CABINET-SUBJECTS FOR CONSIDERATION, ^ h K a r c h 19

CABINET SUBJECT DOCKET

No- V. LATE 6.4 Decision

Refurbishment of property, at 114 C u r r i e S t r e e t , Adelaide t o enable Department of TAFE-to enter- -m APPROVED - MINISTER TO CHECK WITH CROWN LAW DEPT. RE. PROPOSED COMPANY STRUCTURE

T.A.F.E. 619/1987 Dmmereial environment •.

I

Not relevant

Not relevant

MINUTES forming ENCLOSURE to TAFiJl.9/87 |9

TO THE HON. THE PREMIER FOR CABINET

REFURBISHMENT OF PROPERTY AT 114 CURRIE STREET ADELAIDE (FORMERLY ARMSTRONG'S TAVERN)

THE PROPOSAL

The p r o p o s a l i s to seek endorsement to the refurbishment of the* former Armstrong's Tavern at 114 C u r r i e S t r e e t Ade la ide in order for the Department of TAFE to enter into a j o i n t venture with industry and unions to t ra in students in a commercial environment and operate the hotel as a commercial venture.

BACKGROUND

On 10 November, 1986 Cabinet approved the purchase of the property known as Armstrong's Tavern by the Minister of Employment and Further Education and that capi ta l funds of approximately $500 000 be provided to renovate the bu i ld ing .

It i s intended to operate the hotel as an added t ra in ing f a c i l i t y for the Adelaide College of TAFE in a commercially or ientated environment.

The need for such a f a c i l i t y has been establ ished in the previous Cabinet submission and remains unchanged.

The hotel w i l l function both as a commercial operation and as a t ra in ing f a c i l i t y pa r t i cu la r l y for Austra l ian Traineeship programmes.

As per the previous Cabinet submission, the partners in the operating enterprise w i l l be the Austra l ian Hotels Assoc ia t ion , the Liquor Trades Employees Union and the enterpr ise arm of the Adelaide College of TAFE. Each partner w i l l contr ibute $75 000 towards the f i t out costs of the hote l .

DISCUSSION

In order to ensure the commercial v i a b i l i t y of the j o in t venture i t has been decided to reduce the cap i ta l out lay of the project by ra t iona l i s ing the degree of refurbishment of the bu i ld ing . The extent of internal addit ions and a l te ra t ions has been decreased as well as upgrading of the external facade. In addi t ion i t has been decided to opt for a more modest level of commercial operation of the ho te l .

INUTES forming ENCLOSURE to

Furthermore, Pannell Kerr Forster Chartered Accountants were engaged to undertake a f e a s i b i l i t y study and prepare a business plan of the proposed operation of the hotel and make recommendations as to the s t r u c t u r e of the operating company.

The business plan, a copy of which i s attached, confirms that the p r o j e c t i s v i a b l e .

Treasury has i n d i c a t e d that c a p i t a l funds f o r the refurbishment would be made a v a i l a b l e by t r a n s f e r r i n g funds which were p r e v i o u s l y earmarked f o r the establishment of the Advanced Technology Centre at Regency College.

Funds f o r the Advanced Technology Centre have been s u c c e s s f u l l y sought and o b t a i n e d from the Commonwealth Department of Employment Education and T r a i n i n g .

R e c u r r e n t c o s t s w i l l be met through funds generated by Traineeship programmes and s t u d e n t f e e s and through the commercial operation i f necessary.

There w i l l be no a d d i t i o n a l f i n a n c i a l l i a b i l i t y to the Government e i t h e r i n respect to the commercial operation or the maintenance of the educational and t r a i n i n g programmes which w i l l be operated.

RECOMMENDATION

I t i s RECOMMENDED that approval be given to expend an estimated $500 000 on a l t e r a t i o n s and ad d i t i o n s to the former Armstrong's Tavern at 114 C u r r i e S t r e e t A d e l a i d e to enable the j o i n t TAFE/industry/union and commercial operation of the hotel to commence.

(Lynn M.F. Arnold) MINISTER OF TECHNOLOGY AND STATE DEVELOPMENT MINISTER OF EMPLOYMENT AND FURTHER EDUCATION

##/88 In Cabinet

MINUTES forming ENCLOSURE to A'o / v

TO THE HON. THE PREMIER: FOR CABINET

THE PROPOSAL

The proposal i s to purchase the Armstrong Tavern situated at -114 Currie Street, Adelaide i n order to enter into a joint management arrangement with the industry and unions to train students/staff in a commercial environment and operate the hotel as a commercial venture.

BACKGROUND

The School of Tourism and Hospitality commenced operation in February 1986 and is now operating near maximum capacity. The kitchens in the Hospitality Section of the School are in operation 48 weeks of the year from 8.00 am to 10.00 pm daily. Graduates from the pre-apprentice commercial cookery courses are a l l gaining employment within the Industry.

The continued growth of the Tourism and Hospitality Industry has increased the demand for base level s k i l l s training in a l l areas but particularly so in food and liquor service, cocktails and mixed drinks and wine appreciation. The Adelaide Convention Centre due to open in April 1987 and the 400 room Hyatt Hotel due to open in January 1988, w i l l place an added considerable strain on existing training f a c i l i t i e s within the State.

