-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HLXPMAykmAZl7GfoGJO0FmaCQTHIZS2U5T3KVWrXvPEdmQBIlhH5NNjg3z+ZYCwq 2WOhj8nfgWz/n6SKl0tEOg== 0000930661-97-002813.txt : 19971211 0000930661-97-002813.hdr.sgml : 19971211 ACCESSION NUMBER: 0000930661-97-002813 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971208 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971210 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY INC/DE CENTRAL INDEX KEY: 0000016343 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 942872485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-09319 FILM NUMBER: 97735421 BUSINESS ADDRESS: STREET 1: 3030 LBJ FREEWAY STREET 2: STE 1500 CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 9728888000 MAIL ADDRESS: STREET 1: 3030 LBJ FREEWAY STREET 2: STE 1500 CITY: DALLAS STATE: TX ZIP: 75234 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO DATE OF NAME CHANGE: 19970717 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA JOCKEY CLUB DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO\DE CENTRAL INDEX KEY: 0000715273 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 942878485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-09320 FILM NUMBER: 97735422 BUSINESS ADDRESS: STREET 1: 3030 LBJ FREEWAY STREET 2: STE 1500 CITY: DALLAS STATE: TX ZIP: 75234 MAIL ADDRESS: STREET 1: 3030 LBJ FREEWAY STREET 2: STE 1500 CITY: DALLAS STATE: TX ZIP: 75234 FORMER COMPANY: FORMER CONFORMED NAME: BAY MEADOWS OPERATING CO DATE OF NAME CHANGE: 19920703 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) DECEMBER 10, 1997 COMMISSION FILE NUMBER 1-9319 COMMISSION FILE NUMBER 1-9320 PATRIOT AMERICAN HOSPITALITY, PATRIOT AMERICAN HOSPITALITY INC. OPERATING COMPANY - ---------------------------------- --------------------------------- (Exact name of registrant as (Exact name of registrant as specified in its charter) specified in its charter) DELAWARE DELAWARE - ---------------------------------- --------------------------------- (State or other jurisdiction of (State or other jurisdiction of incorporation or organization) incorporation or organization) 94-0358820 94-2878485 - ---------------------------------- --------------------------------- (I.R.S. Employer (I.R.S. Employer Identification No.) Identification No.) 3030 LBJ FREEWAY, SUITE 1500 3030 LBJ FREEWAY, SUITE 1500 DALLAS, TEXAS 75234 DALLAS, TEXAS 75234 - ---------------------------------- --------------------------------- (Address of principal (Address of principal executive offices) (Zip Code) executive offices) (Zip Code) (972) 888-8000 (972) 888-8000 - ---------------------------------- --------------------------------- (Registrant's telephone number, (Registrant's telephone number, including area code) including area code) N/A N/A - ---------------------------------- --------------------------------- (Former name, former address and (Former name, former address and former fiscal year, if changed former fiscal year, if changed since last report) since last report) ITEM 5. OTHER EVENTS Interstate Hotels Company Merger On December 2, 1997, Patriot American Hospitality, Inc. ("Patriot REIT") and Patriot American Hospitality Operating Company ("Patriot Operating Company") entered into an agreement and plan of merger (the "Patriot/IHC Merger Agreement") with Interstate Hotels Company ("IHC"), pursuant to which IHC will merge with and into Patriot REIT with Patriot REIT being the surviving corporation (the "Patriot/IHC Merger"). The terms of the Patriot/IHC Merger are more fully described in a Form 8-K dated December 2, 1997 of Patriot REIT and Patriot Operating Company. Sheraton City Centre Hotel Acquisition On November 25, 1997, Patriot REIT, through Patriot American Hospitality Partnership, L.P. (the "Patriot REIT Partnership"), acquired a 92.5% general partner interest in a partnership formed for the purpose of acquiring the 353-room Sheraton City Centre Hotel (the "Sheraton City Centre Partnership"). A third-party (the "Minority Partner") owns the remaining 7.5% limited partner interest in the Sheraton City Centre Partnership (the "Minority Interest"). The Patriot REIT Partnership contributed approximately $36.8 million for its general partner interest, financed primarily from its $700 million unsecured revolving line of credit (the "Revolving Credit Facility"). Patriot REIT has leased the Sheraton City Centre Hotel to Patriot Operating Company. Beginning in November 1999, the Minority Partner may require Patriot REIT Partnership to purchase the Minority Interest at its then estimated value (as calculated in accordance with the Sheraton City Centre Partnership agreement). In addition, beginning in November 2001, Patriot REIT Partnership has the option to purchase the Minority Interest for the greater of $5.5 million or the estimated value of the Minority Interest (as calculated in accordance with the Sheraton City Centre Partnership agreement). Probable Acquisition of the Buena Vista Palace Hotel In August 1997, Patriot Operating Company purchased a participating loan from National Resort Ventures, L.P., related to the 1,014-room Buena Vista Palace Hotel in Orlando, Florida for approximately $23.75 million in cash. The Buena Vista Palace Hotel is owned by a joint venture (the "Buena Vista Joint Venture") between Equitable Life Insurance Company ("Equitable"), which owns a 55% interest, and Hotel Venture Partners, Ltd. ("HVP"), which owns a 45% interest. Patriot REIT, through certain of its subsidiaries, has entered into a Contribution Agreement dated October 7, 1997 to acquire approximately 90% of HVP's 45% interest in the Buena Vista Joint Venture for approximately $14 million in cash and units of limited partnership interest in the Patriot REIT Partnership and Patriot American Hospitality Operating Partnership, L.P. (the "Patriot Operating Company Partnership"). Patriot REIT has acquired an option to purchase HVP's remaining interest in the Buena Vista Joint Venture. In addition, pursuant to a Purchase and Sale Agreement dated November 6, 1997, Patriot REIT, through certain of its subsidiaries, agreed to acquire Equitable's 55% interest in the Buena Vista Joint Venture for approximately $53.5 million in cash and also agreed to repay outstanding mezzanine debt of approximately $6 million. Patriot REIT will acquire the participating loan investment held by Patriot Operating Company for $23.75 million in cash. Subsequent to acquisition of these joint venture interests, Patriot REIT, through certain of its subsidiaries, will hold an aggregate 95% ownership interest (including a 1% general partnership interest) in the Buena Vista Palace Hotel with an option to acquire the remaining 5% interest in three years. The hotel will remain subject to a ground lease and a first leasehold mortgage note in the amount of approximately $50.7 million. Negotiations to Modify the Revolving Credit Facility and Term Loan On July 21, 1997, Patriot REIT, Patriot Operating Company and their respective subsidiaries (collectively, the "Patriot Companies") entered into a revolving credit facility with Paine Webber Real Estate Securities, Inc. ("Paine Webber Real Estate"), The Chase Manhattan Bank ("Chase") and certain other lenders for a 3-year $700 million unsecured Revolving Credit Facility. The Patriot Companies are negotiating with Paine Webber Real Estate and Chase to increase the amount available under the Revolving Credit Facility to $900 million. Additionally, Patriot REIT entered into a commitment letter with Paine Webber Real Estate and Chase for a $500 million term loan (the "Term Loan"). In connection with the Patriot Companies' negotiations to increase the amount available under the Revolving Credit Facility, the Term Loan amount has been reduced to $350 million. Additionally, the Term Loan will be an unsecured facility. The index to the financial information for Wyndham Hotel Corporation; Crow Family Hotel Partnerships; WHG Resorts & Casinos Inc. (including financial statements for its significant non-consolidated affiliates, Posadas De San Juan Associates, WKA El Con Associates and El Conquistador Partnership L.P.); CHC International, Inc. - Hospitality Division; Interstate Hotels Company and Royal Palace Hotel Associates (Buena Vista Palace Hotel) is included on page F-1 of this report. The index to the separate and combined pro forma information for Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company and for the Combined Lessees is included on page F-1 of this report. 2 PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY INDEX TO FINANCIAL INFORMATION
PAGE ---- PRO FORMA FINANCIAL INFORMATION PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY: Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)............................................................................................... F-12 Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 1997 (unaudited)............................................................................................... F-14 Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 (unaudited)............................. F-17 PATRIOT AMERICAN HOSPITALITY INC.: Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited)............................................................................................... F-19 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997 (unaudited)............................................................................................... F-22 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY: Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited)............................................................................................... F-25 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997 (unaudited)............................................................................................... F-28 COMBINED LESSEES: Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996 (unaudited) and the nine months ended September 30, 1997 (unaudited)...................................... F-32 PRO FORMA FINANCIAL INFORMATION--AS ADJUSTED FOR THE WYNDHAM TRANSACTIONS PATRIOT REIT AND WYNDHAM INTERNATIONAL: Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)........ F-37 Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 1997 (unaudited).............................................................................. F-39 Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 (unaudited).............................. F-42 PATRIOT REIT Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-45 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997 (unaudited).............................................................................. F-47 WYNDHAM INTERNATIONAL: Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-49 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997 (unaudited).............................................................................. F-51 COMBINED LESSEES: Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited) and the nine months ended September 30, 1997 (unaudited)............................................................ F-54 PRO FORMA FINANCIAL INFORMATION--AS ADJUSTED FOR THE WHG MERGER PATRIOT REIT AND WYNDHAM INTERNATIONAL: Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)........ F-57 Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 1997 (unaudited).............................................................................. F-58 Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 (unaudited).............................. F-60 WYNDHAM INTERNATIONAL: Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-62 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997 (unaudited).............................................................................. F-63 PRO FORMA FINANCIAL INFORMATION--AS ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PATRIOT REIT AND WYNDHAM INTERNATIONAL: Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)........ F-68 Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 1997 (unaudited).............................................................................. F-69 Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 (unaudited).............................. F-71 PATRIOT REIT Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-74 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997 (unaudited).............................................................................. F-76 WYNDHAM INTERNATIONAL: Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-78 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997 (unaudited).............................................................................. F-80
F-1
PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY INDEX TO FINANCIAL INFORMATION - CONTINUED PAGE ---- HISTORICAL FINANCIAL INFORMATION WYNDHAM HOTEL CORPORATION (UNAUDITED): Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited)...................... F-82 Consolidated Statements of Income for the quarter ended September 30, 1997 and 1996 (unaudited) and the nine months ended September 30, 1997 and 1996 (unaudited)............................................. F-83 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited)..... F-84 Notes to Consolidated Financial Statements (unaudited)...................................................... F-85 CROW FAMILY HOTEL PARTNERSHIPS: Report of Independent Public Accountants -- Arthur Andersen LLP............................................. F-94 Combined Balance Sheets as of December 31, 1996 and 1995 and September 30, 1997 (unaudited)................. F-95 Combined Statements of Operations for the years ended December 31, 1996, 1995 and 1994 and the nine months ended September 30, 1997 and 1996 (unaudited)............................................. F-96 Combined Statements of Partners' Deficit for the years ended December 31, 1996, 1995 and 1994 and the nine months ended September 30, 1997 (unaudited).......................................................... F-97 Combined Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and the nine months ended September 30, 1997 (unaudited)............................................................... F-98 Notes to Combined Financial Statements...................................................................... F-99 WHG RESORTS & CASINOS INC.: Report of Independent Auditors -- Ernst & Young LLP......................................................... F-108 Consolidated Balance Sheets at June 30, 1997 and 1996 September 30, 1997 (unaudited)........................ F-109 Consolidated Statements of Operations for the years ended June 30, 1997, 1996 and 1995...................... F-110 and the three months ended September 30, 1997 and 1996 (unaudited) Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 (unaudited)........................................ F-111 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, 1996 and 1995 and the three months ended September 30, 1997 (unaudited)......................................................... F-112 Notes to Consolidated Financial Statements.................................................................. F-113 Financial Statement Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1997, 1996 and 1995............................................................................................. F-126 POSADAS DE SAN JUAN ASSOCIATES, A SIGNIFICANT NONCONSOLIDATED AFFILIATE OF WHG: Report of Independent Auditors -- Ernst & Young LLP........................................................ F-127 Balance Sheets at June 30, 1997 and 1996 and September 30, 1997 (unaudited)................................ F-128 Statements of Operations and Deficit for the years ended June 30, 1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 (unaudited)...................................................... F-129 Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 (unaudited)................................................................... F-130 Notes to Financial Statements............................................................................... F-131 Financial Statement Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1997, 1996 and 1995............................................................................................. F-136 WKA EL CON ASSOCIATES, A SIGNIFICANT NONCONSOLIDATED AFFILIATE OF WHG: Report of Independent Auditors -- Ernst & Young LLP........................................................ F-137 Balance Sheets at June 30, 1997 and 1996 and September 30, 1997 (unaudited)................................ F-138 Statements of Operations and Deficit for the years ended June 30, 1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 (unaudited)...................................................... F-139 Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 (unaudited)................................................................... F-140 Notes to Financial Statements............................................................................... F-141 EL CONQUISTADOR PARTNERSHIP L.P., A SIGNIFICANT NONCONSOLIDATED AFFILIATE OF WHG: Report of Independent Auditors -- Ernst & Young LLP........................................................ F-144 Balance Sheets at March 31, 1997 and 1996 and June 30, 1997 (unaudited).................................... F-145 Statements of Operations and (Deficiency in) Partners' Capital for the years ended March 31, 1997, 1996 and 1995 and the three months ended June 30, 1997 and 1996 (unaudited).................................... F-146 Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995 and the three months ended June 30, 1997 and 1996 (unaudited)........................................................................ F-147 Notes to Financial Statements............................................................................... F-148
F-2
PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY INDEX TO FINANCIAL INFORMATION - CONTINUED PAGE ---- CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION: Report of Independent Certified Public Accountants -- Price Waterhouse, LLP................................. F-155 Balance Sheets as of November 30, 1995 and 1996 and August 31, 1997 (unaudited)............................ F-156 Statements of Operations for the years ended November 30, 1995 and 1996 and the nine months ended August 31, 1996 and 1997 (unaudited)................................................ F-157 Statements of Changes in Stockholders' Equity (Deficit) for the years ended November 30, 1995 and 1996 and the nine months ended August 31, 1997 (unaudited).......................... F-158 Statements of Cash Flows for the years ended November 30, 1995 and 1996 and the nine months ended August 31, 1996 and 1997 (unaudited)................................................ F-159 Notes to Financial Statements............................................................................... F-161 INTERSTATE HOTELS COMPANY: Report of Independent Accountants -- Coopers & Lybrand L.L.P................................................ F-181 Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)............. F-182 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (unaudited)...................................................... F-183 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited)...................................................... F-184 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (unaudited)...................................................... F-185 Notes to Consolidated Financial Statements.................................................................. F-186 Unaudited Pro Forma Statement of Income for the year ended December 31, 1996................................ F-202 Unaudited Pro Forma Statement of Income for the nine months ended September 30, 1997........................ F-203 Notes to Unaudited Pro Forma Statements of Income........................................................... F-204 ROYAL PALACE HOTEL ASSOCIATES (THE BUENA VISTA PALACE HOTEL): Report of Independent Accountants -- Coopers & Lybrand L.L.P................................................ F-205 Balance Sheets as of December 31, 1996 and 1995 and September 30, 1997 (unaudited).......................... F-206 Statements of Operations for the years ended December 31, 1996 and 1995 and the nine months ended September 30, 1997 and 1996 (unaudited)................................................................... F-207 Statements of Partners' Equity for the years ended December 31, 1996 and 1995 and the nine months ended September 30, 1997 (unaudited)..................................................................... F-208 Statements of Cash Flows for the years ended December 31, 1996 and 1995 and the nine months ended September 30, 1997 and 1996 (unaudited)................................................................... F-209 Notes to Financial Statements............................................................................... F-210
F-3 PATRIOT REIT AND PATRIOT OPERATING COMPANY INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) BACKGROUND On July 1, 1997, the Virginia corporation formerly known as Patriot American Hospitality, Inc. ("Old Patriot REIT") merged with and into California Jockey Club ("Cal Jockey"), with Cal Jockey being the surviving legal entity (the "Cal Jockey Merger"). In connection with the Cal Jockey Merger, Cal Jockey changed its name to Patriot American Hospitality, Inc. ("Patriot REIT") and Bay Meadows Operating Company ("Bay Meadows") changed its name to Patriot American Hospitality Operating Company ("Patriot Operating Company"). The term "Patriot Companies" as used herein includes Patriot REIT, Patriot Operating Company and their respective subsidiaries. Patriot REIT's shares of common stock are paired and trade together with the shares of common stock of Patriot Operating Company as a single unit pursuant to a stock pairing arrangement. By operation of the Cal Jockey Merger, each issued and outstanding share of common stock, no par value per share of Old Patriot REIT ("Old Patriot REIT Common Stock") was converted into 0.51895 shares of common stock, par value $0.01 per share of Patriot REIT ("Patriot REIT Common Stock") and 0.51895 shares of common stock, par value $0.01 per share of Patriot Operating Company ("Patriot Operating Company Common Stock") (prior to giving effect to the 1.927- for-1 stock split discussed below), which shares are paired and transferable only as a single unit. Each paired share of Cal Jockey and Bay Meadows common stock remained outstanding and represented the same number of paired shares of Patriot REIT Common Stock and Patriot Operating Company Common Stock. Paired shares of Patriot REIT common stock and Patriot Operating Company Common Stock are referred to herein as "Paired Shares." In connection with the Cal Jockey Merger, Bay Meadows formed Patriot American Hospitality Operating Partnership, L.P. (the "Patriot Operating Company Partnership") into which Bay Meadows contributed its assets in exchange for units of limited partnership interest ("OP Units") of the Patriot Operating Company Partnership, and Cal Jockey contributed certain of its assets to Patriot American Hospitality Partnership, L.P. (the "Patriot REIT Partnership") in exchange for OP Units of the Patriot REIT Partnership. Collectively, the Patriot Operating Company Partnership and the Patriot REIT Partnership are referred to herein as the "Patriot Partnerships." Subsequent to completion of the Cal Jockey Merger and the related transactions contemplated by the Cal Jockey Merger agreement, substantially all of the operations of Patriot REIT and Patriot Operating Company have been conducted through the Patriot Partnerships and their subsidiaries. The unaudited Pro Forma Financial Statements have been adjusted for the purchase method of accounting whereby the Bay Meadows Racecourse (the "Racecourse") facilities and related leasehold improvements owned by Cal Jockey and Bay Meadows are adjusted to estimated fair market value. The Cal Jockey Merger has been accounted for as a reverse acquisition whereby Cal Jockey is considered to be the acquired company for accounting purposes. On July 10, 1997, the respective Boards of Directors of Patriot REIT and Patriot Operating Company declared a 1.927-for-1 stock split on its shares of common stock effected in the form of a stock dividend distributed on July 25, 1997 to shareholders of record on July 15, 1997. Unless otherwise indicated, all references in the pro forma financial statements to the number of shares, per share amounts, and market prices of the common stock and options to purchase common stock have been restated to reflect the impact of the conversion of each share of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger and the 1.927-for-1 stock split. In addition, all references in the pro forma financial statements to the number of shares, per share amounts, and market prices of the common stock and options to purchase common stock related to periods prior to the 2-for-1 stock split on Old Patriot REIT Common Stock effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997 have been restated to reflect the impact of such stock split. Patriot REIT leases each of its hotels, except the Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel, which are separately owned through special purpose entities (the "Non-Controlled Subsidiaries"), to either Patriot Operating Company or to other lessees (the "Lessees") who are responsible for operating the hotels. The hotels are leased for periods ranging from one to 12- years pursuant to separate participating leases providing for the payment of the greater of base or participating rent, plus certain additional charges, as applicable (the "Participating Leases"). The Lessees, in turn, have entered into separate agreements with hotel management entities (the "Operators") to manage the hotels. The Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel were structured without lessees and are managed directly by an Operator. F-4 As of December 4, 1997, 35 of Patriot REIT's hotels are leased to separate Lessees (excluding the Park Shore Hotel), and 42 hotels are leased to Patriot Operating Company (excluding the Sheraton City Centre). BUSINESSES ACQUIRED Since January 1, 1997, Patriot REIT, through the Patriot REIT Partnership and its subsidiaries, has invested approximately $730,588 in the acquisition of 20 hotels and five resort properties with a total of 6,024 guest rooms (the "Recent Acquisitions"). These acquisitions were financed primarily with funds drawn on the Patriot Companies' $700,000 revolving credit facility (the "Revolving Credit Facility") and prior to the Cal Jockey Merger, Old Patriot REIT's line of credit facility, and other mortgage debt, the issuance of 3,204,243 OP Units valued at approximately $73,662, and the assumption of mortgage debt in the amount of approximately $34,263. In addition, in connection with certain other transactions described below (see "Acquisition of Gencom American Hospitality and Merger with CHC International, Inc."), Patriot REIT, through the Patriot REIT Partnership and its subsidiaries, has invested approximately $236,984 in the acquisition of ten additional hotels with a total of 3,119 rooms (the "CHC Hotels"). On July 14, 1997, Patriot REIT sold approximately 174 acres of land in San Mateo, California, representing substantially all of the land which was owned by Cal Jockey prior to the Cal Jockey Merger, to an affiliate of PaineWebber Incorporated ("PaineWebber") for a purchase price of approximately $80,864 (the "PaineWebber Land Sale"). These funds were placed in a restricted trust account in order to facilitate a tax-deferred, like-kind exchange through the acquisition of suitable hotel properties. During July 1997, three suitable hotels (the Holiday Inn at the San Francisco International Airport, the Ambassador West Hotel and the Union Station Hotel) were acquired using a portion of the proceeds from this restricted account. Patriot REIT retained ownership of the improvements located on the land, including the Racecourse and its related facilities. Simultaneously with the consummation of the PaineWebber Land Sale, the PaineWebber affiliate and Patriot REIT entered into a ground lease covering a portion of the land on which the Racecourse is situated for a term of seven years. The lease provides for quarterly rental payments of $750 through March 1998, $813 through March 1999, $875 through March 2000, $1,000 through March 2002 and $1,250 through July 2004. Additionally, Patriot REIT subleased the Racecourse land and leased the related improvements to Patriot Operating Company in order to permit Patriot Operating Company to continue horseracing operations at the Racecourse through the term of Patriot REIT's lease. The sublease is for a term of seven years with annual payments based on percentages of revenue generated. In addition, Patriot REIT has leased certain land adjacent to the Racecourse to Borders, Inc. (the "Borders Lease") for an initial term of 20 years with a fixed net annual rent of $279 for years 1 through 10, $362 for years 11 through 15 and $416 for years 16 through 20. In connection with the sale, Patriot REIT assigned all of its rights and benefits under existing leases, contracts, permits and entitlements relating to the land sold (excluding the Borders Lease) to the PaineWebber affiliate, and the PaineWebber affiliate assumed all of Patriot REIT's development obligations including, but not limited to, all obligations for on and off-site improvements and all obligations under existing leases and contracts. The parties have the option to renew such leases upon their expiration under certain circumstances. In August 1997, Patriot Operating Company acquired Grand Heritage Hotels, Inc., a hotel management and marketing company, and other Grand Heritage subsidiaries including Grand Heritage Leasing, L.L.C., which leased three hotels from Patriot REIT (the "Grand Heritage Acquisition"). The acquisition was financed primarily through the issuance of 931,972 Class A preferred OP Units of the Patriot Operating Company Partnership. Effective October 1, 1997, Patriot Operating Company, through certain of its subsidiaries, acquired the members' interest of PAH RSI, L.L.C., a limited liability company owned and controlled by certain executive officers of the Patriot Companies ("PAH RSI Lessee") for approximately $143. PAH RSI Lessee leased eight of Patriot REIT's hotels. As a result of the acquisition, Patriot Operating Company holds these leasehold interests. F-5 FINANCING TRANSACTIONS On July 21, 1997, the Patriot Companies entered into the Revolving Credit Facility with PaineWebber Real Estate Securities, Inc. ("PaineWebber Real Estate"), The Chase Manhattan Bank ("Chase") and certain other lenders for a three-year $700,000 unsecured revolving line of credit. The Patriot Companies are negotiating with PaineWebber Real Estate and Chase to increase the amount available under the Revolving Credit Facility to $900,000. Borrowings were made under the Revolving Credit Facility to repay all outstanding amounts under Old Patriot REIT's secured line of credit with PaineWebber Real Estate (the "Old Line of Credit"). The Revolving Credit Facility generally is used for the acquisition of additional properties, businesses and other assets, for capital expenditures and for general working capital purposes. The interest rate for the Revolving Credit Facility ranges from LIBOR plus 1.0% to 2.0% (depending on the Patriot Companies' leverage ratio or the investment grade rating received from the rating agencies) or the customary alternate base rate announced from time to time plus 0.0% to 0.5% (depending on the Patriot Companies' leverage ratio). The weighted average interest rate in effect for the Revolving Credit Facility for the period ended September 30, 1997 was 7.62% per annum. Additionally, Patriot REIT has entered into a commitment letter with PaineWebber Real Estate and Chase for the $500,000 term loan (the "Term Loan"). In connection with the Patriot Companies' negotiations to increase the amount available under the Revolving Credit Facility, the Term Loan amount has been reduced to $350,000. It is anticipated that the Term Loan will be unsecured. The Term Loan will be used primarily to finance payments to be made in connection with the acquisition of certain assets described herein. The Term Loan is expected to have an interest rate per annum equal to the interest rate incurred on the Revolving Credit Facility. In June 1997, Patriot REIT loaned approximately $20,500 to a partnership affiliated with members of CHC Lease Partners relating to the Doubletree Hotel in Glenview, Illinois. In July 1997, Patriot REIT loaned approximately $25,600 to another partnership affiliated with members of CHC Lease Partners, relating to the Sheraton Gateway Hotel in Miami (also known as the Sheraton River House Hotel). Both loans mature in two years, bear interest at a rate per annum equal to 30-day LIBOR plus 2.75%, and are secured by first priority liens on the respective hotels. Additionally, Patriot REIT has purchased two additional loans on which partnerships affiliated with the members of CHC Lease Partners are borrowers for an aggregate purchase price of $57,000. One of the purchased loans, in the principal amount of approximately $30,700, matures in December 2000 and bears interest at a rate per annum equal to 8.0% until November 30, 1997, 8.5% from December 1, 1997 until November 30, 1999, and 9.0% from December 1, 1999 until December 1, 2000. The second purchased loan, in the principal amount of approximately $24,400, matures on December 31, 1999 and bears interest at a rate per annum equal to 8.0% until December 31, 1997 and 9.5% from January 1, 1998 until December 31, 1999. Each of the purchased loans is secured by first priority liens on the respective hotels. The notes contain certain penalties for early repayment. In connection with such loans, Patriot REIT has entered into a short-term financing arrangement with an affiliate of PaineWebber Real Estate (the "PaineWebber Mortgage Financing"), whereby such affiliate loaned Patriot REIT $103,000 through April 15, 1998 at a rate equal to the greater of 30-day LIBOR plus 1.75% or the borrowing rate on the Revolving Credit Facility. This financing is secured by a collateral assignment of the mortgage loans encumbering the four hotels. In October 1997, Patriot REIT, through certain of its subsidiaries, acquired 100% of the ownership interests in the four partnerships that own these hotels (see "Acquisition of Gencom American Hospitality and Merger with CHC International, Inc." below). As a result, the note balances and the related interest income and expense are eliminated in Patriot REIT's consolidated financial statements. On November 25, 1997, Patriot REIT, through the Patriot REIT Partnership, acquired a 92.5% general partner interest in a partnership formed for the purpose of acquiring the 353-room Sheraton City Centre hotel (the "Sheraton City Centre Partnership"). A third party (the "Minority Partner") owns the remaining 7.5% limited partner interest in the Sheraton City Centre Partnership (the "Minority Interest"). The Patriot REIT F-6 Partnership contributed approximately $36,800 for its general partner interest, financed primarily with funds drawn on the Revolving Credit Facility. Patriot REIT has leased the Sheraton City Centre hotel to Patriot Operating Company. Beginning in November 1999, the Minority Partner may require Patriot REIT Partnership to purchase the Minority Interest at a price equal to the estimated value (as calculated in accordance with the provisions of the partnership agreement). In addition, beginning in November 2001, the Patriot REIT Partnership has the option to purchase the Minority Interest for the greater of $5,500 or the estimated value of the Minority Interest (as defined in the partnership agreement). The following unaudited Pro Forma Condensed Combined Statements of Operations do not include the results of operations of the Sheraton City Centre. In August 1997, Patriot Operating Company purchased a participating loan from National Resort Ventures, L.P., a Delaware limited partnership, related to the 1,014-room Buena Vista Palace Hotel in Orlando, Florida for $23,750 in cash (the "Participating Note"). The Buena Vista Palace Hotel is owned by a joint venture (the "Buena Vista Joint Venture") between Equitable Life Insurance Company ("Equitable"), which owns a 55% interest, and Hotel Venture Partners, Ltd. ("HVP"), a Florida limited partnership, which owns a 45% interest. Patriot REIT, through certain of its subsidiaries, has entered into a Contribution Agreement dated October 7, 1997 to acquire approximately 90% of HVP's 45% interest in the Buena Vista Joint Venture for approximately $14,000 in cash and units of limited partnership interest in the Patriot REIT Partnership and the Patriot Operating Company Partnership. Patriot REIT was also granted an option to acquire HVP's remaining interest in the Buena Vista Joint Venture. In addition, pursuant to a Purchase and Sale Agreement dated November 6, 1997, Patriot REIT, through certain of its subsidiaries, agreed to acquire Equitable's 55% interest in the Buena Vista Joint Venture for approximately $53,500 in cash. Patriot REIT will also acquire the Participating Note investment held by Patriot Operating Company for $23,750 in cash and also agreed to repay outstanding mezzanine debt of approximately $6,004. Subsequent to acquisition of these joint venture interests, Patriot REIT, through certain of its subsidiaries, will hold an aggregate 95% ownership interest (including a 1% general partnership interest) in the Buena Vista Joint Venture with an option to acquire the remaining 5% interest in three years. The hotel will remain subject to a ground lease and a first leasehold mortgage note in the amount of approximately $50,700. In August 1997, the Patriot Companies completed a public offering (the "Offering") of 10,580,000 Paired Shares (including 1,380,000 Paired Shares issued upon exercise of the underwriters' over-allotment option), with net proceeds (less underwriter discount and expenses) of approximately $240,795. The net proceeds were primarily used to reduce the outstanding debt under the Revolving Credit Facility. On November 13, 1997, pursuant to a letter agreement dated September 30, 1997, the Patriot Companies sold 1,000,033 Paired Shares to PaineWebber (the "PaineWebber Direct Placement") for a purchase price per Paired Share of $27.6875, or aggregate consideration of $27,688. In addition, pursuant to a letter agreement dated September 30, 1997, the Patriot Companies sold 1,000,000 Paired Shares to LaSalle Advisors Limited Partnership ("LaSalle"), as agent for certain clients of LaSalle (the "LaSalle Direct Placement"), at a purchase price per Paired Share of $27.65, or aggregate consideration of $27,650. On September 30, 1997, the Patriot Companies exercised their right to call 2,000,033 OP Units in each of the Patriot Partnerships held by The Morgan Stanley Real Estate Fund, L.P., and certain related entities (the "Morgan Stanley Call"). The exercise price on the Morgan Stanley Call was $25.875 per pair of OP Units. The Morgan Stanley Call was funded with the proceeds of the PaineWebber Direct Placement and the LaSalle Direct Placement. ACQUISITION OF GENCOM AMERICAN HOSPITALITY AND MERGER WITH CHC INTERNATIONAL, INC. In September 1997, Patriot REIT, through certain of its subsidiaries, acquired seven hotels (including an approximate 50% controlling ownership interest in the Omni Inner Harbor Hotel) and in October 1997, Patriot REIT, through certain of its subsidiaries, acquired three additional hotels. The ten CHC Hotels were acquired from entities affiliated with the Gencom American Hospitality group of companies ("Gencom") and CHC International, Inc. ("CHCI") for an aggregate purchase price of approximately $236,984. F-7 In addition, Patriot REIT has entered into an agreement whereby Patriot REIT may indirectly acquire the remaining ownership interest in the Omni Inner Harbor Hotel for approximately $19,314. The CHC Hotels are leased to and managed by Patriot Operating Company and its subsidiaries. The purchase of the hotels was financed with approximately $45,000 of cash drawn on the Revolving Credit Facility and by issuing 1,703,943 Paired Shares and 2,174,773 paired OP Units in the Patriot Partnerships in a private placement. Four of the hotels are encumbered by the mortgage loans, in the aggregate amount of approximately $103,443 including accrued interest, that Patriot REIT made in connection with the PaineWebber Mortgage Financing discussed above. In addition, Patriot REIT acquired the leasehold interests related to eight hotels which were previously leased by CHC Lease Partners and re-leased such hotels to Patriot Operating Company. Prior to such acquisition, the management contracts with GAH-II, L.P. ("GAH"), an affiliate of CHCI and Gencom, related to the eight hotels were terminated. The aggregate purchase price of the leasehold interests was approximately $52,766. Concurrently, Patriot Operating Company purchased an approximate 50% managing, controlling ownership interest in GAH from affiliates of Gencom for a purchase price of approximately $13,860. These transactions were financed with approximately $644 of cash, and by issuing 2,388,932 paired OP Units of the Patriot REIT Partnership and the Patriot Operating Company Partnership and 476,682 Class C preferred OP Units of Patriot Operating Company Partnership. In connection with Patriot REIT's acquisition of the eight leasehold interests from CHC Lease Partners, CHC Lease Partners was liquidated and its remaining 17 leasehold interests became leasehold interests of CHCI, the ultimate remaining owner of CHC Lease Partners at the time of its liquidation. These 17 leasehold interests will be acquired by Patriot Operating Company if the CHCI Merger is consummated, as described below. GAH, directly and through certain of its subsidiaries, owns nine management contracts related to hotels leased by Patriot Operating Company, 15 third-party management contracts, and certain other hospitality management assets. Concurrently with Patriot Operating Company's purchase of its controlling interest in GAH, Patriot Operating Company also entered into a Hospitality Advisory, Asset Management and Support Services Agreement with CHCI and GAH whereby Patriot Operating Company will provide certain hospitality advisory, asset management and support services to certain CHCI and GAH subsidiaries for base fees aggregating approximately $750 per month plus a percentage of excess cash flows of the hotels. Patriot REIT, Patriot Operating Company and CHCI have also entered into an Agreement and Plan of Merger dated as of September 30, 1997 for the merger of the hospitality-related businesses of CHCI with and into Patriot Operating Company with Patriot Operating Company being the surviving company (the "CHCI Merger"). Subject to regulatory approvals, CHCI's gaming operations will be transferred to a new legal entity prior to the CHCI Merger and such operations will not be a part of the transaction. It is anticipated that the CHCI Merger will be consummated in the first or second quarter of 1998, although the precise timing is subject to certain conditions, including receipt of all necessary regulatory approvals. As a result of the CHCI Merger, Patriot Operating Company, through its subsidiaries, will acquire the remaining 50% investment interest in GAH, the remaining 17 leases and 16 of the associated management contracts related to the Patriot REIT hotels leased by CHC Lease Partners, 3 management contracts related to Patriot REIT hotels leased by Patriot Operating Company, 12 third-party management contracts, 2 third-party lease contracts, the Grand Bay and Registry Hotels & Resorts proprietary brand names and certain other hospitality management assets. Patriot Operating Company has also agreed to provide CHCI with a $7,000 line of credit until such time as the CHCI Merger is completed. Patriot Operating Company's acquisition of GAH, both the acquisition of an approximate 50% interest in GAH in September 1997 and the acquisition of the remaining approximate 50% interest in connection with the CHCI Merger, is referred to as the "GAH Acquisition" when used in connection with the presentation of pro forma financial data. By operation of the CHCI Merger and the transactions related thereto, each issued and outstanding share of CHCI common stock, par value $0.005 per share ("CHCI Share") and certain stock option rights will be converted into the right to receive shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per share, of Patriot Operating Company ("Operating Company Series A Preferred Stock") and shares of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share, of Patriot Operating Company ("Operating Company Series B Preferred Stock," and collectively with the Operating Company Series A Preferred Stock, the "Operating Company Preferred Stock"). The formula for determining the exchange ratio of CHCI Shares for Operating Company Series A Preferred Stock and Operating Company Series B Preferred Stock is based on issuing an aggregate of approximately 4,396,000 shares of F-8 Operating Company Preferred Stock (based on an aggregate purchase value of approximately $102,200 and a market price per Paired Share of $23.25), subject to reduction if certain specified events occur and subject to increase representing adjustments for dividends paid on Paired Shares after September 30, 1997. Generally, the aggregate number of shares of Operating Company Preferred Stock that each shareholder shall have the right to receive pursuant to the CHCI Merger shall consist of, to the extent possible, an equal number of Operating Company Series A Preferred Stock and Operating Company Series B Preferred Stock. Generally, each share of Operating Company Series A Preferred Stock may be redeemed for one Paired Share at any time following the one-year anniversary of the closing of the CHCI Merger. Each share of Operating Company Series B Preferred Stock may be redeemed for one Paired Share, however, such redemption is generally restricted until the fifth-year anniversary of the closing of the CHCI Merger. The value of a Paired Share at the time of redemption (the "Redemption Value") may, at Patriot Operating Company's option, be paid in cash. Further, if Patriot Operating Company fails to comply with certain restrictions, the preferred shares may be redeemed for cash or, at Patriot Operating Company's option, Paired Shares at the Redemption Value plus a premium. The dividend rate on the shares of Operating Company Preferred Stock is equivalent to the dividend rate on the Paired Shares. Dividends on Operating Company Series B Preferred Stock are subject to increase during the five years subsequent to the closing of the CHCI Merger if the shares are transferred by the original holder. If the dividends on the shares of Operating Company Preferred Stock are not paid when due, dividends will instead accrue at the rate of 115% per annum on a compounded basis. The shares of Operating Company Preferred Stock are redeemable at Patriot Operating Company's option at the Redemption Value, plus a premium in the case of the original holders thereof and certain permitted transferees. In connection with the GAH Acquisition, preferred OP Units of the Patriot Operating Company Partnership with a value of approximately $5,000 have been held back, and the CHCI Merger equity consideration is subject to reduction in the amount of approximately $5,000 if the hotels and leaseholds acquired fail to achieve certain operating targets over the period prior to the closing of the CHCI Merger. In addition, on September 30, 2000 and September 30, 2002, Patriot Operating Company may be obligated to pay the CHCI stockholders, and a subsidiary of Patriot Operating Company may be obligated to pay a Gencom-related entity, additional consideration, in each case based upon the delivery and performance of certain specified assets. F-9 SUMMARY As of December 2, 1997, Patriot REIT owned interests in 81 hotels and resorts and held an approximate 86.0% ownership interest in the Patriot REIT Partnership. Patriot Operating Company held an approximate 84.6% ownership interest in the Patriot Operating Company Partnership. The unaudited Pro Forma Financial Statements reflect an approximate 13.8% minority ownership interest in the Patriot REIT Partnership and a 14.5% minority ownership interest in the Patriot Operating Company Partnership, which represents the estimated ownership interest subsequent to consummation of the GAH Acquisition, the CHCI Merger, the PaineWebber Direct Placement and the LaSalle Direct Placement. The following unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 and the nine months ended September 30, 1997 of Patriot REIT and Patriot Operating Company are derived from the individual unaudited Pro Forma Condensed Consolidated Statements of Operations of Patriot REIT and Patriot Operating Company which are included in this Joint Current Report. Such pro forma information is based in part upon: (i) the Separate and Combined Statements of Income of Cal Jockey and Bay Meadows filed with the Cal Jockey and Bay Meadows Joint Annual Report on Form 10-K for the year ended December 31, 1996; (ii) the Consolidated Statements of Operations of Old Patriot REIT filed with the Old Patriot REIT Annual Report on Form 10-K for the year ended December 31, 1996; (iii) the Separate and Combined Statements of Operations of Patriot REIT and Patriot Operating Company filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the nine months ended September 30, 1997; (iv) the historical financial statements of certain hotels acquired by Old Patriot REIT filed in Old Patriot REIT's Current Reports on Form 8-K dated April 2, 1996, as amended, December 5, 1996 and January 16, 1997, as amended; (v) the historical financial statements of the certain hotels and businesses acquired by Patriot REIT and Patriot Operating Company filed in the Patriot Companies' Joint Current Reports on Form 8-K dated September 17, 1997, and September 30, 1997, as amended, and located elsewhere in this Joint Current Report; and (vi) the Pro Forma Condensed Combined Statements of Operations of the Lessees which are located elsewhere in this Joint Current Report. The following unaudited Pro Forma Condensed Combined Statements of Operations assume the following transactions (the "Recent Transactions") have occurred as of January 1, 1996: (i) the Cal Jockey Merger and the related transactions have been consummated on terms set forth in the Cal Jockey Merger Agreement; (ii) the PaineWebber Land Sale has been consummated, the PaineWebber affiliate has leased that portion of the land upon which the Racecourse is situated to Patriot REIT, and Patriot REIT has subleased the land and related improvements to Patriot Operating Company; (iii) Patriot REIT has leased certain land to Borders, Inc.; (iv) Patriot Operating Company has completed the Grand Heritage Acquisition and the acquisition of PAH RSI Lessee; (v) Patriot REIT has acquired the Recent Acquisitions (excluding the Park Shore Hotel and the Sheraton City Centre); (vi) the mortgage notes to affiliates of CHC Lease Partners have been funded; (vii) Patriot REIT has replaced the Old Line of Credit with the Revolving Credit Facility; (viii) Patriot Operating Company has acquired the Participating Note; and (ix) the Offering of 10,580,000 Paired Shares has been completed. F-10 The unaudited Pro Forma Condensed Combined Statements of Operations also assume the following additional transactions have occurred at the beginning of the periods presented: (i) Patriot REIT has acquired the CHC Hotels and leased such hotels to Patriot Operating Company; (ii) Patriot Operating Company has completed the GAH Acquisition; and (iii) the CHCI Merger has been consummated on the terms set forth in the CHCI Merger Agreement. The pro forma results of operations for the year ended December 31, 1996 assume the 24 hotels acquired during 1996 and the private placement of equity securities and the public offering of common stock completed by Old Patriot REIT during 1996 had occurred as of January 1, 1996. In management's opinion, all material adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of Patriot REIT and Patriot Operating Company would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Further the unaudited Pro Forma Condensed Combined Statement of Operations for the interim period ended September 30, 1997 is not necessarily indicative of the results of operations for the full year. F-11 PATRIOT REIT AND PATRIOT OPERATING COMPANY PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PATRIOT PATRIOT OPERATING REIT COMPANY PRO FORMA PRO FORMA PRO FORMA ELIMINATIONS TOTAL --------- ---------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease reve- nue..................... $213,868 $ -- $(172,119)(A) $ 41,749 Hotel revenue............ -- 572,292 -- 572,292 Racecourse facility and land lease revenue ..... 5,945 51,946 (5,611)(B) 52,280 Management fee and serv- ice fee income.......... -- 13,522 -- 13,522 Interest and other in- come.................... 2,297 10,012 (5,916)(C) 6,393 -------- -------- --------- -------- Total revenue............ 222,110 647,772 (183,646) 686,236 -------- -------- --------- -------- Expenses: Departmental costs--hotel operations.............. -- 241,792 -- 241,792 Racecourse facility oper- ations.................. -- 46,351 (5,611)(B) 40,740 Direct operating costs of management company and service department...... -- 11,143 -- 11,143 General and administra- tive.................... 6,797 71,700 (34)(C) 78,463 Ground lease expense..... 5,693 733 -- 6,426 Repair and maintenance... -- 29,897 -- 29,897 Utilities................ -- 26,843 -- 26,843 Interest expense......... 64,518 1,393 (5,882)(C) 60,029 (D) Real estate and personal property taxes and casu- alty insurance.......... 22,488 398 -- 22,886 Marketing................ -- 51,238 -- 51,238 Management fees.......... -- 9,469 -- 9,469 Depreciation and amorti- zation.................. 62,723 10,348 -- 73,071 Participating lease pay- ments................... -- 172,119 (172,119)(A) -- -------- -------- --------- -------- Total expenses........... 162,219 673,424 (183,646) 651,997 -------- -------- --------- -------- Income (loss) before eq- uity in earnings of un- consolidated subsidiar- ies, income tax provision and minority interests... 59,891 (25,652) -- 34,239 Equity in earnings of un- consolidated subsidiar- ies..................... 7,559 -- -- 7,559 -------- -------- --------- -------- Income (loss) before in- come tax provision and minority interests....... 67,450 (25,652) -- 41,798 Income tax provision..... (170) (760) -- (930) -------- -------- --------- -------- Income (loss) before mi- nority interests......... 67,280 (26,412) -- 40,868 Minority interest in the Patriot Partnerships.... (9,032) 3,830 -- (5,202) Minority interest in con- solidated subsidiaries.. (1,832) -- -- (1,832) -------- -------- --------- -------- Net income (loss) applica- ble to common shareholders(F).......... $ 56,416 $(22,582) $ -- $ 33,834 (D) ======== ======== ========= ======== Net income (loss) per com- mon Paired Share(E)...... $ 0.75 $ (0.30) $ 0.45 (D) ======== ======== ========
