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EXHIBIT 99.2
Report of Independent Auditors
The Stockholders
ClubHouse Hotels, Inc.
We have audited the accompanying combined balance sheets as of December 31,
1996 and 1995, of the entities listed in Note 1 (ClubHouse Acquisition Hotels),
and the related combined statements of income, changes in partners'/owner's
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Entities' 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 combined financial position at December 31, 1996 and
1995 of ClubHouse Acquisition Hotels and the combined results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young L.L.P.
Kansas City, Missouri
April 25, 1997, except for Note 8, as
to which the date is July 31, 1997
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ClubHouse Acquisition Hotels
Combined Balance Sheets
DECEMBER 31 JUNE 30
1995 1996 1997
-------------- -------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 860,349 $ 910,047 $ 1,158,053
Accounts receivable 145,331 254,799 292,769
Prepaid expenses 109,601 129,442 154,052
-------------- -------------- --------------
Total current assets 1,115,281 1,294,288 1,604,874
Property and equipment, net 16,860,175 16,595,149 16,176,832
Intangible assets, net 288,544 298,155 280,065
Repair and replacement fund 594,509 655,574 848,825
Other assets 86,486 85,436 85,436
-------------- -------------- --------------
Total assets $ 18,944,995 $ 18,928,602 $ 18,996,032
============== ============== ==============
LIABILITIES
Current liabilities:
Accounts payable $ 180,334 $ 206,171 $ 220,157
Due to affiliates 51,185 172,513 140,991
Due to partners/owner 37,328 147,009 29,314
Accrued interest 165,385 91,280 64,350
Accrued property taxes 194,080 233,653 215,440
Accrued expenses 215,471 257,071 239,346
Current portion of long-term debt 409,087 424,151 441,664
-------------- -------------- --------------
Total current liabilities 1,252,870 1,531,848 1,351,262
-------------- -------------- --------------
Long-term debt:
Note payable to owner 5,099,846 5,099,846 5,099,846
Mortgage notes 15,074,158 14,651,325 14,409,750
-------------- -------------- --------------
Total long-term debt 20,174,004 19,751,171 19,509,596
-------------- -------------- --------------
Total liabilities 21,426,874 21,283,019 20,860,858
Commitments and contingencies
PARTNERS'/OWNER'S DEFICIT (2,481,879) (2,354,417) (1,864,826)
-------------- -------------- --------------
Total liabilities and partners'/owner's deficit $ 18,944,995 $ 18,928,602 $ 18,996,032
============== ============== ==============
See accompanying notes.
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ClubHouse Acquisition Hotels
Combined Statements of Income
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
1995 1996 1996 1997
-------------- -------------- -------------- --------------
(UNAUDITED)
REVENUES
Hotel room revenues $ 10,624,552 $ 10,583,769 $ 5,252,362 $ 5,360,243
Other hotel revenues 402,219 375,510 188,899 279,360
-------------- -------------- -------------- --------------
Total revenues 11,026,771 10,959,279 5,441,261 5,639,603
-------------- -------------- -------------- --------------
OPERATING COSTS AND EXPENSES
Hotel room expenses 2,646,324 2,725,444 1,342,850 1,332,876
Hotel room expenses - affiliate 65,276 57,575 31,042 26,493
Other hotel expenses 184,104 152,995 79,351 84,033
Administrative and general 942,628 1,081,076 430,948 450,976
Management and accounting fees -
affiliate 325,583 331,105 182,871 211,374
Management and accounting fees 83,912 83,693 40,197 43,404
Royalty fees - affiliate 335,397 334,628 167,968 168,173
Royalty fees 89,584 88,712 42,126 46,237
Marketing fees - affiliate 125,775 125,486 62,988 63,066
Other marketing expenses 517,134 530,040 268,203 255,520
Property operation and maintenance 1,158,787 1,138,079 551,022 531,820
Property taxes and insurance 385,215 462,283 241,963 237,119
Depreciation and amortization 1,212,834 906,167 471,582 492,781
-------------- -------------- -------------- --------------
Total operating expenses 8,072,553 8,017,283 3,913,111 3,943,872
-------------- -------------- -------------- --------------
Income from operations 2,954,218 2,941,996 1,528,150 1,695,731
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest income 40,161 48,408 19,967 26,226
Interest expense (1,869,368) (1,790,762) (850,390) (861,772)
-------------- -------------- -------------- --------------
Total other expense (1,829,207) (1,742,354) (830,423) (835,546)
-------------- -------------- -------------- --------------
Net income $ 1,125,011 $ 1,199,642 $ 697,727 $ 860,185
============== ============== ============== ==============
See accompanying notes.