The operation of a hotel as an added training f a c i l i t y in a commercially oriented environment w i l l provide an unique opportunity for the Government and Industry to combine to ensure the demand for skilled operators within the Tourism and Hospitality Industry i s met and is relevant.

DISCUSSION

The proposition envisages the hotel operating as a training f a c i l i t y while concurrently operating as a commercial entity.

1. Course Needs

The course needs are outlined below.

Traineeship 100 per year New Operator Entry Training 200 students/year Food and Bar Service Training Courses 320 students/year Food Preparation Courses 160 students/year

plus

Work Experience For students in other hospitality courses

and For retraining within the industry.

MINUTES forming ENCLOSURE to No.

2.

Industry Support

Australian Hotels Association (S.A. Branch) - represents the interest of 600 hotel members in South Australia - totally endorse the proposed project and have tentatively committed an amount in the order of $75,000 to assist in the purchase of the building.

The Federated Liquor Employees Union (S.A. Branch) represents the interest of employees employed in hotels, motels, bottleshops, breweries and wineries in South Australia. The Secretary and the Assistant Secretary totally support the project and, subject to ratifi c a t i o n by their Executive, would be prepared to contribute an amount in order of $75>000 to assist i n the purchase of the building.

The Liquor Trades Union believes i f negotiations can be concluded in respect of the recommendation question for trainees, that this would be an ideal environment to commence traineeships within the hospitality industry in South Australia.

The A.M.A. and the Liquor Trades Union both agree that the proposed project would attract sponsorship from a number of leading companies in South Australia as they would see i t as a hospitality industry training centre.

Companies mentioned as possible providers of support:-

South Australian Brewery Co Coopers Brewery Hardy's Wine Wolf Blass Wines MacMouht Pty. Ltd. Hotel & Cafe Suppliers Adelaide Felt Suppliers Adelaide Casino

Such contributions could be in the way of financial support, supply of equipment for upgrading of the premises and/or support in the supply of goods.

Management of the Operation

It is recommended that a Board of Management be constituted to have overall responsibility for a l l decisions associated with the operation of the hotel. The President of the Australian Hotels Association (S.A. Branch), the Secretary of the Federated Liquor Trades Employees Association, a nominee from the Adelaide College of TAFE and a nominee from the Department of TAFE Head Office, would constitute the Board of Management.

The Licensee/Manager of the hotel would be responsible for the day to day operation of the premises and report directly to the Board of Management.

M/NUThS forming KXCLOSUM: t<> -Vo.

3-

Child Care *

The feasibility of incorporating child care f a c i l i t i e s in the project is currently under investigation. It may be possible to incorporate

child care on the f i r s t floor of the building. To provide the required outdoor play space i t would be necessary to acquire development rights over a privately owned car park at the rear of the hotel. This would also provide a linkage to the college.

The costs associated with the child care proposal would be funded from other sources, eg. College Council

COSTS

1. Capital

(a) The purchase price of the f a c i l i t y is likely to be between $625,000 and $700,000 depending upon negotiations. The payment may be made in two or three stages either through negotiations with the owners or by the College Council raising a loan which w i l l be later reimbursed by the Government.

(b) The building w i l l require extensive renovations which are estimated to cost in excess of $500,000. However, i t wil l be possible to lessen the impact of this cost by staging the work, by the use of limited student input as part of their practical experience, and by donations and assistance from the industry. Some of the costs of renovation (possibly $150,000) could be made available through the Commonwealth Tertiary Education Commission for the traineeship programme.

2. Recurrent

(a) Training Courses / Traineeships

A l l operating costs are expected to be covered as part of the trainee programme.

New Operator Entry Courses

A l l operating costs w i l l be covered from student fees.

Food and Bar Service Training Courses

The costs of mounting these courses wil l be covered by student fees.

Food Preparers Course

The costs of mounting these courses w i l l be covered by students fees.

MINUTES forming ENCLOSURE to

4.

A'o.

(b) Hotel Operation

(i) Operating Turnover of $12,000 per week ($624,000 pa) i n i t i a l l y i s expected.

( i i ) Efficient operation w i l l give a net return on investment of 13$ - IS% i-e. $8l,120 - $93,600 pa in due course.

These figures are expected to increase significantly when the hotel is f u l l y operational and the new 12 story Commonwealth Government Office block, which is situtated across the street, i s opened.

It i s confidently expected that the return from the commercial operation of the hotel w i l l more than cover a l l operating expenses and may, in time, be used to underwrite educational programmes.

FINANCING

The capital cost of the purchase of the hotel would need to be met from loan works funds, either by a one off increase of $500,000 in 1986/87, or by a series of annual payments to repay a loan raised through SAFA or the College Council.

The renovation costs w i l l also require additional loan funds of approximately $200,000 i n 1986/87 and $300,000 in 1987/88. Although the required amount may be less depending on assistance from industry and the College Council and traineeship capital funding.

The recurrent costs associated with the project w i l l be met from the self funding courses or from new programme funds. No additional recurrent funding w i l l be sought.

