through management contracts, the Company has operational
control over the limited partnerships; therefore, the entities and the 50%
joint venture interest are accounted for using the equity method in the
accompanying financial statements. Profits and losses of
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
1. BASIS OF PRESENTATION (CONTINUED)
the limited partnerships are allocated to the partners in accordance with the
respective partnership agreement. (See Note 4.)
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.
INTERIM FINANCIAL STATEMENTS
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations; nevertheless, management believes that the disclosures
herein are adequate to prevent the information presented from being misleading.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of
the Company with respect to the results of its operations for the interim
periods from January 1, 1996 to June 30, 1996, and from January 1, 1997 to June
30, 1997, have been included herein. The results of operations for the interim
periods are not necessarily indicative of the results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents generally
include cash on hand and demand deposits with financial institutions. At times
the Company maintains deposits in financial institutions in excess of federally
insured limits. The Company has not experienced any losses in such accounts.
COSTS OF PROJECTS UNDER DEVELOPMENT
The Company capitalizes the costs of developing each hotel location. These
costs include the cost of acquiring land for development, deposits on land,
professional fees and a related portion of overhead costs consisting primarily
of salaries. The Company is later
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reimbursed for a portion of these development costs by the entities formed to
own and operate these properties. Remaining deferred costs, if any, are
expensed at the time construction begins. Costs previously capitalized for
projects which have been abandoned are expensed.
REPAIR AND REPLACEMENT FUND
Under the terms of the Company's management and debt agreements, reserves for
the repair and replacement of hotel property and equipment are required to be
funded on a monthly basis. The agreements require cash reserves of up to 4% of
annual gross revenues of individual hotels for future repairs and capital
improvements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed on the straight-line method over the
following estimated useful lives:
Buildings and improvements 15 - 40 years
Furniture and equipment 5 - 7 years
Financing costs Term of loan
Franchise costs Term of agreement
Organization costs 5 years
LAND HELD FOR DEVELOPMENT OR SALE
Land held for development or sale consists of two tracts of land located in
Atlanta and Chicago. Management expects to use the Atlanta parcel as a site for
future development of a ClubHouse Inn hotel. The Chicago site, which is
adjacent to an existing ClubHouse Inn and has a carrying value of $537,000, is
being held for resale. Costs capitalized in the land include acquisition costs
and costs of permanent improvements. Holding costs are charged to operations
when incurred.
MINORITY INTEREST
The Company owns a 50% general partner interest and a 1% limited partner
interest in Atlanta C.I. Associates II, L.P. (Atlanta). Atlanta is a separate
and distinct legal entity from the Company whose purpose is to own and operate
a ClubHouse Inn hotel franchise.
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For financial reporting purposes, Atlanta's assets, liabilities, and profits
and losses are consolidated with those of the Company. The losses applicable to
the outside investors' minority interests have exceeded the minority interests
in the equity capital of the entity. Accordingly, no minority interest has been
recognized in the accompanying financial statements.
REVENUE RECOGNITION
Hotel revenue, management fees, service fees, reimbursements and other income
are recognized when earned. Initial franchise fees are recognized as revenue
when substantially all of the obligations to the franchisee have been
fulfilled, usually upon beginning development of the respective hotel.
Royalties and management fees from franchisees are recognized as earned.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising expense
for the years ended December 31, 1994, 1995 and 1996 was $853,503, $916,856 and
$1,220,546, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
No. 121 also addresses the accounting for long-lived assets that are expected
to be disposed of. The Company adopted SFAS No. 121 during 1995. The adoption
of SFAS No. 121 had no impact on the operations of the Company.
EARNINGS PER COMMON SHARE
Earnings per common share is based on the number of shares of common stock
outstanding.
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following assumptions were used in estimating the fair value of the
Company's financial instruments for which it was practicable to estimate that
value.
CASH AND CASH EQUIVALENTS - The carrying amount of cash and cash
equivalents approximates their fair value.
NOTE RECEIVABLE FROM AFFILIATE - The interest rate on the note receivable
adjusts periodically with changes in the "base rate." Consequently, the
carrying amount approximates fair value.