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ClubHouse Acquisition Hotels
Combined Statements of Changes in Partners'/Owner's Deficit
Balance at December 31, 1994 $ (2,603,758)
Distributions (1,003,132)
Net income 1,125,011
------------
Balance at December 31, 1995 (2,481,879)
Distributions (1,072,180)
Net income 1,199,642
------------
Balance at December 31, 1996 (2,354,417)
Distributions (unaudited) (370,594)
Net income (unaudited) 860,185
------------
Balance at June 30, 1997 (unaudited) $ (1,864,826)
============
See accompanying notes.
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ClubHouse Acquisition Hotels
Combined Statements of Cash Flows
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
1995 1996 1997
-------------- -------------- --------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income $ 1,125,011 $ 1,199,642 $ 860,185
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,212,834 906,167 492,781
Changes in operating assets and
liabilities:
Accounts receivable 3,567 (109,468) (37,970)
Prepaid expenses 7,414 (19,841) (24,610)
Other assets (1,200) 1,050 -
Accounts payable 29,638 25,837 13,986
Due to affiliates (44,773) 121,328 (31,522)
Due to partners/owner 37,328 109,681 (117,695)
Accrued interest (30,130) (74,105) (26,930)
Accrued property taxes 9,553 39,573 (18,213)
Accrued expenses (15,603) 41,600 (17,725)
-------------- -------------- --------------
Net cash provided by operating activities 2,333,639 2,241,464 1,092,287
-------------- -------------- --------------
INVESTING ACTIVITIES
Purchase of property and equipment (369,298) (596,238) (56,374)
Investment in intangible assets (211,174) (54,514) -
Net additions to repair and
replacement fund (108,877) (61,065) (193,251)
-------------- -------------- --------------
Net cash used in investing activities (689,349) (711,817) (249,625)
-------------- -------------- --------------
FINANCING ACTIVITIES
Proceeds from long-term debt 3,400,000 - -
Repayment of long-term debt (3,759,283) (407,769) (224,062)
Distributions to partners/owner (1,003,132) (1,072,180) (370,594)
-------------- -------------- --------------
Net cash used in financing activities (1,362,415) (1,479,949) (594,656)
-------------- -------------- --------------
Net increase in cash 281,875 49,698 248,006
Cash, beginning of year 578,474 860,349 910,047
-------------- -------------- --------------
Cash, end of year $ 860,349 $ 910,047 $ 1,158,053
============== ============== ==============
For supplemental disclosures of cash flow information, see Note 4.
See accompanying notes.
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of the
ClubHouse Acquisition Hotels (the Entities), which consist of Albuquerque C.I.
Associates, L.P. (Albuquerque); Topeka C.I. Associates, L.P. (Topeka); Valdosta
C.I. Associates, L.P. (Valdosta); Wichita C.I. Associates III, L.P. (Wichita)
(together, the Partnerships) and C.I. Nashville, Inc. (Nashville). The Entities
are beneficially owned and/or managed by ClubHouse Hotels, Inc. (CHI). CHI is,
indirectly, the managing general partner of the Partnerships and provides
management and other services to all of the Entities.
The accompanying combined financial statements were prepared to present the
balance sheets and related results of operations and cash flows of the Entities
and may not necessarily reflect the financial position, results of operations
and cash flows of the Entities that might have resulted had they actually
operated as a stand-alone entity.
The Entities are engaged in owning and operating hotels under the "ClubHouse
Inns" brand name. Revenues are generated from hotel operations and related
activities and are recognized when earned.
INTERIM FINANCIAL STATEMENTS
The interim financial statements have been prepared by the Entities 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 Entities with respect to the results of their 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.
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
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 5-10 years
Financing costs Term of loan
Franchise costs Term of agreement
Organization costs 5 years
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising expense
for the years ended December 31, 1996 and 1995 was $422,269 and $421,586,
respectively.