- -------- (A) Represents elimination of participating lease revenue and expense related to the 59 hotels (including the 17 leases to be acquired in connection with the CHCI Merger) leased by Patriot REIT to Patriot Operating Company. (B) Represents elimination of rental income and expense related to the Racecourse facility and land leased by Patriot REIT to Patriot Operating Company. (C) In connection with the Cal Jockey Merger, Patriot REIT Partnership subscribed for shares of Bay Meadows common stock (which became shares of Patriot Operating Company Common Stock in connection with the Cal Jockey Merger) in an amount equal to the number of shares of Patriot REIT Common Stock that were issued to Old Patriot REIT stockholders in the Cal Jockey Merger. In addition, Patriot REIT Partnership similarly subscribed for OP Units in the Patriot Operating Partnership in an amount equal to the number of Patriot REIT Partnership OP Units that were outstanding subsequent to the Cal Jockey Merger. The subscription for the shares and OP Units was funded through the issuance of promissory notes in the aggregate amount of $58,901 (the "Subscription Notes") payable to Patriot Operating Company. The Subscription Notes accrue interest at a rate of 8% per annum and mature December 31, 1997. The pro forma adjustments represent the elimination of $4,712 of interest income and expense related to the Subscription Notes, the elimination of $1,170 of interest income and expense related to a note receivable issued to Old Patriot REIT in connection with the sale of certain assets to PAH RSI Lessee, which assets were acquired by Patriot Operating Company, and the elimination of $34 of other intercompany income and expense items. F-12 (D) The pro forma amounts presented assume an average interest rate of 7.183% per annum (representing LIBOR plus 1.7%) on the amounts outstanding under the Revolving Credit Facility. An increase of 0.25% in the interest rate would increase pro forma interest expense to $61,604, decrease net income applicable to common shareholders to $32,477 and decrease net income per common share to $0.43. In connection with the closing of the Revolving Credit Facility, deferred loan costs totaling approximately $11,605, including fees, legal and other expenses were incurred and amortization expense of approximately $3,868 is reflected in pro forma interest expense. Amortization of deferred loan costs is computed using the straight-line method over the 3-year loan term. As a result of closing the Revolving Credit Facility, deferred loan costs totaling approximately $2,910 related to the Old Line of Credit were written off. This amount was reported as an extraordinary item in the Patriot Companies' results of operations for the nine months ended September 30, 1997. (E) Pro forma earnings per share is computed based on 75,516 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In addition, the net income per common Paired Share and the weighted average number of common Paired Shares and common Paired Share equivalents have been adjusted for (i) the March 1997 2-for-1 stock split on Old Patriot REIT Common Stock effected in the form of a stock dividend, (ii) the conversion of each share of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger, and (iii) the July 1997 1.927-for-1 stock split effected in the form of a stock dividend. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 Earnings Per Share ("Statement 128"). Statement 128 specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be $0.45 per common Paired Share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. (F) In connection with the GAH Acquisition and the CHCI Merger, Patriot REIT acquired eight Participating Leases held by CHC Lease Partners (and leased these hotels to Patriot Operating Company) and Patriot Operating Company acquired the remaining 17 Participating Leases held by CHC Lease Partners for aggregate consideration of approximately $105,532. Because the intent of the accompanying pro forma condensed combined statement of operations for the year ended December 31, 1996 is to reflect the expected continuing impact of the above-described transactions on the Patriot Companies, the adjustment to write off the cost of acquiring these leases has been excluded. This expense will be recorded as an operating expense on Patriot REIT's and Patriot Operating Company's respective statements of operations. F-13 PATRIOT REIT AND PATRIOT OPERATING COMPANY PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PATRIOT PATRIOT OPERATING REIT COMPANY PRO FORMA PRO FORMA PRO FORMA ELIMINATIONS TOTAL --------- ---------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease reve- nue..................... $172,682 $ -- $(138,309)(A) $ 34,373 Hotel revenue............ -- 462,484 -- 462,484 Racecourse facility and land lease revenue...... 3,504 33,399 (3,246)(B) 33,657 Management fee and serv- ice fee income.......... -- 14,701 -- 14,701 Interest and other in- come.................... 4,043 6,374 (2,306)(C) 8,111 -------- -------- --------- -------- Total revenue............ 180,229 516,958 (143,861) 553,326 -------- -------- --------- -------- Expenses: Departmental costs--hotel operations.............. -- 187,784 -- 187,784 Racecourse facility oper- ations.................. -- 30,114 (3,246)(B) 26,868 Direct operating costs of management company and service department...... -- 12,568 -- 12,568 General and administra- tive.................... 6,937 54,225 (24)(C) 61,138 Ground lease expense..... 5,535 523 -- 6,058 Repair and maintenance... -- 24,230 -- 24,230 Utilities................ -- 20,341 -- 20,341 Interest expense......... 48,329 936 (2,282)(C) 46,983 (D) Real estate and personal property taxes and casu- alty insurance.......... 17,812 290 -- 18,102 Marketing................ -- 41,734 -- 41,734 Management fees.......... -- 9,657 -- 9,657 Depreciation and amorti- zation.................. 47,565 5,449 -- 53,014 Participating lease pay- ments................... -- 138,309 (138,309)(A) -- -------- -------- --------- -------- Total expenses........... 126,178 526,160 (143,861) 508,477 -------- -------- --------- -------- Income (loss) before eq- uity in earnings of un- consolidated subsidiar- ies, income tax provision and minority interests... 54,051 (9,202) -- 44,849 Equity in earnings of un- consolidated subsidiar- ies..................... 4,488 -- -- 4,488 -------- -------- --------- -------- Income (loss) before in- come tax provision and minority interests....... 58,539 (9,202) -- 49,337 Income tax (provision) benefit................. (125) -- -- (125) -------- -------- --------- -------- Income (loss) before mi- nority interests......... 58,414 (9,202) -- 49,212 Minority interest in the Patriot Partnerships.... (7,803) 1,334 -- (6,469) Minority interest in con- solidated subsidiaries.. (1,869) -- -- (1,869) -------- -------- --------- -------- Net income (loss) applica- ble to common shareholders(F).......... $ 48,742 $ (7,868) $ -- $ 40,874 (D) ======== ======== ========= ======== Net income (loss) per com- mon Paired Share(E)...... $ 0.64 $ (0.10) $ 0.54 (D) ======== ======== ========
- -------- (A) Represents elimination of participating lease revenue and expense related to the 59 hotels (including the 17 leases to be acquired in connection with the CHCI Merger) leased by Patriot REIT to Patriot Operating Company. (B) Represents elimination of rental income and expense related to the Racecourse facility and land leased by Patriot REIT to Patriot Operating Company. (C) The pro forma adjustments represent the elimination of $1,450 of interest income and expense related to the Subscription Notes issued to Patriot Operating Company in connection with the subscription for shares of Patriot Operating Company Common Stock and Patriot Operating Partnership OP Units issued in connection with the Cal Jockey Merger, the elimination of $832 of interest income and expense related to a note receivable issued to Old Patriot REIT in connection with the sale of certain assets to PAH RSI Lessee, which assets were acquired by Patriot Operating Company, and the elimination of $24 of other intercompany income and expense items. (D) The pro forma amounts presented assume an average interest rate of 7.303% per annum (representing LIBOR plus 1.7%) on the amounts outstanding under the Revolving Credit Facility. An increase of 0.25% in the interest rate would increase pro forma interest expense to $48,159 and decrease net income applicable to common shareholders to $39,860. Net income per common share would be $0.53. In connection with the closing of the Revolving Credit Facility, deferred loan costs totaling approximately $11,605, including fees, legal and other expenses were incurred and amortization expense of approximately $2,901 is reflected in pro forma interest expense. F-14 Amortization of deferred loan costs is computed using the straight-line method over the 3-year loan term. As a result of closing the Revolving Credit Facility, deferred loan costs totaling approximately $2,910 related to the Old Line of Credit were written off. This amount was reported as an extraordinary item in the Patriot Companies' historical results of operations for the nine months ended September 30, 1997 and has been eliminated from operating results for pro forma presentation purposes. (E) Pro forma earnings per share is computed based on 76,090 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In addition, the net income per common Paired Share and the weighted average number of common Paired Shares and common Paired Share equivalents have been adjusted to reflect the impact of the 1.927-for-1 stock split effected in the form of a stock dividend. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be $0.58 per common Paired Share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. (F) In connection with the GAH Acquisition and the CHCI Merger, Patriot REIT acquired eight Participating Leases held by CHC Lease Partners (and leased these hotels to Patriot Operating Company) and Patriot Operating Company acquired the remaining 17 Participating Leases held by CHC Lease Partners for aggregate consideration of approximately $105,532. Because the intent of the accompanying pro forma condensed combined statement of operations for the nine months ended September 30, 1997 is to reflect the expected continuing impact of the above-described transactions on the Patriot Companies, the adjustment to write off the cost of acquiring these leases has been excluded. This expense will be recorded as an operating expense on Patriot REIT's and Patriot Operating Company's respective statements of operations. F-15 PATRIOT REIT AND PATRIOT OPERATING COMPANY PRO FORMA CONDENSED COMBINED BALANCE SHEET The following unaudited Pro Forma Condensed Combined Balance Sheet assumes the following transactions have occurred as of September 30, 1997: (i) Patriot REIT has acquired the three CHC Hotels and The Buttes (which were acquired subsequent to September 30, 1997) and has acquired the remaining approximate 50% interest in the Omni Inner Harbor Hotel and leased such hotels to Patriot Operating Company; (ii) Patriot Operating Company has acquired the members' interests in PAH RSI Lessee; (iii) Patriot Operating Company has completed the GAH Acquisition; and (iv) The CHCI Merger has been consummated on the terms set forth in the CHCI Merger Agreement. In management's opinion, all material adjustments necessary to reflect the effect of these transactions have been made. The following unaudited Pro Forma Condensed Combined Balance Sheet is derived from Patriot REIT's and Patriot Operating Company's Combined Balance Sheet as of September 30, 1997 and should be read in conjunction with the financial statements filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the nine months ended September 30, 1997. The following Pro Forma Condensed Combined Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of September 30, 1997, nor does it purport to represent the future financial position of Patriot REIT and Patriot Operating Company. F-16 PATRIOT REIT AND PATRIOT OPERATING COMPANY PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (UNAUDITED)
PATRIOT REIT AND PATRIOT OPERATING COMPANY COMBINED OTHER CHC HOTELS CHCI PRO HISTORICAL ACQUISITIONS ACQUISITION MERGER FORMA (A) (B) (C) (D) TOTAL ------------ ------------ ----------- -------- ---------- (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) ASSETS Net investment in real estate and related improvements............ $ 1,477,512 $63,755 $116,016 $ -- $1,657,283 Mortgage notes and other receivables from unconsolidated subsidiaries............ 74,053 -- -- -- 74,053 Other notes and receivables............. 98,538 -- (82,625)(E) -- 15,913 Management contracts..... 22,453 -- -- 22,911 (F) 45,364 Trade names.............. 2,500 -- -- 5,000 (F) 7,500 Investment in unconsolidated subsidiaries............ 12,061 -- -- -- 12,061 Cash and cash equivalents............. 21,515 -- -- -- 21,515 Restricted cash (G)...... 38,196 -- -- 38,196 Accounts receivable...... 38,540 -- -- -- 38,540 Goodwill................. 120,839 -- -- 7,269 (H) 128,108 Deferred expenses, net... 16,626 -- -- -- 16,626 Deferred acquisition costs................... 46,036 -- (6,066) -- 39,970 Prepaid expenses and other assets............ 10,538 (1,002) 1,393 394 11,323 Deferred income taxes.... 700 -- -- -- 700 ----------- ------- -------- -------- ---------- Total assets............ $ 1,980,107 $62,753 $ 28,718 $ 35,574 $2,107,152 =========== ======= ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under a line of credit facility and mortgage notes.......... $ 727,177 $62,753 $ -- $ -- $ 789,930 Accounts payable and accrued expenses........ 48,561 -- 1,816 (I) -- 50,377 Dividends and distributions payable... 21,727 -- -- -- 21,727 Sales taxes payable...... 2,968 -- -- -- 2,968 Deposits................. 2,037 -- -- -- 2,037 Deferred income tax liability............... 4,846 -- -- -- 4,846 Due to unconsolidated subsidiaries............ 5,904 -- -- -- 5,904 Minority interest in the Patriot Partnerships.... 257,274 -- 7,588(J) -- 264,862 Minority interest in consolidated subsidiaries............ 29,284 -- -- -- 29,284 Shareholders' equity: Preferred stock......... -- -- -- 44 (L) 44 Common stock............ 1,360 -- 17 (K) -- 1,377 Paid-in capital......... 941,674 -- 19,297 (K) 88,296 (L) 1,049,267 Unearned stock compensation, net...... (15,075) -- -- -- (15,075) Retained earnings....... (47,630) -- -- (52,766)(L) (100,396) ----------- ------- -------- -------- ---------- Total shareholders' equity................. 880,329 -- 19,314 35,574 935,217 ----------- ------- -------- -------- ---------- Total liabilities and shareholders' equity... $ 1,980,107 $62,753 $ 28,718 $ 35,574 $2,107,152 =========== ======= ======== ======== ==========
See notes on following page. F-17 PATRIOT REIT AND PATRIOT OPERATING COMPANY NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997: (A) Represents the historical combined financial position of Patriot REIT and Patriot Operating Company as of September 30, 1997. (B) Represents adjustments to the Patriot Companies' pro forma financial position assuming Patriot REIT had acquired The Buttes resort as of September 30, 1997. (C) Represents adjustments to the Patriot Companies' pro forma financial position assuming the three CHC Hotels purchased in October 1997 and the remaining approximate 50% ownership interest in the Omni Inner Harbor Hotel had been acquired as of September 30, 1997. (D) Represents adjustments to the Patriot Companies' pro forma financial position assuming the CHCI Merger had been consummated as of September 30, 1997. (E) Represents the elimination of the principal balance of the mortgage notes held by Patriot REIT encumbering three of the CHC Hotels. (F) Represents the estimated value of the management contracts and trade names acquired. (G) The restricted cash balance represents the cash proceeds from the PaineWebber Land Sale (in the initial amount of $80,864) that were placed in a restricted trust account in order to facilitate a tax-deferred, like- kind exchange through the acquisition of suitable hotel properties. In order to qualify as a tax-deferred exchange, suitable properties must be located and exchanged and the exchange must be effectuated within a relatively short time period allowed by Internal Revenue Service regulations. Management believes that the three hotel properties that have been purchased thus far with PaineWebber Land Sale proceeds are suitable hotel properties that qualify as a tax-deferred, like-kind exchange. (H) Represents the purchase consideration in excess of the fair market value of the net assets. (I) Represents adjustment for accounts payable and accrued expenses assumed or incurred in connection with the acquisition of hotel properties. (J) Represents adjustments to reflect the issuance of 326,348 OP Units of the Patriot Partnerships in connection with the acquisition of three of the CHC Hotels. (K) Represents adjustments to reflect the issuance of 830,713 Paired Shares in connection with the acquisition of the remaining approximate 50% interest in the Omni Inner Harbor Hotel. (L) Represents the following adjustments to Shareholders' Equity:
PREFERRED PAID-IN RETAINED STOCK CAPITAL EARNINGS --------- ------- -------- Pursuant to issuance of a total of approximately 4,395,700 shares of Series A Preferred Stock and Series B Preferred Stock of Patriot Operating Company in connection with the CHCI Merger............ $ 44 $88,296 $ -- Write-off the estimated cost to acquire 17 Participating Leases related to hotels leased by Patriot REIT to CHC Lease Partners and related transactions............................... -- -- (52,766) ---- ------- -------- $ 44 $88,296 $(52,766) ==== ======= ========
In connection with the CHCI Merger, Patriot Operating Company will acquire the remaining 17 Participating Leases held by CHC Lease Partners, issuing a combination of Operating Company Series A Preferred Stock and Operating Company Series B Preferred Stock in connection with the transaction. The cost of acquiring these leases will be recorded as an operating expense in Patriot Operating Company's results of operations. However, because the intent of the pro forma financial statements is to reflect, among other things, the expected continuing impact of the CHCI Merger on Patriot Operating Company, this adjustment has been excluded from the pro forma statements of operations and has been reflected as an adjustment to retained earnings for pro forma presentation purposes. F-18 PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
OLD PATRIOT REIT CAL JOCKEY RECENT CHC HOTELS HISTORICAL HISTORICAL TRANSACTIONS ACQUISITION OTHER PRO FORMA (A) (B) (C) (D) ADJUSTMENTS TOTAL ----------- ---------- ------------ ----------- ----------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue............... $75,893 $ -- $98,428 (E) $39,702(E) $ (155) $213,868 Rental of Racecourse facility and land..... -- 4,918 1,027 (F) -- -- 5,945 Interest and other in- come.................. 600 494 1,203 (G) -- -- 2,297 ------- ------- ------- ------- ------- -------- Total revenue.......... 76,493 5,412 100,658 39,702 (155) 222,110 ------- ------- ------- ------- ------- -------- Expenses: Ground lease expense... 1,075 -- 4,238 (H) 380 -- 5,693 General and administra- tive.................. 4,500 5,696 (3,399)(I) -- -- 6,797 Interest expense....... 7,380 -- 46,372 (J) 7,753(J) 3,013 (J) 64,518 (R) Real estate and personal property taxes and casualty insurance............. 7,150 -- 10,121 (K) 5,217(K) -- 22,488 Depreciation and amor- tization.............. 17,420 932 32,894 (L) 11,477(L) -- 62,723 ------- ------- ------- ------- ------- -------- Total expenses......... 37,525 6,628 90,226 24,827 3,013 162,219 ------- ------- ------- ------- ------- -------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests..... 38,968 (1,216) 10,432 14,875 (3,168) 59,891 Equity in earnings of unconsolidated subsidiaries........... 5,845 -- 1,714 (M) -- -- 7,559 ------- ------- ------- ------- ------- -------- Income (loss) before income tax provision and minority interests.............. 44,813 (1,216) 12,146 14,875 (3,168) 67,450 Income tax provision.... -- -- -- -- (170)(N) (170) ------- ------- ------- ------- ------- -------- Income (loss) before minority interests..... 44,813 (1,216) 12,146 14,875 (3,338) 67,280 Minority interest in Patriot REIT Partnership........... (6,767) -- 405 (O) -- (2,670)(O) (9,032) Minority interest in consolidated subsidiaries.......... (55) -- (1,777)(P) -- -- (1,832) ------- ------- ------- ------- ------- -------- Net income (loss) applicable to common shareholders........... $37,991 $(1,216) $10,774 $14,875 $(6,008) $ 56,416 (R) ======= ======= ======= ======= ======= ======== Net income (loss) per common share (Q)....... $ 1.06 $ (0.11) $ 0.75 (R) ======= ======= ========
See notes on following page. F-19 NOTES TO PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996: (A) Represents Old Patriot REIT's historical results of operations for the year ended December 31, 1996. (B) Represents the historical results of operations of Cal Jockey for the year ended December 31, 1996. (C) Represents adjustment to Patriot REIT's results of operations assuming (i) the Cal Jockey Merger and the related transactions have been consummated; (ii) the PaineWebber Land Sale has been consummated, the PaineWebber affiliate has leased the Racecourse land to Patriot REIT and Patriot REIT has subleased this land to Patriot Operating Company; (iii) Patriot REIT has leased certain land to Borders, Inc.; (iv) Patriot REIT has completed the Recent Acquisitions (excluding the Park Shore Hotel and the Sheraton City Centre); (v) the mortgage notes to affiliates of CHC Lease Partners have been funded; (vi) Patriot REIT has replaced the Old Line of Credit with the Revolving Credit Facility and the Term Loan; (vii) the Offering has been completed; and (viii) the 24 hotels acquired by Patriot REIT, the private placement of equity securities and the public offering of common stock completed by Old Patriot REIT during 1996 had occurred as of January 1, 1996. (D) Represents adjustment to Patriot REIT's results of operations assuming the CHC Hotels had been acquired as of January 1, 1996. (E) Represents adjustments to participating lease revenue assuming the 77 hotels owned by Patriot REIT and its subsidiaries (excluding the Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel which are not leased to Lessees and excluding the Park Shore Hotel and the Sheraton City Centre) had been leased to the Lessees or Patriot Operating Company as of January 1, 1996. (F) Represents adjustments to Racecourse facility rental revenue as a result of (i) the new lease agreement between Patriot REIT and Patriot Operating Company subsequent to the Cal Jockey Merger and the related transactions and the PaineWebber Land Sale and (ii) rental income related to the Borders Lease. (G) Represents the following adjustments to interest and other income: Related to interest earned on notes receivable issued to the Patriot REIT Partnership by PAH RSI Lessee in connection with the sale of certain assets and the right to receive certain royalty fees.................................................. $ 1,170 Related to the $500 mortgage note receivable issued to the Pa- triot REIT Partnership by NorthCoast Hotels, L.L.C............ 48 Related to interest earned from notes receivable from an uncon- solidated subsidiary.......................................... 21 Related to the elimination of interest earned on the $2,900 note receivable issued to Old Patriot REIT by Cal Jockey in connection with the Cal Jockey Merger......................... (36) ------- $ 1,203 =======
(H) Represents pro forma ground lease payments pursuant to the ground lease agreement with an affiliate of PaineWebber of $3,964 and pro forma ground lease payments to be made with respect to certain of the hotels of $274. (I) Represents the following adjustments to general and administrative expense: Related to elimination of administrative salaries and other ex- penses not expected to be incurred by Patriot REIT............. $ (568) Related to elimination of non-recurring legal fees.............. (1,344) Related to elimination of Cal Jockey Merger related costs....... (3,284) Related to increased salaries, insurance, travel, audit, legal and other expenses associated with operating as a public com- pany and the continued growth of Patriot REIT.................. 150 Related to the annual amortization of unearned stock compensa- tion computed on a straight-line basis over the 3 to 5-year vesting periods................................................ 1,647 ------- $(3,399) =======
(J) Interest expense consists of the following components: Historical interest expense...................................... $ 7,380 Interest expense related to 47 hotels acquired by Patriot REIT since January 1, 1996 (excluding the Park Shore Hotel, the Sher- aton City Centre and the CHC Hotels)............................ 37,569 Interest expense related to the Subscription Notes payable to Pa- triot Operating Company......................................... 4,712 Interest expense related to amortization of deferred loan costs (including $3,868 of amortization related to costs associated with the Revolving Credit Facility)............................. 3,998 Interest expense related to amortization of capitalized inter- est............................................................. 93 Interest expense related to four of the CHC Hotels encumbered by mortgage loans held by Patriot REIT............................. 7,753 Interest expense related to the acquisition of the 10 CHC Ho- tels............................................................ 3,013 ------- $64,518 =======
(K) Represents real estate and personal property taxes and casualty insurance to be paid by Patriot REIT related to the 47 hotels acquired since January 1, 1996 (except for the Park Shore Hotel and the Sheraton City Centre) and the 10 CHC Hotels. F-20 (L) Represents the following adjustments to depreciation and amortization: Depreciation related to 47 hotels acquired by Patriot REIT since January 1, 1996 (excluding the Park Shore Hotel, the Sheraton City Centre and the CHC Hotels)................................ $30,603 Reduction of depreciation expense related to the Racecourse fa- cility......................................................... (93) Amortization of goodwill resulting from the adjustment for pur- chase method of accounting whereby the Racecourse facility and retained leasehold improvements owned by Cal Jockey are ad- justed to estimated fair market value.......................... 2,384 ------- $32,894 ======= Depreciation related to the CHC Hotels.......................... $11,477 =======
Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for hotel buildings and improvements, 20 years for the Racecourse facility and 5 to 7 years for furniture, fixtures and equipment ("F, F & E"). These estimated useful lives are based on management's knowledge of the properties and the industry in general. Amortization of goodwill is computed using the straight-line method over a 40 year estimated useful life. Because the paired share structure is "grandfathered" under the Code, management believes the life of the paired share structure is perpetual. Under generally accepted accounting principles, however, the maximum amortization period is 40 years for intangible assets. (M) Represents equity in income of PAH WindWatch, L.L.C. and PAH Boulders, Inc. acquired in September 1996 and January 1997, respectively. (N) Represents an adjustment for estimated state income tax liabilities. (O) Represents the adjustment to minority interest to reflect the estimated minority interest percentage subsequent to the assumed transactions. The estimated minority interest percentage subsequent to the Recent Transactions is approximately 11.8%. The estimated minority interest percentage subsequent to the acquisition of the CHC Hotels, the GAH Acquisition, the CHCI Merger and the PaineWebber Direct Placement and the LaSalle Direct Placement is approximately 13.8%. (P) Represents the minority interest related to the partnerships with an affiliate of Doubletree Hotels Corporation and the limited liability companies which own certain other hotels assuming such entities had been formed and the 15 hotels owned by such entities had been acquired at January 1, 1996. (Q) Pro forma earnings per share is computed based on 75,516 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In addition, the net income per common share and the weighted average number of common shares and common share equivalents have been adjusted for (i) the March 1997 2-for- 1 stock split on Old Patriot REIT Common Stock effected in the form of a stock dividend, (ii) the conversion of each share of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger, and (iii) the July 1997 1.927-for-1 stock split effected in the form of a stock dividend, as applicable. Historical basis earnings per share is computed based on 35,938 and 11,106 weighted average common shares and common share equivalents outstanding for Old Patriot REIT and Cal Jockey, respectively. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be $0.75 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. (R) If the interest rate on the Revolving Credit Facility increased by 0.25%, interest expense would increase to approximately $66,093, net income would decrease to $55,059 and net income per common share would decrease to $0.73. F-21 PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PATRIOT REIT RECENT CHC HOTELS HISTORICAL TRANSACTIONS ACQUISITION PRO FORMA (A) (B) (C) TOTAL ---------- ------------ ----------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue............... $117,770 $29,280 (D) $25,632 (D) $172,682 Rental of Racecourse facility and land..... 1,323 2,181 (E) -- 3,504 Interest and other in- come.................. 4,215 (172)(F) -- 4,043 -------- ------- ------- -------- Total revenue.......... 123,308 31,289 25,632 180,229 -------- ------- ------- -------- Expenses: Ground lease expense... 1,993 3,340 (G) 202 5,535 General and administra- tive.................. 7,582 (645)(H) -- 6,937 Interest expense....... 31,977 11,633 (I) 4,719 (I) 48,329 (R) Real estate and per- sonal property taxes and casualty insur- ance.................. 11,219 3,276 (J) 3,317 (J) 17,812 Cost of acquiring leaseholds............ 43,820 (43,820)(K) -- -- Depreciation and amor- tization.............. 30,656 10,391 (L) 6,518 (L) 47,565 -------- ------- ------- -------- Total expenses......... 127,247 (15,825) 14,756 126,178 -------- ------- ------- -------- Income (loss) before eq- uity in earnings of un- consolidated subsidiar- ies, income tax provi- sion, minority inter- ests and extraordinary item................... (3,939) 47,114 10,876 54,051 Equity in earnings of unconsolidated subsid- iaries................ 4,488 -- -- 4,488 -------- ------- ------- -------- Income (loss) before in- come tax provision, mi- nority interests and extraordinary item..... 549 47,114 10,876 58,539 Income tax provision... -- (125)(M) -- (125) -------- ------- ------- -------- Income (loss) before mi- nority interests and extraordinary item..... 549 46,989 10,876 58,414 Minority interest in Patriot REIT Partner- ship.................. (1,194) (4,195)(N) (2,414)(N) (7,803) Minority interest in consolidated subsidi- aries................. (1,368) (501)(O) -- (1,869) -------- ------- ------- -------- Income (loss) before ex- traordinary item....... (2,013) 42,293 8,462 48,742 Extraordinary loss from early extinguishment of debt, net of minority interest..... (2,534) 2,534 (P) -- -- -------- ------- ------- -------- Net income (loss) appli- cable to common share- holders................ $ (4,547) $44,827 $ 8,462 $ 48,742 (R) ======== ======= ======= ======== Net income (loss) per common share: Income (loss) before extraordinary item.... $ (0.04) $ 0.64 Extraordinary loss..... (0.05) -- -------- -------- Net income (loss) per common share (Q)....... $ (0.09) $ 0.64 (R) ======== ========
See notes on following page. F-22 NOTES TO PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997: (A) Represents Patriot REIT's historical results of operations for the nine months ended September 30, 1997. (B) Represents adjustments to Patriot REIT's results of operations assuming (i) the Cal Jockey Merger and the related transactions have been consummated; (ii) the PaineWebber Land Sale has been consummated, the PaineWebber affiliate has leased the Racecourse land to Patriot REIT and Patriot REIT has subleased this land to Patriot Operating Company; (iii) Patriot REIT has leased certain land to Borders, Inc.; (iv) Patriot REIT has completed the Recent Acquisitions (excluding the Park Shore Hotel and the Sheraton City Centre); (v) the mortgage notes to affiliates of CHC Lease Partners have been funded; (vi) Patriot REIT has replaced the Old Line of Credit with the Revolving Credit Facility and the Term Loan; and (vii) the Offering has been completed as of January 1, 1996. (C) Represents adjustments to Patriot REIT's results of operations assuming the CHC Hotels had been acquired as of January 1, 1996. (D) Represents adjustments to participating lease revenue assuming the 77 hotels owned by Patriot REIT and its subsidiaries (excluding the Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel which are not leased to Lessees and excluding the Park Shore Hotel and the Sheraton City Centre) had been leased to the Lessees or Patriot Operating Company as of January 1, 1996. (E) Represents adjustments to Racecourse facility rental revenue including adjustments as a result of (i) the new lease agreement between Patriot REIT and Patriot Operating Company subsequent to the Cal Jockey Merger and the related transactions and the PaineWebber Land Sale and (ii) rental income related to the Borders Lease. (F) Represents the following adjustments to interest and other income: Related to interest earned on notes receivable issued to the Patriot REIT Partnership by PAH RSI Lessee in connection with the sale of certain assets and the right to receive certain royalty fees.................................................. $ 46 Cal Jockey historical interest income prior to the Cal Jockey Merger........................................................ 1,715 Eliminate interest earned on the mortgage notes receivable from affiliates of CHC Lease Partners.............................. (1,869) Related to interest earned on other notes receivable .......... (64) -------- $ (172) ========
(G) Represents ground lease payments pursuant to the ground lease agreement with an affiliate of PaineWebber. (H) Represents the following adjustments to general and administrative expense: Cal Jockey historical general and administrative expense for the six month period prior to the Cal Jockey Merger........... $ 2,657 Elimination of non-recurring legal fees and Cal Jockey Merger related costs................................................. (2,092) Adjustment to the amortization of unearned stock compensation computed on the straight-line method over the 3 to 5-year vesting periods (primarily to allocate a portion of the costs to Patriot Operating Company)................................. (1,210) -------- $ (645) ========
(I) Interest expense consists of the following components: Historical interest expense...................................... $31,977 Interest expense related to the hotels acquired by Patriot REIT since January 1, 1997 (excluding the Park Shore Hotel, the Sher- aton City Centre and the CHC Hotels)............................ 7,115 Interest expense related to the Subscription Notes payable to Pa- triot Operating Company......................................... 1,450 Interest expense related to amortization of deferred loan costs (including $2,901 of amortization related to costs associated with the Revolving Credit Facility)............................. 2,998 Interest expense related to amortization of capitalized inter- est............................................................. 70 Interest expense related to three CHC Hotels encumbered by mort- gage loans held by Patriot REIT acquired subsequent to September 30, 1997........................................................ 4,719 ------- $48,329 =======
(J) Represents real estate and personal property taxes and casualty insurance to be paid by Patriot REIT related to the hotels acquired since January 1, 1997 (except for the Park Shore Hotel and the Sheraton City Centre). (K) Represents elimination of the cost of acquiring seven leaseholds related to Participating Lease agreements for seven hotels leased by CHC Lease Partners recorded as an operating expense in Patriot REIT's historical results of operations. Because the intent of the pro forma financial statements is to reflect the expected continuing impact of certain transactions on the Patriot Companies, this non-recurring expense has been excluded from the pro forma statements of operations. (L) Represents the following adjustments to depreciation and amortization: Depreciation related to hotels acquired by Patriot REIT from January 1, 1997 through September 30, 1997 (excluding the Park Shore Hotel and the Sheraton City Centre)..................... $ 9,536 Reduction of depreciation expense related to the Racecourse facility...................................................... (240) Amortization of goodwill resulting from the adjustment for purchase method of accounting whereby the Racecourse facility and retained leasehold improvements owned by Cal Jockey are adjusted to estimated fair market value....................... 1,095 ------- $10,391 ======= Depreciation related to the CHC Hotels......................... $ 6,518 =======
F-23 Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for hotel buildings and improvements, 20 years for the Racecourse facility and 5 to 7 years for F, F & E. These estimated useful lives are based on management's knowledge of the properties and the industry in general. Amortization of goodwill is computed using the straight-line method over a 40 year estimated useful life. Because the paired share structure is "grandfathered" under the Code, management believes the life of the paired share structure is perpetual. Under generally accepted accounting principles, however, the maximum amortization period is 40 years for intangible assets. (M) Represents an adjustment for estimated state income tax liabilities. (N) Represents the adjustment to minority interest to reflect the estimated minority interest percentage subsequent to the assumed transactions. The estimated minority interest percentage subsequent to the Recent Transactions is approximately 11.8%. The estimated minority interest percentage subsequent to the acquisition of the CHC Hotels, the GAH Acquisition, the CHCI Merger and the PaineWebber Direct Placement and the LaSalle Direct Placement is approximately 13.8%. (O) Represents adjustments to the minority interest related to the partnerships with an affiliate of Doubletree Hotels Corporation and the limited liability companies which own certain other hotels assuming such entities had been formed and the 15 hotels owned by such entities had been acquired as of January 1, 1996. (P) Represents elimination of extraordinary loss from the early extinguishment of debt. Patriot REIT recognized the loss as a result of the write-off of unamortized deferred loan costs related to the Old Line of Credit when it was replaced with the Revolving Credit Facility. Because the intent of the pro forma financial statements is to reflect the expected continuing impact of certain transactions on the Patriot Companies, this non- recurring expense has been excluded from the pro forma statements of operations. (Q) Pro forma earnings per share is computed based on 76,090 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In addition, the historical net income per common share and the weighted average number of common shares and common share equivalents have been adjusted for the conversion of each share of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger, and the July 1997 1.927-for-1 stock split effected in the form of a stock dividend, as applicable. Historical basis earnings per share is computed based on 51,104 weighted average common shares and common share equivalents outstanding. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be $0.69 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. (R) If the interest rate on the Revolving Credit Facility increased by 0.25%, interest expense would increase to approximately $49,505, net income would decrease to $47,728 and net income per common share would decrease to $0.63. F-24 PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
BAY CHC HOTELS CHCI MEADOWS RECENT AND LEASE GAH HOSPITALITY HISTORICAL TRANSACTIONS ACQUISITION HISTORICAL DIVISION PRO FORMA (A) (B) (C) (D) (E) OTHER TOTAL ---------- ------------ ----------- ---------- ----------- ------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Room revenue........... $ -- $145,801 $187,365 $ -- $ 5,282 $ -- $338,448 Other hotel revenues... -- 132,243 97,250 -- 4,351 -- 233,844 Racecourse facility revenue............... 51,946 -- -- -- -- -- 51,946 Management fee and service fee income.... -- 3,165 -- 7,270 9,032 (5,945)(F) 13,522 Interest and other in- come.................. 1,526 7,757 (G) -- 14 715 -- 10,012 ------- -------- -------- ------ ------- ------- -------- Total revenue.......... 53,472 288,966 284,615 7,284 19,380 (5,945) 647,772 ------- -------- -------- ------ ------- ------- -------- Expenses: Departmental costs--ho- tel operations........ -- 124,924 112,873 -- 3,995 -- 241,792 Racecourse facility op- erations.............. 45,658 693 (H) -- -- -- -- 46,351 Management company and service department operations............ -- 1,595 -- 4,882 4,666 -- 11,143 General and administra- tive.................. 4,381 28,264 (I) 28,568 (J) 1,056(J) 9,431 (J) -- 71,700 Ground lease expense... -- 733 -- -- -- -- 733 Repair and mainte- nance................. -- 16,777 13,120 -- -- -- 29,897 Utilities.............. -- 12,676 14,167 -- -- -- 26,843 Marketing.............. 1,436 22,717 27,085 -- -- -- 51,238 Management fees........ -- 8,743 6,671 -- -- (5,945)(F) 9,469 Depreciation and amor- tization.............. 754 1,591 (K) -- 112 853 7,038 (K) 10,348 Participating lease payments.............. -- 78,240 (L) 93,879 (L) -- -- -- 172,119 Interest expense....... 130 1,240 -- 23 3,304 (3,304)(M) 1,393 Real estate and per- sonal property taxes and casualty insur- ance.................. 398 -- -- -- -- -- 398 ------- -------- -------- ------ ------- ------- -------- Total expenses......... 52,757 298,193 296,363 6,073 22,249 (2,211) 673,424 ------- -------- -------- ------ ------- ------- -------- Income (loss) before income tax provision and minority interests.............. 715 (9,227) (11,748) 1,211 (2,869) (3,734) (25,652) Income tax provision... (260) -- -- -- (92)(N) (408)(N) (760) ------- -------- -------- ------ ------- ------- -------- Income (loss) before minority interest...... 455 (9,227) (11,748) 1,211 (2,961) (4,142) (26,412) Minority interest in Patriot Operating Com- pany Partnership...... -- 1,123 (O) -- -- -- 2,707 (O) 3,830 ------- -------- -------- ------ ------- ------- -------- Net income (loss) applicable to common shareholders........... $ 455 $ (8,104) $(11,748) $1,211 $(2,961) $(1,435) $(22,582) ======= ======== ======== ====== ======= ======= ======== Net income (loss) per common share (P).............. $ 0.04 $ (0.30) ======= ========
See notes on following page. F-25 NOTES TO PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996: (A) Represents the historical results of operations of Patriot Operating Company (formerly known as Bay Meadows) for the year ended December 31, 1996. (B) Represents adjustments to Patriot Operating Company's results of operations assuming 24 of Patriot REIT's hotel properties had been leased to Patriot Operating Company as of January 1, 1996. These hotel properties include 11 of the Recent Acquisitions (excluding the Sheraton City Centre), the eight hotels previously leased to PAH RSI Lessee, the three hotels previously leased to Grand Heritage Leasing, L.L.C., the Doubletree Hotel at Allen Center, the Doubletree Hotel in Tulsa, Oklahoma and The Buttes. (C) Represents the combined results of operations for the year ended December 31, 1996 of the 10 CHC Hotels and 25 hotels leased by CHC Lease Partners assuming that such hotels were leased to Patriot Operating Company as of January 1, 1996. (D) Represents the results of operations of GAH for the year ended December 31, 1996, assuming it had been acquired by Patriot Operating Company as of January 1, 1996. (E) Represents the results of operations for the contracts acquired as a result of the CHCI Merger for the twelve months ended November 30, 1996, assuming such contracts had been acquired by Patriot Operating Company as of January 1, 1996. (F) Represents the elimination of management fees for Patriot REIT hotels previously managed by Gencom and CHCI, which subsequent to the GAH Acquisition and the CHCI Merger, such hotels are assumed to be managed by Patriot Operating Company. (G) Adjustments to interest and other income consist of the following components: Interest and other income related to PAH RSI Lessee............. $ 2,030 Interest income related to the Subscription Notes receivable from Patriot REIT.............................................. 4,712 Interest income related to the Participating Note............... 1,015 ------- $ 7,757 =======
All other interest and other income balances presented represent historical amounts recorded by hotels and businesses acquired. (H) Represents adjustment to Racecourse facility rental expense as a result of (i) the new lease agreement between Patriot REIT and Patriot Operating Company subsequent to the Cal Jockey Merger and the related transactions and (ii) the PaineWebber Land Sale. (I) Represents the following adjustments to general and administrative expense: Represents expense related to the hotels recently acquired...... $24,497 Represents general liability insurance expense.................. 1,441 Related to elimination of costs related to the Cal Jockey Merger......................................................... (861) Related to increased salaries, insurance, travel, audit, legal and other expenses associated with operating as a public company and the continued growth of Patriot Operating Company.. 300 Represents expense related to the annual amortization of unearned stock compensation computed on a straight-line basis over the 3 to 5-year vesting periods........................... 2,887 ------- $28,264 =======
(J) Represent general and administrative expense related to the 10 CHC Hotels and general and administrative expense related to the contracts acquired in connection with the GAH Acquisition and the CHCI Merger. (K) Represents the following adjustments to depreciation and amortization: Adjustment to increase depreciation related to F, F & E......... $ 245 Adjustment to reflect amortization of goodwill.................. 438 Adjustment to reflect amortization of trade names............... 125 Adjustment to reflect amortization of management contract costs.......................................................... 783 ------- $ 1,591 ======= Adjustment to increase depreciation related to F, F & E......... $ 86 Adjustment to reflect amortization of goodwill.................. 600 Adjustment to reflect amortization of trade names............... 250 Adjustment to amortization of management contract costs......... 6,102 ------- $ 7,038 =======
Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 5 to 7 years for F, F & E. Amortization of goodwill related to the Cal Jockey Merger is computed using the straight- line method over a 40 year estimated useful life. Because the paired share structure is "grandfathered" under the Code, management believes the life of the paired share structure is perpetual. Under generally accepted accounting principles, however, the maximum amortization period is 40 years for intangible assets. Amortization of goodwill related to the acquisition of the management operations of Grand Heritage Hotels, Inc., GAH and CHCI is computed using the straight-line method over a 20 year estimated useful life. Amortization of trade names is computed using the straight-line method over a 20 year estimated useful life. Amortization of management contract costs is computed using the straight-line method over the estimated remaining term of the contracts. (L) Represents lease payments from Patriot Operating Company to Patriot REIT calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels for the period presented. F-26 (M) Represents the elimination of interest expense related to debt that Patriot Operating Company will not assume in connection with the CHCI Merger. (N) Represents an adjustment to the estimated federal and state tax liability as a result of the pro forma adjustments to the operating results of Patriot Operating Company for the year ended December 31, 1996. (O) Represents the adjustment to minority interest to reflect the estimated minority interest percentage subsequent to the assumed transactions. The estimated minority interest percentage subsequent to the Recent Transactions is approximately 11.8%. The estimated minority interest percentage subsequent to the acquisition of the CHC Hotels, the GAH Acquisition, the CHCI Merger and the PaineWebber Direct Placement and the LaSalle Direct Placement is approximately 14.5%. (P) Pro forma earnings per share is computed based on 75,516 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In addition, the historical net income per common share and the weighted average number of common shares and common share equivalents have been adjusted for (i) the March 1997 2-for-1 stock split on Old Patriot REIT Common Stock effected in the form of a stock dividend, (ii) the conversion of each share of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger, and (iii) the July 1997 1.927-for-1 stock split effected in the form of a stock dividend, as applicable. Historical basis earnings per share is computed based on 11,106 weighted average common shares and common share equivalents outstanding. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be a net loss of $0.30 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-27 PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PATRIOT OPERATING CHC HOTELS CHCI COMPANY RECENT AND LEASE GAH HOSPITALITY HISTORICAL TRANSACTIONS ACQUISITION HISTORICAL DIVISION PRO FORMA (A) (B) (C) (D) (E) OTHER TOTAL ---------- ------------ ----------- ---------- ----------- ------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Room revenue........... $20,437 $108,831 $146,163 $ -- $ 4,164 $ -- $279,595 Other hotel revenues... 9,834 98,144 71,352 -- 3,559 -- 182,889 Racecourse facility revenue............... 10,861 22,538 -- -- -- -- 33,399 Management fee and service fee income.... 1,577 2,836 -- 6,805 6,747 (3,264)(F) 14,701 Interest and other in- come.................. 1,475 1,876 983 142 590 1,308 (G) 6,374 ------- -------- -------- ------ ------- ------- -------- Total revenue.......... 44,184 234,225 218,498 6,947 15,060 (1,956) 516,958 ------- -------- -------- ------ ------- ------- -------- Expenses: Departmental costs--ho- tel operations........ 10,032 90,512 84,047 -- 3,193 -- 187,784 Racecourse facility op- erations.............. 10,536 19,664 (H) -- -- -- (86)(H) 30,114 Management company and service department operations............ 260 1,458 -- 2,147 8,703 -- 12,568 General and administra- tive.................. 4,081 22,598 (I) 21,186 (I) 3,413(I) 5,573 (I) (2,626)(J) 54,225 Ground lease expense... -- 523 -- -- -- -- 523 Repair and mainte- nance................. 1,186 13,077 9,967 -- -- -- 24,230 Utilities.............. 1,450 8,589 10,302 -- -- -- 20,341 Marketing.............. 3,122 16,402 21,678 532 -- -- 41,734 Management fees........ 699 7,395 4,827 -- -- (3,264)(F) 9,657 Depreciation and amor- tization.............. 1,142 370 -- 103 792 3,042 (K) 5,449 Participating lease payments.............. 10,686 57,947 (L) 69,676 (L) -- -- -- 138,309 Interest expense....... 11 912 -- 13 1,934 (1,934)(M) 936 Real estate and personal property taxes and casualty insurance............. 48 220 -- 22 -- -- 290 ------- -------- -------- ------ ------- ------- -------- Total expenses......... 43,253 239,667 221,683 6,230 20,195 (4,868) 526,160 ------- -------- -------- ------ ------- ------- -------- Income (loss) before in- come tax provision and minority interests..... 931 (5,442) (3,185) 717 (5,135) 2,912 (9,202) Income tax (provision) benefit............... (94) 471 (N) -- -- (74)(N) (303)(N) -- ------- -------- -------- ------ ------- ------- -------- Income (loss) before minority interest...... 837 (4,971) (3,185) 717 (5,209) 2,609 (9,202) Minority interest in Patriot Operating Company Partnership... (115) 604 (O) -- -- -- 845 (O) 1,334 Minority interest in consolidated subsidiaries.......... (13) -- -- -- -- 13 -- ------- -------- -------- ------ ------- ------- -------- Net income (loss) appli- cable to common share- holders................ $ 709 $ (4,367) $ (3,185) $ 717 $(5,209) $ 3,467 $ (7,868) ======= ======== ======== ====== ======= ======= ======== Net income (loss) per common share (P)....... $ 0.01 $ (0.10) ======= ========
See notes on following page. F-28 NOTES TO PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997: (A) Represents the historical results of operations of Patriot Operating Company for the three months ended September 30, 1997. As a result of the Cal Jockey Merger on July 1, 1997, Patriot Operating Company is considered for financial reporting purposes to have commenced operations as of such date. (B) Represents adjustments to Patriot Operating Company's results of operations assuming 24 of Patriot REIT's hotel properties had been leased to Patriot Operating Company as of January 1, 1996. These hotel properties include 11 of the Recent Acquisitions (excluding the Sheraton City Centre), the eight hotels previously leased to PAH RSI Lessee, the three hotels previously leased to Grand Heritage Leasing, L.L.C., the Doubletree Hotel at Allen Center, the Doubletree Hotel in Tulsa, Oklahoma and The Buttes. (C) Represents the combined results of operations for the nine months ended September 30, 1997 of the 10 CHC Hotels and 25 leases of CHC Lease Partners leased by CHC Lease Partners assuming that such hotels were leased to Patriot Operating Company as of January 1, 1996. (D) Represents the results of operations of GAH for the nine months ended September 30, 1997, assuming it had been acquired by Patriot Operating Company as of January 1, 1996. (E) Represents the results of operations for the contracts acquired as a result of the CHCI Merger for the nine months ended August 31, 1997, as if they were acquired by Patriot Operating Company as of January 1, 1996. (F) Represents the elimination of management fees for Patriot REIT hotels previously managed by Gencom and CHCI, which subsequent to the GAH Acquisition and the CHCI Merger such hotels are assumed to be managed by Patriot Operating Company. (G) Adjustments to interest and other income consists of the following components: Interest income related to the Subscription Notes receivable from Patriot REIT............................................. $ 723 Interest income related to the Participating Note.............. 585 ------- $ 1,308 =======
All other interest and other income balances presented represent historical amounts recorded by hotels and businesses acquired. (H) Represents historical expense amount of $19,664 recorded by Bay Meadows for the six months prior to the Cal Jockey Merger and an adjustment in the amount of $86 to Racecourse facility rental expense as a result of (i) the new lease agreement between Patriot REIT and Patriot Operating Company subsequent to the Cal Jockey Merger and the related transactions and (ii) the PaineWebber Land Sale. (I) Represent general and administrative expense related to the hotels acquired and general and administrative expense related to the contracts acquired in connection with the GAH Acquisition and the CHCI Merger. (J) Represents the following adjustments to general and administrative expense: Eliminate costs related to the Cal Jockey Merger................ $(4,792) Expense related to annual amortization of unearned stock compensation computed on a straight-line basis over the 3 to 5- year vesting periods........................................... 2,166 ------- $(2,626) =======
(K) Depreciation and amortization expense consists of the following components: Depreciation related to F, F & E and other assets................. $2,306 Amortization of goodwill.......................................... 546 Amortization of trade names....................................... 94 Amortization of management contract costs......................... 2,503 ------ $5,449 ======
Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 5 to 7 years for F, F & E. Amortization of goodwill related to the Cal Jockey Merger is computed using the straight- line method over a 40 year estimated useful life. Because the paired share structure is "grandfathered" under the Code, management believes the life of the paired share structure is perpetual. Under generally accepted accounting principles, however, the maximum amortization period is 40 years for intangible assets. Amortization of goodwill related to the acquisition of the management operations of Grand Heritage Hotels, Inc., GAH and CHCI is computed using the straight-line method over a 20 year estimated useful life. Amortization of trade names is computed using the straight-line method over a 20 year estimated useful life. Amortization of management contract costs is computed using the straight-line method over the estimated remaining term of the contracts. (L) Represents lease payments from Patriot Operating Company to Patriot REIT calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels for the period presented. (M) Represents the elimination of interest expense related to debt which Patriot Operating Company will not assume in connection with the CHCI Merger. (N) Represents an adjustment to the estimated federal and state tax liability as a result of the pro forma adjustment to Patriot Operating Company for the nine months ended September 30, 1997. (O) Represents the adjustment to minority interest to reflect the estimated minority interest percentage subsequent to the assumed transactions. The estimated minority interest percentage subsequent to the Recent Transactions is approximately 11.8%. The estimated minority interest percentage subsequent to the acquisition of the CHC Hotels, the GAH Acquisition, the CHCI Merger and the Paine Webber Direct Placement and the La Salle Direct Placement is approximately 14.5%. F-29 (P) Pro forma earnings per share is computed based on 76,090 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In addition, the historical net income per common share and the weighted average number of common shares and common share equivalents have been adjusted for the conversion of each share of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger, and the July 1997 1.927-for-1 stock split effected in the form of a stock dividend, as applicable. Historical basis earnings per share is computed based on 51,104 weighted average common shares and common share equivalents outstanding. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be a net loss of $0.11 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-30 COMBINED LESSEES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS Patriot REIT leases each of its hotels to Lessees, except those hotels leased to Patriot Operating Company and except the Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel, which are separately owned through the Non-Controlled Subsidiaries and are managed directly by Operators. The Combined Lessees subsequent to (i) the Cal Jockey Merger and the related transactions; (ii) the Grand Heritage Acquisition (which included the acquisition of Grand Heritage Leasing, L.L.C. which leased three hotels from Patriot REIT); (iii) the acquisition of PAH RSI Lessee (which included the acquisition of eight Patriot REIT hotel leases); and (iv) the GAH Acquisition and the CHCI Merger (which included the acquisition of 25 Patriot REIT hotel leases from CHC Lease Partners) consist of NorthCoast Hotels, L.L.C. ("NorthCoast Lessee") which leases 11 hotels (excluding the Park Shore Hotel), DTR North Canton, Inc. ("Doubletree Lessee") which leases four hotels, Crow Hotel Lessee, Inc. which leases two hotels, and Metro Hotel Leasing Corporation ("Metro Lease Partners") which leases one hotel. The Participating Leases provide for staggered terms of one to twelve years and the payment of the greater of base or participating rent, plus certain additional charges, as applicable. The Combined Lessees' unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996 and the nine months ended September 30, 1997 are presented as if the 18 hotels that Patriot REIT leases to the Combined Lessees pursuant to Participating Leases (excluding the Park Shore Hotel) had been leased as of January 1, 1996. The eight hotels which were leased to PAH RSI Lessee, the 25 hotels which were leased to CHC Lease Partners, and the three hotels leased to Grand Heritage Leasing, L.L.C. are assumed to have been leased to Patriot Operating Company and, therefore, have been eliminated from the Pro Forma Condensed Combined Statements of Operations for the Combined Lessees. The pro forma information is based in part upon the Statements of Operations of NorthCoast Lessee filed with Old Patriot REIT's Annual Report on Form 10-K for the year ended December 31, 1996 and the Statements of Operations of NorthCoast Lessee filed with Patriot REIT's and Patriot Operating Company's Joint Quarterly Report on Form 10-Q for the nine months ended September 30, 1997 which are incorporated by reference herein. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of the Combined Lessees would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Combined Statement of Operations for the interim period ended September 30, 1997 is not necessarily indicative of the results of operations for the full year. F-31 COMBINED LESSEES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (IN THOUSANDS) Revenue: Room............................................ $ 88,410 $72,100 Food and beverage............................... 36,878 28,663 Telephone and other............................. 7,837 6,193 --------- ------- Total revenue................................ 133,125 106,956 --------- ------- Expenses: Departmental costs and expenses................. 54,564 42,397 General and administrative...................... 12,595 9,520 Ground lease expense............................ 2,496 985 Repair and maintenance.......................... 6,670 5,072 Utilities....................................... 5,435 4,038 Marketing....................................... 9,169 7,495 Participating lease payments(A)................. 41,749 34,373 --------- ------- Total expenses............................... 132,678 103,880 --------- ------- Income before lessee income (expense)............ 447 3,076 --------- ------- Dividend and interest income(B).................. 142 1,087 Management fees(C)............................... (3,479) (3,102) Lessee general and administrative(D)............. (577) (478) --------- ------- (3,914) (2,493) --------- ------- Net income (loss)................................ $ (3,467) $ 583 ========= =======
- -------- (A) Represents lease payments calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels. (B) Includes dividend income on OP Units in the Patriot Partnerships which form a portion of the required capitalization of NorthCoast Lessee. Pro forma amounts exclude additional dividend income earned on OP Units held by certain Lessees, and pro forma interest income earned on invested cash balances. (C) Represents pro forma management fees paid to the Operators under the terms of their respective management agreements with the Lessees. (D) Represents pro forma overhead expenses, which include an estimate of the Lessees' salaries and benefits, professional fees, insurance costs and administrative expenses. F-32 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WYNDHAM TRANSACTIONS INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) Pursuant to the Agreement and Plan of Merger dated as of April 14, 1997, as thereafter amended, (the "Merger Agreement") between Patriot REIT, Patriot Operating Company and Wyndham Hotel Corporation ("Wyndham"), and the transactions contemplated thereby, Wyndham will merge with and into Patriot REIT, with Patriot REIT being the surviving corporation (the "Merger"). In addition, pursuant to a Stock Purchase Agreement dated as of April 14, 1997 (the "Stock Purchase Agreement"), Patriot REIT will purchase up to 9,447,745 shares of common stock par value $0.01 per share, of Wyndham ("Wyndham Common Stock") owned by CF Securities, L.P. ("CF Securities"), the principal stockholder of Wyndham. Following the Merger, Patriot REIT will continue to be referred to as "Patriot American Hospitality, Inc." and Patriot Operating Company will change its name to "Wyndham International, Inc." ("Wyndham International") Pursuant to the Merger Agreement, subject to certain adjustments and the right of Wyndham stockholders to elect to receive cash (such election being referred to herein as a "Cash Election" and such cash to be received being referred to herein as "Cash Consideration") as described below, Wyndham stockholders will be entitled to receive, for each share of Wyndham Common Stock held by them at the time the Merger becomes effective (the "Effective Time") of the Merger, 1.372 shares of Patriot REIT Common Stock and 1.372 shares of Patriot Operating Company Common Stock (subject to certain REIT qualification requirements and certain charter provisions limiting the number of Paired Shares which may be beneficially owned by any person or entity), which shares will be paired and transferable only as a single unit (the applicable conversion ratio being referred to herein as the "Exchange Ratio"). If the Effective Time of the Merger is on or prior to December 31, 1997 and the average closing price of a Paired Share as reported on the New York Stock Exchange ("NYSE") over the 20 trading days immediately preceding the fifth business day prior to the special meeting of the stockholders of Wyndham (the "Patriot Average Closing Price") is less than $21.86 but greater than or equal to $20.87, Wyndham stockholders will be entitled to receive, for each share of Wyndham Common Stock held by them at the Effective Time of the Merger, the number of Paired Shares equal to $30.00 divided by the Patriot Average Closing Price. If the Effective Time of the Merger is on or prior to December 31, 1997 and the Patriot Average Closing Price is less than $20.87, Wyndham stockholders will be entitled to receive, for each share of Wyndham Common Stock held by them at the effective time of the Merger, 1.438 Paired Shares, provided, however, that in the event that the Patriot Average Closing Price is less than $20.87, Wyndham has the right, waivable by it, to terminate the Merger Agreement. Each Paired Share of Patriot REIT Common Stock and Patriot Operating Company Common Stock outstanding immediately prior to the Merger will remain outstanding after the Merger and will represent the same number of Paired Shares of Patriot REIT Common Stock and Patriot Operating Company Common Stock (or subsequent to the Merger, "Wyndham International Common Stock"). Pursuant to Amendment No. 2 to the Merger Agreement (the "Second Amendment"), if the Effective Time of the Merger does not occur on or prior to December 31, 1997, other than as a result of the failure, caused by Wyndham, of certain closing conditions to be satisfied (a "Wyndham Delay"), and the Patriot Average Closing Price is less than $27.50 but greater than or equal to $25.50, the Exchange Ratio will be adjusted so that each share of Wyndham Common Stock, other than shares as to which Cash Consideration is to be received, will be converted into the right to receive the number of Paired Shares equal to $37.73 divided by the Patriot Average Closing Price. If the Effective Time of the Merger does not occur on or prior to December 31, 1997 other than as a result of such a Wyndham Delay, and the Patriot Average Closing Price is less than $25.50, the Exchange Ratio will be adjusted so that each share of Wyndham Common Stock, other than shares as to which Cash Consideration is to be received, will be converted into the right to receive 1.480 Paired Shares, provided, however, that in such circumstances Wyndham has the right, waivable by it, to terminate the Merger Agreement. As of December 9, 1997, the average closing price of a Paired Share over the previous 20 trading days was $30.71. Management of the Patriot Companies does not anticipate that the Patriot Average Closing Price, as calculated at the Effective Time of the Merger (assuming a closing date of January 5, 1998), will result in an adjustment to the Exchange Ratio. F-33 In lieu of receiving Paired Shares, Wyndham stockholders have the right under the Merger Agreement to make a Cash Election to receive Cash Consideration, and CF Securities has an equivalent right under the Stock Purchase Agreement; provided, however, that the maximum aggregate amount of cash to be paid to Wyndham stockholders and CF Securities pursuant to such Cash Election rights will be a total of $100,000. Pursuant to the Second Amendment, Patriot REIT, Patriot Operating Company and Wyndham also agreed to change the amount per share payable upon a Cash Election to a fixed amount so that stockholders of Wyndham who make a Cash Election will be entitled to receive Cash Consideration in an amount per share equal to equal to $42.80. Prior to the execution of the Second Amendment, the Merger Agreement provided that stockholders of Wyndham who made a Cash Election would have been entitled to receive Cash Consideration in an amount per share equal to the Exchange Ratio multiplied by the average closing price of a Paired Share over the five trading days immediately preceding the closing of the Merger (the "Cash Consideration Fair Market Value"), as provided in the April Merger Agreement. In the event that holders of Wyndham Common Stock and CF Securities elect to receive more than $100,000 in cash, such cash will be allocated on a pro rata basis among such stockholders and CF Securities based upon the respective number of shares of Wyndham Common Stock as to which they have made a Cash Election, and the Wyndham stockholders (other than CF Securities) will receive Paired Shares at the Exchange Ratio for their shares of Wyndham Common Stock which are not converted into Cash Consideration. CF Securities has delivered to Patriot REIT a Cash Election pursuant to which CF Securities has elected to receive Cash Consideration with respect to all 9,447,745 shares of Wyndham Common Stock beneficially owned by CF Securities. Because CF Securities has made a Cash Election with respect to all of the shares of Wyndham Common Stock beneficially owned by it, the maximum amount of cash available to be paid to other holders of Wyndham Common Stock in the Merger is expected to be approximately $56,300. If no other stockholders of Wyndham make a Cash Election, CF Securities will receive the entire $100,000 of cash available for Cash Elections. Under such circumstances, CF Securities may receive a combination of Paired Shares and Series A Convertible Preferred Stock, par value $0.01 per share, of Patriot REIT ("Series A Preferred Stock") pursuant to the terms of the Stock Purchase Agreement for its shares of Wyndham Common Stock which are not converted into Cash Consideration, subject to certain REIT qualification limitations that could, under certain limited circumstances, result in the payment of cash in lieu of shares of Series A Preferred Stock. The Second Amendment also provides that in addition to receiving Paired Shares at the Exchange Ratio, and/or Cash Consideration in the case of shares of Wyndham Common Stock as to which a Cash Election has been made, holders of Wyndham Common Stock, will be entitled to receive an additional cash payment (the "Additional Cash Consideration") equal to the sum of (i) the Pro Forma Dividend Amount (as defined below), if any, and (ii) if the Effective Time of the Merger does not occur on or prior to January 5, 1998 other than as a result of a Wyndham Delay, a per share amount equal to the product of the Full Dilution Percentage (as hereinafter defined) and the Per Share Deferral Amount (as defined below), if any. Under the terms of the Second Amendment, the term "Pro Forma Dividend Amount" is defined as the amount equal to the aggregate per share amount of all dividends declared on the Patriot REIT Common Stock and the Patriot Operating Company Common Stock the record date for which is on or after November 26, 1997 but prior to the Effective Time, multiplied by the Exchange Ratio. Under the terms of the Second Amendment, the term "Per Share Deferral Amount" is defined as follows: (X) so long as there is not in effect an order, ruling or injunction in any action brought by or on behalf of one or more stockholders of Wyndham or in the right of Wyndham (a "Wyndham Stockholder Injunction") that causes the condition under the Merger Agreement that there exist no order, ruling or injunction of a court which prohibits consummation of the Merger (the "Injunction Condition") to not be satisfied, (a) if the Effective Time is on or before January 31, 1998, the Per Share Deferral Amount shall be an amount equal to $10,000, divided by the total number of shares of Wyndham Common Stock outstanding immediately prior to the Effective Time (the "Wyndham Outstanding Shares"), (b) if the Effective Time is after January 31, 1998 but on or before February 28, 1998, the Per Share Deferral Amount shall be an amount equal to $21,000, divided by the Wyndham Outstanding Shares, and (c) if the Effective Time is after February 28, 1998, the Per Share Deferral Amount shall be an amount equal to $32,000, divided by the Wyndham Outstanding Shares; and (Y) in the event that there is in effect a Wyndham Stockholder Injunction that causes the Injunction Condition to not be satisfied, (A) if the Effective Time is on or before January 31, 1998, the Per Share Deferral Amount shall be equal to zero, (B) if the Effective Time is after January 31, 1998 but on or before February 28, 1998, the Per Share Deferral Amount shall be an amount equal to $15,000, divided by the Wyndham Outstanding Shares, and (C) if the Effective Time is after February 28, 1998, the Per Share Deferral Amount shall be an amount equal to $30,000, divided by the Wyndham Outstanding Shares. Under the terms of the Second Amendment the term "Full Dilution Percentage" is defined as (A) the total number of shares of Wyndham Common Stock outstanding immediately prior to the Effective Time, divided by (B) the sum of the total number of shares of Wyndham Common Stock in clause (A) above and the total number of shares of Wyndham Common Stock as to which Assumed Options are or may become exercisable (whether or not currently exercisable). The Full Dilution Percentage will cause the portion of the Additional Cash Consideration attributable to the Per Share Deferral Amount to be calculated on a fully- diluted basis assuming exercise of all of Wyndham's stock options. The parties to the Stock Purchase Agreement have confirmed that the change in the Merger consideration resulting from the Second Amendment will have a corresponding effect under the Stock Purchase Agreement. At November 3, 1997, Wyndham's portfolio of owned, leased or managed hotels consisted of 93 hotels operated by Wyndham, as well as 8 franchised hotels, which in the aggregate contained 24,083 rooms. Wyndham's portfolio includes 84 upscale hotel properties and 17 midscale properties operating under the F-34 ClubHouse brand. Wyndham acquired through merger in July 1997 Kansas City-based ClubHouse, a privately-held hospitality company with a portfolio of 17 hotels. Of the hotels comprising ClubHouse's portfolio, Wyndham acquired through the merger or in related acquisition transactions ownership of 13 ClubHouse hotels and partial ownership of three ClubHouse hotels. Wyndham also acquired through the merger ownership of the "ClubHouse" brand name, as well as license rights with respect to one franchised ClubHouse hotel. Following the Merger, Patriot REIT, through certain of its subsidiaries, will own the 10 Wyndham hotels and 13 ClubHouse hotels and will lease such hotels to Wyndham International. The 13 hotel leases to be assumed by Patriot REIT will be sub-leased to Wyndham International. Wyndham's remaining 52 management and franchise contracts (excluding the Wyndham WindWatch Hotel which is owned by Patriot REIT), the Wyndham and the ClubHouse proprietary brand names and the Wyndham hotel management company will be transferred to corporate subsidiaries of Patriot REIT (collectively, the "New Non-Controlled Subsidiaries"). Patriot REIT will own a 99% non-voting interest and Wyndham International will own the 1% controlling voting interest in each of the New Non-Controlled Subsidiaries. Therefore, the operating results of the New Non-Controlled Subsidiaries will be combined with those of Wyndham International for financial reporting purposes. Patriot REIT will account for its investment in the New Non-Controlled Subsidiaries using the equity method of accounting. Patriot REIT will also assume Wyndham's existing indebtedness, substantially all of which is expected to be refinanced with funds drawn on the Term Loan and/or the Revolving Credit Facility. The Pro Forma Financial Statements have been adjusted for the purchase method of accounting whereby the hotels and related improvements and other assets and liabilities owned by Wyndham are adjusted to estimated fair market value. The fair market value of the assets and liabilities of Wyndham has been determined based upon preliminary estimates and is subject to change as additional information is obtained. Management does not anticipate that the preliminary allocation of purchase costs based upon the estimated fair market value of the assets and liabilities of Wyndham will materially change; however, the allocation of purchase costs is subject to final determination based upon estimates and other evaluations of fair market value as of the close of the transaction. Therefore, the allocation reflected in the following unaudited Pro Forma Financial Statements may differ from the amounts ultimately determined. In connection with the execution of the Merger Agreement, the Patriot REIT Partnership also entered into agreements with certain partnerships that are owned by certain members of the Trammell S. Crow family and their affiliates, certain current and former executive officers of Wyndham and others (the "Crow Family Entities") providing for the acquisition by Patriot REIT of up to 11 full-service Wyndham-brand hotels with 3,072 rooms for approximately $331,664 in cash, plus approximately $14,000 in additional consideration if two hotels meet certain operational targets (the "Crow Assets Acquisition"). However, Patriot REIT currently expects that the purchase of the Milwaukee Hotel will be delayed up to 24 months pending the receipt of certain third party consents. Accordingly, the Pro Forma Financial Statements include only the results of operations of the other 10 hotels with 2,851 rooms which represent approximately $308,633 of the total purchase price. Subsequent to the Crow Assets Acquisition, Patriot REIT will lease the purchased hotels to Wyndham International. In addition, in connection with the Crow Assets Acquisition, the leases with the Wyndham Lessee related to the Wyndham Garden Hotel-Midtown and the Wyndham Greenspoint Hotel will be terminated and Patriot REIT will lease these hotel properties to Wyndham International. The Patriot REIT Partnership and the Crow Family Entities have reached an agreement in principle (the "Agreement in Principle") that the closing of the Crow Assets Acquisition would be scheduled for December 16, 1997 as to a number of hotels sufficient to satisfy certain closing conditions and that they would waive any conditions to the closing that the Merger shall be consummated concurrently with consummation of the Crow Assets Acquisition. The parties also agreed that in the event that the Merger does not close on or before March 31, 1998, other than as a result of a delay caused by (i) the failure of Wyndham to have obtained all required consents, authorizations and approvals of governmental bodies or third parties (other than the consents to be obtained from Hospitality Property Trust or an affiliate thereof, collectively, the "HPT Consents") or (ii) the failure of Wyndham to have (A) performed its obligations under the Merger Agreement, (B) completed the restructuring of certain assets and/or Wyndham subsidiaries, and obtained all required consents (or waivers thereof) in connection therewith (other than the HPT Consents), (C) acknowledged the execution and delivery by Patriot REIT and Patriot Operating Company of the Cooperation Agreement, or (D) obtained all required amendments, consents, authorizations, modifications and approvals relating to the Wyndham Anatole Hotel management agreement, the Patriot REIT Partnership will be required to pay additional consideration (the "Additional Consideration") for the purchased hotels to the Crow Family Entities such that the total purchase price equals the budgeted net operating income ("NOI") for the 11 hotels to be acquired in the Crow Assets Acquisition (with appropriate deductions for management fees, trade name fees and F, F & E reserves) for 1998 capitalized at an 8% rate. The Additional Consideration, if payable, will be payable 60% in Paired Shares (with the value thereof equal to the average closing price of a Paired Share over the ten trading days prior to March 31, 1998) (the "Non-Cash Additional Consideration") and 40% in cash, provided that the Crow Family Entities generally have the option of receiving the Non-Cash Additional Consideration in the form of OP Units of the Patriot Partnerships. The Patriot REIT Partnership and the Crow Family Entities agreed pursuant to the Agreement in Principle, that the Crow Family Entities would receive registration rights with respect to the Paired Shares (or the Paired Shares into which OP Units may be redeemable) received as Non-Cash Additional Consideration based on the terms and conditions of the Registration Rights Agreement relating to the Paired Shares and shares of Series A Preferred Stock to be received by the Registration Rights Holders pursuant to the Merger and the Stock Purchase. The Merger and the Related Transactions and the Crow Assets Acquisition are collectively referred to herein as the "Wyndham Transactions." The Merger and the Related Transactions are expected to be consummated January 5, 1998 and are subject to various conditions, including approval of the Merger by the stockholders of Patriot REIT, Patriot Operating Company and Wyndham. Except as noted above, the Crow Assets Acquisition is expected to be consummated on or about December 16, 1997 and is subject to various conditions. The following unaudited Pro Forma Condensed Combined Statements of Operations as adjusted for the Wyndham Transactions for the year ended December 31, 1996 and the nine months ended September 30, 1997 assume the Merger and the Crow Assets Acquisition had occurred on January 1, 1996 and are based on the applicable terms of the Merger Agreement assuming the Effective Time of the Merger is January 5, 1998, and that the purchase of ten hotels in the Crow Assets Acquisition is completed under the terms in effect if the closing of the Crow Assets Acquisition occurs on or before December 16, 1997. The pro forma information is also presented as if the following Recent Transactions had occurred on January 1, 1996: F-35 (i) the Cal Jockey Merger and the related transactions have been consummated on terms set forth in the Cal Jockey Merger Agreement; (ii) the PaineWebber Land Sale has been consummated, the PaineWebber affiliate has leased that portion of the land upon which the Racecourse is situated to Patriot REIT, and Patriot REIT has subleased this land and the related improvements to Patriot Operating Company; (iii) Patriot REIT has leased certain land to Borders, Inc.; (iv) Patriot Operating Company has completed the Grand Heritage Acquisition and the acquisition of PAH RSI Lessee; (v) Patriot REIT has acquired the Recent Acquisitions (excluding the Park Shore Hotel and the Sheraton City Centre); (vi) the mortgage notes to affiliates of CHC Lease Partners have been funded; (vii) Patriot REIT has replaced the Old Line of Credit with the Revolving Credit Facility and the Term Loan; (viii) Patriot Operating Company has acquired the Participating Note; and (ix) the Offering of 10,580,000 Paired Shares has been completed. The unaudited Pro Forma Condensed Combined Statements of Operations also assume the following additional transactions have occurred at the beginning of the periods presented: (i) Patriot REIT has acquired the CHC Hotels and leased such hotels to Patriot Operating Company; (ii) Patriot Operating Company has completed the GAH Acquisition; and (iii) the CHCI Merger has been consummated on terms set forth in the CHCI Merger Agreement. In addition, the pro forma results of operations for the year ended December 31, 1996 assume the 24 hotels acquired during 1996 and the private placement of equity securities and the public offering of common stock completed by Old Patriot REIT during 1996 had occurred as of January 1, 1996. In management's opinion, all material adjustments necessary to reflect the effects of these transactions have been made. The Pro Forma Condensed Combined Statements of Operations are derived from (i) the Patriot REIT and Patriot Operating Company Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996 and the nine months ended September 30, 1997 included elsewhere in this Joint Current Report; (ii) the Consolidated Statements of Income of Wyndham filed with Wyndham's Annual Report on Form 10-K for the year ended December 31, 1996 incorporated by reference herein and the nine months ended September 30, 1997 included elsewhere in this Joint Current Report; and (iii) the Combined Crow Family Hotel Partnerships financial statements for the year ended December 31, 1996 and the nine months ended September 30, 1997 included in this Joint Current Report. During 1996, one of the hotels to be acquired in the Crow Assets Acquisition (the La Guardia Airport Hotel) was closed for renovation. As a result the hotel reported no historical results of operations for 1996 and therefore is not included in the following unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996 and the nine months ended September 30, 1997. The following pro forma financial information is also based in part upon the following additional financial information incorporated by reference herein: (i) the Separate and Combined Statements of Income of Cal Jockey and Bay Meadows filed with the Cal Jockey and Bay Meadows Joint Annual Report on Form 10-K for the year ended December 31, 1996; (ii) the Consolidated Statements of Operations of Old Patriot REIT filed with the Old Patriot REIT Annual Report on Form 10-K for the year ended December 31, 1996; (iii) the Separate and Combined Statements of Income of Patriot REIT and Patriot Operating Company filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the nine months ended September 30, 1997; (iv) the historical financial statements of certain hotels acquired by Old Patriot REIT filed in Old Patriot REIT's Current Reports on Form 8-K dated April 2, 1996, as amended, December 5, 1996 and January 16, 1997, as amended; (v) the historical financial statements of certain hotels and businesses acquired or to be acquired by the Patriot Companies filed in the Patriot Companies' Joint Current Reports on Form 8-K dated September 17, 1997, and September 30, 1997, as amended; and located elsewhere in this Joint Current Report; and (vi) the Pro Forma Condensed Combined Statements of Operations of the Combined Lessees which are located elsewhere in this Joint Current Report. The following unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of Patriot REIT and Wyndham International as adjusted for the Wyndham Transactions would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Combined Statement of Operations for the interim period ended September 30, 1997 is not necessarily indicative of the results of operations for the full year. F-36 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PATRIOT PATRIOT OPERATING REIT COMPANY AND WYNDHAM AND WYNDHAM PRO FORMA PRO FORMA PRO FORMA ELIMINATIONS TOTAL ----------- ----------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Participating lease revenue................ $279,948 $ -- $(247,218)(A) $ 32,730 Hotel revenue........... -- 876,663 -- 876,663 Racecourse facility revenue, hotel and land lease revenue.......... 17,714 51,946 (17,380)(B) 52,280 Management fee, service fee and reimbursement income................. -- 49,225 -- 49,225 Interest and other income................. 2,797 12,262 (5,916)(C) 9,143 -------- --------- --------- ---------- Total revenue........... 300,459 990,096 (270,514) 1,020,041 -------- --------- --------- ---------- Expenses: Departmental costs-- hotel operations....... -- 368,568 -- 368,568 Racecourse facility operations............. -- 46,351 (5,611)(B) 40,740 Direct operating costs of management company, service department, and reimbursement expenses............... -- 43,809 -- 43,809 General and administrative......... 7,097 103,877 (34)(C) 110,940 Ground lease and hotel lease expense.......... 16,824 12,502 (11,769)(B) 17,557 Repair and maintenance.. -- 41,991 -- 41,991 Utilities............... -- 36,834 -- 36,834 Interest expense........ 124,637 1,393 (5,882)(C) 120,148 Real estate and personal property taxes and casualty insurance..... 34,542 847 -- 35,389 Marketing............... -- 70,577 -- 70,577 Management fees......... -- 9,469 -- 9,469 Depreciation and amortization........... 93,775 29,425 -- 123,200 Participating lease payments............... -- 247,218 (247,218)(A) -- -------- --------- --------- ---------- Total expenses.......... 276,875 1,012,861 (270,514) 1,019,222 -------- --------- --------- ---------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests............... 23,584 (22,765) -- 819 Equity in earnings of unconsolidated subsidiaries........... 2,877 -- 5,045 (D) 7,922 -------- --------- --------- ---------- Income (loss) before income tax provision and minority interests...... 26,461 (22,765) 5,045 8,741 Income tax (provision) benefit................ (345) 7,532 -- 7,187 -------- --------- --------- ---------- Income (loss) before minority interests...... 26,116 (15,233) 5,045 15,928 Minority interests in the Patriot Partnerships........... (2,549) 1,141 -- (1,408) Minority interest in consolidated subsidiaries .......... (1,832) 5,045 (5,045)(D) (1,832) -------- --------- --------- ---------- Net income (loss) applicable to common shareholders............ $ 21,735 $ (9,047) $ -- $ 12,688 (E) ======== ========= ========= ========== Net income (loss) per common Paired Share(F).. $ 0.21 $ (0.09) $ 0.12 (E) ======== ========= ==========
- -------- (A) Represents elimination of participating lease revenue and expense related to the 61 hotel properties leased by Patriot REIT to Wyndham International. (B) Represents elimination of rental income and expense related to the Racecourse facility, land leased and the hotels sub-leased by Patriot REIT to Wyndham International. (C) The pro forma adjustments represent the elimination of $1,170 of interest income and expense related to a note receivable issued to Old Patriot REIT in connection with the sale of certain assets to PAH RSI Lessee, which assets are assumed to be acquired by Patriot Operating Company, the elimination of $4,712 of interest income and expense related to the Subscription Notes issued to Patriot Operating Company in connection with the subscription for shares of Patriot Operating Company Common Stock and Patriot Operating Company Partnership OP Units issued in connection with the Cal Jockey Merger and the elimination of $34 of other intercompany income and expense items. (D) Represents the elimination of equity in losses of the New Non-Controlled Subsidiaries. (E) The pro forma balances assume Wyndham stockholders elect to receive cash for their shares of Wyndham Common Stock up to the maximum funds available of $100,000 and the remaining outstanding shares of Wyndham Common Stock are exchanged for Paired Shares. Set forth below is a summary comparison of the net impact to pro forma net income applicable to common shareholders and net income per Paired Share (i) assuming approximately 2,336 shares of Wyndham Common Stock are purchased for cash ("Cash Option"), based on total funds available of $100,000 and Cash Consideration of $42.80 per share of Wyndham Common Stock); (ii) assuming no Wyndham stockholders elect to receive cash ("All Stock"); and (iii) assuming an average interest rate of 7.333% per annum on the incremental borrowings related to the Revolving Credit Facility and the Term Loan (representing LIBOR plus 1.85%, respectively) on outstanding debt obligations of approximately $1,472,911 for Cash Option and $1,372,911 for All Stock. F-37
CASH ALL OPTION STOCK ------- ------- Decrease in interest expense as a result of reduced borrowings................................................ $ -- $(7,333) ======= ======= Income before minority interests in the Patriot Partnerships and income tax provision (after minority interest in consolidated subsidiaries and other partnerships)............................................. $ 6,909 $14,242 Income tax provision....................................... 7,187 7,187 Minority interests in the Patriot Partnerships............. (1,408) (2,114) ------- ------- Net income applicable to common shareholders............... $12,688 $19,315 ======= ======= Net income per common Paired Share......................... $ 0.12 $ 0.18 ======= ======= Estimated minority interest percentage in the Patriot Partnerships subsequent to the Wyndham Transactions: Patriot REIT Partnership................................. 10.5% 10.2% ======= ======= Patriot Operating Company Partnership.................... 11.2% 10.9% ======= ======= Weighted average number of common Paired Shares and common Paired Share equivalents outstanding...................... 102,543 105,758 ======= =======
Pursuant to the April Merger Agreement, if the Patriot Average Closing Price of the Paired Shares is less than $21.86, the Exchange Ratio would be subject to adjustment. Pursuant to the Second Amendment, if the Effective Time of the Merger occurs after December 31, 1997, other than as a result of a Wyndham Delay, and the Patriot Average Closing Price is less than $27.50, the Exchange Ratio would be subject to adjustment. As of December 9, 1997, the average closing price of a Paired Share as reported on the NYSE over the previous 20 trading days was $30.71. Management of the Patriot Companies do not anticipate that the Patriot Average Closing Price, as calculated at the Effective Time of the Merger (assuming a closing of January 5, 1998), will result in an adjustment to the Exchange Ratio. Additionally, the following table presents the net impact to pro forma net income applicable to common shareholders and net income per common Paired Share assuming the interest rate increases by 0.25%.
CASH ALL OPTION STOCK ------- ------- Decrease in interest expense as a result of reduced borrowings ............................................... $ -- $(7,583) ======= ======= Income before income tax provision and minority interests in the Patriot Partnerships (after minority interest in consolidated subsidiaries and other partnerships)......... $ 2,635 $10,218 Income tax provision....................................... 7,187 7,187 Minority interests in the Patriot Partnerships............. (960) (1,703) ------- ------- Net income applicable to common shareholders............... $ 8,862 $15,702 ======= ======= Net income per common Paired Share......................... $ 0.09 $ 0.15 ======= ======= Estimated minority interest percentage in the Patriot Partnerships subsequent to the Wyndham Transactions: Patriot REIT Partnership................................. 10.5% 10.2% ======= ======= Patriot Operating Company Partnership.................... 11.2% 10.9% ======= ======= Weighted average number of common Paired Shares and common Paired Share equivalents outstanding...................... 102,543 105,758 ======= =======
The Patriot Companies are negotiating with PaineWebber Real Estate and Chase to increase the amount available under the Revolving Credit Facility to $900,000 and to arrange for a new Term Loan commitment for an unsecured Term Loan of $350,000. The Revolving Credit Facility and the Term Loan will be used in part to finance the Wyndham Transactions. Deferred loan costs of approximately $6,737 related to the financing associated with the Wyndham Transactions have been reflected in the pro forma financial information. (F) Pro forma earnings per share is computed based on 102,543 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be $0.13 per Paired Share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-38 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PATRIOT PATRIOT OPERATING REIT COMPANY AND WYNDHAM AND WYNDHAM PRO FORMA PRO FORMA PRO FORMA ELIMINATIONS TOTAL ----------- ----------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue................. $229,977 $ -- $(202,610)(A) $ 27,367 Hotel revenue............ -- 720,754 -- 720,754 Racecourse facility revenue, hotel and land lease revenue........... 19,759 33,399 (19,501)(B) 33,657 Management fee, service fee and reimbursement income.................. -- 45,549 -- 45,549 Interest and other income.................. 4,043 8,507 (2,306)(C) 10,244 -------- -------- --------- -------- Total revenue............ 253,779 808,209 (224,417) 837,571 -------- -------- --------- -------- Expenses: Departmental costs--hotel operations.............. -- 282,402 -- 282,402 Racecourse facility operations.............. -- 30,114 (3,246)(B) 26,868 Direct operating costs of management company, service department, and reimbursement expenses.. -- 40,331 -- 40,331 General and administrative.......... 7,137 81,670 (24)(C) 88,783 Ground lease and hotel lease expense........... 20,017 16,778 (16,255)(B) 20,540 Repair and maintenance... -- 34,512 -- 34,512 Utilities................ -- 29,841 -- 29,841 Interest expense......... 94,414 936 (2,282)(C) 93,068 Real estate and personal property taxes and casualty insurance...... 27,066 290 -- 27,356 Marketing................ -- 59,095 -- 59,095 Management fees.......... -- 9,657 -- 9,657 Depreciation and amortization............ 70,854 20,705 -- 91,559 Participating lease payments................ -- 202,610 (202,610)(A) -- -------- -------- --------- -------- Total expenses........... 219,488 808,941 (224,417) 804,012 -------- -------- --------- -------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests................ 34,291 (732) -- 33,559 Equity in earnings of unconsolidated subsidiaries............ 6,027 -- (1,419)(D) 4,608 -------- -------- --------- -------- Income (loss) before income tax provision and minority interests....... 40,318 (732) (1,419) 38,167 Income tax (provision) benefit................. (256) (3,477) -- (3,733) -------- -------- --------- -------- Income (loss) before minority interests....... 40,062 (4,209) (1,419) 34,434 Minority interests in the Patriot Partnerships.... (4,010) 630 -- (3,380) Minority interest in consolidated subsidiaries............ (1,869) (1,419) 1,419 (D) (1,869) -------- -------- --------- -------- Net income (loss) applicable to common shareholders............. $ 34,183 $ (4,998) $ -- $ 29,185 (E) ======== ======== ========= ======== Net income (loss) per common Paired Share(F)... $ 0.33 $ (0.05) $ 0.28 (E) ======== ======== ========
- -------- (A) Represents elimination of participating lease revenue and expense related to the 61 hotel properties leased by Patriot REIT to Wyndham International. (B) Represents elimination of rental income and expense related to the Racecourse facility, land leased and the hotels sub-leased by Patriot REIT to Wyndham International. (C) Represents primarily the elimination of $832 of interest income and expense related to a note receivable issued to Old Patriot REIT in connection with the sale of certain assets to PAH RSI Lessee, which assets are assumed to be acquired by Patriot Operating Company, the elimination of $1,450 of interest income and expense related to the Subscription Notes issued to Patriot Operating Company in connection with the subscription for shares of Patriot Operating Company Common Stock and Patriot Operating Company Partnership OP Units issued in connection with the Cal Jockey Merger, and the elimination of $24 of other intercompany income and expense items. (D) Represents the elimination of equity in income of the New Non-Controlled Subsidiaries. (E) The pro forma balances assume Wyndham stockholders elect to receive cash for their shares of Wyndham Common Stock up to the maximum funds available of $100,000 and the remaining outstanding shares of Wyndham Common Stock are exchanged for Paired Shares. Set forth below is a summary comparison of the net impact to pro forma net income applicable to common shareholders and net income per Paired Share (i) assuming approximately 2,336 shares of Wyndham Common Stock are purchased pursuant to the Cash Option (based on total funds available of $100,000 and Cash Consideration of $42.80 per share of Wyndham Common Stock); F-39 (ii) assuming Wyndham stockholders elect to receive All Stock; and (iii) assuming an average interest rate of 7.453% per annum on the incremental borrowings related to the Revolving Credit Facility and the Term Loan (representing LIBOR plus 1.85%) on outstanding debt obligations of approximately $1,472,911 for Cash Option and $1,372,911 for All Stock.
CASH ALL OPTION STOCK ------- ------- Decrease in interest expense as a result of reduced borrowings to fund the purchase of Wyndham Common Stock.................................................. $ -- $(5,590) ======= ======= Income before minority interests in the Patriot Partnerships and income tax benefit (after minority interest in consolidated subsidiaries and other partnerships).......................................... $36,298 $41,888 Income tax provision.................................... (3,733) (3,733) Minority interests in the Patriot Partnerships.......... (3,380) (3,853) ------- ------- Net income applicable to common shareholders............ $29,185 $34,302 ======= ======= Net income per common Paired Share...................... $ 0.28 $ 0.32 ======= ======= Estimated minority interest percentage in the Patriot Partnerships subsequent to the Wyndham Transactions: Patriot REIT Partnership.............................. 10.5% 10.2% ======= ======= Patriot Operating Company Partnership................. 11.2% 10.9% ======= ======= Weighted average number of common Paired Shares and common Paired Share equivalents outstanding............ 103,117 106,332 ======= =======
Pursuant to the April Merger Agreement, if the Patriot Average Closing Price of the Paired Shares is less than $21.86, the Exchange Ratio would be subject to adjustment. Pursuant to the Second Amendment, if the Effective Time of the Merger occurs after December 31, 1997, other than as a result of a Wyndham Delay, and the Patriot Average Closing Price is less than $27.50, the Exchange Ratio would be subject to adjustment. As of December 9, 1997, the average closing price of a Paired Share as reported on the NYSE over the previous 20 trading days was $30.71. Management of the Patriot Companies do not anticipate that the Patriot Average Closing Price, as calculated at the Effective Time of the Merger (assuming a closing of January 5, 1998), will result in an adjustment to the Exchange Ratio. Additionally, the following table presents the net impact to pro forma net income applicable to common stockholders and net income per common Paired Share assuming the interest rate increases by 0.25%.
CASH ALL OPTION STOCK ------- ------- Decrease in interest expense as a result of reduced borrowings ............................................ $ -- $(5,777) ======= ======= Income before income tax provision and minority interests in the Patriot Partnerships (after minority interest in consolidated subsidiaries and other partnerships).......................................... $33,391 $39,168 Income tax provision.................................... (3,733) (3,733) Minority interests in the Patriot Partnerships.......... (3,075) (3,576) ------- ------- Net income applicable to common shareholders............ $26,583 $31,859 ======= ======= Net income per common Paired Share...................... $ 0.26 $ 0.30 ======= ======= Estimated minority interest percentage in the Patriot Partnerships subsequent to the Wyndham Transactions: Patriot REIT Partnership.............................. 10.5% 10.2% ======= ======= Patriot Operating Company Partnership................. 11.2% 10.9% ======= ======= Weighted average number of common Paired Shares and common Paired Share equivalents outstanding............ 103,117 106,332 ======= =======
The Patriot Companies are negotiating with PaineWebber Real Estate and Chase to increase the amount available under the Revolving Credit Facility to $900,000 and to arrange for a new Term Loan commitment for an unsecured Term Loan of $350,000. The Revolving Credit Facility and the Term Loan will be used to finance the Wyndham Transactions. Deferred loan costs of approximately $6,737 related to the financing associated with the Wyndham Transactions have been reflected in the pro forma financial information. (F) Pro forma earnings per share is computed based on 103,117 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be $0.30 per Paired Share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-40 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED COMBINED BALANCE SHEET The following unaudited Pro Forma Condensed Combined Balance Sheet is presented as if the Wyndham Transactions had occurred as of September 30, 1997 and is based on the applicable terms of the Merger Agreement in effect assuming the Effective Time of the Merger is January 5, 1998, and assuming that ten hotels are purchased in the Crow Asset Acquisition under the terms in effect if the closing of the Crow Assets Acquisition occurs on or before December 16, 1997. The Pro Forma Condensed Combined Balance Sheet is derived from the Patriot REIT and Patriot Operating Company Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 included elsewhere in this Joint Current Report, which is presented as if the following transactions have occurred as of September 30, 1997: (i) Patriot REIT acquired the three CHC Hotels and The Buttes (which were acquired subsequent to September 30, 1997) and has acquired the remaining approximate 50% interest in the Omni Inner Harbor Hotel and leased such hotels to Patriot Operating Company; (ii) Patriot Operating Company acquired the members' interests in PAH RSI Lessee; (iii) Patriot Operating Company completed the GAH Acquisition; and (iv) the CHCI Merger was consummated on terms set forth in the CHCI Merger Agreement. Such pro forma information is based in part upon Wyndham's Consolidated Balance Sheet as of September 30, 1997 and Patriot REIT's and Patriot Operating Company's Combined Balance Sheet as of September 30, 1997 and should be read in conjunction with the financial statements filed with Wyndham's and the Patriot Companies' respective Quarterly Reports on Form 10-Q for the nine months ended September 30, 1997. In management's opinion, all material adjustments necessary to reflect the effect of these transactions have been made. The accompanying Pro Forma Condensed Combined Balance Sheet reflects adjustments to record the net assets of the Wyndham Transactions at their estimated fair market values and the elimination of Wyndham's historical shareholders' equity. The fair market values of the assets and liabilities of Wyndham have been determined based upon preliminary estimates and are subject to change as additional information is obtained. Management does not anticipate that the preliminary allocation of purchase costs based upon the estimated fair market values of the assets and liabilities of Wyndham will materially change; however, the allocations of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value as of the close of the transaction. Therefore, the allocations reflected in the following unaudited Pro Forma Condensed Combined Balance Sheet may differ from the amounts ultimately determined. The following unaudited Pro Forma Condensed Combined Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of September 30, 1997, nor does it purport to represent the future financial position of Patriot REIT and Wyndham International as adjusted for the Wyndham Transactions. F-41 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PATRIOT REIT AND PATRIOT OPERATING CROW COMPANY ASSETS PRO FORMA ACQUISITION WYNDHAM PRO FORMA TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS TOTAL ---------- ------------ ------------ ----------- ---------- ASSETS Net investment in real estate and related improvements........... $1,657,283 $320,357 $290,391 $165,494 (D) $2,433,525 Mortgage notes and other receivables from unconsolidated subsidiaries........... 74,053 -- -- -- 74,053 Notes and other receivables from affiliates............. -- -- 24,800 -- 24,800 Notes receivable........ 15,913 -- 1,931 -- 17,844 Investment in unconsolidated subsidiaries........... 12,061 -- 4,092 -- 16,153 Cash and cash equivalents............ 21,515 -- 14,819 -- 36,334 Restricted cash......... 38,196 -- 936 -- 39,132 Accounts receivable, net.................... 38,540 -- 15,682 -- 54,222 Goodwill................ 128,108 -- 20,857 311,584 (E) 460,549 Deferred expenses, net.. 16,626 -- 8,019 18 (F) 24,663 Deferred acquisition costs.................. 39,970 -- -- -- 39,970 Management contract costs.................. 45,364 -- 11,419 53,463 (G) 110,246 Trade name and franchise costs.................. 7,500 -- -- 85,550 (H) 93,050 Prepaid expenses and other assets........... 11,323 -- 41,006 -- 52,329 Deferred income taxes... 700 -- 16,347 (15,551)(I) 1,496 ---------- -------- -------- -------- ---------- Total assets........... $2,107,152 $320,357 $450,299 $600,558 $3,478,366 ========== ======== ======== ======== ========== LIABILITIES AND SHARE- HOLDERS' EQUITY Borrowings under a line of credit and mortgage notes.................. $ 789,930 $320,357 $228,986 $133,638 (J) $1,472,911 Accounts payable and accrued expenses....... 50,377 -- 45,756 -- 96,133 Dividends and distributions payable.. 21,727 -- -- -- 21,727 Sales taxes payable..... 2,968 -- -- -- 2,968 Deferred income tax liability.............. 4,846 -- 20,970 50,609 (I) 76,425 Deposits................ 2,037 -- 1,996 -- 4,033 Deferred gain........... -- -- 11,511 (11,511)(I) -- Due to unconsolidated subsidiaries........... 5,904 -- -- -- 5,904 Minority interests in the Patriot Partnerships........... 264,862 -- -- -- 264,862 Minority interest in consolidated subsidiaries........... 29,284 -- 2,828 -- 32,112 Shareholders' equity: Preferred stock........ 44 -- -- -- 44 Common stock........... 1,377 -- 216 313 (K) 1,906 Paid-in capital........ 1,049,267 -- 133,137 466,650 (L) 1,649,054 Unearned stock compen- sation, net........... (15,075) -- -- (15,075) Notes receivable from stockholders.......... -- -- (17,138)(M) -- (17,138) Receivable from affili- ates.................. -- -- (1,229)(N) -- (1,229) Unrealized gain on se- curities available for sale.................. -- -- 790 (790)(L) -- Unrealized foreign ex- change loss........... -- -- (192) 192 (L) -- Retained earnings...... (100,396) -- 22,668 (38,543)(L) (116,271) ---------- -------- -------- -------- ---------- Total shareholders' eq- uity.................. 935,217 -- 138,252 427,822 1,501,291 ---------- -------- -------- -------- ---------- Total liabilities and shareholders' equity.. $2,107,152 $320,357 $450,299 $600,558 $3,478,366 ========== ======== ======== ======== ==========
See notes on following page. F-42 PATRIOT REIT AND WYNDHAM INTERNATIONAL, ADJUSTED FOR THE WYNDHAM TRANSACTIONS NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (A) Represents the Pro Forma Condensed Combined Balance Sheet of Patriot REIT and Patriot Operating Company as of September 30, 1997, which reflects the Cal Jockey Merger and the transactions related thereto. (B) Represents adjustments to Patriot REIT's and Wyndham International's pro forma financial position assuming consummation of the Crow Assets Acquisition had occurred at September 30, 1997. (C) Represents Wyndham's pro forma financial position as of September 30, 1997. (D) Represents adjustment for the purchase method of accounting whereby the investments in hotel properties owned by Wyndham are adjusted to record the assets at their estimated fair market values. (E) Represents the purchase consideration in excess of fair market value of the net assets of Wyndham. (F) Represents the additional loan fees to be incurred in conjunction with the financing for the Wyndham Transactions, net of Wyndham's historical deferred loan fees. (G) Represents adjustment for the purchase method of accounting whereby the management contracts held by Wyndham (including the management contracts acquired in the ClubHouse acquisition) are adjusted to their estimated fair market values. Wyndham holds management contracts with certain of its affiliates and with unrelated third parties for 44 hotels. The contracts have an average remaining life of approximately 14 years and provide for payment of management fees including a base fee plus certain incentive fees based on specified criteria as defined in the respective management agreements. (H) Represents the estimated fair market value of the Wyndham and ClubHouse tradenames and other franchise related assets. (I) Pursuant to the Merger, deferred income taxes, the deferred income tax liability and the deferred gain which resulted from the sale and lease- back of the hotel properties leased by GHALP, Inc., an affiliate of Wyndham, have been adjusted to reflect the effects of the Merger. (J) Represents financing of $6,737 of additional loan fees related to the financing of the Wyndham Transactions, estimated mortgage prepayment penalties of $15,875, acquisition-related costs of $11,026 incurred in connection with the Wyndham Transactions, and $100,000 of cash paid for shares of Wyndham Common Stock. (K) Represents an adjustment to record the exchange of Wyndham Common Stock for Paired Shares. Pursuant to the Merger Agreement, Wyndham stockholders may elect to receive for each share of Wyndham Common Stock held by them either (i) cash for shares, up to a maximum of $100,000 of total funds available or (ii) 1.372 shares of Patriot REIT Common Stock and 1.372 shares of Wyndham International Common Stock. As of September 30, 1997, 21,618 shares of Wyndham Common Stock were outstanding. The pro forma balances assume approximately 2,336 shares of Wyndham Common Stock are purchased for cash pursuant to the Cash Option (based on total funds available of $100,000 and Cash Consideration of $42.80 per share of Wyndham Common Stock). The remaining 19,282 shares of Wyndham Common Stock were assumed to be exchanged for approximately 26,455 Paired Shares, resulting in an adjustment to increase common stock. (L) Represents adjustments to shareholders' equity to eliminate Wyndham's pro forma equity accounts totaling $156,619 and record equity based on the number of Paired Shares issued in the Merger. The pro forma balances assume Wyndham stockholders elect to receive cash for their shares of Wyndham Common Stock up to the maximum funds available of $100,000. As a result, approximately 2,336 shares of Wyndham Common Stock were assumed to be purchased for cash (based on total funds available of $100,000 and Cash Consideration of $42.80 per share of Wyndham Common Stock). The total purchase consideration for the Merger is approximately $688,413 (based upon 19,282 shares of Wyndham Common Stock assumed to be exchanged for approximately 26,455 Paired Shares and an estimated market price per Paired Share of $22.25 (which is based upon the closing price on April 11, 1997, the business day prior to the date of the execution of the Merger Agreement, of Old Patriot REIT's Common Stock) and $100,000 of cash consideration). Set forth below is a summary comparison of the net impact to pro forma borrowings and shareholders' equity (i) assuming approximately 2,336 shares of Wyndham Common Stock are purchased pursuant to the Cash Option (the basis used for pro forma balance sheet presentation purposes), and (ii) assuming Wyndham stockholders elect to receive All Stock.