REPAIR AND REPLACEMENT FUND - The carrying amount of cash reserves for
repair and replacement of hotel property and equipment approximates their
fair value.
REAL ESTATE MORTGAGE NOTES - The interest rates on the Company's variable
rate real estate mortgage notes adjust periodically with changes in the
"base rate." Consequently, the carrying amount of the variable rate notes
approximates fair value. Fair value of fixed rate real estate mortgage
notes are estimated using a discounted cash flow calculation based on
current market rates offered for similar debt issues. In all cases, the
carrying amount of the fixed rate real estate mortgage notes approximates
fair value.
DEBENTURES PAYABLE - It was not practicable to estimate the fair value of
the Company's debentures payable due to the limited sources of comparable
financing with which to base fair value estimates. Information regarding
the carrying amount, repayment terms and maturity is included in Note 6.
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following:
DECEMBER 31
1995 1996
---------------- ----------------
Land and improvements $ 5,588,092 $ 5,592,609
Buildings and improvements 23,396,396 27,285,519
Furniture, fixtures and equipment 10,805,305 13,354,585
---------------- ----------------
Total cost 39,789,793 46,232,713
Accumulated depreciation (11,761,939) (13,554,858)
---------------- ----------------
Net property and equipment 28,027,854 32,677,855
Construction in progress 677,423 6,045,057
---------------- ----------------
Total property and equipment $ 28,705,277 $ 38,722,912
================ ================
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
4. INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company holds general partner interests in various limited partnerships
(the Associates) which own and operate ClubHouse Inn hotels. Information
regarding equity (deficit) investments and advances as of December 31, 1995 and
1996 is as follows:
NET EQUITY
(DEFICIT)
EQUITY INVESTMENT
OWNERSHIP (DEFICIT) AND
INVESTEE PERCENT INVESTMENT ADVANCES ADVANCES
-------- --------- -------------- -------------- --------------
1995:
Wichita C.I. Associates III, L.P. 13.36% $ 147,872 $ - $ 147,872
Topeka C.I. Associates, L.P. 3.49 64,484 - 64,484
Albuquerque C.I. Associates, L.P. 1.00 (17,630) - (17,630)
Westmont C.I. Associates, L.P. 9.09 405,113 - 405,113
Savannah C.I. Associates, L.P. 5.00 46,024 - 46,024
San Jose C.I. Associates, L.P. 5.00 142,059 - 142,059
Long Beach C.I. Associates, L.P. 5.00 47,722 - 47,722
Valdosta C.I. Associates, L.P. .50 4,739 - 4,739
Marquis Hotel Associates
(a joint venture) 50.00 (263,098) - (263,098)
-------------- -------------- --------------
Total $ 577,285 $ - $ 577,285
============== ============== ==============
1996:
Wichita C.I. Associates III, L.P. 13.36% $ 158,661 $ - $ 158,661
Topeka C.I. Associates, L.P. 3.49 60,193 - 60,193
Albuquerque C.I. Associates, L.P. 1.00 (16,937) - (16,937)
Westmont C.I. Associates, L.P. 9.09 417,306 - 417,306
Savannah C.I. Associates, L.P. 5.00 30,885 - 30,885
San Jose C.I. Associates, L.P. 5.00 142,019 - 142,019
Long Beach C.I. Associates, L.P. 5.00 - - -
Valdosta C.I. Associates, L.P. .50 5,176 - 5,176
Marquis Hotel Associates
(a joint venture) 50.00 (77,920) - (77,920)
-------------- -------------- --------------
Total $ 719,383 $ - $ 719,383
============== ============== ==============
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
4. INVESTMENT IN UNCONSOLIDATED AFFILIATES (CONTINUED)
In December 1995, the assets of Long Beach C.I. Associates, L.P. were sold
resulting in a loss of approximately $3,150,000. Proceeds from the sale were
used to repay partner advances and remaining proceeds were paid to the
partnership's general and limited partners in accordance with the terms of the
limited partnership agreement. The Company's share of the loss recognized
during 1995 was approximately $158,000. Management liquidated and dissolved the
partnership in 1996.
The following presentation is a condensed combined summary of financial
information of the Company's investments in unconsolidated affiliates as of
December 31, 1995 and 1996 and for the three years ended December 31, 1996.