The new stock cost of $25,000 w i l l be met by the college in the f i r s t instance to be reimbursed by the f i r s t operating surplus. After which the net operation surplus from the commercial operation w i l l be returned to consolidated revenue.

TREASURY COMMENT

Preliminary discussions have been held with Treasury. It is considered that i f Cabinet wish to proceed the preferred method of funding i s through the consolidated account with additional appropriation being made to the Department of TAFE.

Concern was expressed at the short time available to make an assessment; at the balance and interface between the Commercial and Training a c t i v i t i e s . Treasury indicated that i f time permitted they would prefer a detailed fea s i b i l i t y , t o be conducted before making a recommendation.

MINUTES forming ENCLOSURE to /V

5-

SUMMARY

The proposal provides a unique opportunity to conduct training progranunes in a commercial environment strongly supported by the Industry and Unions who would be partners in the proposal.

Investigations show that the proposition i s soundly based and while further investigation may result i n more precise definition of economic and operational issues, i t i s understood that negotiations are underway to lease the property - failure to act now could well result i n the opportunity being l o s t .

RECOMMENDATIONS

It i s Recommended :

1. That the property at 114 Currie Street, Adelaide be purchased for use as a training f a c i l i t y , and commercial hotel venture.

2. That the property be purchased as tenants .in common with the A.FLA. and Liquor Unions i n proportion with the funds provided, j

3« That additional capital funds of approximately $500,000 be provided to f a c i l i t a t e the purchase (A.H.A. and the Unions are li k e l y to contribute an additional $75,000 each), and $200,000 for the f i r s t stage of renovations.

4« That the Valuer General be requested to negotiate for the purchase of the property.

5. That on purchase, the Control of the f a c i l i t y be handed over to a Management Board consisting of representation from the College Council, the A.H.A., the Unions and the Department of TAFE,.

(L.M. ARNOLD) '•.V»

MINISTER OF EMPLOYMENT AND FURTHER EDUCATION \ \ i\am MINISTER OF STATE DEVELOPMENT AND TECHNOLOGY

» * ' . * t f / I 1 / 8 6 Premier's / Dept

i

10 M

ARMSTRONGS TAVERN COMPLEX

TABLE OP OQMTKMTtf

SECTION

1.0 INTRODUCTION

1.1 Purpose and Scope of Business Plan

1.2 Report Limitations

1.3 Background

2.0 OPERATING STRUCTURE

2.1 Operating Entity

2.2 Management Structure

2.3 Reporting Requirements

3.0 PROJECTED INCOME AND EXPENDITURE

3.1 Assumptions

3•2 Income

3.3 Expenditure

3.4 Funding

llffMUJUCTIOW

Purpose and Scope of Business Plan

The head of the School of Tourism and Hospitality, Adelaide College has instructed Panne11 Kerr Forster to undertake to prepare a business plan in relation to the proposed operation of the former licensed premises, situated at the corner of Currie and Rosina Streets, Adelaide, and previously known as Armstrongs Tavern. Based on a meeting held with the head of the School of Tourism and Hospitality and the financial controller of the college, the purpose of the business plan is to establish the financial viability, or otherwise, of redevelopment of the complex, and operation as such, with an emphasis on the training aspect of the facility as part of the overall curriculum offered by the School of Tourism and Hospitality to students of various courses conducted by that School.

The underlying consideration in redevelopment and establishment of the facility is that the facility must be commercially and financially viable, in the fi r s t instance, and that the training aspect of the facility be considered a secondary consideration, after first satisfying the requirement for the facility to be both commercially and financially viable.

We have been provided with a copy of the draft business plan of the hotel premises, dated the 17th July 1987, prepared by the head of the School of Tourism and Hospitality. The objectives of the business plan, the positioning of the hotel in the market, and it's major activities, are detailed therein. It is not our intention to repeat the contents of this business plan, but rather to attach i t as an addendum to this report, to enable the objective and desires in relation to the hotel premises to be understood.

The purpose of this document is to:-

1. Assess the financial viablility of redevelopment and reopening of the facility.

2. Recommend an appropriate structure to operate the lease of the facility.

3. Provide general recommendations in respect of the style of operations of the facility.

4,.* Produce and provide financial projections in respect of the operations of the facility for consideration by the proposed owners and operators of the facility.

Report Limitations

This document contains matters of a business, commercial and financial nature. Prior to releasing a l l or any information contained in this document, the views of Pannell Kerr Forster, must be sought. Cont.../2

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Throughout the report we have provided information gleaned from our data bank of information and statistics maintained in respect of the ownership and operation of licensed premises. This information is for the % purposes of establishing parameters for preparation of the report, and should be held in the strictest confidence. As to the projections of income and expenditure, the estimates are based upon assumptions and circumstances which are current now, have been detailed herein, and are subject to variations which may arise as future operations, and related factors materialise. Accordingly, we cannot provide any assurances that the estimates will be representative of the results that will be obtained at a future date •

However, based on the understanding that the proposed redevelopment of the complex is correctly and efficiently undertaken, and the ultimate operating facility is efficiently laid out, competent management are engaged to run the facility, adequate trained staff are provided to operate the facility, the facility is adequately marketed and promoted, expenditure incurred in the day-to-day operations of the facility is in accordance with the industry standard, and those detailed in the attached projections and the operating entity has adequate and sufficient working capital to fund the day-to-day operations of the facility, then the facility should be in a position to achieve the income and expenditure results as detailed in the attached projections of income and expenditure.