CASH OPTION ALL STOCK ----------- --------- Number of shares of Wyndham Common Stock purchased for cash............................................ 2,336 -- ======== ======== Cash paid for shares of Wyndham Common Stock (assumed to be financed through the Revolving Credit Facility or the Term Loan.................................... $100,000 $ -- Number of Paired Shares issued pursuant to the Merger.............................................. 26,455 29,660 ======== ======== Purchase consideration for shares.................... $588,413 $659,942 Adjustment to common stock for Paired Shares issued.. (529) (593) Outstanding options to purchase common stock assumed in the Merger....................................... 11,903 11,903 Book value of Wyndham paid-in capital................ (133,137) (133,137) -------- -------- Adjustment to paid-in capital........................ 466,650 538,115 -------- -------- Mortgage prepayment penalties incurred from refinancing of Wyndham debt......................... (15,875) (15,875) Elimination of historical retained earnings.......... (22,668) (22,668) -------- -------- Adjustment to retained earnings...................... (38,543) (38,543) Adjustment to common stock........................... 313 377 Unrealized gain on securities available for sale..... (790) (790) Unrealized foreign exchange loss..................... 192 192 -------- -------- Adjustment to shareholders' equity.................. $427,822 $499,351 ======== ========
F-43 Pursuant to the April Merger Agreement, if the Patriot Average Closing Price of the Paired Shares is less than $21.86, the Exchange Ratio would be subject to adjustment. Pursuant to the Second Amendment, if the Effective Time of the Merger occurs after December 31, 1997, other than as a result of a Wyndham Delay, and the Patriot Average Closing Price is less than $27.50, the Exchange Ratio would be subject to adjustment. As of December 9, 1997, the average closing price of a Paired Share as reported on the NYSE over the previous 20 trading days was $30.71. Management of the Patriot Companies do not anticipate that the Patriot Average Closing Price, as calculated at the Effective Time of the Merger (assuming a closing January 5, 1998), will result in an adjustment to the Exchange Ratio. In connection with the Merger, options to purchase approximately 1,017 shares of Wyndham Common Stock which were issued by Wyndham to certain officers and employees of Wyndham will be converted to options to purchase 1,395 Paired Shares. Such options to purchase Paired Shares will vest immediately upon consummation of the Merger and become exercisable in full. The stated exercise prices will be adjusted to reflect the Exchange Ratio. The excess of the estimated value of a Paired Share on the date the Merger is consummated (based upon the closing price on April 11, 1997, the business day prior to the date of execution of the Original Merger Agreement, of Old Patriot REIT's Common Stock on the NYSE of $22.25 and the Exchange Ratio) over the stated exercise price of the options (as adjusted for the Exchange Ratio) is reflected as additional purchase consideration for the Merger. (M) Represents shareholder notes purchased by Wyndham in conjunction with its initial public offering. In connection with the Merger, Patriot REIT will acquire these notes at their historical cost, which approximates their estimated fair value. (N) Represents deferred management fees owed by an affiliate of Wyndham that are deferred until certain operating criteria, as defined per the management and loan agreement, are met. Such deferred management fees will be acquired by Patriot REIT at their stated historical cost, which approximates their estimated fair value, as a result of the Merger. F-44 PATRIOT REIT ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PATRIOT CROW REIT ASSETS PRO FORMA ACQUISITION MERGER PRO FORMA TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS TOTAL --------- ------------ ------------ ----------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue............... $213,868 $34,235 $ 31,845 $ -- $279,948 Racecourse facility, hotel and land lease revenue............... 5,945 -- 9,404 2,365 (D) 17,714 Interest and other income................ 2,297 -- 500 -- 2,797 -------- ------- --------- --------- -------- Total revenue.......... 222,110 34,235 41,749 2,365 300,459 -------- ------- --------- --------- -------- Expenses: Ground lease and hotel lease expense......... 5,693 1,325 9,806 -- 16,824 General and administrative........ 6,797 100 (E) 200 (E) -- 7,097 Interest expense....... 64,518 23,492 (F) 18,342 (F) 18,285 (F) 124,637 Real estate and personal property taxes and casualty insurance............. 22,488 3,783 8,271 -- 34,542 Depreciation and amortization.......... 62,723 12,033 (G) 19,019 (G) -- 93,775 -------- ------- --------- --------- -------- Total expenses......... 162,219 40,733 55,638 18,285 276,875 -------- ------- --------- --------- -------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests..... 59,891 (6,498) (13,889) (15,920) 23,584 Equity in earnings (losses) of unconsolidated subsidiaries.......... 7,559 -- 363 (5,045)(H) 2,877 -------- ------- --------- --------- -------- Income (loss) before income tax provision and minority interests.............. 67,450 (6,498) (13,526) (20,965) 26,461 Income tax provision... (170) -- -- (175)(I) (345) -------- ------- --------- --------- -------- Income (loss) before mi- nority interests....... 67,280 (6,498) (13,526) (21,140) 26,116 Minority interest in the Patriot REIT Part- nership............... (9,032) 682 1,420 4,381 (J) (2,549) Minority interest in consolidated subsidi- aries................. (1,832) -- -- -- (1,832) -------- ------- --------- --------- -------- Net income (loss) applicable to common shareholders .......... $ 56,416 $(5,816) $ (12,106) $ (16,759) $ 21,735 (K) ======== ======= ========= ========= ======== Net income per common share(L)............... $ 0.75 $ 0.21 (K) ======== ========
- -------- (A) Represents the pro forma results of operations of Patriot REIT for the year ended December 31, 1996 assuming the following transactions had occurred at the beginning of the period presented: (i) the Cal Jockey Merger and the transactions related thereto; (ii) the PaineWebber Land Sale was consummated, the PaineWebber affiliate leased that portion of the land upon which the Racecourse is situated to Patriot REIT and Patriot REIT subleased this land and the related improvements to Patriot Operating Company; (iii) Patriot REIT leased certain land to Borders, Inc.; (iv) Patriot REIT acquired the Recent Acquisitions (excluding the Park Shore Hotel and Sheraton City Centre); and the CHC Hotels; (v) the mortgage notes to affiliates of CHC Lease Partners have been funded; (vi) Patriot REIT replaced the Old Line of Credit with the Revolving Credit Facility and the Term Loan; (vii) Patriot REIT acquired the Participating Note; (viii) the Offering of 10,580,000 Paired Shares was completed; and (ix) Patriot Operating Company acquired eight leases from CHC Lease Partners and re-leased such hotels to Patriot Operating Company. In addition, the pro forma results of operations assume the 24 hotels acquired during 1996 and the private placement and public offering of equity securities completed by Old Patriot REIT during 1996 had occurred as of January 1, 1996. See page F-19. (B) Represents adjustments to Patriot REIT's results of operations assuming the Crow Assets Acquisition (10 hotels) had occurred at the beginning of the period presented. One of the hotels was closed during 1996 due to renovation. As a result, the pro forma results of operations for the Crow Assets Acquisition reflects the results of operations for nine hotels for the year ended December 31, 1996 (excluding the La Guardia Airport Hotel which was closed for renovation during 1996). (C) Represents adjustments to Patriot REIT's results of operations assuming the Merger had been consummated at the beginning of the period presented. (D) Represents the increase in hotel lease revenue for those hotels which are leased by Patriot REIT from third parties and then sub-leased to Wyndham International. F-45 (E) Represents adjustment for estimated incremental administrative salaries and other expenses expected to be incurred by Patriot REIT. (F) For the Crow Assets Acquisition, the adjustment represents interest expense incurred on net borrowings under the Revolving Credit Facility and Term Loan, which will be used to purchase the hotel properties. For the Merger, the adjustment represents interest expense on current debt obligations and interest expense related to certain capital lease obligations which are expected to be assumed in connection with the Merger. Patriot REIT expects to refinance substantially all of Wyndham's long-term debt with borrowings under the Revolving Credit Facility and Term Loan. Patriot REIT will pay an estimated $15,875 in mortgage prepayment penalties. This amount will be reported as an extraordinary item in Patriot REIT's results of operations following the completion of the Wyndham Transactions and has been reflected as an adjustment to retained earnings for pro forma presentation purposes. In addition, the Revolving Credit Facility and Term Loan generally have more favorable interest rates than the debt expected to be repaid. The deferred loan costs are being amortized using the straight-line method over the terms of the loans. Interest expense incurred on the Revolving Credit Facility and Term Loan borrowings assumes an average interest rate of 7.333% (representing LIBOR plus 1.85%). An increase of 0.25% in the interest rate would increase pro forma interest expense to $128,911, decrease net income applicable to common shareholders to $17,909 and decrease net income per common share to $0.17, based on 102,543 weighted average number of common shares and common share equivalents outstanding. (G) Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for hotel buildings and improvements and 5 to 7 years for F, F & E . These estimated useful lives are based on management's knowledge of the properties and the hotel industry in general. (H) Represents equity in losses of the New Non-Controlled Subsidiaries which own the Wyndham tradenames and franchise related assets, the management and franchising contracts and the hotel management company, which will be controlled by Wyndham International. (I) Represents provision for Patriot REIT's estimated state tax liability. (J) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Wyndham Transactions of approximately 10.5%. The estimated minority interest percentage prior to the Wyndham Transactions is approximately 13.8%. (K) The pro forma balances assume Wyndham stockholders elect to receive cash for their shares of Wyndham Common Stock up to the maximum funds available of $100,000 and the remaining outstanding shares of Wyndham Common Stock are exchanged for Paired Shares. If no Wyndham stockholders elect to receive cash (and, therefore, all outstanding shares of Wyndham Common Stock are exchanged for Paired Shares, pro forma interest expense would decrease by $7,333, net income would be $28,392 and net income per common share would be $0.27, based on 105,758 weighted average number of common shares and common share equivalents outstanding. (L) Pro forma earnings per share is computed based on 102,543 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares of common stock. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be $0.22 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-46 PATRIOT REIT ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PATRIOT REIT CROW ASSETS PRO FORMA ACQUISITION MERGER PRO FORMA TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS TOTAL --------- ------------ ------------ ----------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue............... $172,682 $30,857 $ 26,438 $ -- $229,977 Racecourse facility, hotel and land lease revenue .............. 3,504 -- 14,482 1,773 (D) 19,759 Interest and other income................ 4,043 -- -- -- 4,043 -------- ------- -------- -------- -------- Total revenue.......... 180,229 30,857 40,920 1,773 253,779 -------- ------- -------- -------- -------- Expenses: Ground lease and hotel lease expense......... 5,535 -- 14,482 -- 20,017 General and administrative........ 6,937 50 (E) 150 (E) -- 7,137 Interest expense....... 48,329 17,907 (F) 11,788 (F) 16,390 (F) 94,414 Real estate and personal property taxes and casualty insurance............. 17,812 3,018 6,236 -- 27,066 Depreciation and amortization.......... 47,565 9,025 (G) 14,264 (G) -- 70,854 -------- ------- -------- -------- -------- Total expenses......... 126,178 30,000 46,920 16,390 219,488 -------- ------- -------- -------- -------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests..... 54,051 857 (6,000) (14,617) 34,291 Equity in earnings of unconsolidated subsidiaries.......... 4,488 -- 120 1,419 (H) 6,027 -------- ------- -------- -------- -------- Income (loss) before income tax provision and minority interests.............. 58,539 857 (5,880) (13,198) 40,318 Income tax provision... (125) -- -- (131) (I) (256) -------- ------- -------- -------- -------- Income (loss) before mi- nority interests....... 58,414 857 (5,880) (13,329) 40,062 Minority interest in the Patriot REIT Partnership........... (7,803) (90) 617 3,266 (J) (4,010) Minority interest in consolidated subsidi- aries................. (1,869) -- -- -- (1,869) -------- ------- -------- -------- -------- Net income (loss) applicable to common shareholders........... $ 48,742 $ 767 $ (5,263) $(10,063) $ 34,183 (K) ======== ======= ======== ======== ======== Net income per common share(L)............... $ 0.64 $ 0.33 (K) ======== ========
- -------- (A) Represents the pro forma results of operations of Patriot REIT for the nine months ended September 30, 1997 assuming the following transactions had occurred at the beginning of the period presented: (i) the Cal Jockey Merger and the transactions related thereto; (ii) the PaineWebber Land Sale was consummated, the PaineWebber affiliate leases that portion of the land upon which the Racecourse is situated to Patriot REIT and Patriot REIT subleased this land and the related improvements to Patriot Operating Company; (iii) Patriot REIT leased certain land to Borders, Inc.; (iv) Patriot REIT acquired the Recent Acquisitions (excluding the Park Shore Hotel and Sheraton City Centre) and the CHC Hotels; (v) the mortgage notes to affiliates of CHC Lease Partners have been funded; (vi) Patriot REIT replaced the Old Line of Credit with the Revolving Credit Facility and the Term Loan; (vii) Patriot Operating Company acquired the Participating Note; (viii) the Offering of 10,580,000 Paired Shares was completed; and (ix) Patriot REIT acquired eight leases from CHC Lease Partners and re- leased such hotels to Patriot Operating Company. See page F-22. (B) Represents adjustments to Patriot REIT's results of operations assuming the Crow Assets Acquisition (10 hotels) had occurred at the beginning of the period presented. The pro forma results of operations for the Crow Assets Acquisition reflects the results of operations for ten hotels for the nine months ended September 30, 1997. (C) Represents adjustments to Patriot REIT's results of operations assuming the Merger had been consummated at the beginning of the period presented. (D) Represents the increase in hotel lease revenue for those hotels which are leased by Patriot REIT from third parties and then sub-leased to Wyndham International. (E) Represents adjustment for estimated incremental administrative salaries and other expenses expected to be incurred by Patriot REIT. (F) For the Crow Assets Acquisition, the adjustment represents interest expense incurred on net borrowings under the Revolving Credit Facility and Term Loan, which will be used to purchase the hotel properties. For the Merger, the adjustment represents interest expense F-47 on current debt obligations and interest expense related to certain capital lease obligations which are expected to be assumed in connection with the Merger. Patriot REIT expects to refinance Wyndham's long-term debt with borrowings under the Revolving Credit Facility and Term Loan. Patriot REIT will pay approximately $15,875 in mortgage prepayment penalties. This amount will be reported as an extraordinary item in Patriot REIT's results of operations following the completion of the Wyndham Transactions and has been reflected as an adjustment to retained earnings for pro forma presentation purposes. In addition, the Revolving Credit Facility and Term Loan generally have more favorable interest rates than the debt expected to be repaid. The deferred loan costs are being amortized using the straight-line method over the terms of the loans. Interest expense incurred on the Revolving Credit Facility and Term Loan borrowings assumes an average interest rate of 7.453% (representing LIBOR plus 1.85%). An increase of 0.25% in the interest rate would increase pro forma interest expense to 97,321, decrease net income applicable to common shareholders to $31,581 and decrease net income per common share to $0.31, based on 103,117 weighted average number of common shares and common share equivalents outstanding. (G) Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for hotel buildings and improvements and 5 to 7 years for F, F & E. These estimated useful lives are based on management's knowledge of the properties and the hotel industry in general. (H) Represents equity in income of the New Non-Controlled Subsidiaries which own the Wyndham tradenames and franchise related assets, the management and franchising contracts and the hotel management company, which will be controlled by Wyndham International. (I) Represents provision for Patriot REIT's estimated state tax liability. (J) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Wyndham Transactions of approximately 10.5%. The estimated minority interest percentage prior to the Wyndham Transactions is approximately 13.8%. (K) The pro forma balances assume Wyndham stockholders elect to receive cash for their shares of Wyndham Common Stock up to the maximum funds available of $100,000 and the remaining outstanding shares of Wyndham Common Stock are exchanged for Paired Shares. If no Wyndham stockholders elect to receive cash (and, therefore, all outstanding shares of Wyndham Common Stock are exchanged for Paired Shares) pro forma interest expense would decrease by $5,590, net income would be $39,317 and net income per common share would be $0.37, based on 106,332 weighted average number of common shares and common share equivalents outstanding. (L) Pro forma earnings per share is computed based on 103,117 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issue Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be $0.35 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-48 WYNDHAM INTERNATIONAL ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PATRIOT ADJUSTMENTS OPERATING ------------------------------------------ COMPANY CROW ASSETS PRO FORMA ACQUISITION MERGER WYNDHAM PRO FORMA TOTAL(A) PRO FORMA(B) PRO FORMA(C) PRO FORMA(D) ADJUSTMENTS TOTAL --------- ------------ ------------ ------------ ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Room revenue........... $338,448 $ 64,362 $128,248 $16,228 $ -- $ 547,286 Other hotel revenue.... 233,844 44,303 40,920 10,310 -- 329,377 Racecourse facility revenue............... 51,946 -- -- -- -- 51,946 Management fee, service fee and reimbursement income................ 13,522 -- 41,978 -- (6,275)(E) 49,225 Interest and other income................ 10,012 -- 2,250 -- -- 12,262 -------- -------- -------- ------- -------- --------- Total revenue.......... 647,772 108,665 213,396 26,538 (6,275) 990,096 -------- -------- -------- ------- -------- --------- Expenses: Departmental costs-- hotel, club and spa operations............ 241,792 44,914 71,913 9,949 -- 368,568 Racecourse facility operations............ 46,351 -- -- -- -- 46,351 Direct operating costs of management company, service department and reimbursement expenses.............. 11,143 -- 32,666 -- -- 43,809 General and administrative........ 71,700 10,495 18,276 3,305 101 (F) 103,877 Ground lease and hotel lease expense ........ 733 -- -- -- 11,769 (G) 12,502 Repair and maintenance........... 29,897 4,884 6,066 1,144 -- 41,991 Utilities.............. 26,843 4,351 4,585 1,055 -- 36,834 Marketing.............. 51,238 8,375 9,226 1,738 -- 70,577 Management fees........ 9,469 5,349 -- 926 (6,275)(E) 9,469 Depreciation and amortization.......... 10,348 -- 13,016(H) -- 6,061 (H) 29,425 Participating lease payments (I).......... 172,119 34,235 31,845 9,019 -- 247,218 Interest expense....... 1,393 -- -- -- -- 1,393 Real estate and personal property taxes and insurance... 398 -- 449 -- -- 847 -------- -------- -------- ------- -------- --------- Total expenses......... 673,424 112,603 188,042 27,136 11,656 1,012,861 -------- -------- -------- ------- -------- --------- Income (loss) before income tax provision and minority interests.............. (25,652) (3,938) 25,354 (598) (17,931) (22,765) Income tax (provision) benefit............... (760) -- (4,177)(J) -- 12,469 (J) 7,532 -------- -------- -------- ------- -------- --------- Income (loss) before mi- nority interests....... (26,412) (3,938) 21,177 (598) (5,462) (15,233) Minority interest in the Patriot Operating Company Partnership... 3,830 441 (K) (2,372)(K) 67 (K) (825) (K) 1,141 Minority interest in consolidated subsidiaries.......... -- -- -- -- 5,045 (L) 5,045 -------- -------- -------- ------- -------- --------- Net income (loss) applicable to common shareholders........... $(22,582) $ (3,497) $ 18,805 $ (531) $ (1,242) $ (9,047) ======== ======== ======== ======= ======== ========= Net loss per common share(M)............... $ (0.30) $ (0.09) ======== =========
- -------- (A) Represents the pro forma results of operations of Patriot Operating Company for the year ended December 31, 1996 assuming the following transactions had occurred at the beginning of the period presented: (i) the Cal Jockey Merger and the transactions related thereto; (ii) the Paine Webber Land Sale was consummated, the PaineWebber affiliate leased that portion of the land upon which the Racecourse is situated to Patriot REIT and Patriot REIT subleased this land and the related improvements to Patriot Operating Company; (iii) Patriot REIT leased certain land to Borders, Inc.; (iv) Patriot Operating Company completed the Grand Heritage Acquisition and F-49 acquired PAH RSI Lessee; (v) Patriot REIT acquired the Recent Acquisitions (except for the Park Shore Hotel and the Sheraton City Centre) and the CHC Hotels and leased 21 of such hotels to Patriot Operating Company; (vi) the mortgage notes to affiliates of CHC Lease Partners have been funded; (vii) Patriot REIT replaced the Old Line of Credit with the Revolving Credit Facility and the Term Loan; (viii) Patriot Operating Company acquired the Participating Note; (ix) the Offering of 10,580,000 Paired Shares was completed; (x) the GAH Acquisition was completed; and (xi) the CHCI Merger was completed. See page F-25. (B) Represents adjustments to Wyndham International's results of operations assuming the Crow Assets Acquisition (10 hotels) had occurred at the beginning of the period presented. One of the hotels was closed during 1996 due to renovation. As a result, the pro forma results of operations for the Crow Assets Acquisition reflects the results of operations for nine hotels for the year ended December 31, 1996. (C) Represents adjustments to Wyndham International's results of operations assuming the Merger and the Related Transactions had been consummated as of January 1, 1996. The pro forma adjustments are based on the historical results of operations of Wyndham as of December 31, 1996 adjusted for certain transactions, including the acquisition of ClubHouse, all hotels and management contracts acquired during 1996 and Wyndham's initial public offering and related transactions, as if such transactions had occurred as of January 1, 1996. (D) Represents adjustments to Wyndham International's results of operations assuming the two hotels currently leased by Crow Hotel Lessee, Inc. had been leased by Wyndham International as of January 1, 1996. (E) Represents the elimination of management fees for the hotels previously leased to the Crow Hotel Lessee, Inc. which are assumed to be leased by Wyndham International and managed by a New Non-Controlled Subsidiary. (F) Represents incremental general and administrative expenses expected to be incurred by Wyndham International of $200 and the elimination of certain other expenses of $99. (G) Represents pro forma lease expense related to the sub-lease agreement with Patriot REIT for those hotel properties leased by Patriot REIT from third party owners. (H) Represents adjustments to depreciation of furniture and equipment and amortization of goodwill, tradenames and franchise-related intangible assets. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 5 to 7 years for F, F & E. Amortization of goodwill, tradenames and franchise costs is computed using the straight-line method over estimated useful lives ranging from 20 to 35 years. Amortization of management contracts is computed using the straight- line method over the 14-year average remaining term of the related management agreements. (I) Represents lease payments from Wyndham International to Patriot REIT calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels for the period presented. (J) Represents adjustments to Wyndham International's estimated federal and state tax provision for the Wyndham Transactions. (K) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Wyndham Transactions of approximately 11.2%. The estimated minority interest percentage prior to the Wyndham Transactions is approximately 14.5%. (L) Represents adjustment for minority interest in the New Non-Controlled Subsidiaries held by Patriot REIT. (M) Pro forma earnings per share is computed based on 102,543 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be a net loss of $0.09 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-50 WYNDHAM INTERNATIONAL ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PATRIOT ADJUSTMENTS OPERATING ------------------------------------------ COMPANY CROW ASSETS PRO FORMA ACQUISITION MERGER WYNDHAM PRO FORMA TOTAL(A) PRO FORMA(B) PRO FORMA(C) PRO FORMA(D) ADJUSTMENTS TOTAL --------- ------------ ------------ ------------ ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Room revenue........... $279,595 $58,044 $108,868 $12,659 $ -- $459,166 Other hotel revenue.... 182,889 35,548 35,502 7,649 -- 261,588 Racecourse facility revenue............... 33,399 -- -- -- -- 33,399 Management fee, service fee and reimbursement income................ 14,701 -- 35,785 -- (4,937)(E) 45,549 Interest and other income................ 6,374 -- 2,133 -- -- 8,507 -------- ------- -------- ------- -------- -------- Total revenue.......... 516,958 93,592 182,288 20,308 (4,937) 808,209 -------- ------- -------- ------- -------- -------- Expenses: Departmental costs-- hotel, club and spa operations............ 187,784 37,199 49,712 7,707 -- 282,402 Racecourse facility operations............ 30,114 -- -- -- -- 30,114 Direct operating costs of management company, service department and reimbursement expenses.............. 12,568 -- 27,763 -- -- 40,331 General and administrative........ 54,225 9,324 15,539 2,382 200 (F) 81,670 Ground lease and hotel lease expense......... 523 -- -- -- 16,255 (G) 16,778 Repair and maintenance........... 24,230 4,005 5,366 911 -- 34,512 Utilities.............. 20,341 3,745 4,918 837 -- 29,841 Marketing.............. 41,734 6,743 9,294 1,324 -- 59,095 Management fees........ 9,657 4,279 -- 658 (4,937)(E) 9,657 Depreciation and amortization.......... 5,449 -- 10,739 (H) -- 4,517 (H) 20,705 Participating lease payments(I)........... 138,309 30,857 26,438 7,006 -- 202,610 Interest expense....... 936 -- -- -- -- 936 Real estate and personal property taxes and casuality insurance ............ 290 -- -- -- -- 290 -------- ------- -------- ------- -------- -------- Total expenses......... 526,160 96,152 149,769 20,825 16,035 808,941 -------- ------- -------- ------- -------- -------- Income (loss) before income tax provision and minority interests.............. (9,202) (2,560) 32,519 (517) (20,972) (732) Income tax (provision) benefit............... -- -- (9,240)(J) -- 5,763 (J) (3,477) -------- ------- -------- ------- -------- -------- Income (loss) before mi- nority interests....... (9,202) (2,560) 23,279 (517) (15,209) (4,209) Minority interest in the Patriot Operating Company Partnership... 1,334 287 (K) (2,607)(K) 58 (K) 1,558 (K) 630 Minority interest in consolidated subsidiaries.......... -- -- -- -- (1,419)(L) (1,419) -------- ------- -------- ------- -------- -------- Net income (loss) applicable to common shareholders........... $ (7,868) $(2,273) $ 20,672 $ (459) $(15,070) $ (4,998) ======== ======= ======== ======= ======== ======== Net loss per common share(M)............... $ (0.10) $ (0.05) ======== ========
See notes on following page. F-51 WYNDHAM INTERNATIONAL ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (CONTINUED) (UNAUDITED) - -------- (A) Represents the pro forma results of operations of Patriot Operating Company for the nine months ended September 30, 1997 assuming the following transactions had occurred at the beginning of the period presented: (i) the Cal Jockey Merger and the transactions related thereto (ii) the PaineWebber Land Sale was consummated, the PaineWebber affiliate leased that portion of the land upon which the Racecourse is situated to Patriot REIT and Patriot REIT subleased this land and the related improvements to Patriot Operating Company; (iii) Patriot REIT leased certain land to Borders, Inc.; (iv) Patriot Operating Company completed the Grand Heritage Acquisition and acquired PAH RSI Lessee; (v) Patriot REIT acquired the Recent Acquisitions (except for the Park Shore Hotel and the Sheraton City Centre) and the CHC Hotels and leased 21 of such hotels to Patriot Operating Company; (vi) the mortgage notes to affiliates of CHC Lease Partners have been funded; (vii) Patriot REIT replaced the Old Line of Credit with the Revolving Credit Facility and the Term Loan; (viii) Patriot Operating Company acquired the Participating Note; (ix) the Offering of 10,580,000 Paired Shares was completed; (x) the GAH Acquisition was completed; and (xi) the CHCI Merger was completed. See page F-28. (B) Represents adjustments to Wyndham International's results of operations assuming the Crow Assets Acquisition (10 hotels) had occurred as of January 1, 1996. The pro forma results of operations for the Crow Assets Acquisition reflects the results of operations for ten hotels for the nine months ended September 30, 1997. (C) Represents adjustments to Wyndham International's results of operations assuming the Merger had been consummated at the beginning of the period presented. The pro forma adjustments are based on the historical results of operations of Wyndham as of September 30, 1997 adjusted for certain transactions, including the acquisition of ClubHouse and all hotels and management contracts acquired during the first nine months of 1997, as if such transactions had occurred as of January 1, 1996. (D) Represents adjustments to Wyndham International's results of operations assuming the two hotels currently leased by Crow Hotel Lessee, Inc. had been leased by Wyndham International as of January 1, 1996. (E) Represents the elimination of management fees for the hotels previously leased to the Crow Hotel Lessee, Inc. which are assumed to be leased by Wyndham International and managed by a New Non-Controlled Subsidiary. (F) Represents incremental general and administrative expenses expected to be incurred by Wyndham International of $200. (G) Represents pro forma lease expense related to the sub-lease agreement with Patriot REIT for those hotel properties leased by Patriot REIT from third party owners. (H) Represents adjustments to depreciation of furniture and equipment and amortization of goodwill, tradenames and franchise-related intangible assets. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 5 to 7 years for F, F & E. Amortization of goodwill, tradenames and franchise costs is computed using the straight-line method over estimated useful lives ranging from 20 to 35 years. Amortization of management contracts is computed using the straight-line method over the 14-year average remaining term of the related management agreements. (I) Represents lease payments from Wyndham International to Patriot REIT calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels for the period presented. (J) Represents adjustments to Wyndham International's estimated federal and state tax provision for the Wyndham Transactions. (K) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Wyndham Transactions of approximately 11.2%. The estimated minority interest percentage prior to the Wyndham Transactions is approximately 14.5%. (L) Represents adjustment for minority interest in the New Non-Controlled Subsidiaries held by Patriot REIT. (M) Pro forma earnings per share is computed based on 103,117 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be a net loss of $0.05 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-52 COMBINED LESSEES ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS Patriot REIT leases each of its hotels, except the Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel, which are separately owned through Non- Controlled Subsidiaries, to Lessees or to Patriot Operating Company. The Combined Lessees subsequent to (i) the Wyndham Transactions, (ii) the Cal Jockey Merger and the transactions related thereto, (iii) the Grand Heritage Acquisition (which included the acquisition of Grand Heritage Leasing, L.L.C. which leased three hotels from Patriot REIT), (iv) the acquisition of PAH RSI Lessee (which included the acquisition of eight Patriot REIT hotel leases); and (v) the GAH Acquisition and the CHCI Merger (which included the acquisition of 25 Patriot REIT hotel leases from CHC Lease Partners) consist of NorthCoast Lessee which leases 11 hotels (excluding the Park Shore Hotel), Doubletree Lessee which leases four hotels, and Metro Lease Partners which leases one hotel. Patriot REIT also leases two hotels to Crow Hotel Lessee, Inc. (the Wyndham Garden Hotel-Midtown and the Wyndham Greenspoint Hotel). Subsequent to the completion of the Wyndham Transactions, Patriot REIT expects to terminate its leases with Crow Hotel Lessee, Inc. and re-lease such hotels to Wyndham International. The Participating Leases provide for staggered terms of one to twelve years and the payment of the greater of base or participating rent, plus certain additional charges, as applicable. The following Combined Lessees' unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996 and the nine months ended September 30, 1997 are presented as if the 16 hotels that Patriot REIT leases to the Combined Lessees pursuant to Participating Leases (excluding the Park Shore Hotel) had been leased as of January 1, 1996. The 25 hotels leased to CHC Lease Partners, the eight hotels leased to PAH RSI Lessee, the three hotels leased to Grand Heritage Leasing, L.L.C. and the two hotels leased to Crow Hotel Lessee, Inc. are assumed to have been leased to Wyndham International and, therefore, have been eliminated from the Pro Forma Condensed Combined Statements of Operations for the Combined Lessees. The pro forma information is based in part upon the Statements of Operations of NorthCoast Lessee filed with Old Patriot REIT's Annual Report on Form 10-K for the year ended December 31, 1996 and the Statements of Operations of NorthCoast Lessee filed with Patriot REIT's and Patriot Operating Company's Joint Quarterly Report on Form 10-Q for the nine months ended September 30, 1997 all of which are incorporated by reference herein and the Pro Forma Condensed Combined Statement of Operations of the Combined Lessees located elsewhere in this Joint Current Report. In management's opinion, all material adjustments necessary to reflect the effects of these transactions have been made. The unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of the Combined Lessees would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Combined Statement of Operations for the interim period ended September 30, 1997 is not necessarily indicative of the results of operations for the full year. F-53 COMBINED LESSEES ADJUSTED FOR THE WYNDHAM TRANSACTIONS PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (IN THOUSANDS) Revenue: Room................................................ $72,182 $59,441 Food and beverage................................... 28,499 22,355 Telephone and other................................. 5,906 4,852 ------- ------- Total revenue.................................... 106,587 86,648 ------- ------- Expenses: Departmental costs and expenses..................... 44,615 34,690 General and administrative.......................... 9,389 7,138 Ground lease expense................................ 2,496 985 Repair and maintenance.............................. 5,526 4,161 Utilities........................................... 4,380 3,201 Marketing........................................... 7,431 6,171 Participating lease payments(A)..................... 32,730 27,367 ------- ------- Total expenses................................... 106,567 83,713 ------- ------- Income before lessee income (expense)................ 20 2,935 ------- ------- Dividend and interest income(B)...................... 142 1,087 Management fees(C)................................... (2,553) (2,444) Lessee general and administrative(D)................. (478) (478) ------- ------- (2,889) (1,835) ------- ------- Net income (loss).................................... $(2,869) $ 1,100 ======= =======
- -------- (A) Represents lease payments calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels. (B) Includes dividend income on OP Units in the Patriot Partnerships which form a portion of the required capitalization of NorthCoast Lessee. Pro forma amounts exclude additional dividend income earned on OP Units held by certain Lessees, and pro forma interest income earned on invested cash balances. (C) Represents pro forma management fees paid to the Operators under the terms of their respective management agreements with the Lessees. (D) Represents pro forma overhead expenses, which include an estimate of the Lessees' salaries and benefits, professional fees, insurance costs and administrative expenses. F-54 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WHG MERGER INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) On September 30, 1997, Patriot REIT, Patriot Operating Company and WHG Resorts & Casinos Inc. ("WHG") entered into an Agreement and Plan of Merger (the "WHG Merger Agreement") providing for the merger of a newly-formed subsidiary of Patriot Operating Company (and subsequent to the Merger, Wyndham International) with and into WHG, with WHG being the surviving corporation (the "WHG Merger"). As a result of the WHG Merger, Wyndham International will acquire the Condado Plaza Hotel & Casino, a 50% interest in the El San Juan Hotel & Casino and a 23.3% interest in the El Conquistador Resort & Country Club (the "El Conquistador"), all of which are located in Puerto Rico, as well as a 62% interest in Williams Hospitality Group, Inc., the management company for the three hotels and the Las Casitas Village at El Conquistador. Under the terms of the WHG Merger Agreement, each share of WHG common stock, par value $0.01 per share ("WHG Common Stock") generally will be converted into the right to receive 0.784 Paired Shares (the "WHG Exchange Ratio"); provided, however, that in the event that (i) the average closing price of a Paired Share over the ten trading days immediately preceding the third business day prior to the date on which the WHG stockholders' meeting to approve the WHG Merger is convened (the "Patriot/WHG Average Closing Price") is greater than $31.25 and the effective time of the WHG Merger is before February 1998, the WHG Exchange Ratio will be adjusted such that the product (the "WHG Exchange Ratio Product") equals $24.50, (ii) the Patriot/WHG Average Closing Price is greater than $31.75 and the effective time of the WHG Merger is in February 1998, the WHG Exchange Ratio will be adjusted such that the WHG Exchange Ratio Product equals $24.89, (iii) the Patriot/WHG Average Closing Price is greater than $32.25 and the effective time of the WHG Merger is after February 1998, the WHG Exchange Ratio will be adjusted such that the WHG Exchange Ratio Product equals $25.28, (iv) the Patriot/WHG Average Closing Price is less than or equal to $25.50, but greater than or equal to $19.50, the WHG Exchange Ratio will be adjusted such that the WHG Exchange Ratio Product equals $20.00, or (v) the Patriot/WHG Average Closing Price is less than $19.50, the WHG Exchange Ratio will equal 1.026, provided, however, that in such circumstances WHG has the right, waivable by it, to terminate the WHG Merger Agreement. In addition, each issued and outstanding share of WHG Series B Convertible Preferred Stock will be converted into the right to receive that number of Paired Shares that the holder of such shares of WHG Series B Convertible Preferred Stock would have the right to receive assuming conversion of such shares, together with any accrued and unpaid dividends thereon, into shares of WHG Common Stock immediately prior to the effective time of the WHG Merger. The Pro Forma Financial Statements have been adjusted for the purchase method of accounting whereby the hotel and related improvements and other assets and liabilities owned by WHG are adjusted to estimated fair market value. The fair market value of the assets and liabilities of WHG has been determined based upon preliminary estimates and is subject to change as additional information is obtained. Management does not anticipate that the preliminary allocation of purchase costs based upon the estimated fair market value of the assets and liabilities of WHG will materially change; however, the allocation of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value as of the close of the transaction. Therefore, the allocation reflected in the following unaudited Pro Forma Financial Statements may differ from the amounts ultimately determined. In connection with the WHG Merger, Patriot Operating Company is currently in negotiations to acquire additional interests in the El San Juan Hotel & Casino, the El Conquisitor, Williams Hospitality Group, Inc., and WKA Development S.E., and to acquire an option to buy certain property attached to the Condado Plaza Hotel & Casino. No assurance can be given that any of these transactions will be consummated and the following unaudited Pro Forma Financial Statements do not reflect adjustments for these transactions. The following unaudited Pro Forma Condensed Combined Statement of Operations as adjusted for the WHG Merger for the year ended December 31, 1996 and the nine months ended September 30, 1997 are derived from (i) the Patriot REIT and Patriot Operating Company Pro Forma Condensed Combined Statements of Operations as adjusted for the Wyndham Transactions for the year ended December 31, 1996 and the nine months ended September 30, 1997 and (ii) the Consolidated Statements of Operations of WHG for the year ended June 30, 1997 and the three months ended September 30, 1997 included elsewhere in this Joint Current Report. As a result of the WHG F-55 Merger, WHG will become a wholly owned subsidiary of Wyndham International. Consequently the WHG Merger has minimal impact on the pro forma operating results of Patriot REIT. As a result, separate unaudited Pro Forma Condensed Statements of Operations for Patriot REIT, adjusted for the WHG Merger have not been presented. The following unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of Patriot REIT and Wyndham International as adjusted for the WHG Merger would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Combined Statement of Operations for the interim period ended September 30, 1997 is not necessarily indicative of the results of operations for the full year. F-56 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WHG MERGER PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PATRIOT WYNDHAM REIT INTERNATIONAL PRO FORMA PRO FORMA(A) PRO FORMA(B) ELIMINATIONS TOTAL ------------ ------------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Participating lease revenue................ $279,948 $ -- $(247,218)(C) $ 32,730 Hotel revenue........... -- 931,559 -- 931,559 Racecourse facility revenue, hotel and land lease revenue.......... 17,714 51,946 (17,380)(D) 52,280 Management fee, service fee and reimbursement income................. -- 62,221 -- 62,221 Interest and other income................. 2,797 14,346 (5,916)(E) 11,227 -------- ---------- --------- ---------- Total revenue........... 300,459 1,060,072 (270,514) 1,090,017 -------- ---------- --------- ---------- Expenses: Departmental costs-- hotel operations....... -- 403,122 -- 403,122 Racecourse facility operations............. -- 46,351 (5,611)(D) 40,740 Direct operating costs of management company, service department, and reimbursement expenses............... -- 47,564 -- 47,564 General and administrative......... 7,097 110,110 (34)(E) 117,173 Ground lease and hotel lease expense.......... 16,824 12,502 (11,769)(D) 17,557 Repair and maintenance.. -- 41,991 -- 41,991 Utilities............... -- 36,834 -- 36,834 Interest expense........ 124,637 4,866 (5,882)(E) 123,621 Real estate and personal property taxes and casualty insurance..... 34,542 847 -- 35,389 Marketing............... -- 73,533 -- 73,533 Management fees......... -- 9,469 -- 9,469 Depreciation and amortization........... 93,775 40,943 -- 134,718 Participating lease payments............... -- 247,218 (247,218)(C) -- -------- ---------- --------- ---------- Total expenses.......... 276,875 1,075,350 (270,514) 1,081,711 -------- ---------- --------- ---------- Income (loss) before equity in earnings (losses) of unconsolidated subsidiaries, income tax provision and minority interests............... 23,584 (15,278) -- 8,306 Equity in earnings of unconsolidated subsidiaries........... 2,877 (3,407) 5,045 (F) 4,515 -------- ---------- --------- ---------- Income (loss) before income tax provision and minority interests...... 26,461 (18,685) 5,045 12,821 Income tax (provision) benefit................ (345) 4,647 -- 4,302 -------- ---------- --------- ---------- Income (loss) before minority interests...... 26,116 (14,038) 5,045 17,123 Minority interests in the Patriot Partnerships........... (2,428) 1,359 -- (1,069) Minority interest in consolidated subsidiaries .......... (1,832) 1,341 (5,045)(F) (5,536) -------- ---------- --------- ---------- Net income (loss) applicable to common shareholders............ $ 21,856 $ (11,338) $ -- $ 10,518 ======== ========== ========= ========== Net income (loss) per common Paired Share(G).. $ 0.20 $ (0.11) $ 0.09 ======== ========== ==========
- -------- (A) Patriot REIT Pro Forma balances are derived from the pro forma results of operations of Patriot REIT for the year ended December 31, 1996 as adjusted for the Wyndham Transactions. See page F-45. Minority interest in the Patriot REIT Partnership has been decreased by $121 to reflect the decrease in the estimated minority interest percentage subsequent to the WHG Merger to approximately 10.0%. The estimated minority interest percentage prior to the WHG Merger is approximately 10.5%. (B) Wyndham International Pro Forma balances are derived from the pro forma results of operations of Patriot Operating Company for the year ended December 31, 1996 appearing on page F-62. (C) Represents elimination of participating lease revenue and expense related to the 61 hotel properties leased by Patriot REIT to Wyndham International (excluding the Sheraton City Centre). (D) Represents elimination of rental income and expense related to the Racecourse facility, land leased and the hotels sub-leased by Patriot REIT to Wyndham International. (E) The pro forma adjustments represent the elimination of $1,170 of interest income and expense related to a note receivable issued to Old Patriot REIT in connection with the sale of certain assets to PAH RSI Lessee, which assets are assumed to be acquired by Patriot Operating Company, the elimination of $4,712 of interest income and expense related to the Subscription Notes issued to Patriot Operating Company in connection with the subscription for shares of Patriot Operating Company Common Stock and Patriot Operating Company Partnership OP Units issued in connection with the Cal Jockey Merger and the elimination of $34 of other intercompany income and expense items. (F) Represents the elimination of equity in losses of the New Non-Controlled Subsidiaries. (G) Pro forma earnings per share is computed based on 107,547 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares and the conversion of WHG Series B Convertible Preferred Stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be $0.10 per common Paired Share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-57 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WHG MERGER PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
WYNDHAM PATRIOT REIT INTERNATIONAL PRO FORMA PRO FORMA(A) PRO FORMA(B) ELIMINATIONS TOTAL ------------ ------------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue................. $229,977 $ -- $(202,610)(C) $ 27,367 Hotel revenue............ -- 763,616 -- 763,616 Racecourse facility revenue, hotel and land lease revenue........... 19,759 33,399 (19,501)(D) 33,657 Management fee, service fee and reimbursement income.................. -- 56,838 -- 56,838 Interest and other income.................. 4,043 10,524 (2,306)(E) 12,261 -------- -------- --------- -------- Total revenue............ 253,779 864,377 (224,417) 893,739 -------- -------- --------- -------- Expenses: Departmental costs--hotel operations.............. -- 307,597 -- 307,597 Racecourse facility operations.............. -- 30,114 (3,246)(D) 26,868 Direct operating costs of management company, service department, and reimbursement expenses.. -- 43,427 -- 43,427 General and administrative.......... 7,137 87,322 (24)(E) 94,435 Ground lease and hotel lease expense........... 20,017 16,778 (16,255)(D) 20,540 Repair and maintenance... -- 34,512 -- 34,512 Utilities................ -- 29,841 -- 29,841 Interest expense......... 94,414 3,291 (2,282)(E) 95,423 Real estate and personal property taxes and casualty insurance...... 27,066 290 -- 27,356 Marketing................ -- 61,334 -- 61,334 Management fees.......... -- 9,657 -- 9,657 Depreciation and amortization............ 70,854 29,489 -- 100,343 Participating lease payments................ -- 202,610 (202,610)(C) -- -------- -------- --------- -------- Total expenses........... 219,488 856,262 (224,417) 851,333 -------- -------- --------- -------- Income before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests................ 34,291 8,115 -- 42,406 Equity in earnings of unconsolidated subsidiaries............ 6,027 417 (1,419)(F) 5,025 -------- -------- --------- -------- Income before income tax provision and minority interests................ 40,318 8,532 (1,419) 47,431 Income tax (provision) benefit................. (256) (3,477) -- (3,733) -------- -------- --------- -------- Income before minority interests................ 40,062 5,055 (1,419) 43,698 Minority interests in the Patriot Partnerships.... (3,819) (39) -- (3,858) Minority interest in consolidated subsidiaries............ (1,869) (4,692) 1,419 (F) (5,142) -------- -------- --------- -------- Net income applicable to common shareholders...... $ 34,374 $ 324 $ -- $ 34,698 ======== ======== ========= ======== Net income per common Paired Share(G).......... $ 0.31 $ 0.01 $ 0.32 ======== ======== ========