Combined Balance Sheets
DECEMBER 31
1995 1996
---------------- ----------------
ASSETS
Current assets $ 1,837,803 $ 2,498,403
Property and equipment, net of accumulated
depreciation of $18,239,031 in 1995 and
$19,570,894 in 1996 30,415,098 29,382,986
Other assets 1,493,679 1,733,917
---------------- ----------------
Total assets $ 33,746,580 $ 33,615,306
================ ================
LIABILITIES AND PARTNERS' EQUITY
Current liabilities $ 1,817,639 $ 2,141,732
Long-term debt, less current portion 30,978,434 27,653,492
Partners' equity 950,507 3,820,082
---------------- ----------------
Total liabilities and partners' equity $ 33,746,580 $ 33,615,306
================ ================
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
4. INVESTMENT IN UNCONSOLIDATED AFFILIATES (CONTINUED)
Combined Statements of Operations
YEARS ENDED DECEMBER 31
1994 1995 1996
---------------- ---------------- ----------------
Revenues $ 15,032,136 $ 15,657,187 $ 16,663,469
Costs and expenses:
Operating 9,740,885 10,099,902 10,355,882
Interest 3,085,321 3,123,752 2,398,549
Depreciation and amortization 2,452,635 2,165,275 1,719,166
Other (income) loss (257,389) 3,139,346 (90,833)
---------------- ---------------- ----------------
Total costs and expenses 15,021,452 18,528,275 14,382,764
---------------- ---------------- ----------------
Net income (loss) $ 10,684 $ (2,871,088) $ 2,280,705
================ ================ ================
5. INTANGIBLE ASSETS
Intangible assets are recorded at cost and consist of the following:
DECEMBER 31
1995 1996
---------------- ----------------
Financing costs $ 1,046,627 $ 1,113,495
Franchise costs 238,500 153,000
Organization costs 571,626 547,617
Preopening costs 6,863 153,783
---------------- ----------------
Total cost 1,863,616 1,967,895
Accumulated amortization (409,667) (523,127)
---------------- ----------------
Net intangible assets $ 1,453,949 $ 1,444,768
================ ================
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT
DECEMBER 31
1995 1996
---------------- ----------------
Real estate mortgage notes:
8.70% mortgage notes (a) $ 20,901,309 $ 20,484,443
Richardson C.I. Associates, L.P. (b) - 5,000,000
St. Louis C.I. Associates, L.P. (c) - 2,240,173
Tenth Street C.I., Inc. (d) 6,487,315 6,342,348
Airport C.I., Inc. (e) 4,901,252 4,813,752
ClubHouse Properties, Inc. (f) 947,460 909,033
---------------- ----------------
Total real estate mortgage notes 33,237,336 39,789,749
Debentures payable (g) 7,125,000 6,625,000
---------------- ----------------
Total long-term debt 40,362,336 46,414,749
Less current portion (1,221,821) (1,448,165)
---------------- ----------------
Noncurrent portion $ 39,140,515 $ 44,966,584
================ ================
(a) 8.70% notes, payable in monthly installments of $184,910, including
interest, with final payments due October 2005; collateralized by
substantially all of the assets of limited partnerships owning ClubHouse
Inn hotels located in Knoxville, Tennessee; Omaha, Nebraska; Overland
Park, Kansas; and Atlanta, Georgia. These notes were issued in September
1995 to refinance previously issued debt which required monthly
installments of principal and interest at variable rates ranging from
8.75% to 10.50%.
(b) $5,000,000 promissory note collateralized by the assets of Richardson C.I.
Associates, L.P. The note required monthly payments of interest only at
prime plus 1% (9.25% at December 31, 1996). Beginning December 1996,
monthly payments of principal and interest, based on a 15-year
amortization, are due through maturity on November 1, 1998. Additionally,
the interest rate may change to prime plus 2% on July 1, 1998 unless a
binding commitment for permanent financing to repay the note in its
entirety on or before November 7, 1998 is obtained.
(c) $6,000,000 note to fund the construction of a ClubHouse Inn in St. Louis,
Missouri; collateralized by the assets of St. Louis C.I. Associates, L.P.