INCOME TAXES
Nashville is the only entity for which a provision for income taxes is required
in the accompanying financial statements because each partner of the
Partnerships is individually responsible for reporting its respective share of
partnership net income or loss.
CASH
For purposes of reporting cash flows, cash generally includes cash on hand and
demand deposits with financial institutions.
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(CONTINUED)
REPAIR AND REPLACEMENT FUND
Under the terms of the Partnerships' management and certain of their debt
agreements, the Partnerships are required to fund a reserve for repair and
replacement of property equipment. The agreements generally call for the
Partnerships to place between 3% and 4% of monthly gross revenues in this fund.
Expenditures from this fund require the approval of CHI.
RECENTLY ISSUED ACCOUNTING STANDARD
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 Entities adopted SFAS No. 121
during 1995. The adoption of SFAS No. 121 had no impact on the operations of
the Entities.
2. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following:
DECEMBER 31
1995 1996
------------ ------------
Land $ 3,928,026 $ 3,928,026
Buildings and improvements 16,449,049 16,492,428
Furniture and equipment 7,728,587 8,006,503
------------ ------------
Total cost 28,105,662 28,426,957
Accumulated depreciation (11,245,487) (11,831,808)
------------ ------------
Net property and equipment $ 16,860,175 $ 16,595,149
============ ============
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements (continued)
3. INTANGIBLE ASSETS
Intangible assets are recorded at cost and consist of the following:
DECEMBER 31
1995 1996
-------------- --------------
Financing costs $ 317,945 $ 317,462
Franchise costs 113,489 113,489
Organization costs 16,086 16,086
-------------- --------------
Total cost 447,520 447,037
Accumulated amortization (158,976) (148,882)
-------------- --------------
Net intangible assets $ 288,544 $ 298,155
============== ==============
4. LONG-TERM DEBT
DECEMBER 31
1995 1996
-------------- --------------
Real Estate Mortgage Notes:
Albuquerque C.I. Associates, L.P. (a) $ 5,458,050 $ 5,368,627
Topeka C.I. Associates, L.P. (b) 2,973,247 2,832,803
Valdosta C.I. Associates, L.P. (c) 3,669,488 3,565,328
Wichita C.I. Associates III, L.P. (d) 3,382,460 3,308,718
-------------- --------------
Total Real Estate Mortgage Notes 15,483,245 15,075,476
Note payable to owner (e) 5,099,846 5,099,846
-------------- --------------
Total long-term debt 20,583,091 20,175,322
Less current portion 409,087 424,151
-------------- --------------
Noncurrent portion $ 20,174,004 $ 19,751,171
============== ==============
(a) Albuquerque's mortgage note payable is collateralized by substantially
all of Albuquerque's property and equipment. Monthly principal and
interest payments of $48,648 are due until maturity in March 2016. The
interest rate on the note is 8.75% through March 1, 1997 and adjusting
annually thereafter at 3.75% over the weekly average yield on U.S.
Treasury securities. This loan was modified in March 1996 to extend the
maturity date for 20 years. The interest rate at December 31, 1995 was
10%.
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
(b) Topeka's mortgage notes payable are collateralized by substantially all
of Topeka's property and equipment and are payable in monthly
installments of principal and interest through maturity in November 2011.
Topeka has the option to fix the interest rate at the Federal Home Loan
Bank of Topeka's advance rate plus 2% for one-, two- or three-year
periods. At December 31, 1996 and 1995, the interest rate was 8.75% and
6.75%, respectively.
(c) On June 1, 1992, Valdosta's 8% mortgage note was assigned by the
Resolution Trust Corporation to the current lender. Quarterly payments of
25% of net cash flow, as defined, are applied to interest accrued during
the period from July 1, 1992 to February 28, 1993. At December 31, 1996,
such accrued interest amounted to $53,952. Monthly principal and interest
payments of $32,811 are payable through and including March 1, 2000 at
which time all outstanding amounts due under the note become due and
payable in full. The mortgage note is collateralized by substantially all
of Valdosta's property and equipment.
(d) Wichita's mortgage note bears interest at 7.95% and requires monthly
installments of $28,333, including interest, through maturity in October
2005. The note is collateralized by substantially all of Wichita's
assets. Wichita's previous variable rate mortgage note required monthly
payments of principal plus interest at 10.75% through maturity in June
1995. Thereafter, Wichita made monthly payments of interest only through
September 1995 at which time the remaining principal balance was repaid
with the proceeds of the new mortgage note.