1.3 Background

The South Australian Government in December 1986, purchased the former licensed premises operation, known as Armstrongs Tavern, at 114 Currie Street, Adelaide, for the sum of $700,000. At the time of acquisition, the property was acquired to permit a joint training facility/commercial venture for the hospitality industry, to be conducted at a location in close proximity to the Adelaide College.

Our understanding is that the South Australian Government provides sufficient funds for the capital cost of redevelopment facility to be undertaken in f u l l . These capital improvements would be in the nature of landlord improvements to the facility, to enable i t to be once again operated as a hotel offering front bar, lounge bar, and browse in bottle department liquor sales, and a bistro food operation incorporated in the lounge of the hotel.

Upon completion of the capital work needed to be undertaken in the facility-?-, a lease would be granted to an entity which would operate the facility, that entity to then undertake the normal commercial practice in the hotel industry as a tenant, of providing plant and equipment, fixtures and fittings, thereby enabling the facility to operate as a hotel.

Cont.../3

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The principle of the entire venture is that the operating entity would comprise representatives of the Government (through the Adelaide College School of Tourism and Hospitality), the Australian

' Hotels Association (as a representative of the hotel industry), and the Liquor Trades Employee Union (as a representative of the employees of the hotel industry).

It is the intention that the facility be owned and operated on a strict commercial basis as is normal commercial practice in the hotel industry, but in addition, be responsible for providing an opportunity for in-house training and traineeships in the hospitality industry to be initiated.

Initial plans have been prepared by architects engaged by"the South Australian Government, to redevelop the landlord component of the facility, and we understand that a number of adjustments have been made to those i n i t i a l redevelopment plans, with input being provided by the proposed operators of the facility, in preparation of this business plan, we have not addressed the final capital cost of construction of the facility, or the final layout of the facility to be undertaken by the landlord, other than to assume that the landlord will provide an adequate facility, effeciently laid out, from which the operators of the facility can conduct a normal commercial hotel operation.

Based on our instructions received in this regard, we have prepared a business plan for the proposed operators of the facility, addressing the structure of the operating entity, the terms and conditions on which the lease from the landlord should be structured, and preparing projections in respect of anticipated income and expenditure to be received from the facility on successful completion of the land renovations and the tenants fitout.

2.0 OPERATING STKUCTUHK

Based on the understanding that the owners and operators of the lease of the facility are to be the South Australian Government through the Adelaide College, the Australian Hotels Association, and the Liquor Trades Union, i t is considered that the most appropriate operating structure be that of a South Australian incorporated exempt proprietry company, operating in the capacity as a corporate trustee of a unit trust. This, we consider to be the most effective structure to own and operate the lease of the complex, in that the

~ corporate trustee offers limited li a b i l i t y to each of the investors in the venture, and provides the most effective structure for income tax purposes.

Cont.../5

The structure recommended is as below:-

, Exempt Proprietry Company

Hotel Unit Trust

Issued Units Say 90

Unitholders

Adelaide AHA LTEU College

30 30 30 Units Units Units

The structure recommended enables limited liability to be granted to a l l three participants in the operation, and an efficient structure for distribution of income and taxable profits. The unit trust prepares financial statements on an annual basis, and any taxable profit at the end of each financial year, is then distributed in equal shares to the Adelaide College, Australian Hotels Association, and the Liquor Trades Union. As the accounting and taxable profit of the unit trust have distributed each financial year, the unit trust, while required to prepare and lodge an income tax return, does not pay tax in it's own right, and each of the unitholders is then responsible for inclusion of their share of the profit from the operation in their own return (if at a l l applicable), and payment of

. the tax thereon. Accordingly, the unit trust does not.incur any income tax l i a b i l i t y in it's own right. The comany which acts as trustee for the unit trust would also be prepared to prepare financial statements, and lodge the same with the Australian Taxation Office, but being a trustee only, i t would not incur any income or expenditure in it's own right, and thereby, would not be in a position to incur any income tax l i a b i l i t y .

Cont.•./5

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The unit trust would have a total of 90 issued units, which i t would issue in equal proportions, 30 units to each of the venturers, in return, the proprietry limited company, which acts as trustee of the

, unit trust, would also issue 90 shares, 30 shares each being held by the Adelaide College, the Australian Hotels Association and the Liquor Trades Union. This recommended structure would provide the operators with equal ownership of the leasehold of the complex, equal shares in both accounting and taxable distributions from the operations, and equal share of control in day-to-day operations.

The estimated cost of such a structure would be approximately $800 for an exempt proprietry company, and a further $400 for a unit trust deed, a total cost of $1,200.