- -------- (A) Patriot REIT Pro Forma balances are derived from the pro forma results of operations of Patriot REIT for the nine months ended September 30, 1997 as adjusted for the Wyndham Transactions. See page F-47. Minority interest in the Patriot REIT Partnership has been decreased by $191 to reflect the decrease in the estimated minority interest percentage subsequent to the WHG Merger to approximately 10.0%. The estimated minority interest percentage prior to the WHG Merger is approximately 10.5%. (B) Wyndham International Pro Forma balances are derived from the pro forma results of operations of Patriot Operating Company for the nine months ended September 30, 1997 appearing on page F-63. (C) Represents elimination of participating lease revenue and expense related to the 61 hotel properties leased by Patriot REIT to Wyndham International (excluding the Sheraton City Centre). (D) Represents elimination of rental income and expense related to the Racecourse facility, land leased and the hotels sub-leased by Patriot REIT to Wyndham International. (E) Represents primarily the elimination of $832 of interest income and expense related to a note receivable issued to Old Patriot REIT in connection with the sale of certain assets to PAH RSI Lessee, which assets are assumed to be acquired by Patriot Operating Company, the elimination of $1,450 of interest income and expense related to the Subscription Notes issued to Patriot Operating Company in connection with the subscription for shares of Patriot Operating Company Common Stock and Patriot Operating Company Partnership OP Units issued in connection with the Cal Jockey Merger, and the elimination of $24 of other intercompany income and expense items. (F) Represents the elimination of equity in income of the New Non-Controlled Subsidiaries. (G) Pro forma earnings per share is computed based on 108,178 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares and the conversion of WHG Series B Convertible Preferred Stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be $0.34 per common Paired Share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-58 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WHG MERGER PRO FORMA CONDENSED COMBINED BALANCE SHEET The following unaudited Pro Forma Condensed Combined Balance Sheet is presented as if the WHG Merger had occurred as of September 30, 1997. The Pro Forma Condensed Combined Balance Sheet is also derived from the Patriot REIT and Patriot Operating Company Pro Forma Condensed Combined Balance Sheet as adjusted for the Wyndham Transactions as of September 30, 1997 included elsewhere in this Joint Current Report. Such pro forma information is based in part upon WHG's Consolidated Balance Sheet as of September 30, 1997 and Wyndham's Consolidated Balance Sheet as of September 30, 1997 and should be read in conjunction with the financial statements presented elsewhere in this Joint Current Report and filed with WHG's and Wyndham's respective Quarterly Reports on Form 10-Q for the quarter ended September 30, 1997 and Patriot REIT's and Patriot Operating Company's Combined Balance Sheet as of September 30, 1997, filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the nine months ended September 30, 1997. In management's opinion, all material adjustments necessary to reflect the effect of these transactions have been made. The accompanying Pro Forma Condensed Combined Balance Sheet reflects adjustments to record the net assets of WHG at their estimated fair market values and the elimination of WHG's historical shareholders' equity. The fair market values of the assets and liabilities of WHG have been determined based upon preliminary estimates and are subject to change as additional information is obtained. Management does not anticipate that the preliminary allocation of purchase costs based upon the estimated fair market values of the assets and liabilities of WHG will materially change; however, the allocations of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value as of the close of the transaction. Therefore, the allocations reflected in the following unaudited Pro Forma Condensed Combined Balance Sheet may differ from the amounts ultimately determined. The following unaudited Pro Forma Condensed Combined Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of September 30, 1997, nor does it purport to represent the future financial position of Patriot REIT and Wyndham International as adjusted for the WHG Merger. F-59 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WHG MERGER PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PATRIOT REIT AND WYNDHAM INTERNATIONAL PRO FORMA WHG PRO FORMA TOTAL(A) HISTORICAL(B) ADJUSTMENTS TOTAL ------------- ------------- ----------- ---------- ASSETS Net investment in real estate and related improvements............ $2,433,525 $ 49,050 $ 31,641 (C) $2,514,216 Mortgage notes and other receivables from unconsolidated subsidiaries............ 74,053 1,731 40,308 (D) 116,092 Notes and other receivables from affiliates.............. 24,800 -- -- 24,800 Notes receivable......... 17,844 -- -- 17,844 Investment in unconsolidated subsidiaries............ 16,153 29,791 (21,399)(E) 24,545 Cash and cash equivalents............. 36,334 18,941 -- 55,275 Restricted cash.......... 39,132 -- -- 39,132 Accounts receivable, net..................... 54,222 3,454 -- 57,676 Goodwill................. 460,549 8,613 7,628 (F) 476,790 Deferred expenses, net... 24,663 -- -- 24,663 Deferred acquisition costs................... 39,970 -- -- 39,970 Management contract costs................... 110,246 -- 43,567 (G) 153,813 Trade name and franchise costs................... 93,050 -- -- 93,050 Prepaid expenses and other assets............ 52,329 6,772 -- 59,101 Deferred income taxes.... 1,496 -- -- 1,496 ---------- -------- -------- ---------- Total assets............ $3,478,366 $118,352 $101,745 $3,698,463 ========== ======== ======== ========== LIABILITIES AND SHARE- HOLDERS' EQUITY Borrowings under a line of credit and mortgage notes................... $1,472,911 $ 22,363 $ -- $1,495,274 Notes and other liabilities............. -- 5,032 -- 5,032 Accounts payable and accrued expenses........ 96,133 11,204 -- 107,337 Dividends and distributions payable... 21,727 -- -- 21,727 Sales tax payable........ 2,968 -- -- 2,968 Deferred income tax liability............... 76,425 2,192 -- 78,617 Deposits................. 4,033 -- -- 4,033 Due to unconsolidated subsidiaries............ 5,904 -- -- 5,904 Minority interests in the Patriot Partnerships.... 264,862 -- -- 264,862 Minority interest in consolidated subsidiaries............ 32,112 20,410 -- 52,522 Shareholders' equity: Preferred stock......... 44 3 (3)(H) 44 Common stock............ 1,906 61 39 (H) 2,006 Paid-in capital......... 1,649,054 17,293 141,503 (I) 1,807,850 Unearned stock compensa- tion, net.............. (15,075) -- (15,075) Notes receivable from stockholders........... (17,138) -- -- (17,138) Receivable from affili- ates................... (1,229) -- -- (1,229) Retained earnings....... (116,271) 39,794 (39,794)(I) (116,271) ---------- -------- -------- ---------- Total shareholders' eq- uity................... 1,501,291 57,151 101,745 1,660,187 ---------- -------- -------- ---------- Total liabilities and shareholders' equity... $3,478,366 $118,352 $101,745 $3,698,463 ========== ======== ======== ==========
See notes on following page. F-60 - -------- (A) Reflects the Pro Forma Condensed Combined Balance Sheet of Patriot REIT and Patriot Operating Company as of September 30, 1997, which reflects (i) the Recent Transactions, including the Cal Jockey Merger; (ii) the acquisition of the CHC Hotels, the GAH Acquisition and the CHCI Merger; and (iii) the Wyndham Transactions. See page F-42. (B) Represents the Consolidated Balance Sheet of WHG as of September 30, 1997. (C) Represents adjustment for the purchase method of accounting whereby the investment in the hotel property owned by WHG is adjusted to record the assets at their estimated fair market values. (D) Represents the reclassification of receivables from/advances to WHG unconsolidated subsidiaries, stated at their historical cost which approximates their fair value. (E) Represents the following adjustments: Adjustment to state investments in WHG unconsolidated subsid- iaries at estimated fair market value....................... $ 18,909 Reclassify receivables from/advances to WHG unconsolidated subsidiaries................................................ (40,308) -------- $(21,399) ========
(F) Represents purchase consideration in excess of fair market value of the net assets of WHG. (G) Represents adjustment for the purchase method of accounting whereby the management contracts held by WHG are adjusted to their estimated fair market values. WHG, through certain of its subsidiaries, holds management contracts for the three resort hotels that it holds ownership interests in. The contracts have remaining lives of 6 to 14 years and provide for payment of management fees including a base fee plus certain incentive fees based on specified criteria as defined in the respective management agreements. (H) Represents adjustments to record the exchange of WHG Common Stock for Paired Shares and the conversion of the WHG Series B Convertible Preferred Stock outstanding into its Paired Share equivalent. Pursuant to the WHG Merger Agreement, WHG stockholders will receive 0.784 Paired Shares for each share of WHG Common Stock held by them at the time of the WHG Merger, subject to certain adjustments. At September 30, 1997, 6,050 shares of WHG Common Stock were outstanding and were assumed to be exchanged for approximately 4,743 Paired Shares (with a par value equal to $0.02 per Paired Share) resulting in an adjustment to increase Common Stock. At September 30, 1997, 300 shares of WHG Series B Convertible Preferred Stock were outstanding. The preferred stock has a stated value of $10.00 per share (plus adjustment for accrued, unpaid dividends) and is convertible into WHG Common Stock based on a value of $9.00 per share for the WHG Common Stock. The outstanding shares of WHG Series B Convertible Preferred Stock were assumed to be converted into approximately 261 Paired Shares (which represents the number of Paired Shares the holder of such preferred stock would have the right to receive assuming conversion of such shares into WHG Common Stock). (I) Represents the following adjustments to shareholders' equity: Purchase consideration for shares.............................. $158,899 Adjustment to preferred stock assumed to be exchanged for Paired Shares................................................. (3) Adjustment to Common Stock for Paired Shares issued............ (39) Book value of WHG common stock................................. (61) Book value of WHG paid-in capital.............................. (17,293) -------- Adjustment to paid-in capital................................. 141,503 Elimination of WHG historical retained earnings................ (39,794) Adjustment to preferred stock.................................. (3) Adjustment to common stock..................................... 39 -------- Adjustment to shareholders' equity............................ $101,745 ========
F-61 WYNDHAM INTERNATIONAL ADJUSTED FOR THE WHG MERGER PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
WYNDHAM INTERNATIONAL PRO FORMA WHG PRO FORMA TOTAL(A) HISTORICAL(B) ADJUSTMENTS TOTAL ------------- ------------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Room revenue........... $ 547,286 $25,131 $ -- $ 572,417 Other hotel revenue.... 329,377 29,765 -- 359,142 Racecourse facility revenue............... 51,946 -- -- 51,946 Management fee, service fee and reimbursement income................ 49,225 12,996 -- 62,221 Interest and other income................ 12,262 2,084 -- 14,346 ---------- ------- ------- ---------- Total revenue.......... 990,096 69,976 -- 1,060,072 ---------- ------- ------- ---------- Expenses: Departmental costs-- hotel, club and spa operations............ 368,568 34,554 -- 403,122 Racecourse facility operations............ 46,351 -- -- 46,351 Direct operating costs of management company, service department, and reimbursement expenses.............. 43,809 3,755 -- 47,564 General and administrative........ 103,877 6,233 -- 110,110 Ground lease and hotel lease expense ........ 12,502 -- -- 12,502 Repair and maintenance........... 41,991 -- -- 41,991 Utilities.............. 36,834 -- -- 36,834 Marketing.............. 70,577 2,956 -- 73,533 Management fees........ 9,469 -- -- 9,469 Depreciation and amortization.......... 29,425 5,549 5,969 (C) 40,943 Participating lease payments.............. 247,218 -- -- 247,218 Interest expense....... 1,393 3,473 -- 4,866 Real estate and personal property taxes and insurance... 847 -- -- 847 ---------- ------- ------- ---------- Total expenses......... 1,012,861 56,520 5,969 1,075,350 ---------- ------- ------- ---------- Income (loss) before equity earnings of unconsolidated subsidiaries........... (22,765) 13,456 (5,969) (15,278) Equity in earnings of unconsolidated subsidiaries........... -- (2,896) (511)(D) (3,407) ---------- ------- ------- ---------- Income (loss) before income tax provision and minority interests.............. (22,765) 10,560 (6,480) (18,685) Income tax (provision) benefit............... 7,532 (2,152) (733)(E) 4,647 ---------- ------- ------- ---------- Income (loss) before mi- nority interests....... (15,233) 8,408 (7,213) (14,038) Minority interest in the Patriot Operating Company Partnership... 1,141 -- 218 (F) 1,359 Minority interest in consolidated subsidiaries.......... 5,045 (3,704) -- 1,341 ---------- ------- ------- ---------- Net income (loss) applicable to common shareholders........... $ (9,047) $ 4,704 $(6,995) $ (11,338) ========== ======= ======= ========== Net loss per common share(G)............... $ (0.09) $ (0.11) ========== ==========
- -------- (A) Represents the pro forma results of operations of Wyndham International for the year ended December 31, 1996 which reflects adjustments for (i) the Recent Transactions, including the Cal Jockey Merger and the related transactions; (ii) the acquisition of the CHC Hotels, the GAH Acquisition and the CHCI Merger; and (iii) the Wyndham Transactions. See page F-49. (B) Represents the historical consolidated results of operations of WHG for the twelve months ended December 31, 1996 (excluding the adjustment to reflect dividends on preferred stock of Condado Plaza Hotel & Casino). (C) Represents an increase in depreciation and amortization which results from the adjustment for the purchase method of accounting whereby the asset values are adjusted to their estimated fair market value. The adjustment represents increases in depreciation expense of $907, amortization of goodwill of $519 and amortization of management contracts of $4,543. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for buildings and improvements and 5 to 7 years for F, F & E. Amortization of goodwill is computed using the straight-line method over a 20-year estimated useful life. Amortization of management contract costs is computed using the straight-line method over the remaining terms of the related contracts. (D) Represents adjustment to equity in earnings of unconsolidated subsidiaries which results from the adjustment for the purchase method of accounting whereby the investment values are adjusted to their estimated fair market value. The adjustment to the investment balance is being amortized using the straight-line method based upon an estimated useful life of 35 years. (E) Represents adjustments to Wyndham International's estimated federal and state tax provision for the WHG Merger. (F) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the WHG Merger of approximately 10.7%. The estimated minority interest percentage prior to the WHG Merger is approximately 11.2%. (G) Pro forma earnings per share subsequent to the WHG Merger is computed based on 107,547 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares and the conversion of WHG Series B Convertible Preferred Stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be unchanged. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-62 WYNDHAM INTERNATIONAL ADJUSTED FOR THE WHG MERGER PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
WYNDHAM INTERNATIONAL PRO FORMA WHG PRO FORMA TOTAL(A) HISTORICAL(B) ADJUSTMENTS TOTAL ------------- ------------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Room revenue............. $459,166 $19,627 $ -- $478,793 Other hotel revenue...... 261,588 23,235 -- 284,823 Racecourse facility revenue................. 33,399 -- -- 33,399 Management fee, service fee and reimbursement income.................. 45,549 11,289 -- 56,838 Interest and other income.................. 8,507 2,017 -- 10,524 -------- ------- ------- -------- Total revenue............ 808,209 56,168 -- 864,377 -------- ------- ------- -------- Expenses: Departmental costs-- hotel, club and spa operations.............. 282,402 25,195 -- 307,597 Racecourse facility operations.............. 30,114 -- -- 30,114 Direct operating costs of management company, service department, and reimbursement expenses.. 40,331 3,096 -- 43,427 General and administrative.......... 81,670 6,652 (1,000)(C) 87,322 Ground lease and hotel lease expense........... 16,778 -- -- 16,778 Repair and maintenance... 34,512 -- -- 34,512 Utilities................ 29,841 -- -- 29,841 Marketing................ 59,095 2,239 -- 61,334 Management fees.......... 9,657 -- -- 9,657 Depreciation and amortization............ 20,705 4,412 4,372 (D) 29,489 Participating lease payments................ 202,610 -- -- 202,610 Interest expense......... 936 2,355 -- 3,291 Real estate and personal property taxes and casualty insurance ..... 290 -- -- 290 -------- ------- ------- -------- Total expenses........... 808,941 43,949 3,372 856,262 -------- ------- ------- -------- Income (loss) before equity in earnings of unconsolidated subsidiaries............ (732) 12,219 (3,372) 8,115 Equity in earnings of unconsolidated subsidiaries............ -- 822 (405)(E) 417 -------- ------- ------- -------- Income (loss) before income tax provision and minority interests....... (732) 13,041 (3,777) 8,532 Income tax (provision) benefit................. (3,477) (3,336) 3,336 (F) (3,477) -------- ------- ------- -------- Income (loss) before mi- nority interests......... (4,209) 9,705 (441) 5,055 Minority interest in the Patriot Operating Company Partnership..... 630 -- (669)(G) (39) Minority interest in consolidated subsidiaries............ (1,419) (3,273) -- (4,692) -------- ------- ------- -------- Net income (loss) applicable to common shareholders............. $ (4,998) $ 6,432 $(1,110) $ 324 ======== ======= ======= ======== Net income (loss) per common share(H).......... $ (0.05) $ 0.01 ======== ========
- -------- (A) Represents the pro forma results of operations of Wyndham International for the nine months ended September 30, 1997 which reflects adjustments for (i) the Recent Transactions, including the Cal Jockey Merger and the related transactions; (ii) the acquisition of the CHC Hotels, the GAH Acquisition and the CHCI Merger; and (iii) the Wyndham Transactions. See page F-51. (B) Represents the historical consolidated results of operations of WHG for the nine months ended September 30, 1997 (excluding the adjustment to reflect dividends on preferred stock of Condado Plaza Hotel & Casino). (C) Represents adjustment to eliminate non-recurring WHG Merger related costs. (D) Represents an increase in depreciation and amortization which results from the adjustment for the purchase method of accounting whereby by the asset values are adjusted to their estimated fair market value. The adjustment represents increases in depreciation expense of $678, amortization of goodwill of $286 and amortization of management contracts of $3,408. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for buildings and improvements and 5 to 7 years for F, F & E. Amortization of goodwill is computed using the straight-line method over a 20-year estimated useful life. Amortization of management contract costs is computed using the straight-line method over the remaining terms of the related contracts. F-63 (E) Represents adjustment to equity in earnings of unconsolidated subsidiaries which results from the adjustment for the purchase method of accounting whereby the investment values are adjusted to their estimated fair market value. The adjustment to the investment balance is being amortized using the straight-line method based upon an estimated useful life of 35 years. (F) Represents adjustments to Wyndham International's estimated federal and state tax provision for the WHG Merger. (G) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the WHG Merger of approximately 10.7%. The estimated minority interest percentage prior to the WHG Merger is approximately 11.2%. (H) Pro forma earnings per share subsequent to the WHG Merger is computed based on 108,178 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of shares of Patriot Operating Company Preferred Stock into Paired Shares and the conversion of WHG Series B Convertible Preferred Stock into Paired Shares. In February 1997, the Financing Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be unchanged. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-64 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) On December 2, 1997, Patriot REIT and Patriot Operating Company entered into an Agreement and Plan of Merger (the "Patriot/IHC Merger Agreement") with Interstate Hotels Company ("IHC"), pursuant to which IHC will merge with and into Patriot REIT with Patriot REIT being the surviving corporation (the "Patriot/IHC Merger"). As a result of the Patriot/IHC Merger, Patriot REIT will acquire all of the assets and liabilities of IHC, including IHC's portfolio of 222 owned, leased or managed hotels located in the United States, Canada, the Caribbean and Russia. Of IHC's portfolio, 40 hotels aggregating approximately 11,580 rooms are owned or controlled by IHC, 90 hotels aggregating approximately 10,354 rooms are leased and 92 hotels aggregating approximately 23,183 rooms are managed or subject to service agreements. IHC operates its hotels under a variety of brand names, including Marriott(R), Embassy Suites(R), Hilton(TM), Holiday Inn(R), Radisson(TM), Westin(R), Sheraton(TM), Doubletree(TM), Residence Inn(TM), Hampton Inn(R), Comfort Inn(TM), Homewood Suites(TM) and Colony(R). As a result of the Patriot/IHC Merger, Patriot REIT will assume or refinance all of IHC's existing indebtedness, which totaled approximately $776,000 million as of September 30, 1997, will pay approximately $24,300 to buy out options to purchase shares of common stock, par value $0.01 per share, of IHC ("IHC Common Stock") and assume certain severance obligations of approximately $30,000. Upon consummation of the Patriot/IHC Merger, and subject to proration as described below, IHC stockholders may elect to convert their shares of IHC Common Stock into the right to receive either (i) cash equal to $37.50 per share of IHC Common Stock, (the "Patriot/IHC Cash Consideration") or (ii) Paired Shares having a value of $37.50 pursuant to an exchange ratio (the "Patriot/IHC Exchange Ratio") based on the average closing price of the Paired Shares preceding the meeting of stockholders of IHC relating to the Patriot/IHC Merger (the "Patriot/IHC Average Closing Price"). The Patriot/IHC Merger Agreement provides that, except under certain circumstances involving the payment of cash to IHC stockholders who exercise dissenters' appraisal rights in connection with the Patriot/IHC Merger, approximately 40% of the total issued and outstanding shares of IHC Common Stock (the "IHC Outstanding Shares") will be converted into the right to receive the Patriot/IHC Cash Consideration and the remaining approximately 60% of the IHC Outstanding Shares will be converted into the right to receive Paired Shares at the Patriot/IHC Exchange Ratio. Accordingly, the aggregate Patriot/IHC Cash Consideration (the "Aggregate Patriot/IHC Cash Consideration") to be received by holders of IHC Common Stock who elect to receive Patriot/IHC Cash Consideration generally will be an amount equal to 40% of the IHC Outstanding Shares multiplied by $37.50, or an aggregate of approximately $530,000 based on the number of shares of IHC Common Stock outstanding as of December 1, 1997. The aggregate number of Paired Shares to be received by holders of IHC Common Stock who elect to receive Paired Shares in the Patriot/IHC Merger (the "Aggregate Paired Share Consideration") generally will equal 60% of the IHC Outstanding Shares multiplied by the Patriot/IHC Exchange Ratio. Upon consummation of the Patriot/IHC Merger, holders of outstanding options to acquire IHC Common Stock will receive cash in an amount equal to the spread between the exercise price of such options and $37.50, except that certain senior executives of IHC may elect to have their options assumed by Patriot REIT. The Patriot/IHC Merger Agreement provides that, in the event that the holders of IHC Outstanding Shares elect to receive Patriot/IHC Cash Consideration with respect to more than 14,168,500 shares of IHC Common Stock (approximately 40% of the IHC Outstanding Shares), such holders will receive the Aggregate Patriot/IHC Cash Consideration on a pro rata basis based on the respective numbers of shares of IHC Common Stock with respect to which each such holder has elected to receive Patriot/IHC Cash Consideration. Under such circumstances, such holders' remaining shares of IHC Common Stock that are not converted into the right to receive Patriot/IHC Cash Consideration will be converted into the right to receive Paired Shares at the Patriot/IHC Exchange Ratio. In the event that the aggregate number of shares of IHC Common Stock with respect to which the holders thereof have elected to receive Paired Shares at the Patriot/IHC Exchange Ratio is greater than 60% of the IHC Outstanding Shares, such holders will receive the Aggregate Paired Share Consideration on a pro rata basis based on the respective numbers of shares of IHC Common Stock with respect to which each such holder has elected to receive Paired Shares. Under such circumstances, such holders' remaining shares of IHC Common Stock that are not converted into the right to receive Paired Shares will be converted into the right to receive Patriot/IHC Cash Consideration. F-65 Under the terms of the Patriot/IHC Merger Agreement and subject to proration as described above, each issued and outstanding share of IHC Common Stock with respect to which the holder thereof has made an election to receive Paired Shares in the Patriot/IHC Merger generally will be converted into the right to receive a number of Paired Shares equal to $37.50 divided by the Patriot/IHC Average Closing Price. However, the Patriot/IHC Exchange Ratio is subject to adjustment if the Patriot/IHC Average Closing Price is less than $27.97 or greater than $34.186. If the Patriot/IHC Average Closing Price is less than $27.97 but greater than or equal to $26.416, the Patriot/IHC Exchange Ratio will be equal to 1.341. If the Patriot/IHC Average Closing Price is greater than $34.186 but less than or equal to $37.294 ($38.848, if the Patriot/IHC Merger is consummated after March 30, 1998), the Patriot/IHC Exchange Ratio will be equal to 1.097. If the Patriot/IHC Average Closing Price is greater than $37.294 ($38.848, if the Patriot/IHC Merger is consummated after March 30, 1998), the Patriot/IHC Exchange Ratio will be equal to $40.912 ($42.616, if the Patriot/IHC Merger is consummated after March 30, 1998) divided by the Patriot/IHC Average Closing Price. If the Patriot/IHC Average Closing Price is less than $26.416, the Patriot/IHC Exchange Ratio will be equal to 1.341, but IHC will have the right to terminate the Patriot/IHC Merger Agreement unless Patriot REIT decides to increase the Patriot/IHC Exchange Ratio to an amount equal to $35.424 divided by the Patriot/IHC Average Closing Price and in the event Patriot REIT exercises such right, IHC will no longer have the right to terminate the Patriot/IHC Merger Agreement. Following the Patriot/IHC Merger, Patriot REIT, directly or through its subsidiaries, will own the 40 IHC hotels and will lease such hotels to Wyndham International. The 90 hotel leases acquired by Patriot REIT subsidiaries (of which 88 were leased by IHC as of September 30, 1997) will be sub-leased to Wyndham International. IHC's remaining 92 management and franchise contracts, the IHC hotel management company and other hotel management-related assets will be transferred to corporate subsidiaries of Patriot REIT (collectively, the "Patriot/IHC Non-Controlled Subsidiaries"). Patriot REIT will own a 99% non- voting interest and Wyndham International will own the 1% controlling voting interest in each of the Patriot/IHC Non-Controlled Subsidiaries. Therefore, the operating results of the Patriot/IHC Non-Controlled Subsidiaries will be combined with those of Wyndham International for financial reporting purposes. Patriot REIT will account for its investment in the Patriot/IHC Non-Controlled Subsidiaries using the equity method of accounting. The Patriot Companies intend to enter into forward commitment arrangements to place $200,000 of Paired Shares concurrent with the closing of the Patriot/IHC Merger, the proceeds from which will be used to satisfy certain cash requirements resulting from the Patriot/IHC Merger. Consummation of these forward commitment arrangements is subject to various conditions and no assurances can be given that the Patriot Companies will be successful in their efforts to place $200,000 of Paired Shares concurrently with the closing of the Patriot/IHC Merger. The Pro Forma Financial Statements have been adjusted for the purchase method of accounting whereby the hotels and related improvements and other assets and liabilities owned by IHC are adjusted to estimated fair market value. The fair market value of the assets and liabilities of IHC has been determined based upon preliminary estimates and is subject to change as additional information is obtained. Management does not anticipate that the preliminary allocation of purchase costs based upon the estimated fair market value of the assets and liabilities of IHC will materially change; however, the allocation of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value as of the close of the transaction. Therefore, the allocation reflected in the following unaudited Pro Forma Financial Statements may differ from the amounts ultimately determined. In addition, the Patriot Companies have entered into agreements to acquire an aggregate 95% interest in the Buena Vista Joint Venture (the "Buena Vista Acquisition"). Patriot REIT, through certain of its subsidiaries, has entered into a Contribution Agreement dated October 7, 1997 to acquire approximately 90% of HVP's 45% interest in the Buena Vista Joint Venture for approximately $14,000 in cash and OP Units of the Patriot Partnerships. Patriot REIT was also granted an option to acquire HVP's remaining interest in the Buena Vista Joint Venture. In addition, pursuant to a Purchase and Sale Agreement dated November 6, 1997, Patriot REIT, through certain of its subsidiaries, agreed to acquire Equitable's 55% interest in the Buena Vista Joint Venture for approximately $53,500 in cash and also agreed to repay outstanding mezzanine debt of approximately $6,004. Patriot REIT will acquire the participating loan investment held by Patriot Operating Company for approximately $23,750 in F-66 cash. Subsequent to the acquisition of these joint venture interests, Patriot REIT, through certain of its subsidiaries, will hold an aggregate 95% ownership interest (including a 1% general partnership interest) in the Buena Vista Joint Venture with an option to acquire the remaining 5% interest in three years. The hotel will remain subject to a ground lease and a first leasehold mortgage note in the amount of approximately $50,700. The Patriot/IHC Merger is subject to various conditions, including approval of the Patriot/IHC Merger by the stockholders of Patriot REIT, Patriot Operating Company and IHC. In the event that the Patriot/IHC Merger Agreement is terminated under certain circumstances, including in order to allow IHC to pursue a superior proposal (as defined in the Patriot/IHC Merger Agreement), IHC will be required to pay Patriot REIT a break-up fee of $50,000. Likewise, if the Patriot/IHC Merger Agreement is terminated by IHC as a result of Patriot REIT's failure to recommend approval of the Patriot/IHC Merger to its stockholders, Patriot REIT will be required to pay a $50,000 break-up fee to IHC. The Buena Vista Acquisition is subject to various conditions, including completion of the Patriot Companies' due diligence procedures. The following unaudited Pro Forma Condensed Combined Statements of Operations, as adjusted for the Patriot/IHC Merger and Buena Vista Acquisition for the year ended December 31, 1996 and the nine months ended September 30, 1997, are derived from (i) the Patriot REIT and Wyndham International Pro Forma Condensed Combined Statements of Operations as adjusted for the WHG Merger for the year ended December 31, 1996 and the nine months ended September 30, 1997; (ii) the Pro Forma Statements of Income of IHC for the year ended December 31, 1996 and the nine months ended September 30, 1997 included elsewhere in this Joint Current Report, (iii) the Consolidated Statements of Operations of IHC included elsewhere in this Joint Current Report (see page ), and (iv) the statements of operations of Royal Palace Hotel Associates for the year ended December 31, 1996 and the nine months ended September 30, 1997 included elsewhere in this Joint Current Report. The following unaudited Pro Forma Condensed Combined Statements of Operations assume the Patriot/IHC Merger and the Buena Vista Acquisition had occurred on January 1, 1996. The following unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of Patriot REIT and Wyndham International as adjusted for the Patriot/IHC Merger and the Buena Vista Acquisition would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Combined Statement of Operations for the interim period ended September 30, 1997 is not necessarily indicative of the results of operations for the full year. F-67 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
WYNDHAM PATRIOT REIT INTERNATIONAL PRO FORMA PRO FORMA PRO FORMA ELIMINATIONS TOTAL ------------ ------------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Participating lease revenue................ $453,764 $ -- $(421,034)(A) $ 32,730 Hotel revenue........... -- 1,686,214 -- 1,686,214 Racecourse facility revenue, hotel and land lease revenue.......... 100,868 51,946 (100,534)(B) 52,280 Management fee, service fee and reimbursement income................. -- 102,979 -- 102,979 Interest and other income................. 2,797 16,002 (5,916)(C) 12,883 -------- ---------- --------- ---------- Total revenue........... 557,429 1,857,141 (527,484) 1,887,086 -------- ---------- --------- ---------- Expenses: Departmental costs-- hotel operations....... -- 682,451 -- 682,451 Racecourse facility operations............. -- 46,351 (5,611)(B) 40,740 Direct operating costs of management company, service department, and reimbursement expenses............... -- 66,458 -- 66,458 General and administrative......... 7,097 184,492 (34)(C) 191,555 Ground lease and hotel lease expense.......... 99,570 100,263 (94,923)(B) 104,910 Repair and maintenance.. -- 75,549 -- 75,549 Utilities............... -- 68,535 -- 68,535 Interest expense........ 234,882 4,866 (5,882)(C) 233,866 Real estate and personal property taxes and casualty insurance..... 56,849 3,104 -- 59,953 Marketing............... -- 136,080 -- 136,080 Management fees......... -- 15,800 -- 15,800 Depreciation and amortization........... 183,877 62,952 -- 246,829 Participating lease payments............... -- 421,034 (421,034)(A) -- -------- ---------- --------- ---------- Total expenses.......... 582,275 1,867,935 (527,484) 1,922,726 -------- ---------- --------- ---------- Loss before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests............... (24,846) (10,794) -- (35,640) Equity in earnings of unconsolidated subsidiaries........... 2,096 (3,407) 5,826 (D) 4,515 -------- ---------- --------- ---------- Loss before income tax provision and minority interests............... (22,750) (14,201) 5,826 (31,125) Income tax provision.... (1,045) (1,048) -- (2,093) -------- ---------- --------- ---------- Income (loss) before minority interests...... (23,795) (15,249) 5,826 (33,218) Minority interests in the Patriot Partnerships........... (232) 1,113 -- 881 Minority interest in consolidated subsidiaries .......... (4,768) 2,122 (5,826)(D) (8,472) -------- ---------- --------- ---------- Net loss applicable to common shareholders..... $(28,795) $ (12,014) $ -- $ (40,809) ======== ========== ========= ========== Net loss per common Paired Share(E)......... $ (0.21) $ (0.09) $ (0.30) ======== ========== ==========
- -------- (A) Represents the elimination of participating lease revenue and expense related to those hotel properties leased by Patriot REIT to Wyndham International. (B) Represents the elimination of rental income and expense related to the Racecourse facility, land leased and the hotels sub-leased by Patriot REIT to Wyndham International. (C) The pro forma adjustments represent the elimination of $1,170 of interest income and expense related to a note receivable issued to Old Patriot REIT in connection with the sale of certain assets to PAH RSI Lessee, which assets are assumed to be acquired by Patriot Operating Company, the elimination of $4,712 of interest income and expense related to the Subscription Notes issued to Patriot Operating Company in connection with the subscription for shares of Patriot Operating Company Common Stock and Patriot Operating Company Partnership OP Units issued in connection with the Cal Jockey Merger and the elimination of $34 of other intercompany income and expense items. (D) Represents the elimination of equity in losses of the New Non-Controlled Subsidiaries and the Patriot/IHC Non-Controlled Subsidiaries. (E) Pro forma earnings per share is computed based on 139,598 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of preferred stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be a net loss of $0.30 per Paired Share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-68 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
WYNDHAM PATRIOT REIT INTERNATIONAL PRO FORMA PRO FORMA PRO FORMA ELIMINATIONS TOTAL ------------- ------------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue............... $376,299 $ -- $ (348,932)(A) $ 27,367 Hotel revenue.......... -- 1,368,550 -- 1,368,550 Racecourse facility revenue, hotel and land lease revenue.... 92,336 33,399 (92,078)(B) 33,657 Management fee, service fee and reimbursement income................ -- 87,715 -- 87,715 Interest and other income................ 4,043 11,738 (2,306)(C) 13,475 -------- ---------- ---------- --------- Total revenue.......... 472,678 1,501,402 (443,316) 1,530,764 -------- ---------- ---------- --------- Expenses: Departmental costs-- hotel operations...... -- 525,457 -- 525,457 Racecourse facility operations............ -- 30,114 (3,246)(B) 26,868 Direct operating costs of management company, service department, and reimbursement expenses.............. -- 59,138 -- 59,138 General and administrative........ 7,137 145,137 (24)(C) 152,250 Ground lease and hotel lease expense......... 90,828 93,181 (88,832)(B) 95,177 Repair and maintenance........... -- 60,241 -- 60,241 Utilities.............. -- 53,539 -- 53,539 Interest expense....... 174,063 3,291 (2,282)(C) 175,072 Real estate and personal property taxes and casualty insurance............. 43,469 2,027 -- 45,496 Marketing.............. -- 108,417 -- 108,417 Management fees........ -- 15,174 -- 15,174 Depreciation and amortization.......... 138,430 45,996 -- 184,426 Participating lease payments.............. -- 348,932 (348,932)(A) -- -------- ---------- ---------- --------- Total expenses......... 453,927 1,490,644 (443,316) 1,501,255 -------- ---------- ---------- --------- Income before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests.... 18,751 10,758 -- 29,509 Equity in earnings of unconsolidated subsidiaries.......... 4,650 417 (42)(D) 5,025 -------- ---------- ---------- --------- Income before income tax provision and minority interests.............. 23,401 11,175 (42) 34,534 Income tax (provision) benefit............... (781) (7,449) -- (8,230) -------- ---------- ---------- --------- Income before minority interests.............. 22,620 3,726 (42) 26,304 Minority interests in the Patriot Partnerships.......... (2,485) (35) -- (2,520) Minority interest in consolidated subsidiaries.......... (4,159) (3,315) 42 (D) (7,432) -------- ---------- ---------- --------- Net income applicable to common shareholders.... $ 15,976 $ 376 $ -- $ 16,352 (E) ======== ========== ========== ========= Net income per common Paired Share........... $ 0.11 $ 0.00 $ 0.11 (E) ======== ========== =========
- -------- (A) Represents elimination of participating lease revenue and expense related to those hotel properties leased by Patriot REIT to Wyndham International. (B) Represents elimination of rental income and expense related to the Racecourse facility, land leased and the hotels sub-leased by Patriot REIT to Wyndham International. (C) Represents primarily the elimination of $832 of interest income and expense related to a note receivable issued to Old Patriot REIT in connection with the sale of certain assets to PAH RSI Lessee, which assets are assumed to be acquired by Patriot Operating Company, the elimination of $1,450 of interest income and expense related to the Subscription Notes issued to Patriot Operating Company in connection with the subscription for shares of Patriot Operating Company Common Stock and Patriot Operating Company Partnership OP Units issued in connection with the Cal Jockey Merger, and the elimination of $24 of other intercompany income and expense items. (D) Represents the elimination of equity in income of the New Non-Controlled Subsidiaries and the Patriot/IHC Non-Controlled Subsidiaries. (E) Pro forma earnings per share is computed based on 140,229 weighted average common Paired Shares and common Paired Share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of preferred stock into Paired Shares. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be $0.11 per Paired Share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-69 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following unaudited Pro Forma Condensed Combined Balance Sheet is presented as if the Patriot/IHC Merger and the Buena Vista Acquisition had occurred as of September 30, 1997. The Pro Forma Condensed Combined Balance Sheet is derived from the Patriot REIT and Wyndham International Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 included elsewhere herein. Such pro forma information is based in part upon the Consolidated Balance Sheets of IHC and Wyndham as of September 30, 1997 which are included elsewhere herein. This pro forma information is also based in part upon Patriot REIT's and Patriot Operating Company's Combined Balance Sheet as of September 30, 1997 filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the nine months ended September 30, 1997 and such information should also be read in conjunction with the financial statements filed in IHC's, Wyndham's, and WHG's respective Quarterly Reports on Form 10-Q for the period ended September 30, 1997 all of which are incorporated by reference herein. In management's opinion, all material adjustments necessary to reflect the effect of these transactions have been made. The accompanying Pro Forma Condensed Combined Balance Sheet reflects adjustments to record the net assets of IHC at their estimated fair market values and the elimination of IHC's historical shareholders' equity. The fair market values of the assets and liabilities of IHC have been determined based upon preliminary estimates and are subject to change as additional information is obtained. Management does not anticipate that the preliminary allocation of purchase costs based upon the estimated fair market values of the assets and liabilities of IHC will materially change; however, the allocations of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value as of the close of the transaction. Therefore, the allocations reflected in the following unaudited Pro Forma Condensed Combined Balance Sheet may differ from the amounts ultimately determined. The following unaudited Pro Forma Condensed Combined Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of September 30, 1997, nor does it purport to represent the future financial position of Patriot REIT and Wyndham International as adjusted for the Patriot/IHC Merger and the Buena Vista Acquisition. F-70 PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PATRIOT REIT AND WYNDHAM BUENA INTERNATIONAL VISTA PATRIOT/IHC PRO FORMA ACQUISITION IHC MERGER PRO FORMA TOTAL(A) PRO FORMA(B) HISTORICAL(C) ADJUSTMENTS(D) TOTAL ------------- ------------ ------------- -------------- ---------- ASSETS Net investment in real estate and related improvements........... $2,514,216 $145,720 $1,140,291 $760,208 (E) $4,560,435 Mortgage notes and other receivables from unconsolidated subsidiaries........... 116,092 -- -- -- 116,092 Notes and other receivables from affiliates............. 24,800 -- -- -- 24,800 Notes receivable........ 17,844 -- 5,184 (5,184)(F) 17,844 Investment in unconsolidated subsidiaries........... 24,545 -- 24,518 -- 49,063 Cash and cash equivalents............ 55,275 1,064 31,924 -- 88,263 Restricted cash......... 39,132 5,222 7,745 -- 52,099 Accounts receivable, net.................... 57,676 3,895 48,653 -- 110,224 Goodwill................ 476,790 -- 21,501 123,911 (G) 622,202 Deferred expenses, net.. 24,663 2,787 13,979 8,512 (H) 49,941 Deferred acquisition costs.................. 39,970 (23,750) -- -- 16,220 Management contract and leasehold costs........ 153,813 -- 28,344 101,987 (I) 284,144 Trade name and franchise costs.................. 93,050 -- -- -- 93,050 Prepaid expenses and other assets........... 59,101 769 25,831 -- 85,701 Deferred income taxes... 1,496 -- 2,283 -- 3,779 ---------- -------- ---------- -------- ---------- Total assets........... $3,698,463 $135,707 $1,350,253 $989,434 $6,173,857 ========== ======== ========== ======== ========== LIABILITIES AND SHARE- HOLDERS' EQUITY Borrowings under a line of credit and mortgage notes.................. $1,495,274 $123,423 $775,504 $434,124 (J) $2,828,325 Notes and other liabilities............ 5,032 279 -- -- 5,311 Accounts payable and accrued expenses....... 107,337 7,904 98,613 -- 213,854 Dividends and distributions payable.. 21,727 -- -- -- 21,727 Sales taxes payable..... 2,968 -- -- -- 2,968 Deferred income tax liability.............. 78,617 -- 13,878 13,460(K) 105,955 Deposits................ 4,033 2,023 -- -- 6,056 Deferred gain........... -- -- -- -- -- Due to unconsolidated subsidiaries........... 5,904 -- -- -- 5,904 Minority interests in the Patriot Partnerships........... 264,862 2,078 -- -- 266,940 Minority interest in consolidated subsidiaries........... 52,522 -- 17,141 -- 69,663 Shareholders' equity: Preferred stock........ 44 -- -- -- 44 Common stock........... 2,006 -- 354 287 (L) 2,647 Paid-in capital........ 1,807,850 -- 411,644 574,682 (M) 2,794,176 Unearned stock compen- sation, net........... (15,075) -- (813) 813 (M) (15,075) Notes receivable from stockholders.......... (17,138) -- -- -- (17,138) Receivable from affili- ates.................. (1,229) -- -- -- (1,229) Retained earnings...... (116,271) -- 33,932 (33,932) (M) (116,271) ---------- -------- ---------- -------- ---------- Total shareholders' eq- uity.................. 1,660,187 -- 445,117 541,850 (M) 2,647,154 ---------- -------- ---------- -------- ---------- Total liabilities and shareholders' equity.. $3,698,463 $135,707 $1,350,253 $989,434 $6,173,857 ========== ======== ========== ======== ==========
See notes on following page. F-71 PATRIOT REIT AND WYNDHAM INTERNATIONAL, ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION NOTES TO PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (A) Represents the pro forma combined balance sheet of Patriot REIT and Patriot Operating Company as of September 30, 1997 as adjusted for the Wyndham Transactions and WHG Merger. See page F-60. (B) Represents adjustments to Patriot REIT and Wyndham International's combined balance sheet assuming the Buena Vista Acquisition had occurred on September 30, 1997. (C) Represents the historical balance sheet of IHC as of September 30, 1997. (D) Represents adjustments to Patriot REIT and Wyndham International's Combined balance sheet as adjusted for the Patriot/IHC Merger. (E) Represents adjustments for the purchase method of accounting whereby the investments in hotel properties owned by IHC are adjusted to record the assets at their estimated fair market values. (F) Represents adjustment to eliminate notes receivable from officers which are to be extinguished prior to the Patriot/IHC Merger. (G) Represents the purchase consideration in excess of the fair market value of the net assets of IHC. (H) Represents an increase in deferred loan costs expected to be incurred in connection with an increase in the Revolving Credit Facility to finance the cash portion of the purchase price and Patriot/IHC Merger related costs. (I) Represents adjustments for the purchase method of accounting whereby the third-party management contracts and leaseholds held by IHC are adjusted to their estimated fair market value. The management contracts have an average remaining life of approximately 5 years. The leaseholds have an average remaining life of 14 years. (J) Represents additional borrowings assumed to be incurred in connection with the Patriot/IHC Merger as follows: Cash required to finance the acquisition of 40% of the IHC Out- standing Shares at $37.50 per share............................. $ 531,312 Less: Net proceeds from concurrent public offering (see Note L).. (190,000) --------- Cash required to finance stock purchase.......................... 341,312 Estimated transaction costs...................................... 30,000 Buyout of IHC options............................................ 24,300 Estimated severance costs........................................ 30,000 Additional loan costs............................................ 8,512 --------- Total cash requirements......................................... $ 434,124 =========
In addition, immediately following the Patriot/IHC Merger, the shareholders of IHC and Patriot REIT will receive a special dividend in order to distribute the current and accumulated earnings and profits of IHC and Patriot REIT through the date of the Patriot/IHC Merger. (K) Represents adjustments to eliminate $11,800 of the deferred tax liability of IHC which is associated with timing differences related to depreciation of real property which will be owned by Patriot REIT following the Patriot/IHC Merger offset by an increase in the deferred tax liability of $25,260 related to purchased management contracts. (L) Represents adjustments to record the exchange of IHC Common Stock for Paired Shares. Pursuant to the Patriot/IHC Merger Agreement, IHC Stockholders may elect to receive for each share of IHC Common Stock held by them, either (i) cash for shares equal to $37.50 per share; or (ii) Paired Shares, for which the exchange ratio is determined by dividing $37.50 by the average closing price for a Paired Share as reported on the NYSE over the 20 consecutive trading day period ending on the trading day immediately preceding the fifth trading day prior to the date on which the shareholder meeting is held (subject to certain adjustments). The Patriot/IHC Merger Agreement also provides for purchase of 40% of the IHC Outstanding Shares for cash, with the remainder in Paired Shares. At September 30, 1997, there were 35,421 shares of IHC Common Stock outstanding. Assuming 40% of the IHC Outstanding Shares are tendered for cash, the remaining 21,253 shares will be exchanged for 25,621 Paired Shares (based upon the average closing price of the Paired Shares for the trading 20 days ended November 26, 1997 of $31.106). In addition, the Patriot Companies have received a forward commitment from PaineWebber and UBS to place $200,000 of Paired Shares concurrent with the Patriot/IHC Merger. Assuming the Paired Shares were offered at the average closing price of the Paired Shares for the trading 20 days ended November 26, 1997 of $31.106, an additional 6,430 Paired Shares will be outstanding following the Patriot/IHC Merger. The increase in common stock is summarized as follows: Paired Shares exchanged in Patriot/IHC Merger........................ 25,621 Paired Shares offered in concurrent offering......................... 6,430 ====== Increase in Paired Shares............................................ 32,051 Par value of each Paired Share....................................... $ 0.02 ====== Increase in common stock............................................. $ 641 Less: IHC historical common stock.................................... (354) ------ Adjustment to common stock........................................ $ 287 ======
F-72 (M) Represents adjustments to shareholders' equity to eliminate IHC's historical equity accounts and record equity based upon the number of Paired Shares issued in the Patriot/IHC Merger and the concurrent public offering of Paired Shares as follows: Purchase consideration for IHC Outstanding Shares (35,421 shares of IHC Common Stock at $37.50 per share)....................... $1,328,279 Less: IHC Common Stock to be purchased for cash................. (531,312) ---------- Purchase consideration for shares............................... 796,967 Net proceeds from concurrent offering........................... 190,000 Book value of IHC paid-in capital............................... (411,644) Adjustment to common stock...................................... (641) ---------- Adjustment to Paid-in Capital.................................. $ 574,682 ---------- Elimination of IHC historical retained earnings................. (33,932) Adjustment to unearned stock compensation....................... 813 Adjustment to common stock...................................... 287 ---------- Adjustment to shareholders' equity............................. $ 541,850 ==========
F-73 PATRIOT REIT ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PATRIOT BUENA REIT VISTA PATRIOT/IHC PRO FORMA ACQUISITION MERGER PRO FORMA TOTAL(A) PRO FORMA(B) ADJUSTMENTS(C) TOTAL --------- ------------ -------------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue............... $279,948 $22,434 $151,382 (D) $453,764 Racecourse facility, hotel and land lease revenue............... 17,714 -- 83,154 (E) 100,868 Interest and other income................ 2,797 -- -- 2,797 -------- ------- -------- -------- Total revenue.......... 300,459 22,434 234,536 557,429 -------- ------- -------- -------- Expenses: Ground lease and hotel lease expense......... 16,824 -- 82,746 (F) 99,570 General and administrative........ 7,097 -- -- 7,097 Interest expense....... 124,637 10,543 (G) 99,702 (G) 234,882 Real estate and personal property taxes and casualty insurance............. 34,542 2,543 19,764 (H) 56,849 Depreciation and amortization.......... 93,775 5,692 84,410 (I) 183,877 -------- ------- -------- -------- Total expenses......... 276,875 18,778 286,622 582,275 -------- ------- -------- -------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests..... 23,584 3,656 (52,086) (24,846) Equity in earnings (losses) of unconsolidated subsidiaries.......... 2,877 -- (781)(J) 2,096 -------- ------- -------- -------- Income (loss) before income tax provision and minority interests.............. 26,461 3,656 (52,867) (22,750) Income tax provision... (345) -- (700)(K) (1,045) -------- ------- -------- -------- Income (loss) before mi- nority interests....... 26,116 3,656 (53,567) (23,795) Minority interest in the Patriot REIT Part- nership............... (2,428) -- 2,196 (L) (232) Minority interest in consolidated subsidi- aries................. (1,832) (183) (2,753)(M) (4,768) -------- ------- -------- -------- Net income (loss) applicable to common shareholders .......... $ 21,856 $ 3,473 $(54,124) $(28,795)(N) ======== ======= ======== ======== Net income (loss) per common share........... $ 0.20 $ (0.21)(N) ======== ========