The note requires monthly payments of interest only at prime plus 1%
(9.25% at December 31, 1996) through April 1, 1997. Thereafter, monthly
payments of principal and interest (at the
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
two-year U.S. Treasury rate plus 2.75%), based on a 20-year amortization,
are due beginning May 1, 1997 through maturity on March 31, 1999.
Additionally, effective April 1, 1998, the interest rate may be increased
.25% if the debt service coverage ratio, as defined, falls below 1.2 to 1.
This note has been classified as long term until the construction is
completed and the total amount of advances to be made under the note
agreement has been determined.
(d) Variable rate notes, payable in monthly installments of $66,491, including
interest, with final payment due August 1999; collateralized by
substantially all of the assets of Tenth Street C.I., Inc., which owns the
ClubHouse Inn and Conference Center located in Nashville, Tennessee.
Interest is currently charged at 9.25%; however, the rates are subject to
periodic adjustment at 1% over the prime rate of CitiBank of New York.
(e) 8.75% notes, payable in monthly installments of $43,000, including
interest, with final payment due July 1997; collateralized by
substantially all of the assets of Airport C.I., Inc. which owns a
ClubHouse Inn hotel located in Kansas City, Missouri.
(f) Variable rate note, payable in monthly installments of $10,071, including
interest, with final payment due June 2009; collateralized by the
Company's office facilities located in Overland Park, Kansas. Interest is
currently charged at the rate of 8.75%; however, the rate is subject to
periodic adjustment after five years at 300 basis points above the weekly
average yield on U.S. Treasury Securities and in five year intervals
thereafter until maturity. The first scheduled rate adjustment is June
1999.
(g) $6,000,000 face amount debentures which mature March 2004. Quarterly
payments of $125,000 are due until maturity. The recorded amount of the
debentures reflect the gross remaining principal and interest due under
the terms of the debenture agreements. All payments made under the
debenture agreements are applied against the recorded amount of the
debenture. Accordingly, no interest expense has been recognized in the
accompanying consolidated statements of income.
In addition, CHI has granted the holder of the debentures warrants to acquire
36% of the outstanding common stock of CHI. The percentage to be acquired by
the lender may be reduced to 20% depending on the outstanding principal balance
of the debentures. The warrants may be exercised at an aggregate price of $100
during any period the debentures are outstanding.
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
During 1995, the Company used the proceeds from a $4.8 million note, included
in (a) above, to refinance a loan from an affiliated entity. The carrying value
of the note at the date of refinancing was approximately $5.6 million. The
terms of the existing note agreement provided for a discounted payoff amount,
based on appraised value, in the event of a refinancing; accordingly, the
Company recognized a gain on the early extinguishment of debt of $1,544,822.
During 1994, as part of a troubled-debt restructuring, the Company issued
debentures (the new debentures) with an aggregate face amount of $6,000,000 in
exchange for then outstanding Series A and B subordinated debentures with an
aggregate principal amount of $10,000,000, accrued interest thereon of
$2,541,666 and certain other consideration. The new debentures, which mature in
2004, carry an aggregate interest charge of $2,000,000. As a result of this
troubled-debt restructuring, the Company recorded an extraordinary gain of
$4,723,768.
Principal maturities for long-term debt are as follows:
1997 $ 1,448,165
1998 6,143,391
1999 3,650,100
2000 1,492,667
2001 1,589,408
Thereafter 32,091,018
----------------
$ 46,414,749
================
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31
1994 1995 1996
-------------- -------------- --------------
Current:
Federal $ 12,496 $ 532,081 $ 586,131
State - - 93,359
Deferred:
Federal 452,922 181,547 431,741
State 79,057 110,858 56,623
Change in deferred tax asset
valuation allowance (604,150) (292,405) (981,363)
-------------- -------------- --------------
Total income tax expense (benefit) $ (59,675) $ 532,081 $ 186,491
============== ============== ==============
The provision for income taxes on the 1994 extraordinary gain was offset by a
change in the valuation allowance of the deferred tax assets. Accordingly, no
tax expense was recognized on the 1994 extraordinary gain. The provision for
income taxes on the 1995 extraordinary gain was partially offset by a change in
the valuation allowance of the deferred tax assets.