2.1 Management Structure

It is acknowledged that each of the proposed partners in the operating entity have experience in certain facets of the hotel industry, however, i t is considered inappropriate that the partners be involved in the day-to-day management of the facility. It is recommended that a qualified and competent hotel manager be engaged to attend to the day-to-day management and operations of the facility, and that such a person be recruited from within the hotel industry. The manager, on appointment, would be directly responsible to the directors of the trustee company, and in particular, to the chairman of directors.

In respect of the trustee company, we recommend that a total of six directors be appointed, two from each of the Adelaide College, Australian Hotels Association and Liquor Trades Union. In addition, we would recommend an independent chairman be appointed, such person to be drawn from the hotel industry, or advisers 'to the hotel industry, who is well versed in the ownership and operation of a hotel facility. Bearing in mind the possibility for competing interest from the three proposed owners of the facility, an independent chairman with a casting vote, would ensure that essential senior management decisions would be made without undue delays because of potential stalemates, we have a structure without the ability for a casting vote to be made.

We would recommend that the directors meet on a monthly basis at some time during the second week of each following month, to enable the trading results of the previous month to be prepared, tabled and set at directors meetings, while we do consider i t important that the directors become involved in the management of the facility, i t is essential that the day-to-day operations be delegated to the manager, who we would recommend be accountable to the chairman of directors, and that the individual directors do not in any way interfere with the managers decision-making, in areas where directors have delegated that decision-making to the manager.

Cont.../6

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It is also essential that the manager be given a reasonably high level of responsibility in decision-making, and many important decisions will need to be made on a timely day-to-day basis, such

' decisions not being able to be deferred until the holding of monthly directors meetings.

In respect of directors authority, each of the partners, that is the Adelaide College, Australian Hotels Association and the Liquor Trades Union, will need to be able to give their appointed directors quite a high level of responsibility in decision-making, in that any decisions at director level can not be raised at one directors meeting, referred back to the partner, and resolved at the following directors meeting, where potentially, you will have a two to three month lag in decision-making. The nature of the hotel industry in South Australia in the current environment is such that important decisions requiring directors approval, need to be made on a timely basis.

2.2 Reporting Requirements

As with any commercial venture, there is a need for accurate trading results for the venture to be prepared on a timely basis, and provided to the owners of those businesses for management purposes. We understand that the plant and equipment to be acquired by the tenant and installed in the hotel, includes a fully integrated computerised hotel accounting and management system. Accordingly, we would recommend that monthly trading statements be prepared detailing the departmental income and expenditure for liquor, food and other income. We further recommend that f u l l financial statements of the hotel be prepared on a four-monthly basis, such financial statements to be prepared for the period July to October, November to February and March to June of each respective year.

The basis of our recommendation of preparation of f u l l financial statements only three times a year, rather than each month, is that the costs of preparation of f u l l financial statements on a monthly basis for a normal commercial hotel are prohibitive, and accordingly, the same principle should be applied to this hotel operation. The monthly management trading statements correctly prepared, and prepared on a timely basis, provide adequate reporting requirements for the purpose of the directors monitoring the hotel's performance.

3.0 PROJECTED INCOME AMD EXPENDITURE

3.1 Assumptions

The assumptions of income and expenditure in respect of the proposed Armstrongs Tavern Complex, have been prepared based on this firm's knowledge of the hotel industry and review of the income and expenditure to similar hotel operating in the city of Adelaide.

Cont.../7

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The projected income has been based on income being experienced by similar establishments within the city of Adelaide, and has been based on the assumption that the facility is adequately marketed, well managed, providing a seven day operation. The gross trading

' profit pf the complex has been based on industry standard margins, which should be achievable by a well known facility. Expenses detailed are based on industry standard expenses, normal for a commercial hotel operation.

To enable an estimate of turnover and return for the complex to be determined, three projections of income and expenditure have been prepared. Because of the changed nature of operations of the complex in the future, past performance of the complex has been ignored. The philosophy in preparing three statements of income and expenditure is that the statement Bl is our estimate of projected income and expenditure of a well marketed, well present, well managed, well run facility. That projection is the projection that will be provided to respective hotel operater looking to run such a facility on a normal commercial basis. Projections referred to as

V/7 Bl and B2 then detail the position, should the income projected in / Bl not be achievable. It is essential that the proposed operaters

of the facility be aware of their potential exposure and li a b i l i t y , should the facility not achieve the income projections detailed in Bl. The income projections in Bl are considered conservative, and achievable in a facility that has been well marketed, and is being well run. They are the minimum income to be expected in relation to an investment of $400,000 in fixtures and fittings by any tenant in a normal commercial hotel operation.

Turnover in the second projection referred to as B2, has been reduced by 7.5%, and in the third projection referred to as B3, reduced by 15%. The reductions of 7.5% and 15% are on the original projections referred to in Bl. The expenses which are tied to income have been reduced accordingly, in B2 and B3, to give an indication of the anticipated return from the proposed complex, at varying levels of income.

The gross profit in each of the projections has been calculated using the following gross profit percentages:-

Sales Area Gross Profit % On Sales

Liquor: Dispensed 62% 62% Liquor: Packaged 28% 28%

Meal Income 55% 55%

Sundry Income 25% 25%

Sundry income consists of income obtained from tobacco sales, sales of chips and nuts, ice etc.