- -------- (A) Represents the pro forma results of operations of Patriot REIT for the year ended December 31, 1996 as adjusted for the Wyndham Transactions and WHG Merger. See page F-57. (B) Represents adjustments to Patriot REIT's results of operations assuming the Buena Vista Acquisition had occurred as of January 1, 1996. (C) Represents adjustments to Patriot REIT's results of operations assuming the Patriot/IHC Merger had occurred as of January 1, 1996. (D) Represents pro forma lease payments from Wyndham International to Patriot REIT for the 40 hotels Patriot REIT will own subsequent to the Patriot/IHC Merger, based upon the historical revenue for the hotels for the period presented. (E) Represents pro forma hotel lease payments from Wyndham International to Patriot REIT for the 88 hotels leased by IHC at September 30, 1997 that Patriot REIT will sublease to Wyndham International subsequent to the Patriot/IHC Merger, based upon the historical revenue of the hotels for the period presented. (F) Represents ground lease expense of $1,602 related to certain of the hotels acquired by Patriot REIT in the Patriot/IHC Merger and hotel lease expense of $81,144 related to the 88 hotels leased from third-party owners that Patriot REIT will sublease to Wyndham International subsequent to the Patriot/IHC Merger. (G) For the Buena Vista Acquisition, the adjustment represents interest expense on debt assumed and interest expense incurred on additional borrowings under the Revolving Credit Facility, which will be used to purchase the hotel. For the Patriot/IHC Merger, the adjustment represents interest expense of $59,086 on approximately $775,504 of IHC debt assumed in connection with the transaction, interest expense of $32,486 incurred on borrowings which will be used to finance a portion of the Patriot/IHC Merger, and amortization of deferred loan costs of $6,191. Amount also represents an adjustment of $1,939 to reflect an increase in the interest rate charged on borrowings under the Revolving Credit Facility and Term Loan (to LIBOR plus 2%) based on Patriot REIT's estimated leverage ratio following the Patriot/IHC Merger. The deferred loan costs incurred on the new borrowings are being amortized over the term of the loan. Interest expense on the Revolving Credit Facility and Term Loan assumes an average interest rate of 7.483% (LIBOR plus 2%). An increase of 0.25% in the interest rate F-74 would increase pro forma interest expense to $239,381, increase net loss applicable to common shareholders to $33,140 and increase net loss per common share to $0.24, based on 139,598 weighted average common shares and common share equivalents outstanding. (H) Represents real estate and personal property taxes and casualty insurance related to the 40 IHC owned hotels which will be paid by Patriot REIT following the Patriot/IHC Merger. (I) Represents adjustment to increase depreciation of the real estate and amortization of the cost of leaseholds acquired in the Patriot/IHC Merger. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for buildings and improvements and 5 to 7 years for F, F&E. These estimates are based upon management's knowledge of the properties and the hotel industry in general. Leasehold costs are amortized on a straight-line basis over the remaining term of the lease. (J) Represents Patriot REIT's share of the earnings of the Patriot/IHC Non- Controlled Subsidiaries which will own the management contracts and hotel management business and will be controlled by Wyndham International following the Patriot/IHC Merger. (K) Represents provision for Patriot REIT's estimated state tax liability. (L) Represents adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Buena Vista Acquisition and Patriot/IHC Merger of approximately 10%. The estimated minority interest percentage prior to the Buena Vista Acquisition and Patriot/IHC Merger is also approximately 10%. (M) Represents the minority interest in income of consolidated entities which will be acquired by Patriot REIT in connection with the Patriot/IHC Merger. (N) Pro forma earnings per share is computed based on 139,598 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of preferred stock into Paired Shares of common stock. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be a net loss of $0.21 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-75 PATRIOT REIT ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PATRIOT REIT BUENA VISTA PATRIOT/IHC PRO FORMA ACQUISITION MERGER PRO FORMA TOTAL(A) PRO FORMA(B) ADJUSTMENTS(C) TOTAL --------- ------------ -------------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue: Participating lease revenue............... $229,977 $19,348 $126,974 (D) $376,299 Racecourse facility, hotel and land lease revenue .............. 19,759 -- 72,577 (E) 92,336 Interest and other income................ 4,043 -- -- 4,043 -------- ------- -------- -------- Total revenue.......... 253,779 19,348 199,551 472,678 -------- ------- -------- -------- Expenses: Ground lease and hotel lease expense......... 20,017 -- 70,811 (F) 90,828 General and administrative........ 7,137 -- -- 7,137 Interest expense....... 94,414 8,082 (G) 71,567 (G) 174,063 Real estate and personal property taxes and casualty insurance............. 27,066 1,914 14,489 (H) 43,469 Depreciation and amortization.......... 70,854 4,269 63,307 (I) 138,430 -------- ------- -------- -------- Total expenses......... 219,488 14,265 220,174 453,927 -------- ------- -------- -------- Income (loss) before equity in earnings of unconsolidated subsidiaries, income tax provision and minority interests..... 34,291 5,083 (20,623) 18,751 Equity in earnings (losses) of unconsolidated subsidiaries.......... 6,027 -- (1,377)(J) 4,650 -------- ------- -------- -------- Income (loss) before income tax provision and minority interests.............. 40,318 5,083 (22,000) 23,401 Income tax provision... (256) -- (525)(K) (781) -------- ------- -------- -------- Income (loss) before mi- nority interests....... 40,062 5,083 (22,525) 22,620 Minority interest in the Patriot REIT Partnership........... (3,819) -- 1,334 (L) (2,485) Minority interest in consolidated subsidi- aries................. (1,869) (254) (2,036)(M) (4,159) -------- ------- -------- -------- Net income (loss) applicable to common shareholders........... $ 34,374 $ 4,829 $(23,227) $ 15,976 (N) ======== ======= ======== ======== Net income per common share.................. $ 0.31 $ 0.11 (N) ======== ========
- -------- (A) Represents the pro forma results of operations of Patriot REIT for the nine months ended September 30, 1997 as adjusted for the Wyndham Transactions and WHG Merger. See page F-58. (B) Represents adjustments to Patriot REIT's results of operations assuming the Buena Vista Acquisition had occurred as of January 1, 1996. (C) Represents adjustments to Patriot REIT's results of operations assuming the Patriot/IHC Merger had occurred as of January 1, 1996. (D) Represents pro forma lease payments from Wyndham International to Patriot REIT for the 40 hotels Patriot REIT will own subsequent to the Patriot/IHC Merger, based upon the historical revenue for the hotels for the period presented. (E) Represents pro forma hotel lease payments from Wyndham International to Patriot REIT for the 88 hotels leased by IHC at September 30, 1997 that Patriot REIT will sublease to Wyndham International subsequent to the Patriot/IHC Merger, based upon the historical revenue of the hotels for the period presented. (F) Represents ground lease expense of $1,138 related to certain of the hotels acquired by Patriot REIT in the Patriot/IHC Merger and hotel lease expense of $69,673 related to the 88 hotels leased from third-party owners that Patriot REIT will sublease to Wyndham International subsequent to the Patriot/IHC Merger. (G) For the Buena Vista Acquisition, the adjustment represents interest expense on debt assumed and interest expense incurred on additional borrowings under the Revolving Credit Facility, which will be used to purchase the hotel. For the Patriot/IHC Merger, the adjustment represents interest expense of $40,657 on approximately $775,504 of IHC debt assumed in connection with the transaction, interest expense of $24,754 incurred on borrowings which will be used to finance a portion of the Patriot/ IHC Merger, and amortization of deferred loan costs of $4,666. Amount also represents an adjustment of $1,490 to reflect an increase in the interest rate charged on borrowings under the Revolving Credit Facility and Term Loan (to LIBOR plus 2%) based on Patriot REIT's estimated leverage ratio following the Patriot/IHC Merger. The deferred loan costs incurred on the new borrowings are being amortized over the term of the loan. Interest expense on the Revolving Credit Facility and Term Loan assumes an average interest rate of 7.603% (LIBOR plus 2%). An increase of 0.25% in the interest rate F-76 would increase pro forma interest expense to $177,501, decrease net income applicable to common shareholders to $12,655 and decrease net income per common share to $0.09, based on 140,229 weighted average common shares and common share equivalents outstanding. (H) Represents real estate and personal property taxes and casualty insurance related to the 40 IHC owned hotels which will be paid by Patriot REIT following the Patriot/IHC Merger. (I) Represents adjustment to increase depreciation of the real estate and amortization of the cost of leaseholds acquired in the Patriot/IHC Merger. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for buildings and improvements and 5 to 7 years for F, F&E. These estimates are based upon management's knowledge of the properties and the hotel industry in general. Leasehold costs are amortized on a straight-line basis over the remaining term of the lease. (J) Represents Patriot REIT's share of the earnings of the Patriot/IHC Non- Controlled Subsidiaries which will own the management contracts and hotel management business and will be controlled by Wyndham International following the Patriot/IHC Merger. (K) Represents provision for Patriot REIT's estimated state tax liability. (L) Represents adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Buena Vista Acquisition and Patriot/IHC Merger of approximately 10%. The estimated minority interest percentage prior to the Buena Vista Acquisition and Patriot/IHC Merger is also approximately 10%. (M) Represents the minority interest in income of consolidated entities which will be acquired by Patriot REIT in connection with the Patriot/IHC Merger. (N) Pro forma earnings per share is computed based on 140,229 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of preferred stock into Paired Shares of common stock. In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be $0.12 per common share. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-77 WYNDHAM INTERNATIONAL ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
ADJUSTMENTS WYNDHAM ------------------------------------------ INTERNATIONAL BUENA VISTA PATRIOT/IHC PRO FORMA ACQUISITION IHC MERGER PRO FORMA TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS(D) TOTAL ------------- ------------ ------------ -------------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Room revenue........... $ 572,417 $38,089 $490,330 $ -- $1,100,836 Other hotel revenue.... 359,142 24,402 201,834 -- 585,378 Racecourse facility revenue............... 51,946 -- -- -- 51,946 Management fee, service fee and reimbursement income................ 62,221 -- 40,758 -- 102,979 Interest and other income................ 14,346 -- 1,656 -- 16,002 ---------- ------- -------- -------- ---------- Total revenue.......... 1,060,072 62,491 734,578 -- 1,857,141 ---------- ------- -------- -------- ---------- Expenses: Departmental costs-- hotel, club and spa operations............ 403,122 25,927 253,402 -- 682,451 Racecourse facility operations............ 46,351 -- -- -- 46,351 Direct operating costs of management company, service department and reimbursement expenses.............. 47,564 -- 18,894 -- 66,458 General and administrative........ 110,110 4,313 70,069 -- 184,492 Ground lease and hotel lease expense ........ 12,502 4,607 1,602 81,552 (E) 100,263 Repair and maintenance........... 41,991 2,318 31,240 -- 75,549 Utilities.............. 36,834 2,522 29,179 -- 68,535 Marketing.............. 73,533 3,681 64,394 (5,528)(F) 136,080 Management fees........ 9,469 1,677 661 3,993 (G) 15,800 Depreciation and amortization.......... 40,943 -- 48,024 (26,015)(H) 62,952 Participating lease payments.............. 247,218 22,434 81,144 (I) 70,238 (I) 421,034 Interest expense....... 4,866 -- 59,086 (59,086)(J) 4,866 Real estate and personal property taxes and insurance... 847 -- 22,021 (19,764)(J) 3,104 ---------- ------- -------- -------- ---------- Total expenses......... 1,075,350 67,479 679,716 45,390 1,867,935 ---------- ------- -------- -------- ---------- Income (loss) before eq- uity earnings of uncon- solidated subsidiaries income tax provision, and minority interests.............. (15,278) (4,988) 54,862 (45,390) (10,794) Equity in earnings of unconsolidated subsidi- aries.................. (3,407) -- -- -- (3,407) ---------- ------- -------- -------- ---------- Income (loss) before income tax provision and minority interests.............. (18,685) (4,988) 54,862 (45,390) (14,201) Income tax (provision) benefit............... 4,647 -- (19,801) 14,106 (K) (1,048) ---------- ------- -------- -------- ---------- Income (loss) before mi- nority interests....... (14,038) (4,988) 35,061 (31,284) (15,249) Minority interest in the Patriot Operating Company Partnership... 1,359 -- -- (246)(L) 1,113 Minority interest in consolidated subsidiaries.......... 1,341 -- (2,753) 3,534 (M) 2,122 ---------- ------- -------- -------- ---------- Net income (loss) applicable to common shareholders........... $ (11,338) $(4,988) $ 32,308 $(27,996) $ (12,014)(N) ========== ======= ======== ======== ========== Net loss per common share.................. $ (0.11) $ (0.09) (N) ========== ==========
See notes on following page. F-78 WYNDHAM INTERNATIONAL, ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (A) Represents the pro forma results of operations of Patriot Operating Company for the year ended December 31, 1996 as adjusted for the Wyndham Transactions and WHG Merger. See page F-62. (B) Represents adjustments to Wyndham International's results of operations assuming the Buena Vista had been acquired on January 1, 1996. (C) Represents the pro forma results of operations of IHC for the year ended December 31, 1996 prior to the Patriot/IHC Merger. See page . (D) Represents adjustments to Wyndham International's results of operations assuming the Patriot/IHC Merger had occurred as of January 1, 1996. (E) Represents the following adjustments to pro forma ground lease and hotel lease expense: Eliminate ground lease expense which will be paid by Patriot REIT subsequent to the Patriot/IHC Merger...................... $(1,602) Reclassification of hotel lease expense for financial statement presentation purposes related to the 88 hotels IHC leased from third-party owners at September 30, 1997. Subsequent to the Patriot/IHC Merger, these hotels will be sub-leased by Patriot REIT to Wyndham International (see Note I)..................... 81,144 Incremental hotel lease expense related to the sub-lease of the 88 hotels by Patriot REIT to Wyndham International............. 2,010 ------- $81,552 =======
(F) Represents the historical costs of IHC franchise fee payments related to franchise agreements for ten Marriott International, Inc. hotels which are assumed to be terminated concurrently with the Patriot/IHC Merger. (G) Represents additional management fees to be incurred by IHC pursuant to new management agreements with Marriott International, Inc., which are assumed to be executed concurrently with the Patriot/IHC Merger. (H) Represents an adjustment of $45,887 to allocate the IHC pro forma depreciation and amortization related to real estate to Patriot REIT, partially offset by an increase of $19,872 in amortization expense related to amortization of goodwill and management contracts. The goodwill related to the management business is amortized on a straight-line basis over an estimated useful life of 20 years. Management contracts are amortized on a straight-line basis over their estimated remaining lives of 5 years. (I) The participating lease payment amount of $81,144 reflected in the IHC Pro Forma Statement of Operations represents hotel lease payments made to third parties in connection with the 88 leaseholds held by IHC as of September 30, 1997. Following the Patriot/IHC Merger, Patriot REIT will sublease these hotel leaseholds to Wyndham International. The pro forma adjustment of $70,238 is composed of the following adjustments: Pro forma participating lease payments related to the 40 owned hotels leased by Patriot REIT to Wyndham International subsequent to the Patriot/IHC Merger.......................... $151,382 Reclassification of hotel lease expense for financial statement presentation purposes related to the 88 hotels IHC leased from third-party owners at September 30, 1997. Subsequent to the Patriot/IHC Merger, these hotels will be sub-leased by Patriot REIT to Wyndham International (see Note E).................... (81,144) -------- $ 70,238 ========
(J) Represents adjustments to the IHC pro forma results of operations to eliminate interest expense and real estate and personal property taxes and casualty insurance to be paid by Patriot REIT subsequent to the Patriot/IHC Merger. (K) Represents an adjustment to the IHC pro forma tax expense to reflect the tax provision based upon Wyndham International's pro forma taxable income following the Patriot/IHC Merger. (L) Represents the adjustment to minority interest to reflect the estimated minority interest percentage subsequent to the Patriot/IHC Merger to 8.48%. (M) Represents an adjustment of $2,753 to eliminate the IHC pro forma minority interest in certain consolidated subsidiaries which will be owned by Patriot REIT following the Patriot/IHC Merger, and an adjustment of $781 to reflect Patriot REIT's allocation of losses from the Patriot/IHC Non- Controlled subsidiaries. (N) Pro forma earnings per share subsequent to the Patriot/IHC Merger is computed based on 139,598 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculation includes adjustments to reflect the impact of the conversion of preferred stock into Paired Shares. In February 1997, the Financing Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the year ended December 31, 1996 would be a net loss of $0.09. The impact of Statement 128 on the calculation of diluted earnings per share is not expected to differ significantly from the earnings per share amounts reported. F-79 WYNDHAM INTERNATIONAL ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
ADJUSTMENTS WYNDHAM ------------------------------------------ INTERNATIONAL BUENA VISTA PATRIOT/IHC PRO FORMA ACQUISITION IHC MERGER PRO FORMA TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS(D) TOTAL ------------- ------------ ------------ -------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Room revenue........... $478,793 $31,573 $400,419 $ -- $ 910,785 Other hotel revenue.... 284,823 20,610 152,332 -- 457,765 Racecourse facility revenue............... 33,399 -- -- -- 33,399 Management fee, service fee and reimbursement income................ 56,838 -- 30,877 -- 87,715 Interest and other income................ 10,524 -- 1,214 -- 11,738 -------- ------- -------- -------- --------- Total revenue.......... 864,377 52,183 584,842 -- 1,501,402 -------- ------- -------- -------- --------- Expenses: Departmental costs-- hotel, club and spa operations............ 307,597 21,294 196,566 -- 525,457 Racecourse facility operations............ 30,114 -- -- -- 30,114 Direct operating costs of management company, service department and reimbursement expenses.............. 43,427 -- 15,711 -- 59,138 General and administrative........ 87,322 3,267 54,548 -- 145,137 Ground lease and hotel lease expense ........ 16,778 3,826 1,138 71,439 (E) 93,181 Repair and maintenance........... 34,512 2,239 23,490 -- 60,241 Utilities.............. 29,841 1,802 21,896 -- 53,539 Marketing.............. 61,334 2,529 48,962 (4,408)(F) 108,417 Management fees........ 9,657 1,464 765 3,288 (G) 15,174 Depreciation and amortization.......... 29,489 -- 34,179 (17,672)(H) 45,996 Participating lease payments.............. 202,610 19,348 69,673 (I) 57,301 (I) 348,932 Interest expense....... 3,291 -- 40,657 (40,657)(J) 3,291 Real estate and personal property taxes and insurance... 290 -- 16,226 (14,489)(J) 2,027 -------- ------- -------- -------- --------- Total expenses......... 856,262 55,769 523,811 54,802 1,490,644 -------- ------- -------- -------- --------- Income (loss) before eq- uity earnings of uncon- solidated subsidiaries income tax provision, and minority interests.............. 8,115 (3,586) 61,031 (54,802) 10,758 Equity in earnings of unconsolidated subsidi- aries.................. 417 -- -- -- 417 -------- ------- -------- -------- --------- Income (loss) before income tax provision and minority interests.............. 8,532 (3,586) 61,031 (54,802) 11,175 Income tax (provision) benefit............... (3,477) -- (22,418)(K) 18,446 (K) (7,449) -------- ------- -------- -------- --------- Income (loss) before mi- nority interests....... 5,055 (3,586) 38,613 (36,356) 3,726 Minority interest in the Patriot Operating Company Partnership... (39) -- -- 4 (L) (35) Minority interest in consolidated subsidiaries.......... (4,692) -- (2,036) 3,413 (M) (3,315) -------- ------- -------- -------- --------- Net income (loss) applicable to common shareholders........... $ 324 $(3,586) $ 36,577 $(32,939) $ 376 (N) ======== ======= ======== ======== ========= Net income per common share.................. $ 0.01 $ 0.00 (N) ======== =========
See notes on following page. F-80 WYNDHAM INTERNATIONAL, ADJUSTED FOR THE PATRIOT/ICH MERGER AND BUENA VISTA ACQUISITION NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (A) Represents the pro forma results of operations of Patriot Operating Company for the nine months ended September 30, 1997 as adjusted for the Wyndham Transactions and WHG Merger. See page F-63. (B) Represents adjustments to Wyndham International's results of operations assuming the Buena Vista had been acquired on January 1, 1996. (C) Represents the pro forma results of operations of IHC for the nine months ended September 30, 1997 prior to the Patriot/IHC Merger. See page . (D) Represents adjustments to Wyndham International's results of operations assuming the Patriot/IHC Merger had occurred as of January 1, 1996. (E) Represents the following adjustments to pro forma ground lease and hotel lease expense: Eliminate ground lease expense which will be paid by Patriot REIT subsequent to the Patriot/IHC merger...................... $(1,138) Reclassification of hotel lease expense for financial statement presentation purposes related to the 88 hotels IHC leased from third-party owners at September 30, 1997. Subsequent to the Patriot/IHC Merger, these hotels will be sub-leased by Patriot REIT to Wyndham International (see Note I)..................... 69,673 Incremental hotel lease expense related to the sub-lease of the 88 hotels by Patriot REIT to Wyndham International............. 2,904 ------- $71,439 =======
(F) Represents the historical costs of IHC franchise fee payments related to franchise agreements for ten Marriott International, Inc. hotels which are assumed to be terminated concurrently with the Patriot/IHC Merger. (G) Represents additional management fees to be incurred by IHC pursuant to new management agreements with Marriott International, Inc., which are assumed to be executed concurrently with the Patriot/IHC Merger. (H) Represents an adjustment of $32,943 to allocate the IHC pro forma depreciation and amortization related to real estate to Patriot REIT, partially offset by an increase of $15,271 in amortization expense related to amortization of goodwill and management contracts. The goodwill related to the management business is amortized on a straight-line basis over an estimated useful life of 20 years. Management contracts are amortized on a straight-line basis over their estimated remaining lives of 5 years. (I) The participating lease payment amount of $69,673 reflected in the IHC Pro Forma Statement of Operations represents hotel lease payments made to third parties in connection with the 88 leaseholds held by IHC as of September 30, 1997. Following the Patriot/IHC Merger, Patriot REIT will sublease these hotel leaseholds to Wyndham International. The pro forma adjustment of $57,301 is composed of the following adjustments: Pro forma participating lease payments related to the 40 owned hotels leased by Patriot REIT to Wyndham International subsequent to the Patriot/IHC Merger.......................... $126,974 Reclassification of hotel lease expense for financial statement presentation purposes related to the 88 hotels IHC leased from third-party owners at September 30, 1997. Subsequent to the Patriot/IHC Merger, these hotels will be sub-leased by Patriot REIT to Wyndham International (see Note E).................... (69,673) -------- $ 57,301 ========
(J) Represents adjustments to the IHC pro forma results of operations to eliminate interest expense and real estate and personal property taxes and casualty insurance to be paid by Patriot REIT subsequent to the Patriot/IHC Merger. (K) Represents an adjustment to the IHC pro forma tax expense to reflect the tax provision based upon Wyndham International's pro forma taxable income following the Patriot/IHC Merger. (L) Represents the adjustment to minority interest to reflect the estimated minority interest percentage subsequent to the Patriot/IHC Merger to 8.48% (M) Represents an adjustment of $2,036 to eliminate the IHC pro forma minority interest in certain consolidated subsidiaries which will be owned by Patriot REIT following the Patriot/IHC Merger, and an adjustment of $1,377 to reflect Patriot REIT's allocation of earnings from the Patriot/IHC Non- Controlled subsidiaries. (N) Pro forma earnings per share subsequent to the Patriot/IHC Merger is computed based on 140,229 weighted average common shares and common share equivalents outstanding for the period. The number of shares used for the calculations includes adjustments to reflect the impact of the conversion of preferred stock into Paired Shares. In February 1997, the Financing Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and convertible preferred securities will be excluded. Pro forma basic earnings per share for the nine months ended September 30, 1997 would be $0.00. The impact of Statement 128 on the calculation of diluted earnings per share is not expected is not expected to differ significantly from the earnings per share amounts reported. F-81 WYNDHAM HOTEL CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......................... $ 11,517 $ 14,819 Cash, restricted................................... 865 936 Accounts receivable, less allowance of $941 at December 31, 1996 and $2,063 at September 30, 1997............................. 13,330 15,682 Due from affiliates................................ 12,686 16,484 Inventories........................................ 1,430 1,887 Deferred income taxes.............................. 1,539 1,975 Other.............................................. 1,412 6,894 -------- -------- Total current assets............................. 42,779 58,677 Investment in hotel partnerships.................... 1,125 4,092 Notes and other receivables from affiliates......... 7,685 8,316 Notes receivable.................................... 6,307 1,931 Property and equipment, net......................... 134,176 290,391 Management contract costs, net...................... 7,766 10,119 Security deposits................................... 15,288 24,168 Deferred income taxes............................... 14,148 14,372 Other............................................... 13,688 17,376 Goodwill............................................ -- 20,857 -------- -------- Total assets..................................... $242,962 $450,299 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses.............. $ 23,556 $ 45,756 Deposits........................................... 959 1,652 Deposits from affiliates........................... 344 344 Current portion of long-term debt and capital lease obligations................................. 510 1,320 -------- -------- Total current liabilities........................ 25,369 49,072 -------- -------- Borrowings under revolving credit facility.......... -- 72,000 Long-term debt and capital lease obligations........ 129,944 155,666 Deferred income taxes............................... -- 20,970 Deferred gain....................................... 12,065 11,511 -------- -------- 142,009 260,147 -------- -------- Minority interest................................... -- 2,828 -------- -------- Stockholders' equity: Common stock....................................... 200 216 Additional paid-in capital......................... 84,342 133,137 Retained earnings.................................. 11,714 22,668 Receivables from affiliates........................ (1,223) (1,229) Notes receivable from stockholders................. (19,449) (17,138) Unrealized gain on securities available for sale... -- 790 Foreign currency translation adjustments........... -- (192) -------- -------- Total stockholders' equity......................... 75,584 138,252 -------- -------- Total liabilities and stockholders' equity....... $242,962 $450,299 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-82 WYNDHAM HOTEL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- ------------------- 1996 1997 1996 1997 ------- ------- -------- --------- (UNAUDITED) Revenues: Hotel revenues......................... $30,388 $45,310 $ 71,302 $ 128,670 Management fees........................ 1,953 2,472 6,434 6,751 Management fees--affiliates............ 4,015 5,301 10,112 13,816 Service fees........................... 426 766 1,111 1,973 Service fees--affiliates............... 763 726 1,850 1,817 Reimbursements......................... 1,503 1,761 4,636 4,934 Reimbursements--affiliates............. 2,386 2,484 6,176 6,495 Other.................................. (19) 95 320 800 ------- ------- -------- --------- Total revenues....................... 41,415 58,915 101,941 165,256 ------- ------- -------- --------- Operating costs and expenses: Hotel expenses......................... 23,923 34,091 52,227 96,275 Selling, general and administrative expenses.............................. 4,373 5,729 12,877 16,335 Equity participation compensation...... -- -- 2,919 -- Reimbursable expenses.................. 1,503 1,761 4,636 4,934 Reimbursable expenses--affiliates...... 2,386 2,484 6,176 6,495 Depreciation and amortization.......... 2,151 3,581 5,609 8,789 Merger expenses........................ -- 913 -- 3,632 ------- ------- -------- --------- Total operating costs and expenses... 34,336 48,559 84,444 136,460 ------- ------- -------- --------- Operating income........................ 7,079 10,356 17,497 28,796 Interest income......................... 539 503 982 1,371 Interest income--affiliates............. 180 184 536 688 Interest expense........................ (3,407) (4,664) (8,462) (11,788) Equity in earnings of hotel partnerships........................... -- 120 870 120 Amortization of deferred gain........... 185 185 320 554 ------- ------- -------- --------- Income before minority interests, income taxes and extraordinary item........... 4,576 6,684 11,743 19,741 Income attributable to minority interests.............................. -- -- (571) -- ------- ------- -------- --------- Income before income taxes and extraordinary item..................... 4,576 6,684 11,172 19,741 Income tax (provision) benefits......... (1,807) (3,008) 10,388 (9,240) ------- ------- -------- --------- Income before extraordinary item........ 2,769 3,676 21,560 10,501 Extraordinary item (less applicable income tax benefits of $270 for 1996 and $195 for 1997, respectively)....... -- (298) (1,131) (298) ------- ------- -------- --------- Net income.............................. $ 2,769 $ 3,378 $ 20,429 $ 10,203 ======= ======= ======== ========= Earnings per share: Income before extraordinary item-- primary and fully diluted............. $ .14 $ .17 $ 1.08 $ .52 Extraordinary item..................... -- (.01) (.06) (.02) ------- ------- -------- --------- Net income--primary and fully diluted.. $ .14 $ .16 $ 1.02 $ .50 ======= ======= ======== ========= Average number of common shares outstanding............................ 20,018 21,097 20,018 20,382 ======= ======= ======== =========
The accompanying notes are an integral part of the consolidated financial statements. F-83 WYNDHAM HOTEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1996 1997 --------- -------- (UNAUDITED) Cash flows from operating activities: Net income............................................... $ 20,429 $ 10,203 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................ 5,168 7,862 Current income taxes..................................... 2,569 8,916 Deferred income taxes.................................... (12,958) 129 Provision for bad debt................................... 628 1,283 Amortization of deferred debt issuance costs............. 441 927 Write-off of predecessor deferred debt issuance costs.... 1,401 493 Amortization of deferred gain............................ (312) (691) Equity in earnings of hotel partnership.................. -- (120) Equity participation compensation........................ 2,919 -- Minority interest........................................ 571 -- Net withdrawals from restricted cash..................... 2,196 (71) Changes to operating assets and liabilities: Accounts receivable...................................... (3,887) (3,424) Net change in due to/from affiliates..................... (10,405) (3,739) Other.................................................... (1,273) (7,345) Accounts payable and accrued expenses.................... 10,409 471 Deposits................................................. (1,672) 362 Security deposits........................................ (13,676) (6,917) --------- -------- Net cash provided by operating activities............... 2,548 8,339 --------- -------- Cash flows from investing activities: Purchase of property and equipment....................... (4,964) (23,085) Proceeds from sale of property and equipment............. 136,374 -- Investments in management contracts...................... (575) (2,724) Advances on notes receivable............................. (11) (1,616) Payment for purchase of hotels, net of cash acquired..... (33,470) (8,205) Purchase of equity investment in hotel partnerships...... -- (2,848) Acquisition of minority interest......................... (5,479) -- Increase in long-term restricted cash.................... (1,650) (140) Collections on notes receivable.......................... 1,724 137 --------- -------- Net cash provided by (used in) investing activities..... 91,949 (38,481) --------- -------- Cash flows from financing activities: Partners' contributed capital............................ 4,801 -- Partners' capital distributions.......................... (29,593) -- Distribution made to withdrawing partners................ (982) -- Increase in payable to minority interest................. (218) -- Proceeds from borrowings under revolving credit facility................................................ -- 78,750 Repayments of revolving credit facility.................. -- (6,750) Proceeds from issuance of common stock................... 69,504 -- Proceeds from long-term borrowings and issuance of debt.. 94,383 9,675 Repayments of long-term borrowings and capital lease obligations............................................. (197,516) (51,293) Collections/(advances) on notes receivable from stockholders............................................ (18,889) 3,062 --------- -------- Net cash provided by (used in) financing activities..... (78,510) 33,444 --------- -------- Increase in cash and cash equivalents..................... 15,987 3,302 Cash and cash equivalents at beginning of period.......... 4,160 11,517 --------- -------- Cash and cash equivalents at end of period................ $ 20,147 $ 14,819 ========= ========
The accompanying notes are an integral part of the consolidated financial statements. F-84 WYNDHAM HOTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Wyndham Hotel Corporation ("WHC") was incorporated and formed in February 1996. The accompanying consolidated financial statements of WHC at December 31, 1996 and September 30, 1997 and for the period from May 24, 1996 through September 30, 1996 and the quarter and nine months ended September 30, 1997 include the accounts of WHC, its wholly owned subsidiaries and certain equity interests in hotel partnerships (collectively, the "Company"). Financial statements for the period from January 1, 1996 through May 24, 1996 relating to the period prior to the Company's initial public offerings include the combined accounts of WHC, its majority owned entities and a 30% owned hotel entity which was accounted for using the equity method. All significant intercompany balances and transactions have been eliminated. These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation at September 30, 1997 have been included. Operating results for the quarter and nine months ended September 30, 1997 are not necessarily indicative of the operating results for the year ending December 31, 1997. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K of the Company for the year ended December 31, 1996. Certain prior period amounts have been reclassified to conform to the current period presentation. 2. PROPOSED MERGER WITH PATRIOT AMERICAN HOSPITALITY, INC.: On April 14, 1997, the Company entered into a merger agreement with Patriot American Hospitality, Inc. ("Patriot"), (as amended, the "Patriot Merger Agreement"), pursuant to which the Company will merge with and into the successor to Patriot ("New Patriot REIT") following Patriot's merger with and into California Jockey Club (the "Cal Jockey Merger"), with New Patriot REIT being the surviving company (the "Patriot Merger"). Patriot also entered into a related stock purchase agreement with the principal stockholder of the Company (the "Stock Purchase Agreement"), to acquire all of such stockholder's shares of the Company's common stock (the "Stock Purchase.") The Cal Jockey Merger was completed on July 1, 1997. As a result of the Patriot Merger and the Stock Purchase, New Patriot REIT will acquire all of the outstanding shares of common stock of the Company. Pursuant to the Patriot Merger Agreement and the Stock Purchase Agreement, each outstanding share of common stock of the Company ("Wyndham Common Stock") generally will be converted into the right to receive 1.372 shares (the "Patriot Exchange Ratio") of common stock of each of New Patriot REIT and Patriot American Hospitality Operating Company ("New Patriot Operating Company"), which shares will be paired and transferable and trade together only as a single unit (the "Paired Shares"). The Patriot Exchange Ratio is subject to adjustment in the event that the average of the closing prices of the Paired Shares on the twenty trading days preceding the fifth trading day prior to the Company's stockholders' meeting called to approve the Patriot Merger (the "Average Trading Price") is less than $21.86 per Paired Share. If the Average Trading Price is between $21.86 and $20.87 per Paired Share, the Patriot Exchange Ratio will be adjusted so that each outstanding share of Wyndham Common Stock will be converted into the right to receive a number of Paired Shares equal to $30.00 divided by the Average Trading Price. If the Average Trading Price is less than $20.87 per Paired Share, there will be no further adjustments to the Patriot Exchange Ratio, which at that point would equate to 1.438 Paired Shares per share of Wyndham Common Stock; however, in such circumstances, the Company has the right, waivable by it, to terminate the Patriot Merger Agreement without liability. On December 9, 1997, in connection with the Patriot/IHC Merger described below, the Patriot Merger Agreement was further amended by Amendment No. 2 (the "Second Amendment") so that if the Effective Time of the Patriot Merger does not occur on or prior to December 31, 1997, other than as a result of the failure, caused by Wyndham, of certain closing conditions to be satisfied (a "Wyndham Delay"), and the Average Trading Price is less than $27.50 but greater than or equal to $25.50, the Patriot Exchange Ratio will be adjusted so that each share of Wyndham Common Stock, other than shares as to which cash consideration is to be received, will be converted into the right to receive the number of Paired Shares equal to $37.73 divided by the Average Trading Price. If the Effective Time of the Patriot Merger does not occur on or prior to December 31, 1997, other than as a result of such a Wyndham Delay, and the Average Trading Price is less than $25.50, the Patriot Exchange Ratio will be adjusted so that each share of Wyndham Common Stock, other than shares as to which cash consideration is to be received, will be converted into the right to receive 1.480 Paired Shares, provided, however, that in such circumstances the Company has the right, waivable by it, to terminate the Patriot Merger Agreement. The Second Amendment also provides that stockholders of the Company will be entitled to receive additional cash consideration under certain circumstances in the event that the Patriot Merger is not consummated on or prior to January 5, 1998. In addition, the Second Amendment provides that if any dividend is declared on the New Patriot REIT common stock or the New Patriot Operating Company common stock the record date for which is on or after November 26, 1997 but prior to the Patriot Merger (including the dividend declared by New Patriot REIT and payable to holders of record of New Patriot REIT Common Stock, as of December 26, 1997), stockholders of the Company will receive additional consideration in the Patriot Merger that will result in such stockholders receiving the economic benefit of the dividend as if they had been holders of Paired Shares on the dividend record date. Under the Second Amendment, in lieu of receiving Paired Shares, the Company's stockholders have the right to elect to receive cash in F-85 WYNDHAM HOTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) an amount per share equal to $42.80, up to a maximum aggregate amount of $100 million. If stockholders holding shares of Wyndham Common Stock with a value in excess of this amount elect to receive cash, such cash will be allocated on a pro rata basis among such stockholders in accordance with the Patriot Merger Agreement. In connection with the Patriot Merger, New Patriot REIT will assume the Company's existing indebtedness, which was approximately $229.0 million as of September 30, 1997. In connection with the execution of the Patriot Merger Agreement, Patriot also entered into agreements with partnerships affiliated with members of the Trammell Crow family providing for the acquisition by New Patriot REIT of up to 11 full-service Wyndham branded hotels with 3,072 rooms, located throughout the United States, for approximately $331.7 million in cash, plus approximately $14 million in additional consideration if two hotels meet certain operational targets (the "Crow Acquisition" and, collectively with the Patriot Merger and the Stock Purchase, the "Proposed Patriot Transactions"). In connection with the execution of the Patriot/IHC Merger Agreement described below, the parties to the agreements for the Crow Acquisition agreed in principle that the closing of these transactions would be scheduled for December 16, 1997. The parties further agreed in principle that if the Patriot Merger fails to close by March 31, 1998, then additional consideration will be required to be paid under certain circumstances. The Patriot Merger and the Crow Acquisition are subject to various conditions including, without limitation, the approval of the Patriot Merger and certain of the related transactions by the stockholders of New Patriot REIT, New Patriot Operating Company and the Company. It is currently anticipated that the stockholder meetings to approve the Proposed Patriot Transactions will occur in December 1997. New Patriot REIT and New Patriot Operating Company entered into an Agreement and Plan of Merger dated December 2, 1997 (the "Patriot/IHC Merger Agreement") with Interstate Hotels Company ("IHC") that provides for the merger of IHC with and into New Patriot REIT, with New Patriot REIT being the surviving corporation (the "Patriot/IHC Merger"). If the Patriot/IHC Merger is consummated, approximately 40% of the total issued and outstanding shares of common stock, par value $.01 per share, of IHC (the "IHC Common Stock") will be converted into the right to receive $37.50 in cash (the "Patriot/IHC Cash Consideration") and the remaining approximately 60% of IHC Common Stock will be converted into the right to receive Paired Shares having a value of $37.50 pursuant to an exchange ratio (the "Patriot/IHC Exchange Ratio") based on an average closing price of the Paired Shares over a specified period prior to the meeting of stockholders of IHC relating to the Patriot/IHC Merger (the "Patriot/IHC Average Closing Price"). The Patriot/IHC Exchange Ratio may be adjusted under certain circumstances depending on the Patriot/IHC Average Closing Price. The Patriot/IHC Merger is subject to certain conditions, including approval of the Patriot/IHC Merger Agreement by the stockholders of New Patriot REIT, New Patriot Operating Company and IHC. On April 14, 1997, an action styled Kwalbrun v. James D. Carreker, et al., was filed in the Delaware Court of Chancery in and for New Castle County (the "Wyndham Stockholders' Litigation"), purportedly as a class action on behalf of the Company's stockholders, against the Company, New Patriot REIT and the members of the Board of Directors of the Company. The Compliant alleges that the Company's Board of Directors breached its fiduciary duties owed to the Company's public stockholders in connection with the Board of Directors' approval of the Patriot Merger. In particular, the complaint alleges that the Patriot Merger was negotiated at the expense of the Company's public stockholders, and the Company's Board of Directors permitted Patriot to negotiate on more favorable terms the Crow Acquisition with members of the Trammel Crow family. The complaint seeks to enjoin, preliminarily and permanently, consummation of the Patriot Merger under the terms presently proposed and also seeks unspecified damages. The defendants deny the allegations in the complaint. In November 1997 an agreement in principle was reached to settle the Wyndham Stockholders' Litigation (and such agreement was subsequently amended in December 1997). The settlement arrangement among other things, would require Wyndham to provide certain additional information and an updated fairness opinion regarding the Patriot Merger to its stockholders, increase the limitation on certain expenses payable to the Company in connection with the Patriot Merger, and establish certain amounts payable to the Company in the event the Patriot Merger is not consummated on or before December 31, 1997. The agreement is subject to approval of the Boards of Directors of both the Company and New Patriot, execution of definitive settlement documents and obtaining court approval. 3. FEDERAL INCOME TAXES: Since the Company's formation in 1996, federal income taxes have been provided in accordance with Statement of Financial Accounting Standards No. 109. For the quarter and nine months ended September 30, 1996, income taxes included the effect of recording deferred income tax benefits arising as a result of the Company's incorporation in the amount of $13.0 million. 4. EARNINGS PER SHARE: Earnings per share for the quarter and nine months ended September 30, 1996 and 1997 are computed based on the weighted average number of shares of common stock outstanding. The impact of common stock equivalents to earnings per share is immaterial. In February 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share ("EPS"). SFAS 128 requires basic EPS to be computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period and diluted EPS to reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. SFAS 128 is effective for financial statements issued F-86 WYNDHAM HOTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) for periods ending after December 15, 1997 and requires restatement of all prior period EPS data presented. Earlier application is not permitted. The impact of the implementation of SFAS 128 on the Company's consolidated financial statements is expected to be immaterial. If SFAS 128 were adopted, basic EPS and diluted EPS would have been as follows:
NINE MONTHS QUARTER ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------- ------------- 1996 1997 1996 1997 ------ ------- ------- ------ Basic EPS: Income before extraordinary item............ $ .14 $ .17 $ 1.08 $ .51 Net income.................................. .14 .16 1.02 .50 Diluted EPS: Income before extraordinary item............ $ .14 $ .17 $ 1.06 $ .51 Net income.................................. .14 .16 1.00 .49
5. ACQUISITIONS AND RELATED BORROWINGS: On July 31, 1997, the Company acquired Kansas City-based ClubHouse Hotels, Inc., ("ClubHouse") a privately held chain of 17 hotels operating in the mid- scale segment of the lodging industry. The acquisition added 2,456 rooms, or approximately 10% to the Company's current portfolio of hotels open or under construction. In connection with the acquisition of ClubHouse, the Company acquired direct or indirect ownership of 13 ClubHouse hotels, ownership of partial interests in three additional managed ClubHouse hotels, ownership of the ClubHouse Inns brand name and one license for a franchised ClubHouse hotel. The terms of the merger and related transactions were reached following arms-length negotiations among the parties involved. The total consideration paid by the Company in connection with the merger and related transactions included (1) the issuance of 1,599,448 shares of common stock of the Company pursuant to the merger (with the total number of shares issuable subject to a working capital adjustment to be made in the future), (2) the assumption of approximately $23.5 million of debt and (3) the payment of approximately $55.6 million in cash. The cash portion of the purchase price was borrowed under the Company's revolving credit facility with Bankers Trust Company, as agent for a group of financial institutions. In connection with the acquisition of ClubHouse, the Company amended the revolving credit facility to (i) increase the aggregate amount of the credit facility by $50 million to a total of $150.0 million, (ii) make certain revisions to the method of calculating the borrowing base, (iii) amend certain financial covenants, (iv) permit the Company to make certain debt and equity investments and (v) make certain other amendments. On September 26, 1997, the Company elected to fund a cash shortfall related to renovation costs and assumed a 67.5% interest in a hotel partnership, as the owner of the hotel partnership failed to fund the shortfall. The Company contributed and converted its outstanding note receivable and accrued interest thereon totaling $5.9 million to equity. 6. MERGER EXPENSES: During the quarter and nine months ended September 30, 1997, the Company incurred merger expenses totaling $913,000 and $3.6 million, respectively, in connection with the Patriot Merger. These expenses were incurred for legal services, investment banker fees and certain other professional fees. If the merger is consummated, the Company will incur additional investment banker fees of approximately $4.2 million. F-87 WYNDHAM HOTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. TERMINATION OF A MANAGEMENT AGREEMENT: On July 25, 1997, the Company agreed to the termination of its management relationship with Homegate Hospitality Inc. ("Homegate") which operates extended-stay hotels. The termination was effective October 31, 1997 as a result of the pending merger of Homegate with another company in the lodging industry and is conditioned upon the completion of such merger. The Company will receive $12.0 million in exchange for the termination. In 1996, the Company and Homegate entered into an agreement under which the Company would manage up to 60 Homegate mid-price extended-stay hotels as they were purchased or developed by Homegate prior to December 31, 1998. The Company managed 9 of these hotels at September 30, 1997. 8. COMMITMENTS AND CONTINGENCIES: Litigation has been initiated against the Company pertaining to the right to use the Wyndham name for hotel service in the New York metropolitan area. On January 29, 1996, a temporary restraining order was issued by the Supreme Court of the State of New York which, pending the outcome of a trial, prevents the Company from using the Wyndham name in the New York area. An adverse decision in the litigation could prevent the Company from operating Wyndham brand hotels or advertising the Wyndham name in connection with the operation of a Wyndham brand hotel within a 50 mile radius of a hotel in Manhattan operated under the "Wyndham" name. It is management's opinion, based on legal counsel, that the range of losses resulting from the ultimate resolution of the aforementioned claim cannot be determined. The cost of $1.3 million at September 30, 1997 for defending the trademark has been capitalized and is being amortized over 17 years, pending the ultimate resolution. An adverse decision may result in the immediate write-off of those capitalized costs. The Company received a Notice of Intent to make Sales and Use Tax audit changes from the Tampa Region of the Florida Department of Revenue for the period from July 31, 1990 through June 30, 1995. The audit assessed additional taxes of $584,000, penalty of $224,000 and interest of $201,000 for a total assessment of $1,009,000. The previous owners (an affiliate) have agreed to indemnify the Company with respect to any additional sales and use tax paid by the Company for the audit period. Management, after review and consultation with legal counsel, believes the Company has meritorious defenses to this matter and that any potential liability in excess of the $189,000 accrued in the financial statements would not materially effect the Company's consolidated financial statements. The Company is the subject of the class action lawsuit described under Note 2 above. The Company has pending several other claims incurred in the normal course of business which, in the opinion of management, based on the advice of legal counsel, will not have a material effect on the consolidated financial statements. Pursuant to the terms of a management agreement with an affiliate-owned hotel under construction, the Company has undertaken certain commitments to provide furniture, fixtures and equipment for the hotel at a fixed price totaling $6.0 million. As of September 30, 1997, the Company has satisfied commitments totaling $4.8 million. The Company has also guaranteed to fund up to $230,000 in working capital per year for three years on a hotel in the event that the hotel generates inadequate cash flow and the Company has guaranteed $875,000 of its indebtedness. The Company has not to date been required to make any capital contribution under the guarantee. Pursuant to the terms of a management agreement of a hotel in which the Company has a 30% ownership interest, the Company has committed to loan up to $2.5 million for the renovation of the hotel property. The loan will bear an interest rate of 10% and will be collateralized by the outstanding partnership interest of the owners. Interest will be due monthly and principal is payable in installments beginning January 1998 based on the operating income of the hotel. As of September 30, 1997, the Company has made $619,000 of such advances. The Company also guarantees $2,340,000 in indebtedness of this hotel. F-88 WYNDHAM HOTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pursuant to the terms of a management agreement of a hotel owned by an affiliate, the Company has guaranteed to fund up to $600,000 of working capital per year to the extent the entity experiences operating deficits, with a maximum required contribution of $2.3 million over the term of the guarantee extending from 1995 to 2000. The Company has not to date been required to make any capital contribution under the guarantee. The Company is subject to environmental regulations related to the ownership, management, development and acquisition of real estate (hotels). The cost of complying with the environmental regulations was not material to the Company's consolidated statements of income for the nine months ended September 30, 1996 and 1997. The Company is not aware of any environmental condition on any of its properties which is likely to have a material adverse effect on the Company's financial statements. 9. PRO FORMA FINANCIAL INFORMATION: The pro forma condensed consolidated statements of income of the Company are presented as if the ClubHouse Merger had occurred on January 1, 1996. These pro forma condensed consolidated statements are presented for informational purposes only and are not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods.