The reconciliation of income taxes at statutory rates to income taxes at
effective rates is as follows:
YEAR ENDED DECEMBER 31
1994 1995 1996
-------------- -------------- --------------
Statutory rate $ 509,834 $ 677,852 $ 1,056,266
State and local income taxes 74,976 99,684 155,333
Change in deferred tax asset
valuation allowance (604,150) (292,405) (981,363)
Others, net (40,335) 46,950 (43,745)
-------------- -------------- --------------
$ (59,675) $ 532,081 $ 186,491
-------------- -------------- --------------
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The tax effects of significant temporary differences that give rise to deferred
tax balances are presented below:
DECEMBER 31
1995 1996
----------- ----------
Deferred tax assets:
Net operating loss carryforwards $ 496,467 $ -
Alternative Minimum Tax credit carryforward 538,081 491,368
Capital loss carryforward 63,266 113,432
Investment in unconsolidated affiliates 162,384 161,468
Intangible assets 43,923 -
Accrued expenses 131,790 24,544
Others 30,700 6,132
----------- ----------
Total deferred tax assets 1,466,611 796,944
Deferred tax asset valuation allowance (1,094,795) (113,432)
----------- ----------
Net deferred tax assets 371,816 683,512
Deferred tax liabilities:
Property and equipment (280,157) (182,532)
Intangible assets - (2,279)
Others (91,659) (5,702)
----------- ----------
Total deferred tax liabilities (371,816) (190,513)
----------- ----------
Net deferred tax assets $ - $ 492,999
=========== ==========
Income taxes paid were $-0- in 1994, $93,464 in 1995, and $777,424 in 1996.
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8. LEASES
The Company is a lessor of office space under operating leases expiring in
various years through the year 2000. The portion of the Company's property and
equipment at December 31, 1996 which is used in leasing activities is as
follows:
Land $ 281,769
Building and improvements 870,130
Furniture, fixtures and equipment 270,877
--------------
1,422,776
Accumulated depreciation (291,263)
--------------
$ 1,131,513
==============
The Company is responsible for payment of all taxes, insurance, utilities and
other operating expenses up to a base amount as provided in each lease.
Operating expenses in excess of the base amount are reimbursed to the Company
in accordance with percentages established in each lease. The leases generally
grant an option to the lessee to extend the term of the lease. Future minimum
rentals to be received from noncancelable leases are as follows:
1997 $ 169,509
1998 164,412
1999 153,191
2000 34,371
--------------
$ 521,483
==============
9. TRANSACTIONS WITH RELATED PARTIES
The Company is party to transactions with affiliated companies in the normal
course of business. The Company is related by common ownership and shares
office facilities with Innco Hospitality, Inc.
The Company manages various ClubHouse Inn hotels owned by affiliates under
management agreements which require monthly management fees ranging from 2% to
4% of gross revenues from the property plus 10% of net operating cash flow, as
determined by a formula specified in the agreements. The Company also provides
centralized accounting, purchasing and reservation systems and charges the
affiliates for their respective shares of these costs.
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ClubHouse Hotels, Inc.
Notes to Consolidated Financial Statements (continued)
9. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The Company is the franchiser of ClubHouse Inn hotels owned by affiliates under
franchise agreements which require monthly royalty fees of 4% and marketing
assessments of 1 1/2% of gross room revenues, respectively. The franchise
agreements are for terms of 15 years.
The Company leases office space to Innco Hospitality, Inc. under an operating
lease (Note 8).
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to environmental regulations related to the ownership,
management, development and acquisition of its hotel properties. The Company is
not aware of any environmental condition on any of its properties which could
have a material adverse effect on the Company's financial statements.
11. SUBSEQUENT EVENTS
On July 31, 1997, Wyndham Hotel Corporation (Wyndham) acquired the Company. In
connection with the acquisition, Wyndham acquired direct or indirect ownership
of 13 ClubHouse Inn hotels, including four hotels owned by limited partnerships
which are affiliates of the Company. Wyndham also acquired ownership of partial
interests in the three additional limited partnerships which are affiliates of
the Company, ownership of the ClubHouse Inn brand name, and one license for a
franchised ClubHouse Inn hotel.
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