Cont.../8

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The above percentages are based on the currently accepted industry standards and adjusted as necessary to suit the establishment. The dispensed liquor percentage has been set at 62%, a l i t t l e lower than

* industry standard to allow for less efficient dispensing of liquor in a training situation. The meal gross profit percentage equates to a food cost to meal income of 45 cents for each dollar of meal income. Based on the desire of the hotel to provide moderately priced lunches between $4.50 and $8.00, with a major proportion of meal income coming from lunches, food costs of 45 cents would be achievable.

In respect of the food operation, we have assumed a normal commercial standard of operation, with no discounting in the margin to be achieved, as we have assumed a strict commercial operation in respect of meal income.

Although not detailed in the original plan for redevelopment of the complex, we have included income and expenditure in respect of a browse in bottle shop of the complex. In our meeting of the 13th January 1988, with the head of the School of Tourism and Hospitality, we recommended that the complex be constructed so as to include a small browse in bottle shop. We consider this to be essential in a complex which is endeavouring to provide training in a l l aspects of the hotel industry. The browse in bottle shop would enable training to be undertaken in respect of stock control of liquor, and provide live training to students in the operation and control of computerised stock control machines, commonly referred to in the industry as D.T.S. machines. For that reason, we have recommneded to the head of the School of Tourism and Hospitality, that a browse in bottle shop be incorporated in the complex redevelopment. We are informed that such a change will be made, and accordingly, we have included projections of income and expenditure to enhance that change.

The gross profit percentage on packaged liquor has been set at 28% of sales. This percentage assumes that the complex will be a member of one of the liquor buying groups, (Sip 'n Save, Seal Bottlers, etc.), and bearing in mind the small volume anticipated in packaged liquor sales.

3.3 Expenditure

The expenses detailed in these projections are based on the expenses incurred by similar establishments within the industry.

Music and entertainment has been calculated as 0.5% of income as indicated in the original business plan, and rent paid has been set at $60,000 in year 1. This rate of rental is based on commercial rates of rental currently applicable to the industry.

A l l other expenses have been calculated either as a set dollar value, or as a percentage of sales in accordance with current industry standards. These standards have been established by calculating the average cost of each expense item from a number of similar operations.

Cont.../9

The following expenses require further clarification and accordingly, we have detailed those expenses specifically:-

1. Insurance.

Based on the current premium rate applicable to the industry, workers compensation insurance as levied by workcover has been set at 2.8% of wages, which is the percentage rate applicable to the hotel industry.

2. Interests in Loan Repayments.

These have been calculated over a ten year period, at an interest rate of 16% on total borrowings of $325,000." Based on discussions with the head of the School of Tourism and Hospitality, total borrowings by the entity operating the complex, will be required in the sum of $400,000, however, contributions from industry are anticipated to be approximately $75,000, so the total borrowings for the entity will be the sum of $325,000. We have assumed an interest only loan by the entity for the first two years at 16% p.a. providing annual repayments of $52,000 p.a. and then years three to ten, principal and interest repayments, the total amount borrowed of $325,000 at the rate of $72,500 p.a.

3. Licence fees are payable on the liquor purchases for the previous year, year 1 therefore, does not incurr licence fees. Each year thereafter the licence fee has been calculated at 10.5% of the previous years' purchase. The percentage of 10.5% is used rather than 11%, to allow a small margin for low and non-alcoholic beverages.

4. Payroll tax is calculated at the rate of 5% of wages. The wages have been calculated on departmental income in accordance with currently accepted industry standards as set out below:-

Dispensed Liquor Wages - 22% of Dispensed Liquor Income•

Packaged Liquor Wages - 8% of Packaged Liquor Income.

Meals Wages - 33% of Meal Income. Overall Wages - 24.32% of Total Income.

5. The cost of repairs and maintenance is considerably less than the original assessment. The f i t out of the building will include complete refurbishing and the installation of a l l new equipment. Because of this, repairs and maintenance over the first few years should be minimal. Year three however, includes the cost of complete repainting of the building, which is standard practice in the hotel industry.

6. A contingency of 5% of total expenses has been included to allow for any expenses not accounted for within these projections, or, unexpected variations of expenses as detailed.

Cont.../10

- 10 -

^ m the attached projections, expenditure in year 1 has been based on industry anticipated expenses. Expenditure in years two to five has been Increased to reflect the effects of

' Inflation, and increase turnover.

10. The rent received income is from the rental of the upstairs.

3.4 Funding

The operaters as tenants, are required to provide for the cost of $400,000 being the estimated cost of fitout of the complex, of which amount i t is anticipated, contribution from industry will total $75,000. Accordingly, the operater is required to arrange finance in the sum of $325,000 to complete the funding of the fitout. It is recommended that the company make application to a trading bank of it's choice in it's own name (rather than as previously recommended and discussed by the partners in their individual names), for the sum of $325,000, over a period of ten years. The loan would in the first instance, be an interest only loan of two years, with principal and interest repayable over the balance of the loan.