(e) Nashville's demand note payable is secured by a deed of trust on the
property. Interest only payments at 8.5% are due monthly. The note
agreement has "targeted" a minimum working capital position of $100,000.
Contingent interest payments are due to the extent that working capital
exceeds $100,000. Total interest is not to exceed 12.5% per year.
Principal payments are due only to the extent that working capital
exceeds the level needed to pay interest at the rate of 12.5%. Contingent
interest incurred during 1996 was $76,948. No contingent interest was
incurred in 1995. The owner has agreed not to demand repayment of the
note in 1997. Accordingly, this note has been classified as long-term in
the accompanying balance sheets.
Cash paid by the Entities for interest in 1996 and 1995 was $1,778,732 and
$1,869,368, respectively.
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
Principal maturities for long-term debt are as follows:
1997 $ 424,151
1998 420,105
1999 449,746
2000 3,545,284
2001 405,055
Thereafter 9,831,135
--------------
$ 15,075,476
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5. INCOME TAXES
The provision for income taxes for Nashville consists of the following:
YEAR ENDED DECEMBER 31
1995 1996
--------- --------
Current:
Federal $ - $ -
State - -
--------- --------
- -
Deferred:
Federal (14,878) 9,132
State (2,626) 1,612
Change in deferred tax asset valuation allowance 17,504 (10,744)
--------- --------
- -
--------- --------
Total income tax expense $ - $ -
========= ========
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The reconciliation of income taxes at the statutory rate to income taxes at the
effective rate is as follows:
YEAR ENDED DECEMBER 31
1995 1996
-------------- --------------
Statutory rate $ 17,676 $ -
State and local taxes 1,641 -
Utilization of net operating loss carryforwards (19,317) -
-------------- --------------
$ - $ -
============== ==============
Nashville incurred a net loss for the year ended December 31, 1996.
Accordingly, there is no reconciliation of income taxes at the statutory rate
to income taxes at the effective rate. Nashville provides deferred income taxes
to reflect the impact of temporary differences between the recorded amounts of
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. The significant temporary differences and
carryforwards and their related deferred tax asset (liability) and deferred tax
asset valuation allowance balances are as follows:
YEAR ENDED DECEMBER 31
1995 1996
-------------- --------------
Property and equipment $ (19,308) $ (30,052)
Net operating loss carryforward 1,071,038 1,071,038
Deferred tax asset valuation allowance (1,051,730) (1,040,986)
-------------- --------------
$ - $ -
============== ==============
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
For federal income tax purposes, Nashville has net operating loss carryforwards
expiring in the following manner:
AVAILABLE FOR YEAR ENDED
NO LATER THAN DECEMBER 31
-------------------------
2003 $ 469,421
2004 716,431
2005 364,237
2006 284,745
2007 296,170
2008 398,568
2009 148,023
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$ 2,677,595
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6. RELATED-PARTY TRANSACTIONS
Each of the Entities has a management agreement with ClubHouse Inns of America,
Inc. (CIA), an affiliate of the general partner of each partnership and a
wholly owned subsidiary of CHI, to manage the Entities' hotels and provide
accounting services.
In addition, the Entities are obligated under a franchise agreement with CIA to
pay royalty and marketing fees along with their share of the costs of the
ClubHouse Inns' central reservation system. The Entities may also purchase
goods at cost through CIA's centralized purchasing service.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following assumptions were used in estimating the fair value of the
Entities' financial instruments for which it was practicable to estimate that
value.
CASH - The carrying amount of cash approximates its 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.
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ClubHouse Acquisition Hotels
Notes to Combined Financial Statements (continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
REAL ESTATE MORTGAGE NOTES - The interest rates on the Entities' 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 is 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.
NOTE PAYABLE TO OWNER - It was not practicable to estimate the fair value of
Nashville's note payable to owner 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 4.
8. SUBSEQUENT EVENTS
On July 31, 1997, Wyndham Hotel Corporation (Wyndham) acquired CHI. In
connection with the acquisition of CHI, Wyndham acquired direct or indirect
ownership of the Entities.
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