It is considered most appropriate that the operating entity meet the committment on the borrowings, rather than the three individual partners meeting their share of the committment on the borrowings. The company would be in a position to offer to the trading bank of it's choice, a b i l l of sale over the plant and equipment, fixtures and fittings, to secure the advance of $325,000, such b i l l of sale being over equipment to the value of $400,000, and therefore, offering sufficient security for normal trading bank lending margins.

Before any of the trading banks would give due consideration to granting finance to the company, those trading banks would require security of tenure by the company on the lease of the hotel premises. Accordingly, a lease of ten years on the premises would be required, to enable the company to have security of tenure to enable i t recoup a return on it's investment, and also for the purposes of providing the bank with comfort that i t can rely on the hotel operations to trade for a period of ten years, and thereby repay the loan of funds granted to i t .

PAHNELL KERR FORSTER Licensed Premises Division

12/2/88

ARMSTRONGS TAVERN PROJECTED INCOME & EXPENDITURE CASH FLOW YEARS 1 TO 5 : Bl

INCOME YEAR 1 YEAR 2 YEAR 3

LIQUOR : DISPENSED 442.000 486.200 534.820 : PACKAGED 78.000 85,800 94.380

MEALS 208.000 228.800 251.680 SUNDRIES 26.000 28.600 31.460

TOTAL INCOME 754.000 829.400 912.340

GROSS TRADING PROFIT 416.780 458.458 504.304

EXPENSES:ACCOUNTANCY FEES 4.000 4.500 5.000 ADVERTISING 5.655 6.221 6.843 BANK FEES & CHARGES 1.500 1.750 2.000 BORROWING COSTS 2.500 0 0 CLEANING & MATERIALS 7,540 8.294 9.123 DISPOSABLE SUPPLIES 7.314 8.045 8.850 FLOWERS & DECORATIONS 452 498 547 GLASSES 980 1.078 1. 186 INSURANCE GENERAL 8.000 8.500 9.000

WORK COVER 4.819 5.301 5,831 LAUNDRY 4 DRYCLEANING 1.885 2.074 2,281

5? 000 52,000 72,500 LICENCES, FEES & PERMITS 0 23.533 25.886

18 000 90 f) 0 f 1 22,000 MUSIC & ENTERTAINERS 3.770 4. 147 4.562 r A I K U l i b 1AA 717 789 868 PRINTING. STATIONERY 4.000 1,000 1.500 RENT C ft ft ft ft Rd f i r m D O , u u u » 6 •ouw REPAIRS & MAINTENANCE 6.000 8.000 20,000 SUBSCRIPTIONS 1 C ft ft

1, b l) u 1 0 ft l\ o 1 n ri

£ , 1 11V TELEPHONE 2.000 2.500 3.000 WAGES 172.120 189.332 208.265 WRAPPING 302 332 365

TOTAL EXPENSES 365,055 415.693 484.307

CONTINGENCY 5X 18.253 20.785 24.215

SURPLUS/DEFECIT 33.473 21.981 (4.218

RENT RECEIVED 2,000 2.200 2.420

CLOSING BALANCE 35.473 24.181 (1.798

THIS STATEMENT IS PRESENTED SUBJECT TO THE COMMENTS AND RECOMMENDATIONS

YEAR 4 YEAR 5

588,302 647.132 103.818 114,200 276.848 304,533 34.606 38,067

003,574 1,103.931

554,734 610,208

5.500 6,000 7.527 8,279 2.250 2,500

0 0 10.036 11.039 9.735 10.708

602 662 1 , a l i a 1 Alt. 9,500 10.000 6,415 7.056 2.509 2.760

72,500 72.500 28,474 31,322 24.000 26,000 5.018 5.520

955 1 .050 2.000 2.500

7 Q A f i n A 7 A A f i O f • O nO 10,000 12,000 2.400 2.700 3.500 4.000

229,092 252.001 401 442

513,578 558.320

25,679 27.916

15,478 23.971

2,662 2.928

18.140 26.900

ATTACHED REPORT.

INCOME

PANNELL KERR FORSTER

LIQUOR

MEALS SUNDRIES

ARMSTRONGS TAVERN PROJECTED INCOME & EXPENDITURE CASH FLOW YEARS 1 TO 5 : B2 (less 7.5% of income)

DISPENSED PACKAGED

TOTAL INCOME

GROSS TRADING PROFIT

YEAR 1

408.850 72,150 192.400 24.050

YEAR 2

449.735 79,365 211.640 26,455

YEAR 3

494.709 87.302 232.804 29.101

697.450

385.522

767.195

424.074

843.915

466,481

YEAR 4 544,179 96,032

256.084 32.011

928.306

513.129

YEAR 5 598.597 105.635 281.693 35.212

1.021.137

564.442

EXrENStS:ALLOUNTANCY FEES 4,000 4.500 5,000 5,500 6,000 ADVERTISING 5.231 5.754 6.329 6.962 7,659 BANK FEES & CHARGES 1,500 1.750 2, 000 2.250 2,500 BORROWING COSTS 2,500 0 0 0 0 CLEANING & MATERIALS 6,975 7 ,672 8 , 439 9,283 10.211 DISPOSABLE SUPPLIES 6.765 7.442 8, 186 9, 005 9.905 FLOWERS & DECORATIONS 418 460 506 557 613 GLASSES 907 997 1 . 097 1. 207 1.327 INSURANCE GENERAL 8.000 8, 500 9 . 000 9,500 10.000

WORK COVER 4 ,458 4 .904 5 , 394 5,933 6,527 LAUNDRY & DRYCLEANING 1.744 1,918 2.110 2.321 2.553 INTEREST/LOAN PAYMENTS 52.000 52,000 7 2.500 72.500 72,500 LICENCES, FEES & PERMITS 0 21,768 23,944 26.339 28.973 LIGHT. POWER & FUEL 18.000 20.000 22,000 24.000 26.000 MUSIC it ENTERTAINERS 3,487 3,836 4.220 4,642 5. 106 PAYROLL TAX 663 730 803 883 971 PRINTING, STATIONERY 4,000 1, 000 1,500 2.000 2.500 RENT 60.000 66.000 72,600 79.860 87.846 REPAIRS & MAINTENANCE 6,000 8.000 20.000 10.000 12,000 SUBSCRIPTIONS 1,500 1.800 2. 100 2,400 2,700 TELEPHONE 2.000 2.500 3,000 3.500 4.000 WAGES 159.211 175,132 192.645 211,910 233.101 WRAPPING 279 307 338 371 408

TOTAL EXPENSES 349.638 , 396,969 463.711 490,922 533.400

CONTINGENCY 5% 17.482 19.848 23.186 24,546 26,670

SURPLUS/DEFECIT 18.402 7 . 256 (20.416) (2.339) 4.372

RENT RECEIVED 2.000 2.200 2,420 2,662 2,928

CLOSING BALANCE 20.402 9 , 456 C17 .996) 323 7.301

THIS STATEMENT IS PRESENTED SUBJECT TO THE COMMENTS AND RECOMMENDATIONS IN THE ATACHED REPORT.

PANNELL ARMSTRONGS TAVERN KERR PROJECTED INCOME 4 EXPENDITURE CASH FLOW FORSTER YEARS 1 TO 5 : B3 (less 15% of income)

INCOME YEAR 1 YEAR 2 YEAR 3 LIQUOR : DISPENSED 375.700 413,270 454,597

: PACKAGED 66.300 72,930 80,223 MEALS 176,800 194,480 213.928 SUNDRIES 22.100 24.310 26.741

TOTAL INCOME 640,900 704,990 775.489

GROSS TRADING PROFIT 354,263 389,689 428.658

EXPENSES:ACCOUNTANCY FEES 4,000 4.500 5,000 ADVERTISING 4,807 5,287 5,816 BANK FEES & CHARGES 1,500 1.750 2,000 BORROWING COSTS 2.500 0 0 CLEANING & MATERIALS 6.409 7.050 7,755 DISPOSABLE SUPPLIES 6,217 6.838 7 ,522 FLOWERS & DECORATIONS 385 423 465 GLASSES 833 916 1.008 INSURANCE GENERAL 8.000 8,500 9.000

WORK COVER 4.096 4.506 4,957 LAUNDRY & DRYCLEANING 1,602 1.762 1,939 INTEREST/LOAN PAYMENTS 52 000 52,000 72,500 LICENCES. FEES 4 PERMITS 0 20,003 22i003

18 000 90 OOO 99 000 MUSIC 4 ENTERTAINERS 3^205 3.525 3,877 P A Y B A T I T A Y r n i D u i j i j 1 A A

c i n D 1 U

R7 1 O i l

738 PRINTING. STATIONERY 4.000 1.000 1,500 RENT 60 o o o

U U % 17 XJ 17 RR 000 72.600

REPAIRS 4 MAINTENANCE 6.000 8.000 20i000 Q f t P Q P P T P T T C IN Q I , U u 1.800 2, 100 TELEPHONE 2,000 2^500 3! 000 WAGES 146.302 160.932 177.025 WRAPPING 256 282 310

TOTAL EXPENSES 334,221 378,246 443.116

CONTINGENCY 5% 16,711 18,912 22, 156

SORPLOS/DEFRCIT 3,331 (7.469) (36.613)

RENT RECEIVED 2,000 2.200 2.420

CLOSING BALANCE 5,331 (5,263) (34.193)

, THIS STATEMENT IS PRESENTED SUBJECT TO THE COMMENTS AND RECOMMENDATIONS

YEAR 4 YEAR 5 500.057 88,245 235.321 29.415

550,062 97,070 258.853 32,357

853,038

471.524

938.342

518,676

5.500 6,398 2.250

0 8,530 8,274

512 1.109 9,500 5.452 2.133

72,500 24.203 24.000 4.265

811 2,000

79.860 10,000 2,400 3.500

194.728 341

6 ,000 7.038 2,500

0 9.383 9,102

563 1.220

10.000 5.998 2.346

72.500 26.624 26.000 4.692

893 2.500 87.846 12,000 2,700 4.000

214.201 375

468,267

23,413

(20.157)

2.662

(17,495)

508,479

25,424

(15,227)

2.928

(12.298)

N THE ATTACHED REPORT.