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1996 1997 ----------- ----------- (IN THOUSANDS, EXCEPT, PER SHARE AMOUNTS) Total revenues..................................... $ 128,121 $ 186,204 Operating income................................... 25,319 34,102 Income before extraordinary item................... 23,124 21,337 Earnings before extraordinary item per common share outstanding....................................... 1.07 .56
10. CONDENSED COMBINED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES: In connection with the issuance of the $100 million subordinated notes ("Notes"), all of the Company's direct and indirect subsidiaries, with the exception of a number of subsidiaries (which subsidiaries are individually and collectively inconsequential), are fully and unconditionally guaranteeing the Company's obligations under the Notes on a joint and several basis (the "Guarantor Subsidiaries"). Accordingly, the condensed combined financial information set forth below summarizes financial information for all of the Guarantor Subsidiaries on a combined basis. Separate complete financial statements and other disclosure for the Guarantor Subsidiaries have not been presented because management does not believe that such information is material to investors. The condensed combined financial information of the Guarantor Subsidiaries as of December 31, 1996 and September 30, 1997, and for the quarter and nine months ended September 30, 1996 and 1997 are presented as follows: F-89 GUARANTOR SUBSIDIARIES CONDENSED COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents......................... $ 9,673 $ 17,725 Cash, restricted.................................. 865 469 Accounts receivable, net.......................... 22,085 40,815 Other............................................. 2,466 4,159 -------- -------- Total current assets............................ 35,089 63,168 Notes and other receivables from affiliates......... 7,685 8,316 Notes receivable.................................... 1,978 1,931 Investments in hotel partnerships................... -- 3,907 Property and equipment, net......................... 61,062 190,374 Management contract costs, net...................... 8,166 10,119 Security deposits................................... 15,105 24,041 Other............................................... 2,502 5,279 -------- -------- Total assets.................................... $131,587 $307,135 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued expenses............. $ 18,169 $ 32,139 Deposits.......................................... 1,147 1,365 Current portion of long-term debt and capital lease obligations................................ 510 1,070 Due to affiliates................................. 42,666 164,002 -------- -------- Total current liabilities....................... 62,492 198,576 -------- -------- Long-term debt and capital lease obligations........ 29,944 52,440 -------- -------- Minority interest................................... -- 3,369 -------- -------- Stockholder's equity: Receivable from affiliates........................ (1,223) (1,229) Additional paid-in capital........................ 31,071 31,071 Retained earnings................................. 9,303 22,908 -------- -------- Total stockholder's equity...................... 39,151 52,750 -------- -------- Total liabilities and stockholder's equity.... $131,587 $307,135 ======== ========
See note to the condensed combined financial information. F-90 GUARANTOR SUBSIDIARIES CONDENSED COMBINED STATEMENTS OF INCOME (IN THOUSANDS)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- ------------------- 1996 1997 1996 1997 ------- ------- -------- --------- (UNAUDITED) Revenues............................... $33,422 $40,441 $ 82,280 $ 126,463 ------- ------- -------- --------- Operating costs and expenses........... 25,514 34,668 61,298 97,362 Depreciation and amortization.......... 1,180 2,281 3,352 5,174 ------- ------- -------- --------- Total operating costs and expenses... 26,694 36,949 64,650 102,536 ------- ------- -------- --------- Operating income....................... 6,728 3,492 17,630 23,927 Interest expense, net.................. (338) (596) (2,128) (1,079) Equity in earnings of hotel partnerships.......................... -- 118 870 118 ------- ------- -------- --------- Income before minority interests, income taxes and extraordinary item... 6,390 3,014 16,372 22,966 Income (loss) attributable to minority interests............................. -- (15) 571 (15) ------- ------- -------- --------- Income before income taxes and extraordinary item.................... 6,390 3,029 15,801 22,981 Income taxes........................... 2,524 1,197 3,325 9,078 ------- ------- -------- --------- Income before extraordinary item....... 3,866 1,832 12,476 13,903 Extraordinary item (less applicable taxes)................................ -- (298) (1,028) (298) ------- ------- -------- --------- Net income........................... $ 3,866 $ 1,534 $ 11,448 $ 13,605 ======= ======= ======== =========
See note to the condensed combined financial information. F-91 GUARANTOR SUBSIDIARIES CONDENSED COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1996 1997 --------- -------- (UNAUDITED) Net cash provided by operating activities.................. $ 3,618 $ 16,694 --------- -------- Cash flows from investing activities: Purchase of property and equipment....................... (3,581) (9,985) Sale of property and equipment........................... 133,778 -- Investments in management contracts...................... (575) (2,724) Advances on notes receivable from affiliates............. (11) (619) Advances on other notes receivable....................... -- (53) Advances on collection on notes receivables.............. -- 117 Payment for purchase of hotels, net of cash acquired..... (2,520) -- Acquisition of minority interest......................... (5,479) -- Decrease (increase) in long-term restricted cash......... (1,296) 778 Other.................................................... 1,674 -- --------- -------- Net cash provided by (used in) investing activities.... 121,990 (12,486) --------- -------- Cash flows from financing activities: Partners' contributed capital............................ 26,502 -- Partners' capital distributions.......................... (42,572) -- Decrease (increase) in receivables from affiliates....... 5,327 (20,726) Increase in payables to affiliates....................... 32,379 25,105 Decrease in payable to minority interest................. (218) -- Proceeds from long-term borrowings....................... 2,500 9,675 Repayment of long-term debt and capital lease obligations............................................. (148,195) (10,210) --------- -------- Net cash provided by (used in) financing activities.... (124,277) 3,844 --------- -------- Increase in cash and cash equivalents...................... 1,331 8,052 Cash and cash equivalents at beginning of period........... 3,708 9,673 --------- -------- Cash and cash equivalents at end of period................. $ 5,039 $ 17,725 ========= ========
NOTE TO CONDENSED COMBINED FINANCIAL INFORMATION: (1) The foregoing condensed combined financial information includes GHALP Corporation, Waterfront Management Corporation, WHCMB, Inc., Wyndham Management Corporation, Wyndham Hotels & Resorts (Aruba) N.V., WHC Vinings Corporation, WH Interest, Inc., Wyndham IP Corporation, Rose Hall Associates, L.P., XERXES Limited, WHC Caribbean, Ltd., WHC Development Corporation, WHC Franchise Corporation, WHCMB Overland Park, Inc., WHCMB, Toronto, Inc., WHC Columbus Corporation, Wyndham Hotels & Resorts Management Ltd., WHC Salt Lake City Corporation, WHC Airport Corporation, ClubHouse Hotels, Inc., CHMB, Inc., MBAH, Inc., PSMB, Inc., GHMB, Inc. and a management subsidiary for a non-branded hotel. They all are wholly-owned subsidiaries of the Company at September 30, 1997. F-92 11. SUBSEQUENT EVENTS: Subsequent to September 30, 1997, the Company borrowed an additional $20.5 million under the revolving credit facility. Of the amount borrowed, $6.5 million was used to fund the purchase of the remaining interest in a hotel property managed by ClubHouse of which the Company owned a 5% interest at September 30, 1997 through the ClubHouse merger. The remaining balance was used to fund renovation costs, to make security deposits on hotel properties to be acquired and leased and to make interest payment on the Company's 10 1/2% Senior Subordinated Notes due 2006. F-93 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners Crow Family Hotel Partnerships We have audited the accompanying combined balance sheets of Crow Family Hotel Partnerships (identified in Note 1) (collectively the "Partnerships") as of December 31, 1996 and 1995 and the related combined statements of operations, partners' 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 Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying combined financial statements were prepared to present the balance sheets and related results of operations and cash flows of the Partnerships, which are to be acquired by Patriot American Hospitality, Inc., and may not necessarily reflect the financial position, results of operations and cash flows of the Partnerships that might have resulted had they actually operated as a stand-alone entity. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Partnerships as of December 31, 1996 and 1995 and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Dallas, Texas September 17, 1997 F-94 CROW FAMILY HOTEL PARTNERSHIPS COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31 SEPTEMBER 30 ------------------------------ ---------------- 1995 1996 1997 -------------- -------------- ---------------- (unaudited) ASSETS Current assets: Cash and cash equivalents.................................. $ 1,277 $ 2,127 $ 2,488 Cash, restricted........................................... 2,532 3,058 2,738 Accounts receivable, less allowance of $103 and $96 in 1995 and 1996................................................... 4,660 6,118 6,703 Inventories................................................ 925 946 861 Prepaid expenses and other................................. 1,102 1,359 907 -------- -------- -------- Total current assets................................... 10,496 13,608 13,697 -------- -------- -------- Cash, restricted for noncurrent assets...................... 4,093 2,764 2,640 Property and equipment, net................................. 150,617 162,908 165,140 Other assets................................................ 8,285 8,230 8,584 -------- -------- -------- Total assets........................................... $173,491 $187,510 $190,061 ======== ======== ======== LIABILITIES AND PARTNERS' DEFICIT Current liabilities: Accounts payable and accrued expenses....................... $ 16,673 $ 17,256 $ 14,769 Due to affiliates........................................... 4,278 384 1,724 Due to operator............................................. 1,925 2,778 2,167 Advance deposits............................................ 759 1,163 964 Current portion of long-term debt (net of discount of $1,779 and $1,746 in 1995 and 1996) and capital lease obligations. 1,827 67,996 66,261 -------- -------- -------- Total current liabilities.................................. 25,462 89,577 85,885 -------- -------- -------- Advances from partners...................................... 4,679 4,911 4,818 Long-term debt and capital lease obligations................ 202,104 146,239 149,776 -------- -------- -------- 206,783 151,150 154,594 -------- -------- -------- Commitments and contingencies Partners' deficit........................................... (58,754) (53,217) (50,418) -------- -------- -------- Total liabilities and partners' deficit................ $173,491 $187,510 $190,061 ======== ======== ========
The accompanying notes are an integral part of the combined financial statements. F-95 CROW FAMILY HOTEL PARTNERSHIPS COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 NINE MONTHS ENDED SEPTEMBER 30 ---------------------------------------------- --------------------------------- 1994 1995 1996 1996 1997 -------------- -------------- -------------- --------------- ---------------- (UNAUDITED) --------------- Revenues: Rooms................................... $ 42,588 $ 50,652 $ 64,362 $47,714 $ 58,044 Food and beverage....................... 30,275 33,217 35,137 24,827 28,400 Telephone............................... 2,413 3,464 4,386 3,270 3,300 Other departmental revenues............. 2,178 2,821 3,070 2,311 2,455 Other income............................ 663 1,190 1,753 1,136 1,393 -------- -------- -------- ------- -------- 78,117 91,344 108,708 79,258 93,592 -------- -------- -------- ------- -------- Operating costs and expenses: Rooms................................... 10,364 12,587 15,078 11,111 12,903 Food and beverage....................... 21,260 24,010 25,937 18,549 21,197 Telephone............................... 1,052 1,412 1,608 1,203 1,316 Lease expense........................... 1,964 1,982 1,993 1,472 1,554 Management fees......................... 3,238 3,951 5,349 3,771 4,279 Energy costs............................ 3,338 4,151 4,351 3,386 3,744 Property insurance and taxes............ 2,892 3,462 3,783 2,895 3,018 General and administrative.............. 15,841 19,065 22,309 16,336 18,138 Depreciation and amortization........... 5,877 6,569 8,136 5,143 7,176 Other expenses.......................... 2,359 2,483 3,066 1,490 2,163 -------- -------- -------- ------- -------- 68,185 79,672 91,610 65,356 75,488 -------- -------- -------- ------- -------- Operating income...................... 9,932 11,672 17,098 13,902 18,104 Interest income............................ 85 179 76 - - Interest expense........................... (16,182) (18,213) (19,008) (13,400) (15,318) -------- -------- -------- ------- -------- Net income (loss).......................... $ (6,165) $ (6,362) $ (1,834) $ 502 $ 2,786 ======== ======== ======== ======= ========
The accompanying notes are an integral part of the combined financial statements. F-96 CROW FAMILY HOTEL PARTNERSHIPS COMBINED STATEMENTS OF PARTNERS' DEFICIT (IN THOUSANDS) Balance at December 31, 1993................................................................ $(85,133) Capital contributions.................................................................... 13,074 Contribution of note payable............................................................. 11,608 Capital distributions.................................................................... (610) Net loss................................................................................. (6,165) -------- Balance at December 31, 1994................................................................ (67,226) Capital contributions.................................................................... 16,379 Capital distributions.................................................................... (1,545) Net loss................................................................................. (6,362) -------- Balance at December 31, 1995................................................................ (58,754) Capital contributions.................................................................... 7,740 Capital distributions.................................................................... (369) Net loss................................................................................. (1,834) -------- Balance at December 31, 1996................................................................ (53,217) Capital contributions (unaudited)........................................................ 3,287 Capital distributions (unaudited)........................................................ (3,274) Net income (unaudited)................................................................... 2,786 -------- Balance at September 30, 1997 (unaudited)................................................... $(50,418) ========
The accompanying notes are an integral part of the combined financial statements. F-97 CROW FAMILY HOTEL PARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31 SEPTEMBER 30 ---------------------------------------------- ---------------- 1994 1995 1996 1997 -------------- -------------- -------------- ---------------- (UNAUDITED) Cash flows from operating activities: Net income (loss) $ (6,165) $ (6,362) $ (1,834) $ 2,786 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................................. 5,877 6,569 8,136 7,176 Amortization of loan cost..................................... 368 686 521 601 (Increase) decrease in accounts receivable.................... (2,423) 1,393 (1,458) (585) (Increase) decrease in inventories............................ (242) 24 (21) 85 (Increase) decrease in prepaid expenses....................... (65) 215 (257) 452 Decrease (increase) in other assets........................... 416 (1,465) (596) (1,731) Increase (decrease) in accounts payable and accrued expenses................................................. 3,803 1,934 583 (2,487) Net increase (decrease) in due to affiliates.................. 181 (2,881) (3,894) 1,340 Increase (decrease) in due to operator........................ 147 628 853 (611) Increase (decrease) in advance deposits....................... 3 188 404 (199) (Increase) decrease in restricted cash........................ (423) 3,552 (526) 320 -------- -------- -------- ------- Net cash provided by operating activities..................... 1,477 4,481 1,911 7,147 -------- -------- -------- ------- Cash flows from investing activities: Property and equipment additions.............................. (27,512) (37,295) (20,297) (8,632) (Increase) decrease in cash restricted for noncurrent assets.. (1,056) (2,561) 1,329 124 -------- -------- -------- ------- Net cash used in investing activities......................... (28,568) (39,856) (18,968) (8,508) -------- -------- -------- ------- Cash flows from financing activities: Net (decrease) increase in advances from partners............. (668) 970 232 (93) Proceeds from long-term debt.................................. 22,256 21,773 13,249 3,705 Repayments of long-term debt and capital lease obligations... (6,487) (2,601) (2,945) (1,903) Partners' contributions...................................... 13,074 16,379 7,740 3,287 Partners' distributions...................................... (610) (1,545) (369) (3,274) Other........................................................ (902) - - - -------- -------- -------- ------- Net cash provided by financing activities................ 26,663 34,976 17,907 1,722 -------- -------- -------- ------- (Decrease) increase in cash and cash equivalents.............. (428) (399) 850 361 Cash and cash equivalents at beginning of year................ 2,104 1,676 1,277 2,127 -------- -------- -------- ------- Cash and cash equivalents at end of year $ 1,676 $ 1,277 $ 2,127 $ 2,488 ======== ======== ======== ======= Supplemental cash flow information: Cash paid for interest $ 14,602 $ 17,210 $ 19,751 $18,325 Noncash activity: Capital lease obligations 265 259 - - Interest added to principal of notes payable 401 448 1,161 - Contribution of note payable 11,608 - - -
The accompanying notes are an integral part of the combined financial statements. F-98 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS 1. COMBINED PARTNERSHIPS DESCRIPTION AND BASIS OF PRESENTATION: The accompanying combined financial statements include the accounts of 10 hotel partnerships (the "Partnerships") which are owned by various corporations, partnerships and joint ventures. These partnerships are beneficially owned or controlled by various members of the family of Trammell Crow. The Partnerships along with Wyndham Hotel Corporation ("WHC"), which manages the 10 hotels, are being considered for acquisition by Patriot American Hospitality, Inc., a publicly traded real estate investment trust ("REIT"). The accompanying combined financial statements were prepared to present the balance sheets and related results of operations and cash flows of the Partnerships and may not necessarily reflect the financial position, results of operations and cash flows of the Partnerships that might have resulted had they actually operated as a stand-alone entity. The accounts of the Partnerships and related hotels consist of the following hotel entities:
Partnerships Hotels ------------ ------ Hotel Bel Age Associates, L.P. Wyndham Bel Age Franklin Plaza Associates Wyndham Franklin Plaza Itasca Hotel Company Wyndham Northwest Chicago WHC-LG Hotel Associates, L.P. Garden Hotel at LaGuardia Airport CLC Limited Partnership Wyndham Garden Hotel-Las Colinas Novi Garden Hotel Associates Wyndham Garden Hotel-Novi Pleasanton Hotel Associates, Ltd. Wyndham Garden Hotel-Pleasanton Wood Dale Garden Hotel Partnership Wyndham Garden Hotel-Wood Dale Convention Center Boulevard Hotel, Limited Wyndham Riverfront Hotel and Convention Center Partners I-XI, Ltd. Wyndham Palm Springs
Interim Financial Statements The interim financial statements have been prepared by the Partnerships 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 Partnerships with respect to the results of their operations for the interim periods from January 1, 1996 to September 30, 1996, and from January 1, 1997 to September 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. Use of Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. F-99 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Concentration of Credit Risk Financial instruments that potentially subject the Partnerships to concentration of credit risk consist principally of cash investments. The Partnerships maintain cash and cash equivalents in accounts with major financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. Management believes credit risk related to these deposits is minimal. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and cash equivalents For purposes of reporting cash flows, all highly liquid debt instruments with original maturities of three months or less are considered to be cash equivalents. Restricted cash consists of amounts in escrow for the payment of property taxes and interest. Cash restricted for noncurrent assets consists of a reserve for fixed asset repairs and replacements and hotel renovations. Inventories Inventories consisting of food, beverage, china, linen, glassware, silverware, uniforms and supplies are stated at cost which approximates market, with cost determined using the first-in, first-out method. Property and Equipment Buildings and site improvements are carried at cost and are depreciated using the straight-line method over 40 and 20 years, respectively. Furniture and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives of approximately 5 years. Normal repairs and maintenance are charged to expense as incurred. Investment in property is recorded at cost, except when it has been determined that the property has sustained a permanent impairment in value. At such time, a write-down is recorded to reduce the property to its estimated recoverable amount. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Cost of assets under construction are reported as construction in progress. Construction in progress is not depreciated until the construction is completed and the related assets are in use. Interest and taxes incurred during the construction period are capitalized as part of the building cost. F-100 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Other Assets Other assets consist primarily of unamortized loan costs, capitalized organization costs and capitalized lease acquisition costs. Other assets are stated at cost, except when it has been determined that the asset has sustained a permanent impairment in value. These costs are amortized using the straight-line method over the following periods: Loan costs Over the term of the loan Organization costs 60 months Preopening expenses 12 months Lease acquisition costs Over the term of the lease Income Taxes The Partnerships are not taxable entities and the results of their operations are included in the tax returns of the partners. The Partnerships' tax returns and the amount of allocable income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes to income or loss, the tax liability of the partners could be changed accordingly. Revenue Recognition Room, food and beverage, telephone and other revenues are recognized when earned. Self-Insurance The Partnerships are self-insured for various levels of general liability, workers' compensation and employee medical coverages. The general and auto liability premiums are paid to a related party who maintains a loss reserve fund. Workers' compensation premiums are paid to an independent insurance company. The Partnerships' workers' compensation insurance is subject to a "retro adjustment" which could result in additional premiums or a refund of premiums based on actual claims settled by the insurance company. 3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following (in thousands):
December 31 -------------------------------------- 1995 1996 ------------------ ------------------ Land $ 17,575 $ 20,924 Buildings 133,761 147,881 Furniture, fixtures and equipment 17,854 23,065 Construction in progress 12,329 8,345 -------- -------- 181,519 200,215 Less accumulated depreciation (30,902) (37,307) -------- -------- $150,617 $162,908 ======== ========
Substantially all the Partnerships' property and equipment are pledged as collateral for mortgage notes payable. F-101 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS: The Partnerships entered into management agreements with a wholly-owned subsidiary of Wyndham Hotel Corporation (the "Operator"). These management agreements, having terms ranging from 10 to 22 years, provide for base management fees and chain service fees ranging from 2.5% to 5% of gross revenues, plus incentive fees ranging from 14% to 25% of income after fixed charges or excess cash, as defined in the respective management agreements. The Partnerships incurred incentive management fees of $509,000, $870,000 and $1,638,000, during the years ended December 31, 1994, 1995 and 1996, respectively. In addition, the agreements require the Partnerships to pay a marketing contribution to the Operator equal to 1.5% of monthly room revenues. The Partnerships made marketing contributions of $639,000 $760,000 and $965,000 in 1994, 1995 and 1996, respectively. Due to operator represents management fees, chain service fees and other expenses payable to the Operator. The Partnerships receive services from and provide services to affiliates, which are reimbursed in the normal course of business. In 1994, 1995 and 1996, the Partnerships reimbursed the Operator for services such as administrative, tax, legal, accounting, finance, risk management, sales and central reservations totaling $1,132,000, $1,409,000, and $1,404,000, respectively. Certain partnerships, in the normal course of business, have made advances to or received advances from (including operating deficit loans) the partners and their affiliates. Such amounts are classified as "Due to affiliates" in the accompanying combined financial statements and accrue interest at rates ranging from 2.62% to 10%. Interest expense of $222,000, $305,000, and $303,000 in 1994, 1995 and 1996, respectively, on advances from partners and affiliates is included in other accrued expenses in the accompanying combined financial statements. No due dates have been specified for these advances and such advances may be repaid from available cash flow. Pursuant to one of the partnership agreements, the general partner of the partnership earns an annual management fee for services rendered in connection with the business of the partnership equal to 1% of gross revenues ($207,000, $220,000 and $233,000 in 1994, 1995 and 1996, respectively). Unpaid general partner management fees are classified as "Due to affiliates" in the accompanying combined financial statements. The Partnerships participate in a centralized cash management system with affiliates who are excluded from these combined financial statements. Gross receipts from the hotels are deposited into the centralized cash management system, from which operating expenses and other disbursements are paid. The net position with the pool is reported as "Due to affiliates" in the accompanying combined financial statements. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following (in thousands):
December 31 ----------------------------------------- 1995 1996 -------------------- ------------------- Accounts payable $ 3,943 $ 4,350 Taxes 2,417 2,433 Accrued interest 6,716 5,973 Payroll and related costs 2,230 2,628 Other 1,367 1,871 ------- ------- $16,673 $17,255 ======= =======
F-102 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT: Substantially all of the hotel property is pledged as collateral for long- term debt consisting of the following (in thousands):
December 31 ------------------------------------------ 1995 1996 -------------------- -------------------- Mortgage note, bearing interest at 10% with monthly payments of interest only, maturing August 1, 1997. The note was extended until December 31, 1997, for a fee of $33,333.................................................... $ 11,308 $ 11,308 Mortgage note, bearing interest at 10%, with monthly payments of interest only at 5%, pay rate increasing 1% per year (7% and 8% at December 31, 1995 and 1996). Net cash flow, as defined, is payable quarterly and is applied first to deferred interest with balance, if any, applied to principal. The note matured August 1, 1997, but was extended until December 31, 1997, for a fee of $33,333. Monthly interest payments at 10% are due beginning September 1, 1997, through maturity......................... 7,627 6,662 Note payable to a financial institution, for which payment is guaranteed by certain partners, bearing interest at 9.75%. Interest only is payable through November 1, 1996, with principal and interest payable in monthly installments commencing November 1, 1996. Additional interest of 30% of net cash flow, as defined, is payable quarterly. Note matures October 31, 2000.......................................................................... 8,500 8,470 Mortgage note, bearing interest at 10%, with monthly payments of interest only. Note matures August 1, 1997. The note was extended until December 31, 1997, for a fee of $33,333................................................ 10,521 10,521 Mortgage note, bearing interest at 10.71%, with current pay rate of 6.5% increasing to 8.5% on January 1, 1997, with annual increases of .5% per year to maturity. The difference between the amount of interest accrued and that paid is payable quarterly from available gross income, as defined. The amounts accrued at December 31, 1995 and 1996, respectively, were $3,132,000 and $1,866,000. In addition, additional interest, based on net cash flows, as defined, is payable through December 31, 1997. No additional interest was paid in 1994, 1995, or 1996. At maturity, April 1, 2001, or upon sale, an additional amount equal to 40% of the residual value, as defined, is due .................................................... 47,000 47,000 Noninterest bearing mortgage shortfall payable, maturing April 1, 2001.......... 2,917 2,917 Mortgage note, bearing interest at 9.82%, principal and interest payable in monthly installments through October, 1999, maturing October 13, 1999......... 10,781 10,591 Mortgage note, bearing interest at annually increasing rates ranging from 5.78% to 13.07%. Specified interest payments are due monthly, with the difference between the amount of interest paid and accrued at the contract rate added to the principal of the note. Additional interest is due quarterly equal to 30% of adjusted gross revenue, as defined. The note matures on October 13, 2004. At maturity, the lender is due Shared Appreciation Interest, as defined. The note is callable after February 1, 2000. The loan has an interest reserve account of $1,028,000 and $1,000,000, as of December 31, 1995 and 1996, respectively. The related partnership may make withdrawals from this reserve to cover any interest shortfalls, as defined. The loan agreement provides for a release of the interest reserve account to the related partnership after October 1, 1997, if certain conditions are met................................................ 9,219 9,378
F-103 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
December 31 -------------------------------------------- 1995 1996 --------------------- --------------------- Mortgage note, bearing interest at 11%, principal and interest payable monthly through July 1997, and maturing August 1997. The note was extended until December 31, 1997, for a fee of $120,922. Interest is payable on the first of each month, beginning September 1, 1997, through maturity at a rate equal to the sum of LIBOR plus 300 basis points.............. 24,928 24,446 Note payable, due on April 21, 2003, or on demand by lender....................... 10 10 Mortgage note, bearing interest at 9.25% with interest only. Payments through January 1, 1998, and principal and interest payable monthly beginning February 1, 1998, based upon a twenty year amortization. In addition, net cash flow, as defined, is payable quarterly. On December 31, 2000, all remaining principal and interest are due, net cash flow, as defined, payable quarterly...................................................... 6,876 12,610 Mortgage note, bearing interest at an initial rate of 9.125%, adjusted for the Citibank Base Rate plus .625%. All principal and interest payable on January 12, 1997, extended to April 12, 1997. The loan was subsequently refinanced with a $13,750,000 note bearing interest at 8.25%., with monthly payments of principal and interest totaling $118,150 through September 2001, with the remaining balance due October 1, 2001.................. 6,105 13,430 Certificates of Participation, bearing interest at a variable rate, adjusted weekly to be the rate necessary to remarket the certificates at par (4.8% and 4% at December 31, 1995 and 1996). Interest payments are due monthly, and principal payments are due annually until maturity in 2014. Upon the occurrence of certain events, the variable interest rate will convert to a fixed rate. The certificates were issued at a discount of $2,046,000 which is being amortized to interest expense over the life of the certificates using the effective interest method. In addition to the hotel property, the certificates are secured by letters of credit totaling the outstanding principal balance of the certificates. The letters of credit are secured by other property and ownership interests owned by the partners of the hotel partnership. The letters of credit bear an annual fee of 2% of the outstanding principal balance of the certificates. Until expiration in December 1995, pursuant to the terms of an interest rate swap agreement, interest payments were fixed at 5.69% for the hotel partnership, and the counterparty paid interest at one half of its daily prime rate. The original cost of the agreement was capitalized as an other asset and amortized over the life of the swap agreement using the straight line method. Additional interest expense incurred as a result of the swap agreement totaled $1,130 and $449 in 1994 and 1995................................................................... 59,300 58,200 Discount on certificates.......................................................... (1,779) (1,746) -------- -------- 203,313 213,797 Current portion of long-term debt................................................. (1,647) (67,811) -------- -------- Long-term debt, excluding current portion......................................... $201,666 $145,986 ======== ========
F-104 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The annual principal requirements of the long-term debt for the five years subsequent to December 31, 1996 (excluding a discount of $1,746,000) are as follows (in thousands):
Year ending December 31: 1997 $ 67,811 1998 1,773 1999 11,772 2000 22,190 2001 52,117 Thereafter 59,880 -------- Total long-term debt at December 31, 1996 $215,543 ========
As discussed above, certain of the mortgage notes payable contain provisions which require additional payments to the lenders based on residual values or shared appreciation of the properties at the maturity of the loan or sale of the property. If the properties are acquired, management estimates that additional payments related to these provisions ranging from $11,500,000 to $14,000,000 will be paid to the lenders from the proceeds of the sale. These amounts are considered as additional costs to sell the properties and they will be reflected in the financial statements at the time the transaction is completed. The terms of substantially all of the mortgage notes require the respective partnerships to make deposits, on a monthly basis, to tax escrow accounts for the payment of real estate and personal property taxes and assessments. The terms of the mortgage notes also require hotel partnerships to maintain furniture, fixture and equipment reserve accounts ("FF&E Reserve") equal to an amount ranging from 3% to 4% of gross revenues, as defined, to be used for capital expenditures. The balances of the tax escrow accounts and the FF&E Reserve are included in "Cash, restricted" and "Cash, restricted for noncurrent assets", respectively, in the accompanying combined financial statements. The Partnerships will use the proceeds from the sale of the properties to repay existing debt. Approximately $67,800,000 of the combined partnerships' debt matures in 1997. In the event the assets are not sold before the debt matures, management intends to extend or refinance these existing mortgage notes. 7. CONTRIBUTION OF NOTE PAYABLE: In May 1994, a revolving credit facility utilized by one of the hotel partnerships was converted to a related party note payable and was then contributed by the partners to the hotel partnership. This contribution is reflected on the accompanying combined statement of partners' deficit for the year ended December 31, 1994. Prior to the conversion, the revolving credit facility bore interest at LIBOR plus .65% and was secured by property owned by affiliates of the partners of the hotel partnership. 8. EMPLOYEE BENEFIT PLANS: All employees at the Partnerships are employees of WHC. The Partnerships reimburse WHC for all expenses and charges related to the employees' participation in any of the WHC benefit programs. Included in these plans are the Wyndham Employees Savings and Retirement Plan, a 401(k) retirement savings plan (the "Plan") and a self-insured group health plan. Employees who are over 21 years of age and have completed one year of service are eligible to participate in the Plan. The Plan matches employee contributions up to 4% of the employee's salary. For the years ended December 31, 1994, 1995 and 1996, the Partnerships reimbursed WHC $205,000, $194,000 and $281,000, respectively for the Plan. F-105 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The Partnerships also reimburse WHC for costs related to the employees' participation in a self-insured group health plan. For the years ended December 31, 1994, 1995 and 1996, the Partnership reimbursed WHC $791,000, $902,000 and $1,005,000, respectively. One hotel makes contributions, based on monthly rates per employee, as specified in union agreements, to union-administered, multi-employer, defined benefit retirement plans. Because the plans cover numerous employees from many organizations, no plan benefit information is presented. Expenses relating to these plans totaled $82,000, $80,000 and $105,000 in 1994, 1995 and 1996 respectively. 9. COMMITMENTS AND CONTINGENCIES: Certain hotel partnerships lease equipment and land under capital and operating leases having noncancellable agreements extending beyond one year. Capital leases have imputed interest rates ranging from 8% to 14.29%. Future minimum lease payments required under the capital leases (together with the present value of net minimum lease payments) and operating leases at December 31, 1996 are as follows (in thousands):
CAPITAL OPERATING LEASES LEASE ----------------- ----------------- Year ending December 31: 1997 $224 $ 1,639 1998 172 1,616 1999 68 1,508 2000 45 1,499 2001 - 1,482 Thereafter - 49,367 ---- ------- Total minimum lease payments 509 $57,111 ======= Less imputed interest 71 ---- Present value of net minimum lease payment 438 Less current portion 185 ---- Long-term portion of net minimum lease payments $253 ====
A partnership leases the land on which the hotel is built through two lease agreements. Rent of $1 is payable annually to one of the partners under one of these leases. The partner financed this purchase of land with an interest- free advance from the partnership of $3,625,000. The remainder of the land is leased from a state authority for $653,000 annually, payable in quarterly installments of $163,000. These leases are dated July 31, 1978, with an initial term of 65 years, and two renewal options of 15 years each, subject to the term of the lessor's legal existence. Another hotel partnership leases the land on which the hotel is built under a sub-lease effective January 1, 1985, with an initial term of 75 years and one renewal option of 25 years. Lease payments include two components: (1) "basic rent" which escalate every 5 years based on the consumer price index, and (2) "additional rent," as defined in the master lease, to the extent that it exceeds basic rent. Basic rent payments are due annually on December 20 on a prepaid basis, and the current basic rent payment is $672,000 per year. To date, no additional rent has been paid as the basic rent exceeds all amounts calculated as additional rent. The Partnerships incurred rent expense totaling $1,964,000, 1,982,000 and $1,993,000 in 1994, 1995 and 1996, respectively, which includes operating leases and the three land leases. F-106 CROW FAMILY HOTEL PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The Partnerships may be subject to certain litigation and claims in the ordinary course of business which are generally covered by insurance policies. In management's opinion, litigation and claims will not have a material adverse effect upon the financial position or results of operations of the Partnerships. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Partnerships have estimated the fair value of its financial instruments at December 31, 1996 as required by Statement of Financial Accounting Standards No. 107. The carrying values of cash and cash equivalents, accounts receivable and accrued expenses are reasonable estimates of their fair values due to their short-term maturities. Long-term debt had a fair value of approximately $202,053,000 and $215,597,000 at December 31, 1995 and 1996, respectively. Fair value was estimated using an interest rate of prime plus one percent at December 31, 1995 and 1996. F-107 REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors WHG Resorts & Casinos Inc. We have audited the accompanying consolidated balance sheets of WHG Resorts & Casinos Inc. as of June 30, 1997 and 1996, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedule of valuation and qualifying accounts for each of the three years in the period ended June 30, 1997. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WHG Resorts & Casinos Inc. as of June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP San Juan, Puerto Rico August 7, 1997, except for Note 18, as to which the date is September 17, 1997. F-108 WHG RESORTS & CASINOS INC. CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
SEPTEMBER 30, JUNE 30, ------------ ----------------------- 1997 1997 1996 ------------ ----------- ----------- (UNAUDITED) ASSETS - ------ Current assets: Cash and cash equivalents............................ $ 18,941 $ 17,886 $ 6,616 Receivables, net of allowances of $649 and $475 at June 30, 1997 and 1996, respectively, and $809 at September 30, 1997.................................. 3,454 3,477 2,534 Receivables from nonconsolidated affiliates.......... 1,731 1,105 608 Inventories.......................................... 575 590 651 Other current assets................................. 931 791 689 ----------- ----------- ----------- Total current assets............................... 25,632 23,849 11,098 Investments in, receivables and advances to nonconsolidated affiliates............................ 29,791 30,603 27,126 Property and equipment, net............................ 43,955 43,861 44,919 Land held as investment................................ 5,095 5,095 5,095 Excess of purchase cost over amount assigned to net assets acquired, net of accumulated amortization of $3,739 and $3,340 at June 30, 1997 and 1996, respectively, and $3,836 at September 30, 1997........ 8,613 8,710 9,109 Other assets........................................... 5,266 5,355 7,387 ----------- ----------- ----------- $ 118,352 $ 117,473 $ 104,734 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable..................................... $ 3,952 $ 3,760 $ 3,297 Accrued compensation and related benefits............ 2,342 2,855 2,128 Other accrued liabilities............................ 4,910 3,723 2,721 Dividend payable on preferred stock of Condado Plaza............................................... -- -- 94 Notes payable........................................ 500 1,000 2,000 Current maturities of long-term debt................. 3,869 3,681 3,299 ----------- ----------- ----------- Total current liabilities.......................... 15,573 15,019 13,539 Long-term debt, less current maturities................ 18,494 19,868 23,555 Deferred income taxes.................................. 2,192 2,638 2,291 Other noncurrent liabilities........................... 4,532 4,532 4,542 Payable to WMS Industries Inc.......................... -- 102 397 Minority interests..................................... 20,410 19,990 18,810 Preferred stock of Condado Plaza held by WMS Industries Inc........................................ -- -- 4,100 Stockholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized, 300,000 shares outstanding.............. 3 -- -- Common stock, class A, $.01 par value, non-voting, 3,000,000 shares authorized......................... -- -- -- Common stock, $.01 par value, 12,000,000 shares authorized, 6,050,200 shares outstanding in 1997 and 1,000 shares authorized and 100 shares outstanding in 1996................................. 61 61 1 Additional paid-in capital............................. 17,293 14,296 3,849 Retained earnings...................................... 39,794 40,967 33,650 ----------- ----------- ----------- Total stockholders' equity......................... 57,151 55,324 37,500 ----------- ----------- ----------- $ 118,352 $ 117,473 $ 104,734 =========== =========== ===========
See Notes to Consolidated Financial Statements. F-109 WHG RESORTS & CASINOS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SEPTEMBER 30, YEARS ENDED JUNE 30, ------------------ ------------------------------- 1997 1996 1997 1996 1995 --------- -------- --------- --------- --------- (UNAUDITED) Revenues: WHGI management fees from nonconsolidated affiliates................................. $ 2,256 $ 1,935 $ 13,937 $ 13,372 $ 13,348 Condado Plaza hotel/casino: Casino...................................... 6,172 4,635 23,720 22,438 24,584 Casino promotional allowances............... (2,018) (1,432) (7,721) (6,986) (6,872) Rooms....................................... 5,159 4,849 25,629 25,477 25,210 Food and beverages.......................... 2,255 2,240 11,034 11,478 11,412 Other....................................... 747 652 3,035 2,915 3,196 --------- --------- --------- --------- --------- 12,315 10,944 55,697 55,322 57,530 --------- --------- --------- --------- --------- Total revenues............................ 14,571 12,879 69,634 68,694 70,878 Costs and expenses: WHGI operating expenses (excl. depreciation).............................. 1,013 870 3,910 3,882 5,175 Condado Plaza operating expenses (excl. depreciation): Casino..................................... 2,917 2,629 11,334 12,375 13,737 Rooms...................................... 1,844 1,752 7,639 8,593 9,081 Food and beverages......................... 2,071 2,050 9,076 10,088 10,503 Other...................................... 1,112 1,188 4,968 5,281 6,463 --------- --------- --------- --------- --------- 7,944 7,619 33,017 36,337 39,784 Selling and administrative................... 2,528 2,205 9,913 9,487 12,301 Depreciation and amortization................ 1,514 1,395 5,707 5,430 5,994 --------- --------- --------- --------- --------- Total costs and expenses.................. 12,999 12,089 52,547 55,136 63,254 --------- --------- --------- --------- --------- Operating income............................. 1,572 790 17,087 13,558 7,624 Interest income, primarily from nonconsolidated affiliates, and other income................................ 774 547 2,334 1,830 2,548 Interest expense............................. (764) (848) (3,265) (3,689) (4,300) Equity in loss of nonconsolidated affiliates.................................. (1,010) (1,289) (1,196) (3,465) (7,003) Merger costs to date......................... (1,000) -- -- -- -- --------- --------- --------- --------- --------- Income (loss) before tax credit (provision) and minority interests...................... (428) (800) 14,960 8,234 (1,131) Credit (provision) for income taxes.......... (163) 89 (3,397) (1,645) 234 Minority interests in income................. (535) (421) (4,000) (3,636) (2,910) Dividend on preferred stock of Condado Plaza....................................... -- (82) (246) (516) (557) --------- --------- --------- --------- --------- Net income (loss)............................ $ (1,126) $ (1,214) $ 7,317 $ 2,437 $ (4,364) ========= ========= ========= ========= ========= Primary earnings (loss) per share............ $ (0.19) $ (0.20) $ 1.20 $ .40 $ (.72) ========= ========= ========= ========= ========= Shares used in primary earnings per share calculation................................. 6,050,000 6,050,000 6,086,443 6,050,200 6,050,200 ========= ========= ========= ========= ========= Fully diluted earnings (loss) per share...... $ (0.19) $ (0.20) $ 1.17 $ .40 $ (.72) ========= ========= ========= ========= ========= Shares used in fully diluted earnings per share calculation........................... 6,050,000 6,050,000 6,247,241 6,050,200 6,050,200 ========= ========= ========= ========= ========= Pro forma information reflecting income taxes on a separate return basis (unaudited): Income (loss) before tax provision and minority interests......................... $ (800) $ 14,960 $ 8,234 $ (1,131) Provision for income taxes.................. (372) (3,478) (2,545) (1,902) Minority interests in income................ (421) (4,000) (3,636) (2,910) Dividend on preferred stock of Condado Plaza...................................... (82) (246) (516) (557) --------- --------- --------- --------- Net income (loss)......................... $ (1,675) $ 7,236 $ 1,537 $ (6,500) ========= ========= ========= =========
See Notes to Consolidated Financial Statements. F-110 WHG RESORTS & CASINOS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SEPTMBER 30, YEARS ENDED JUNE 30, ------------------ -------------------------- 1997 1996 1997 1996 1995 -------- -------- ------- -------- ------- (UNAUDITED) Operating activities: Net income (loss)................................. $ (1,126) $ (1,214) $ 7,317 $ 2,437 $(4,364) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................... 1,514 1,395 5,707 5,430 5,994 Provision for loss on receivables............... 160 72 366 1,457 1,842 Undistributed loss of nonconsolidated affiliates..................................... 1010 1,289 1,196 3,465 7,003 Deferred income taxes........................... (446) -- 347 3,239 (1,626) Minority interests.............................. 535 421 4,000 3,636 2,910 Increase (decrease) resulting from changes in operating assets and liabilities: Receivables.................................... (137) 119 (1,309) 342 (541) Other current assets........................... (125) (303) 54 459 471 Accounts payable and accruals.................. 866 655 2,192 (12) (1,152) Net amounts due from nonconsolidated affiliates.................................... (626) (596) (5,170) (1,931) (5,906) Other assets and liabilities not reflected elsewhere..................................... (105) 399 (10) (618) 218 -------- --------- ------- -------- ------- Net cash provided by operating activities......... 1,520 2,237 14,690 17,904 4,849 Investing activities: Purchase of property and equipment................ (1,466) (331) (3,153) (1,149) (2,066) Purchase of additional shares of subsidiaries..... -- -- (1,500) -- (3,925) Investments in and advances to nonconsolidated affiliates....................................... (198) (186) -- -- (1,360) Collections from nonconsolidated affiliates....... -- -- -- 985 2,010 Other investing................................... . . . -- -- 1,760 -- -- -------- --------- ------- -------- ------- Net cash used in investing activities............. (1,664) (517) (2,893) (164) (5,341) Financing activities: Payment of long-term debt and notes payable....... (1,686) (2,285) (8,703) (3,887) (4,568) Proceeds from short-term note..................... -- -- 4,500 -- -- Capital contribution from WMS Industries Inc...... -- -- 1,643 -- -- Net intercompany transactions with WMS Industries Inc.............................................. -- (528) 4,273 (6,275) 3,125 Issuance of preferred stock....................... 3,000 -- -- -- -- Purchase of preferred stock of Condado Plaza by WMS Industries Inc............................... -- -- -- -- 2,500 Redemption of preferred stock of Condado Plaza from WMS Industries Inc.......................... -- -- -- (3,400) -- Dividends paid to minority shareholders of subsidiary....................................... (115) (151) (2,240) (1,189) (783) -------- --------- ------- -------- ------- Net cash (used) provided by financing activities.. 1,199 (2,964) (527) (14,751) 274 -------- --------- ------- -------- ------- Increase (decrease) in cash and cash equivalents... 1,055 (1,244) 11,270 2,989 (218) Cash and cash equivalents at beginning of year..... 17,886 6,616 6,616 3,627 3,845 -------- --------- ------- -------- ------- Cash and cash equivalents at end of year........... $ 18,941 $ 5,372 $17,886 $ 6,616 $ 3,627 ======== ========= ======= ======== =======
See Notes to Consolidated Financial Statements. F-111 WHG RESORTS & CASINOS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS EQUITY --------- ------ ---------- -------- ------------- (THOUSANDS OF DOLLARS) Balance as of June 30, 1994............................. $ -- $ 1 $ 3,849 $35,577 $39,427 Net loss.............................................. -- -- -- (4,364) (4,364) ---- ------- ------- ------- Balance as of June 30, 1995............................. -- 1 3,849 31,213 35,063 Net income............................................ -- -- -- 2,437 2,437 ----- ---- ------- ------- ------- Balance as of June 30, 1996............................. -- 1 3,849 33,650 37,500 Net income............................................ -- -- -- 7,317 7,317 Capital contributions by WMS Industries Inc........... -- -- 10,507 -- 10,507 6,050.2 for 1 stock split............................. -- 60 (60) -- -- Balance as of June 30, 1997............................. -- 61 14,296 40,967 55,324 Net loss (unaudited).................................. -- -- -- (1,126) (1,126) Issue preferred stock (unaudited)..................... 3 -- 2,997 -- 3,000 Preferred stock dividends (unaudited)................. -- -- -- (47) (47) ----- ---- ------- ------- ------- Balance as of September 30, 1997 (unaudited)............ $ 3 $ 61 $17,293 $39,794 $57,151 ===== ==== ======= ======= =======
See Notes to Consolidated Financial Statements. F-112 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION AND COMPANY OPERATIONS Basis of Presentation WHG Resorts & Casinos Inc. ("WHG") was formerly known as WMS Hotel Corporation. Prior to the April 21, 1997 spin-off, WHG was a wholly owned subsidiary of Williams Hotel Corporation ("WHC"). WHC was a wholly-owned subsidiary of WMS Industries Inc. ("WMS"). WMS merged WHC, just prior to the April 21, 1997 spin-off, into WHG at which time the predecessor financial statements of WHC appearing herein became the financial statements of WHG. The consolidated financial statements of WHG reflect results of operations, cash flows, financial position and changes in stockholders' equity and have been prepared using the historical basis in the assets and liabilities and historical results of operations of WHG and subsidiaries and affiliates. The pro forma information reflecting income taxes on a separate return basis (unaudited), included with the consolidated statements of operations, reflects the provision for income taxes without the tax benefits allocated to WHG from WMS for utilization of partnership losses in the WMS consolidated Federal income tax return, see Note 6--Income Taxes. WHG during the periods presented did not have income subject to Federal income tax that could have been included in its consolidated Federal income tax return or in the separate tax returns of certain of its subsidiaries along with the partnership losses to be able to realize the tax benefits. Company Operations WHG through its subsidiaries and affiliates owns, operates and manages two of the leading hotels and casinos located in San Juan, Puerto Rico, and through a second affiliate, the El Conquistador Resort & Country Club, a destination resort complex in Las Croabas, Puerto Rico. WHG's holdings include: a 100% interest in Posadas de Puerto Rico Associates, Incorporated, the owner of the Condado Plaza Hotel & Casino ("Condado Plaza"); a 50% interest in Posadas de San Juan Associates, a partnership which owns the El San Juan Hotel & Casino ("El San Juan"); a 23.3% indirect interest in El Conquistador Partnership L.P. which owns the El Conquistador Resort & Country Club; and a 62% interest in Williams Hospitality Group Inc. ("WHGI"), the management company for the above properties. WHG was a wholly owned subsidiary of WMS prior to April 21, 1997. On April 21, 1997 WMS distributed 100% of the outstanding voting common stock of WHG to WMS's stockholders, thereby creating a new independent public corporation. The consolidated interim financial statements as of and for the three months ended September 30, 1997 and 1996 included herein are unaudited. Such information reflects all adjustments consisting solely of normal recurring adjustments, which are in the opinion of management necessary for a fair presentation of the consolidated balance sheet as of September 30, 1997 and the consolidated results of operations and cash flows for the three months ended September 30, 1997 and 1996. Due to the seasonality of the businesses, the reported results are not necessarily indicative of those expected for the entire year. Certain information and disclosures normally included in annual financial statements in accordance with generally accepted accounting principles have been excluded or omitted in presentation of the consolidated interim financial statements. NOTE 2: PRINCIPAL ACCOUNTING POLICIES Consolidation Policy The consolidated financial statements include the accounts of WHG and its majority-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. Investments in companies that are 20% to 50% owned are accounted for by the equity method. WHG records its equity in the results of operations of El Conquistador Partnership L.P., based on that partnership's fiscal year end of March 31. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates. F-113 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Inventories Inventories, which consist mainly of food, beverages and supplies, are valued at the lower of cost (determined by the first-in, first-out method) or market. Property and Equiptment Property and equipment are stated at cost and depreciated by the straight- line method over their estimated useful lives. Excess of Purchase Cost Over Amount Assigned to Net Assets Acquired (Goodwill) Goodwill arising from acquisitions is being amortized by the straight-line method over 20 to 40 years. Casino Revenues Casino revenues are the net win from gaming activities, which is the difference between gaming wins and losses. Casino Promotional Allowances Casino promotional allowances represent the retail value of complimentary food, beverages and hotel services furnished to patrons, commissions and transportation costs. Advertising Expense The cost of advertising is charged to earnings as incurred and for fiscal 1997, 1996 and 1995 was $809,000, $988,000 and $1,103,000, respectively. NOTE 3: ACQUISITIONS In July 1994, the Company acquired 5% of Williams Hospitality increasing its interest from 57% to 62%. In July 1994, the Company acquired 2.5% of Posadas de Puerto Rico Associates, Incorporated increasing its interest from 92.5% to 95%. In April 1997, the Company acquired the remaining 5% of Posadas de Puerto Rico Associates, Incorporated increasing its interest from 95% to 100%. NOTE 4: INVESTMENTS IN NONCONSOLIDATED AFFILIATES Investments in nonconsolidated affiliates consist of a 50% interest in Posadas de San Juan Associates, a partnership ("PSJA") and a 23.3% indirect interest in El Conquistador Partnership L.P. ("El Conquistador") through a 46.5% interest in WKA El Con Associates, a partnership ("WKA El Con"). F-114 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Current receivables from nonconsolidated affiliates at June 30 were:
1997 1996 -------- -------- (IN THOUSANDS) PSJA................................................... $ 252 $ 61 WKA El Con............................................. 85 64 El Conquistador........................................ 768 483 -------- -------- $ 1,105 $ 608 ======== ======== Investments in and noncurrent receivables and advances to nonconsolidated affiliates at June 30 were: 1997 1996 -------- -------- (IN THOUSANDS) Investments: PSJA................................................. $ (6,690) $ (7,678) WKA El Con........................................... (2,813) (612) Receivables and advances: PSJA................................................. 25,541 23,148 WKA El Con........................................... 5,062 4,556 El Conquistador...................................... 9,503 7,712 -------- -------- $ 30,603 $ 27,126 ======== ========
PSJA operates as a partnership, therefore, 50% of its accumulated deficit is recorded as an investment. Summarized financial data for PSJA's financial position at June 30, 1997 and 1996 and PSJA's results of operations for fiscal 1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 were:
SEPTEMER 30, SEPTEMBER 30, 1997 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 ----------- ------------ ------------ ------------- ------------- (IN THOUSANDS) (IN THOUSANDS) (UNAUDITED) Current assets................... $ -- -- $ 8,133 $ 6,558 -- Noncurrent assets................ -- -- 35,804 35,198 -- Total assets..................... -- -- 43,937 41,756 -- Payable to affiliates............ -- -- 237 61 -- Other current liabilities........ -- -- 10,659 10,101 -- Total current liabilities........ -- -- 10,896 10,162 -- Noncurrent payable to affiliates...................... -- -- 25,591 23,148 -- Other noncurrent liabilities..... -- -- 20,831 23,803 -- Total noncurrent liabilities..... -- -- 46,422 46,951 -- Partners' capital deficiency..... -- -- (13,381) (15,357) -- Total liabilities and partners' capital deficiency.............. -- -- 43,937 41,756 -- Revenues......................... $ 10,944 9,600 51,732 50,124 $ 51,797 Management fees and interest payable to WHGI................. 955 836 5,325 4,738 4,691 Other costs and expenses......... 10,927 10,472 44,431 46,746 49,507 Net income (loss)................ $ (938) $ (1,708) $ 1,976 $ (1,360) $ (2,401)
F-115 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company has a 46.5% interest in WKA El Con which has a 50% interest in El Conquistador. Summarized financial data for WKA El Con's financial position at June 30, 1997 and 1996 and WKA El Con's results of operations for fiscal 1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 were:
SEPTEMBER 30, SEPTEMBER 30, 1997 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 ------------ ------------- ------------- ------------- ------------- (IN THOUSANDS) (IN THOUSANDS) (UNAUDITED) Loans receivable from El Conquistador.................... -- -- $ 18,343 $ 16,116 -- Investment in El Conquistador, net............................. -- -- (12,464) (7,763) -- Other assets, net................ -- -- 2,384 3,566 -- Total assets..................... -- -- 8,263 11,919 -- Current payable to WHGI.......... -- -- 85 64 -- Long-term note payable including interest........................ -- -- 5,527 5,197 -- Long-term notes payable to partners including interest..... -- -- 10,475 9,791 -- Partners' (capital deficiency)... -- -- (7,824) (3,133) -- Total liabilities and partners' capital deficiency.............. -- -- 8,263 11,919 -- Net operating income (loss)...... $ 5 $ (11) 10 (178) $ (356) Equity in net loss of El Conquistador to March 31 for fiscal years and to June 30 for the three months ended September 30.................. (1,168) (922) (4,701) (6,120) (13,739) Equity in income of Las Casitas.. -- -- -- 313 1,627 Net (loss)....................... $(1,163) $(933) $ (4,691) $ (5,985) $(12,468)
The WKA El Con's long-term note payable is collateralized by a pledge of a second mortgage on land owned by the Company that cost $3,761,000 and a WMS guarantee of $1,000,000 as to which WHG will indemnify WMS in the event of any payments made on the guarantee. The other partners of WKA El Con have pledged cash and a portion of their interest in WHGI stock, in proportion to their interests in WKA El Con, to WHG to be used in the event the guarantee is drawn on. El Conquistador is a destination resort and casino which began operations in November 1993. Summarized financial data for El Conquistador's financial position at March 31, 1997 and 1996 (the partnership's fiscal year end) and El Conquistador's results of operations for fiscal years ended March 31, 1997, 1996 and 1995 and the three months ended June 30, 1997 and 1996 were:
JUNE 30, JUNE 30, 1997 1996 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 ------------ ------------- -------------- -------------- ------------- (IN THOUSANDS) (IN THOUSANDS) (UNAUDITED) Current assets................ -- -- $ 13,618 $ 11,823 -- Land, building and equipment, net.......................... -- -- 185,552 190,463 -- Deferred debt issuance and pre-opening costs, net....... -- -- 5,841 8,587 -- Other assets.................. -- -- 419 818 -- Total assets.................. -- -- 205,430 211,691 -- Current liabilities........... -- -- 22,829 23,281 -- Debt due February 1, 1998..... -- -- 120,000 -- -- Long-term debt................ -- -- 26,660 149,324 -- Long-term due to partners and -- -- affiliates................... -- -- 48,869 42,611 -- Partners' (capital deficiency).................. -- -- (12,928) (3,525) -- Total liabilities and capital deficiency................... -- -- 205,430 211,691 -- Revenues...................... $ 24,438 $ 23,995 92,958 89,214 $ 84,743 Management fees and interest payable to WHGI.............. 1,529 1,503 6,282 5,820 3,874 Interest payable to partners.. 611 702 2,498 2,598 1,898 Other costs and expenses...... 22,326 21,358 84,434 82,538 95,324 Depreciation and amortization................. 2,307 2,276 9,147 10,499 11,124 Net (loss).................... $ (2,335) $ (1,844) $ (9,403) $(12,241) $(27,477)
F-116 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At March 31, 1997 WHGI has provided guarantees amounting to $2,170,000 in connection with leasing and other financing transactions of El Conquistador. Debt of the El Conquistador of $120,000,000 is collateralized by a letter of credit which terminates on March 9, 1998. Under the terms of the loan agreement, such debt is required to be repaid on February 1, 1998 in the event the letter of credit is not renewed or replaced prior to November 9, 1997. El Conquistador has engaged investment advisors to investigate obtaining an alternative letter of credit or financing arrangement. If such an alternative is not found, the Company's investment in, receivables from, advances to and potential payments on guarantees for El Conquistador totaling $18,463,000 at June 30, 1997 may not be recoverable. In the event this amount is not recovered the 38% minority interest in WHGI would absorb approximately $5,900,000 of the charge. WHGI would also incur a loss of future management fees from El Conquistador. For the years ended June 30, 1997, 1996 and 1995, the Company accrued approximately $5,650,000, $5,395,000 and $3,704,000, respectively, in management fee revenue from El Conquistador. The Company also recorded equity in losses of El Conquistador of $2,188,000, $2,786,000 and $5,803,000 in the years ending June 30, 1997, 1996 and 1995, respectively. Consolidated retained earnings of the Company at June 30, 1997 is reduced by $23,262,000 for the Company's ownership percentage in the accumulated deficit of PSJA and WKA El Con which are accounted for under the equity method. Interest earned by the Company from all the nonconsolidated affiliates for the years ended June 30, 1997, 1996 and 1995 was $1,823,000, $1,650,000 and $1,373,000, respectively. NOTE 5: PROPERTY AND EQUIPMENT At June 30 net property and equipment were:
1997 1996 -------- -------- (IN THOUSANDS) Land................................................... $ 7,535 $ 7,535 Buildings and improvements............................. 47,865 45,294 Furniture, fixtures and equipment...................... 31,975 30,473 -------- -------- 87,375 83,302 Less accumulated depreciation.......................... (43,514) (38,383) -------- -------- Net property and equipment............................. $ 43,861 $ 44,919 ======== ========
NOTE 6: INCOME TAXES The Company's two operating subsidiaries and two nonconsolidated affiliates operate under the provisions of the Puerto Rico Tourism Incentives Act of 1993 which provides a ten-year incentive grant which may be extended for ten years. Major benefits include a 90% exemption from income taxes on income deemed to be derived from tourism operations. The grant also provides a 90% exemption from municipal real and personal property taxes. Income deemed to be derived from casino operations are not covered by the grant. The two operating subsidiaries, the Condado Plaza and WHGI elect to file income tax returns under Section 936 of the United States Internal Revenue Code which provides for total or, after 1994, partial exemption from Federal income taxes on income from sources within Puerto Rico if certain conditions are met. The portion of taxes that can be exempt under Section 936 is determined by the calculation of certain limits prescribed by Section 936. These limits are either based on certain costs and expenses ("economic activity method") or a fixed F-117 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) percentage as prescribed in Section 936 ("percentage limitation method"). Corporations that operate under Section 936 cannot be members of a consolidated Federal income tax return. The tax exemption under Section 936 generally decreases each year until the benefits terminate in 2005. The Condado Plaza elected the economic activity method which results in a 100% exemption from Federal income taxes. WHGI elected the percentage limitation method which resulted in a Federal tax provision of $2,793,000 in fiscal 1997, $1,741,000 in fiscal 1996 and $1,149,000 in fiscal 1995. Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income taxes in the consolidated Federal income tax return of WMS and allocated to the Company through April 22, 1997. Significant components of the Company's deferred tax assets and liabilities at June 30 were:
1997 1996 ------- ------- (IN THOUSANDS) Deferred tax liabilities resulting from: Tax over book deductions of WKA El Con.................. $(1,033) $ (686) Tax over book deductions of PSJA........................ (1,605) (1,605) ------- ------- Deferred tax liability.................................. $(2,638) $(2,291) ======= =======
The Company's provision for income taxes was calculated on a historical basis. WHG and certain of its subsidiaries were members of the WMS consolidated Federal income tax return since their inception until April 21, 1997, the effective date of the spin off. Accordingly, losses for Federal income tax purposes which were primarily generated by the Company's equity in loss of nonconsolidated affiliates in the form of partnership losses were utilized by WMS in its consolidated tax return and resulted in tax benefits. The Company received the tax benefits of $428,000, $4,139,000 and $510,000 for usage of such losses during the years ended June 30, 1997, 1996 and 1995, respectively. Significant components of the (provision) credit for income taxes for the years ended June 30, 1997, 1996 and 1995 were:
1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Current: Federal: Certain Puerto Rico corporate income subject to federal tax............................... $(2,793) $(1,741) $(1,149) U.S. subsidiaries--primarily partnership losses of nonconsolidated affiliates......... 428 4,139 510 ------- ------- ------- Total federal............................... (2,365) 2,398 (639) Puerto Rico.................................... (685) (804) (753) ------- ------- ------- Total current (provision) credit............ (3,050) 1,594 (1,392) Deferred--federal, primarily from book to tax differences on partnership losses.............. (347) (3,239) 1,626 ------- ------- ------- (Provision) credit for income taxes............. $(3,397) $(1,645) $ 234 ======= ======= =======
F-118 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) For financial reporting purposes, income (loss) before income tax credit (provision) and minority interests is comprised of the following components for the years ended June 30:
1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Income (loss) before income tax credit (provision) and minority interests: Puerto Rico corporate income.................. $16,908 $11,487 $ 5,652 U.S. subsidiaries--primarily partnership losses of nonconsolidated affiliates......... (1,948) (3,253) (6,783) ------- ------- ------- $14,960 $ 8,234 $(1,131) ======= ======= =======
The provision (credit) for income taxes differs from the amount computed using the statutory federal income tax rate as follows for the years ended June 30:
1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Statutory federal income tax at 35%............. $ 5,236 $ 2,882 $ (395) Puerto Rico corporate loss resulting in no tax benefit........................................ -- 199 1,525 Puerto Rico corporate income taxed at lower rates.......................................... (2,180) (1,671) (1,602) Other, net...................................... 341 235 238 ------- ------- ------- $ 3,397 $ 1,645 $ (234) ======= ======= =======
Undistributed earnings of the Puerto Rico subsidiaries that operate as Section 936 corporations under Federal income tax regulations were approximately $41,800,000 at June 30, 1997. Those earnings are considered indefinitely reinvested and, accordingly, no provision for income or toll gate taxes has been provided thereon. Upon distribution of those earnings in the form of dividends, the Company would be subject to U.S. income tax of approximately $2,300,000 and toll gate withholding taxes of approximately $750,000. WHG and WMS have entered into a tax sharing agreement that provides for the rights and obligations of each company regarding deficiencies and refunds, if any, relating to Federal and Puerto Rico income taxes for tax years up to and including fiscal 1997. During fiscal 1997, 1996 and 1995 income taxes paid to taxing authorities were $2,728,000, $2,289,000 and $1,549,000, respectively. NOTE 7: NOTES PAYABLE AND LONG-TERM DEBT The Condado Plaza has a $2,000,000 bank line of credit which is payable on demand with interest at the prime rate plus 1 percentage point, 9.5% and 9.25% at June 30, 1997 and 1996, respectively. Borrowings under the line were $1,000,000 on June 30, 1997 and $2,000,000 on June 30, 1996. The line of credit is collateralized by a mortgage on the Condado Plaza property and accounts receivable. F-119 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Long-term debt at June 30 was:
1997 1996 ------- ------- (IN THOUSANDS) Condado Plaza mortgage note, due in increasing semi- annual amounts through 1999, 12%..................... $21,900 $24,150 Other................................................. 1,649 2,704 ------- ------- 23,549 26,854 Less current maturities............................... (3,681) (3,299) ------- ------- $19,868 $23,555 ======= =======
Scheduled payments by fiscal year on long-term debt are as follows: $3,681,000 in 1998 and $19,868,000 in 1999. The amount of interest paid during fiscal 1997, 1996 and 1995 was $3,255,000, $3,679,000 and $4,306,000, respectively. NOTE 8: AUTHORIZED SHARES At June 30, 1997 the authorized common stock of WHG consists of 12,000,000 shares of $.01 par value of which 6,050,200 shares were issued and outstanding. The Company's capital structure at June 30, 1997 also consists of 3,000,000 shares of Class A non-voting common stock of which none are outstanding. The Company also has 2,000,000 shares of authorized preferred stock, none were issued at June 30, 1997. The preferred stock will be issuable in series, and the relative rights and preferences and the number of shares in each series are established by the Board of Directors. At June 30, 1997, 300,000 shares of the Preferred Stock were designated as Series B Preferred Stock and reserved for issuance. See Note 16. At June 30, 1996 the capital structure consisted of 1,000 shares of no par value common stock of which 100 were issued and outstanding. NOTE 9: STOCK OPTION PLAN The Company's stock option plan allows for the grant of both incentive stock options and nonqualified options on shares of voting common stock through the year 2007. The stock option plan allows for the grant of options on 900,000 shares of common stock to officers, directors, employees and under certain conditions to consultants and advisers to the Company and its subsidiaries. The stock option committee has the authority to fix the terms and conditions upon which each option is granted, but in no event shall the term exceed ten years or be granted at less than 100% of the fair market value of the stock at the date of grant in the case of incentive stock options and 85% of the fair market value of the stock on the date of grant in the case of non-qualified stock options. The Company accounts for stock options for purposes of determining net income in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees." SFAS No. 123 regarding stock option plans permits the use of APB No. 25 but requires the inclusion of certain pro forma disclosures in the footnotes. If the Company had adopted the expensing provisions of SFAs No. 125 the Company's pro forma net income for fiscal 1997 would have been $5,876,000. Pro forma primary and fully diluted earnings per share for fiscal 1997 would have been $0.97 and $0.96, respectively. There is no effect on reported amounts for fiscal 1996, since the options were not granted until fiscal 1997. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants, all of which were in 1997: dividend yield 0%; expected volatility 32%; risk free interest rates of 6.2%; and expected lives of four years. F-120 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. During fiscal 1997, there were 898,000 options granted, all of which were outstanding on June 30, 1997 and have a weighted average exercise price of $8.49, a weighted average fair market value of $2.94, a weighted average contractual life of 9.8 years and exercise prices that range from $8.38 to $11.00. At June 30, 1997, 472,000 options are exercisable with a weighted average exercise price of $8.38. NOTE 10: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Company to concentrations of credit and market risk consist primarily of cash equivalents and accounts receivable. By policy, the Company places its cash equivalents only in high credit quality securities and limits the amounts invested in any one security. At June 30, 1997, accounts receivable are from hotel and casino guests and travel agents located throughout North America and Latin America and because of the number and geographic distribution, concentration is limited. The estimated fair value of financial instruments at June 30, 1997 has been determined by the Company, using available market information and valuation methodologies considered to be appropriate. The amounts reported for cash equivalents and current notes payable are considered to be a reasonable estimate of their fair value. At June 30, 1997, the $21,900,000 Condado Plaza 12% mortgage note payable is estimated to have a fair value of $22,781,000 using discounted cash flow analysis based on an estimated interest rate of 8.25%. The mortgage note is subject to a substantial prepayment penalty based on interest rate differentials plus a fixed percentage. NOTE 11: LEASE COMMITMENTS Operating leases relate principally to hotel facilities and equipment. A portion of the Condado Plaza hotel facilities are leased from a partnership owned by a former minority shareholder of the Condado Plaza. The former minority shareholder lease extends through 2008 at an annual rent of $684,000 through September 30, 1998 with periodic escalations thereafter to an annual rent of $827,000 in 2004. Rent expense for fiscal 1997, 1996 and 1995 was $760,000, $1,027,000 and $1,077,000, respectively (including $684,000, paid in each fiscal 1997, 1996 and 1995, under the former minority shareholder lease at the Condado Plaza). Total net future lease commitments for minimum rentals at June 30, 1998, 1999, 2000, 2001, 2002 and thereafter are $718,000, $769,000, $786,000, $786,000, $786,000 and $1,490,000, respectively. F-121 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12: TRANSACTIONS WITH WMS The Company's two operating subsidiaries and two nonconsolidated affiliates have each provided for its off-season cash needs through its own operating cash and from individual short-term note arrangements. Plant and equipment additions at each property have also generally been provided by its own cash from operations or third party financing. Cash advances from WMS, for the periods reported, have been used for investment purposes. A summary of advances and repayments between WMS and the Company prior to the April 21, 1997 spin-off for the years ended June 30, 1997, 1996 and 1995 were:
1997 1996 1995 ------ ------- ------ (IN THOUSANDS) Advances from (repayments to) WMS by use or source: Purchase of additional shares in subsidiaries.... $ -- $ -- $3,738 Investment in and advances to (repayments from) WKA El Con...................................... -- (546) 157 Cash primarily generated from Williams Hospitality dividends........................... -- (1,590) (260) Cash received from WMS for cumulative tax benefits........................................ 4,357 -- -- Other, net....................................... 409 -- -- Income tax benefits from partnership losses utilized by WMS-- see Note 6.................... (493) (4,139) (510) ------ ------- ------ $4,273 $(6,275) $3,125 ====== ======= ======
During fiscal 1995 the Condado Plaza sold to WMS 50 shares of 8% non-voting preferred stock with a liquidation preference of $50,000 per share for $2,500,000 bringing the total of such preferred stock held by WMS to 150 shares and $7,500,000 at June 30, 1995. During fiscal 1996 the Condado Plaza redeemed 68 of those preferred shares at $50,000 per share for $3,400,000. During fiscal 1997 the remaining 82 preferred shares were contributed to the capital of WHG. In April 1997, the Condado Plaza redeemed 41 of those preferred shares at $50,000 per share for $2,050,000. Subsequent to June 30, 1997 (July and August 1997), an additional 24 shares were redeemed at $50,000 per share for $1,200,000. During fiscal 1997 WMS contributed the following to the capital of WHG (in thousands): Net, intercompany payable to WMS................................. $ 4,764 Cash contribution................................................ 1,643 82 preferred shares of PPRA, liquidation preference of $50,000... 4,100 ------- Total contribution............................................... $10,507 =======
NOTE 13: PENSION PLAN Certain subsidiaries are required to make contributions on behalf of unionized employees to defray part of the costs of the multi-employer pension plans established by their respective labor unions. Such contributions are computed using a fixed charge per employee. Contributions to the plans for fiscal 1997, 1996 and 1995 were $377,000, $340,000 and $352,000, respectively. F-122 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for fiscal 1997 and 1996 are as follows, in thousands except per share amounts:
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1996 1996 1997 1997 ------------- ------------ ---------- ---------- Fiscal 1997 Quarters: Revenues................... $ 12,879 $ 17,175 $ 21,592 $ 17,988 ========== ========== ========== ========== Operating income........... $ 790 $ 4,312 $ 8,115 $ 3,870 Interest expense, net...... (301) (282) (263) (85) Equity in income (loss) of nonconsolidated affiliates................ (1,289) (1,739) 633 1,199 Credit (provision) for income taxes.............. 89 (313) (2,078) (1,095) Minority interests......... (421) (841) (1,670) (1,068) Dividend on preferred stock of subsidiary............. (82) (82) (82) -- ---------- ---------- ---------- ---------- Net income (loss).......... $ (1,214) $ 1,055 $ 4,655 $ 2,821 ========== ========== ========== ========== Primary earnings per share..................... $ (.20) $ (.17) $ .77 $ .46 ========== ========== ========== ========== Shares used in calculation............... 6,050,200 6,050,200 6,050,200 6,195,774 ========== ========== ========== ========== Fully diluted earnings per share..................... $ (.20) $ (.17) $ .77 $ .45 ========== ========== ========== ========== Shares used in calculation............... 6,050,200 6,050,200 6,050,200 6,247,241 ========== ========== ========== ========== Pro forma net income (loss) reflecting income taxes on a separate return basis... $ (1,675) $ 435 $ 5,121 $ 3,355 ========== ========== ========== ========== SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 ------------- ------------ ---------- ---------- Fiscal 1996 Quarters: Revenues................... $ 13,404 $ 17,452 $ 21,450 $ 16,388 ========== ========== ========== ========== Operating income (loss).... $ (226) $ 4,069 $ 7,248 $ 2,467 Interest expense, net...... (560) (493) (395) (411) Equity in income (loss) of nonconsolidated affiliates................ (2,087) (1,510) (318) 450 Credit (provision) for income taxes.............. 448 (153) (1,005) (935) Minority interests......... (298) (896) (1,585) (857) Dividend on preferred stock of subsidiary............. (150) (146) (126) (94) ---------- ---------- ---------- ---------- Net income (loss).......... $ (2,873) $ 871 $ 3,819 $ 620 ========== ========== ========== ========== Earnings per share......... $ (.47) $ .14 $ .63 $ .10 ========== ========== ========== ========== Shares used................ 6,050,200 6,050,200 6,050,200 6,050,200 ========== ========== ========== ========== Pro forma net income (loss) reflecting income taxes on a separate return basis... $ (3,623) $ 361 $ 3,713 $ 1,086 ========== ========== ========== ==========
For pro forma net income (loss), see Note 1--Basis of Presentation. F-123 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 15: SEGMENT INFORMATION The Company's operations are conducted through two industry segments: the operation of the Condado Plaza and the management of hotels/casinos. Industry segment information for the fiscal years ended June 30 follows:
1997 1996 1995 -------- -------- -------- (IN THOUSANDS) Revenues Condado Plaza................................ $ 55,697 $ 55,322 $ 57,530 WHGI........................................ 18,227 16,939 17,350 Intersegment revenues elimination--WHGI fees charged to Condado Plaza................... (4,290) (3,567) (4,002) -------- -------- -------- Total revenues............................ $ 69,634 $ 68,694 $ 70,878 ======== ======== ======== Operating income (loss) Condado Plaza............................... $ 6,348 $ 2,830 $ (1,465) WHGI........................................ 11,923 10,837 9,174 General corporate administrative expenses... (1,184) (109) (85) -------- -------- -------- Total operating income.................... $ 17,087 $ 13,558 $ 7,624 ======== ======== ======== Identifiable assets Condado Plaza............................... $ 55,385 $ 53,323 $ 57,879 WHGI........................................ 15,086 18,582 17,737 General investment and corporate............ 15,294 5,095 5,994 Investments in, receivables and advances to nonconsolidated affiliates................. 31,708 27,734 29,696 -------- -------- -------- Total identifiable assets................. $117,473 $104,734 $111,306 ======== ======== ======== Depreciation of property and equipment Condado Plaza............................... $ 4,227 $ 4,120 $ 4,656 WHGI........................................ 777 769 681 -------- -------- -------- Total depreciation of property and equipment................................ $ 5,004 $ 4,889 $ 5,337 ======== ======== ======== Capital expenditures Condado Plaza............................... $ 3,181 $ 1,078 $ 2,030 WHGI........................................ 41 71 36 -------- -------- -------- Total capital expenditures................ $ 3,222 $ 1,149 $ 2,066 ======== ======== ========
NOTE 16: CONTINGENT LIABILITIES The Company is involved in various disputes arising in the ordinary course of business, which may result in litigation. Management expects no material adverse effect on the Company's financial condition as a result of these matters. NOTE 17: SALE OF PREFERRED STOCK SUBSEQUENT TO JUNE 30, 1997 The Board of Directors exercised the put provisions of a Put Option and Call Option Agreement that was established on April 21, 1997 which resulted in the Chairman of the Board purchasing on July 31, 1997, 300,000 shares of Series B Preferred Stock for $3,000,000 in cash. Each share of Series B Preferred Stock has 5 votes F-124 WHG RESORTS & CASINOS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) per share voting collectively with the common stockholders and a liquidation preference of $10.00 per share plus accrued dividends, has a quarterly dividend equal to the prime rate plus one half percent calculated on the liquidation preference and the holder has a redemption right after three years or earlier in the event of two unpaid quarterly dividends. The holder of the Series B Preferred Stock can convert into shares of common stock. The conversion price is $9.00, which is the lower of the closing price of the voting common stock on its first day of official trading ($9.00) and the closing price in the New York Stock Exchange at the close of business on the business day immediately prior to the date of issuance of the Preferred Stock ($12.50). NOTE 18: PROPOSED ACQUISITION SUBSEQUENT TO JUNE 30, 1997 On September 17, 1997, the Company executed an asset purchase agreement to acquire an existing 127 room Hotel and related land next to the Condado Plaza for $9,600,000, subject to certain terms and conditions, including satisfactory due diligence. If the agreement is finalized, the Company intends to finance the purchase price through long term financing and the use of excess cash currently available. F-125 SCHEDULE II WHG RESORTS & CASINOS INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ------------ --------------------- ------------ ---------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS-- BALANCE AT BEGINNING OF COSTS AND OTHER AMOUNTS END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITTEN OFF PERIOD ----------- ------------ ---------- ---------- ------------ ---------- Allowance for receivables: 1997.................. $474,000 $ 366,000 $-- $ 191,000 $649,000 ======== ========== ==== ========== ======== 1996.................. $399,000 $1,457,000 $-- $1,382,000 $474,000 ======== ========== ==== ========== ======== 1995.................. $755,000 $1,842,000 $-- $2,198,000 $399,000 ======== ========== ==== ========== ======== Unrealized holding loss on noncurrent marketable equity securities: 1997.................. $ -- $ -- $-- $ -- $ -- ======== ========== ==== ========== ======== 1996.................. $ -- $ -- $-- $ -- $ -- ======== ========== ==== ========== ======== 1995.................. $ -- $ -- $-- $ -- $ -- ======== ========== ==== ========== ========
- -------- (1) Included as a direct reduction of stockholders' equity. F-126 REPORT OF INDEPENDENT AUDITORS The Partners Posadas de San Juan Associates We have audited the accompanying balance sheets of Posadas de San Juan Associates as of June 30, 1997 and 1996, and the related statements of operations and deficit, and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedule of valuation and qualifying accounts for each of the three years in the period ended June 30, 1997. These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Posadas de San Juan Associates at June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP San Juan, Puerto Rico August 7, 1997 F-127 POSADAS DE SAN JUAN ASSOCIATES BALANCE SHEETS
SEPTEMBER 30, JUNE 30, ------------ ------------------------ 1997 1997 1996 ------------ ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......................... $ 2,787,000 $ 2,681,100 $ 2,443,700 Trade accounts receivable, less allowance for doubtful accounts of $606,300 and $357,100 at June 30, 1997 and 1996, respectively, and $947,300 at September 30, 1997.................... 3,697,600 3,692,000 2,370,700 Inventories........................................ 893,800 969,500 906,400 Prepaid expenses................................... 534,300 790,300 837,100 ----------- ----------- ----------- Total current assets............................. 7,912,700 8,132,900 6,557,900 Land, building and equipment: Land............................................... 3,300,000 3,300,000 3,300,000 Building........................................... 14,350,700 14,350,700 14,350,700 Building improvements.............................. 14,533,900 14,285,400 12,439,600 Furniture, fixtures and equipment.................. 36,234,900 36,114,600 33,814,000 Construction in progress........................... 658,200 113,400 -- ---------- ----------- ----------- 69,077,700 68,164,100 63,904,300 Less accumulated depreciation...................... 34,203,200 33,353,000 30,080,700 ---------- ----------- ----------- 34,874,500 34,811,100 33,823,600 Operating equipment, net............................. 434,300 523,000 570,700 Deferred financing costs, less accumulated amortization of $662,400 and $530,900 at June 30, 1997 and 1996, respectively, and $696,000 at September 30, 1997.................. 368,400 402,000 533,500 Other assets......................................... 172,900 68,300 270,500 ---------- ----------- ----------- Total assets......................................... $43,762,800 $43,937,300 $41,756,200 =========== =========== =========== LIABILITIES AND DEFICIENCY IN PARTNERSHIP CAPITAL Current liabilities: Trade accounts payable............................. $ 4,187,400 $ 4,078,700 $ 4,039,900 Accrued compensation and related benefits.......... 1,419,900 1,376,600 1,139,300 Other accrued liabilities.......................... 2,345,100 2,032,600 1,458,700 Due to affiliated companies........................ 1,040,900 237,600 11,600 Note payable to bank............................... -- -- 300,000 Current portion of long-term debt.................. 3,170,600 3,170,600 3,152,000 ---------- ----------- ----------- Total current liabilities........................ 12,163,900 10,896,100 10,101,500 Long-term debt, net of current portion............... 20,045,600 20,831,400 23,805,000 Due to Williams Hospitality Group Inc................ 25,872,900 25,590,800 23,206,700 Deficiency in partnership capital: Capital contribution............................... 7,000,000 7,000,000 7,000,000 Deficit............................................ (21,319,600) (20,381,000) (22,357,000) ---------- ----------- ----------- Total deficiency in partnership capital.............. (14,319,600) (13,381,000) (15,357,000) ---------- ----------- ----------- Total liabilities and deficiency in partnership capital............................................. $43,762,800 $43,937,300 $41,756,200 =========== =========== ===========
See accompanying notes. F-128 POSADAS DE SAN JUAN ASSOCIATES STATEMENTS OF OPERATIONS AND DEFICIT
THREE MONTHS ENDED SEPTEMBER 30, YEAR ENDED JUNE 30, -------------------------- ---------------------------------------- 1997 1996 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenues: Rooms.............................. $ 4,264,700 $ 3,760,000 $ 22,588,800 $ 22,016,700 $ 21,517,300 Food and beverage.................. 2,476,300 2,370,800 13,218,000 13,424,400 12,688,200 Casino............................. 4,917,500 3,926,700 19,582,200 18,117,600 22,575,400 Rental and other income............ 871,000 665,600 3,255,800 3,503,000 2,852,400 Less casino promotional allowances........................ (1,586,000) (1,002,400) (6,905,300) (6,937,900) (7,836,300) ------------ ------------ ------------ ------------ ------------ Net revenues..................... 10,943,500 9,720,700 51,739,500 50,123,800 51,797,000 Costs and expenses: Rooms.............................. 1,643,500 1,493,200 6,764,600 6,891,000 6,775,000 Food and beverage.................. 1,920,000 1,900,900 9,297,400 9,506,100 9,340,600 Casino............................. 2,524,500 2,439,200 9,729,000 10,716,800 14,027,100 Selling, general and administrative.................... 2,352,500 2,293,800 8,803,200 9,094,000 8,953,700 Management and incentive management fees.............................. 773,400 589,100 4,336,700 3,850,100 3,893,000 Property operation, maintenance and energy costs...................... 1,060,400 1,150,000 4,509,700 4,803,200 4,416,800 Depreciation and amortization...... 891,900 818,500 3,438,800 3,595,300 3,617,300 ------------ ------------ ------------ ------------ ------------ 11,166,200 10,684,700 46,879,400 48,456,500 51,023,500 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations.... (222,700) (964,000) 4,860,100 1,667,300 773,500 Interest income...................... -- -- -- -- 2,500 Interest expense..................... (715,900) (743,700) (2,884,100) (3,026,800) (3,176,800) ------------ ------------ ------------ ------------ ------------ Net income (loss).................... (938,600) (1,707,700) 1,976,000 (1,359,500) (2,400,800) Deficit at beginning of year......... (20,381,000) (22,357,000) (22,357,000) (20,997,500) (18,596,700) ------------ ------------ ------------ ------------ ------------ Deficit at end of year............... $(21,319,600) $(24,064,700) $(20,381,000) $(22,357,000) $(20,997,500) ============ ============ ============ ============ ============
See accompanying notes. F-129 POSADAS DE SAN JUAN ASSOCIATES STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, YEAR ENDED JUNE 30, ------------------------ ------------------------------------- 1997 1996 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Operating Activities Net income (loss)...................... $ (938,600) $(1,707,700) $ 1,976,000 $(1,359,500) $(2,400,800) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........ 891,900 818,500 3,438,800 3,595,300 3,617,300 Provision for losses on accounts receivable.......................... 214,900 214,900 150,600 1,278,200 3,880,400 Gain or sale of equipment............ -- -- -- (46,600) -- Changes in operating assets and liabilities: Amounts due to/from affiliated companies.......................... 1,085,400 461,500 2,610,100 2,086,700 639,600 Trade accounts receivable........... (220,500) 212,600 (1,471,900) 503,900 833,200 Inventories and prepaid expenses.... 331,700 121,700 (16,400) 193,600 21,600 Other assets........................ (112,700) (734,500) 167,200 (10,500) (125,600) Trade accounts payable, accrued expenses and other accrued liabilities........................ 464,500 551,700 850,000 (990,600) (2,493,100) ----------- ----------- ----------- ----------- ----------- Net cash provided by operating activities........................ 1,716,600 (61,300) 7,704,400 5,250,500 3,972,600 Investing Activities Proceeds from sale of equipment...... -- -- -- 119,300 -- Purchases of property and equipment.. (913,600) (457,400) (4,059,700) (2,502,800) (3,310,000) Purchases of operating equipment-- net................................. 88,700 25,400 47,700 78,800 635,900 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities........................ (824,900) (432,000) (4,012,000) (2,304,700) (2,674,100) Financing Activities Proceeds from long-term debt......... -- -- -- -- 156,200 Proceeds from short-term borrowings.. -- 300,000 -- 300,000 -- Payment of short-term borrowings..... -- -- (300,000) -- -- Payments of long-term debt........... (785,800) (785,800) (3,155,000) (2,326,400) (2,046,800) ----------- ----------- ----------- ----------- ----------- Net cash used in financing activities........................ (785,800) (485,800) (3,455,000) (2,026,400) (1,890,600) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents...................... 105,900 (979,100) 237,400 919,400 (592,100) Cash at beginning of year.............. 2,681,100 2,443,700 2,443,700 1,524,300 2,116,400 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of year.................................. $ 2,787,000 $ 1,464,600 $ 2,681,100 $ 2,443,700 $ 1,524,300 =========== =========== =========== =========== =========== Included in cash provided by operating activities above: Interest paid........................ -- -- $ 2,887,600 $ 3,031,400 $ 3,232,500 =========== =========== =========== =========== ===========
See accompanying notes. F-130 POSADAS DE SAN JUAN ASSOCIATES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 1. INTERIM INFORMATION (UNAUDITED) The interim financial statements as of and for the three months ended September 30, 1997 and 1996 included herein are unaudited. Such information reflects all adjustments, consisting solely of normal recurring adjustments, which are in the opinion of management necessary for a fair presentation of the balance sheet as of September 30, 1997 and the results of operations and cash flows for the three months ended September 30, 1997 and 1996. Due to the seasonality of the business, the reported results are not necessarily indicative of those expected for the entire year. Certain information and disclosures normally included in annual financial statements in accordance with generally accepted accounting principles have been excluded or omitted in presentation of the interim financial statements. 2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES Organization Posadas de San Juan Associates (the Partnership), is a joint venture organized under the General Partnership Laws of the State of New York, pursuant to a Joint Venture Agreement dated July 27, 1984, as amended (the Agreement). The Partnership is 50% owned by ESJ Hotel Corporation, a wholly- owned subsidiary of Posadas de Puerto Rico Associates, Incorporated (Posadas de Puerto Rico), with the remainder owned by entities owned by individual investors (collectively, the Partners). Posadas de Puerto Rico is 100% owned by WHG Resorts & Casinos Inc., a publicly-held corporation. The Partnership shall continue to exist until July 27, 2024, unless terminated earlier by mutual agreement of the Partners pursuant to the Agreement. The Agreement provides that the net profits or losses of the Partnership shall be allocated to the Partners in the same proportion as their capital contributions. The Partnership owns and operates the El San Juan Hotel & Casino (the "Hotel"), a luxury resort hotel and casino property in San Juan, Puerto Rico. Basis of Presentation The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Partnership considers all highly liquid investments with a maturity of three months or less when purchased as cash equivalents. Inventories Inventories, which consist mainly of food, beverages and supplies, are valued at the lower of cost (first-in, first-out method) or market. Land, Building and Equipment Land, building and equipment are stated on the basis of cost. Building and equipment are depreciated by the straight-line method over their estimated useful lives. Deferred Financing Costs Deferred financing costs are being amortized over the maturities of the related debt. Casino Revenues Casino revenues are the net win from gaming activities, which is the difference between gaming wins and losses. F-131 POSADAS DE SAN JUAN ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1997 Promotional Allowances Casino promotional allowances represent the retail value of complimentary food, beverage and hotel services furnished to patrons, commissions and transportation costs. Advertising Costs Advertising costs are charged to operations as incurred. Advertising costs for fiscal years 1997, 1996 and 1995 amounted to approximately $1,388,000, $1,394,000 and $1,299,000, respectively. Fair Values of Financial Instruments The methods and assumptions used to estimate the fair value of the different classes of financial instruments were as follows: Long-term debt: The carrying amount of the long-term borrowings at June 30, 1997 approximates fair value. The fair values were estimated using discounted cash flows, based on the current borrowing rates for similar types of borrowing arrangements. 3. FURNITURE, FIXTURES AND EQUIPMENT FUND In accordance with the terms of the Management Agreement and a certain loan agreement (see Note 6), the Partnership is required to deposit cash equal to 4% of hotel gross revenues each month into a furniture, fixtures and equipment fund. Williams Hospitality Group Inc. (Williams Hospitality), a hotel/casino management company that is an affiliated company, (on behalf of the Partnership) withdraws from the fund amounts required to pay the cost of replacements of, and additions to, furniture, fixtures and equipment at the Hotel. At June 30, 1997 and 1996, there were no unexpended funds available. 4. TRADE ACCOUNTS RECEIVABLE At June 30, 1997 and 1996 trade accounts receivable consisted of the following:
1997 1996 ---------- ---------- Trade accounts receivable--casino................... $2,001,600 $1,045,100 Less allowance for doubtful accounts................ 516,100 266,100 ---------- ---------- 1,485,500 779,000 Trade accounts receivable--hotel.................... 2,296,700 1,682,700 Less allowance for doubtful accounts................ 90,200 91,000 ---------- ---------- 2,206,500 1,591,700 ---------- ---------- $3,692,000 $2,370,700 ========== ==========
Approximately 51% and 31% of the trade accounts receivable--casino, as of June 30, 1997 and 1996, respectively, are from customers in Latin America. F-132 POSADAS DE SAN JUAN ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1997 5. DUE TO AFFILIATED COMPANY Amounts due to affiliated company consist of fees earned by Williams Hospitality and other payments made by Williams Hospitality for services rendered on behalf of the Partnership. At June 30, 1997 and 1996 amounts due to an affiliated company consisted of the following:
1997 1996 ----------- ----------- Due to Williams Hospitality--noncurrent: Incentive management fees....................... $11,283,400 $ 9,878,900 Interest on incentive management fees........... 5,506,400 4,526,800 Basic management fees........................... 8,801,000 8,801,000 ----------- ----------- $25,590,800 $23,206,700 =========== ===========
Payment of substantially all the noncurrent amounts due to Williams Hospitality are restricted under the terms of the Loan Agreement (see Note 6). 6. LINE OF CREDIT The Partnership has available a $1,000,000 revolving line of credit with a bank, which is payable on demand, bearing interest at one percentage over the prime rate. The line of credit is collateralized by substantially all trade accounts receivable and leases with concessionaires as well as the mortgage covering long-term debt. As of June 30, 1997, there was no balance outstanding under the line of credit. 7. LONG-TERM DEBT Long-term debt at June 30, 1997 and 1996 consisted of the following:
1997 1996 ----------- ----------- Mortgage note payable to bank.......................... $23,250,000 $26,250,000 Capital lease obligation bearing interest at 11.18% payable in monthly installments of $3,450, including interest through 1999................................. 70,000 109,600 Capital lease obligation bearing interest at 9.5% payable in monthly installments of $10,413, including interest through 2001................................. 396,100 480,700 Chattel mortgage note payable bearing interest at 9%, payable in monthly installments of $3,900, including interest through 1998, collateralized with personal property.............................................. 85,900 116,700 Note payable to a non-related party, non-interest bearing, payable in two annual installments of $100,000 beginning on October 1, 1998................. 200,000 -- ----------- ----------- 24,002,000 26,957,000 Less current portion................................... 3,170,600 3,152,000 ----------- ----------- $20,831,400 $23,805,000 =========== ===========
The mortgage note payable to bank is collateralized by all the Partnership's real and personal property. The note is payable in accelerating monthly installments with a final installment of $7,500,000 due in fiscal 2003. Interest is payable at rates from 6.7% to 7.3% on $18,250,000 of the note. Interest rates have not been fixed on F-133 POSADAS DE SAN JUAN ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1997 $5,000,000 of the note, which at June 30, 1997 was at an interest rate of 7.97%, which is reset every seven days. Under the terms of the loan agreement, 50% of the excess net free cash flow, as defined, each year is required to be used to prepay the final installment of the note until it is reduced to $3,000,000. Further, distributions to the partners and payment of basic and incentive management fees and accrued interest thereon outstanding at the date of the borrowing may only be paid to the extent of the remaining 50% of the excess net free cash flow. Excess net free cash flow, as defined, amounted to $648,000 at June 30, 1997. Maturities of long-term debt are as follows: Fiscal year ending in: 1998........................................................... $ 3,170,600 1999........................................................... 3,392,000 2000........................................................... 3,726,000 2001........................................................... 3,588,400 2002........................................................... 2,625,000 Thereafter..................................................... 7,500,000 ----------- $24,002,000 ===========
8. INCOME TAXES The Partnership operated under the provisions of the Puerto Rico Tourism Incentives Act of 1993 (the 1993 Act). The 1993 Act provides for a ten-year grant which may be extended for an additional ten-year term. Major benefits of this grant are: a 90% exemption from income taxes on hotel income through the entire term of the grant, and a 90% exemption from municipal real and personal property taxes for the first five years. The Partnership's casino operations are not covered by the tax exemption grant and are fully taxable. As of June 30, 1997, the Partnership had net operating loss carryforwards of approximately $20,391,600, net of approximately $1,600,000 used to offset 1997 taxable income for Puerto Rico income tax purposes from its combined hotel and casino operations and, accordingly, no Puerto Rico taxes have been provided in the accompanying financial statements. Such losses may be utilized to offset future Puerto Rico taxable income through June 30, 2001 as follows: 1998, $2,064,000; 1999, $3,271,000; 2000, $3,896,600; 2001, $6,046,000 and 2002, $5,114,000. Following the provisions of SFAS No. 109, the deferred tax asset that results from the cumulative net operating loss carryforwards has been fully reserved. For Puerto Rico income tax purposes the Partnership is taxed as if it were a corporation. Income of the Partnership for federal income tax purposes is taxable to the Partners. 9. TRANSACTIONS WITH RELATED PARTIES The Partnership has an Operating and Management Agreement (the Management Agreement) dated October 2, 1986 with Williams Hospitality. The Management Agreement provides that Williams Hospitality is to manage the Hotel until the year 2005 for a basic management fee of 5% of the Hotel's gross revenues (as defined in the Management Agreement) and an incentive management fee of 12% of the Hotel's gross operating profits (as defined in the Management Agreement). In addition, the Partnership is required to pay certain administrative expenses incurred by Williams Hospitality in connection with management of the Hotel. F-134 POSADAS DE SAN JUAN ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1997 During fiscal years 1997, 1996 and 1995 basic management fees amounted to $2,932,200, $2,852,500 and $2,981,600, respectively. Incentive management fees amounted to $1,404,500, $997,600 and $911,500, respectively, for the same fiscal years. Administrative costs and service fees charged by Williams Hospitality during fiscal years 1997, 1996 and 1995, amounted to $1,422,600, $1,446,700 and $1,844,000, respectively. During fiscal years 1997, 1996 and 1995, interest at 10% charged to the Partnership by Williams Hospitality amounted to $987,900, $888,100 and $797,000, respectively. During fiscal years 1997, 1996 and 1995, the Partnership was charged by Posadas de Puerto Rico $338,100, $243,600 and $92,800, respectively, for certain services provided. During fiscal years 1997, 1996 and 1995, the Partnership charged Posadas de Puerto Rico $337,400, $256,100 and $191,500, respectively, for certain services rendered. F-135 SCHEDULE II POSADAS DE SAN JUAN ASSOCIATES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ------------ --------------------- -------- ---------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS-- BALANCE AT BEGINNING OF COSTS AND OTHER AMOUNTS END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITTEN OFF PERIOD ----------- ------------ ---------- ---------- ------------ ---------- Allowance for receivables: 1997.................... $ 357,100 $ 150,600 $-- $ (98,599) $606,299 ========== ========== ==== =========== ======== 1996.................... $ 434,546 $1,278,200 $-- $ 1,355,646 $357,100 ========== ========== ==== =========== ======== 1995.................... $1,290,819 $3,880,413 $-- $ 4,736,686 $434,546 ========== ========== ==== =========== ========
F-136 REPORT OF INDEPENDENT AUDITORS The Partners WKA El Con Associates We have audited the accompanying balance sheets of WKA El Con Associates (a joint venture partnership) as of June 30, 1997 and 1996, and the related statements of operations and deficit, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WKA El Con Associates as of June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that WKA El Con Associates will continue as a going-concern. As more fully described in Note 8, El Conquistador Partnership L.P., a 50% owned partnership, has not renewed or replaced a letter of credit collateralizing $120,000,000 of indebtedness. In the event that the letter of credit is not renewed or replaced prior to November 9, 1997, the debt will be required to be repaid on February 1, 1998. This condition raises substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classifications of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP San Juan, Puerto Rico August 11, 1997 F-137 WKA EL CON ASSOCIATES BALANCE SHEETS
JUNE 30, SEPTEMBER 30, -------------------------- 1997 1997 1996 ------------ ------------ ------------ (UNAUDITED) ASSETS Cash............................................... $ 3,600 $ 3,600 $ 3,200 Notes receivable from affiliated company........... 18,863,700 18,343,200 16,116,000 Investment in Las Casitas Development Company...... -- 242,600 1,292,600 Capitalized interest, less accumulated amortization of $100,400 and $71,000 at June 30, 1997 and 1996, respectively, and $107,700 at September 30, 1997.. 1,360,800 1,368,100 1,397,500 Deferred debt issuance costs and other assets, less accumulated amortization of $598,600 and $496,200 at June 30, 1997 and 1996, respectively, and $624,400 at September 30, 1997................ 744,000 769,800 872,200 ------------ ------------ ------------ Total assets................................... $ 20,972,100 $ 20,727,300 $ 19,681,500 ============ ============ ============ LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL Liabilities: Long-term note payable........................... $ 5,526,200 $ 5,527,400 $ 5,197,000 Due to affiliated company........................ 90,600 85,100 64,200 Due to partners.................................. 10,653,900 10,475,100 9,790,700 Losses in excess of equity investment in El Conquistador Partnership L.P. .................. 13,689,200 12,464,200 7,762,600 ------------ ------------ ------------ Total liabilities.............................. 29,959,900 28,551,800 22,814,500 Deficiency in partners' capital: Contributed...................................... 20,286,200 20,286,200 20,286,200 Deficit.......................................... (29,274,000) (28,110,700) (23,419,200) ------------ ------------ ------------ Total deficiency in partners' capital.......... (8,987,800) (7,824,500) (3,133,000) ------------ ------------ ------------ Total liabilities and deficiency in partners' capital....................................... $ 20,972,100 $ 20,727,300 $ 19,681,500 ============ ============ ============
See accompanying notes. F-138 WKA EL CON ASSOCIATES STATEMENTS OF OPERATIONS AND DEFICIT
THREE MONTHS ENDED SEPTEMBER 30, YEAR ENDED JUNE 30, -------------------------- ---------------------------------------- 1997 1996 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Interest income..................... $ 325,300 $ 295,500 $ 1,241,100 $ 1,150,100 $ 1,027,600 Costs and expenses: Interest.......................... 282,400 265,400 1,078,400 1,145,800 1,137,600 Professional fees................. 5,500 7,400 20,900 40,100 83,400 Amortization...................... 33,100 33,100 131,800 142,000 163,200 ------------ ------------ ------------ ------------ ------------ 321,000 305,900 1,231,100 1,327,900 1,384,200 ------------ ------------ ------------ ------------ ------------ Income (loss) before equity in operations of investees............ 4,300 (10,400) 10,000 (177,800) (356,600) Equity in operations of investees: El Conquistador Partnership L.P... (1,167,600) (923,500) (4,701,500) (6,120,500) (13,738,400) Las Casitas Development Company... -- -- -- 313,200 1,627,100 ------------ ------------ ------------ ------------ ------------ (1,167,600) (923,500) (4,701,500) (5,807,300) (12,111,300) ------------ ------------ ------------ ------------ ------------ Net loss............................ (1,163,300) (933,900) (4,691,500) (5,985,100) (12,467,900) Accumulated deficit at beginning of year............................... (28,110,700) (23,419,200) (23,419,200) (17,434,100) (4,966,200) ------------ ------------ ------------ ------------ ------------ Accumulated deficit at end of year.. $(29,274,000) $(24,353,100) $(28,110,700) $(23,419,200) $(17,434,100) ============ ============ ============ ============ ============
See accompanying notes. F-139 WKA EL CON ASSOCIATES STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, YEAR ENDED JUNE 30, ------------------------- -------------------------------------- 1997 1996 1997 1996 1995 ----------- ------------ ----------- ----------- ------------ (UNAUDITED) Operating Activities Net loss............................... $(1,163,300) $ (933,900) $(4,691,500) $(5,985,100) $(12,467,900) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Amortization......................... 33,100 33,100 131,800 142,000 163,200 Equity in operations of affiliates including $1,050,000 and $950,000 in cash distributions received in fiscal years 1997 and 1996, respectively, and $300,100 and $600,000 in cash distributions received during the three months ended September 30, 1997 and 1996, respectively........................ 1,467,600 1,523,500 5,751,600 6,757,300 12,111,300 Changes in operating assets and liabilities: Accrued interest income added to notes receivable.................... (351,400) (626,900) (1,177,200) (1,122,800) (1,000,600) Other receivables.................... -- -- -- -- 13,200 Accrued interest expense added to long-term liabilities............... -- -- 330,400 1,102,900 974,500 Accounts payable..................... (1,200) 94,200 -- -- (36,700) Due to affiliated company............ 5,500 7,500 -- 58,900 -- ----------- ----------- ----------- ----------- ------------ Net cash provided by (used in) operating activities.............. (9,700) 97,500 345,100 953,200 (243,000) Investing Activities Sale of certificate of deposit held in escrow................................ -- -- -- 682,500 100,000 Increase on deferred debt issuance costs and other assets................ -- -- -- -- (230,400) Increase in notes receivable from affiliated company.................... (169,100) (268,200) (1,050,000) (950,000) (423,500) ----------- ----------- ----------- ----------- ------------ Net cash used in investing activities........................ (169,100) (268,200) (1,050,000) (267,500) (553,900) Financing Activities Partners' contributed capital.......... -- -- -- 1,295,700 1,870,500 Partners' loans--net................... 178,800 171,100 684,400 (852,900) 323,500 Payments to affiliated company......... -- -- 20,900 (1,125,300) (1,397,100) ----------- ----------- ----------- ----------- ------------ Net cash provided by (used in) financing activities.................. 178,800 171,100 705,300 (682,500) 796,900 ----------- ----------- ----------- ----------- ------------ Net increase in cash................... -- 400 400 3,200 -- Cash at beginning of year.............. 3,600 3,200 3,200 -- -- ----------- ----------- ----------- ----------- ------------ Cash at end of year.................... $ 3,600 $ 3,600 $ 3,600 $ 3,200 $ -- =========== =========== =========== =========== ============
See accompanying notes. F-140 WKA EL CON ASSOCIATES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 1. INTERIM INFORMATION (UNAUDITED) The interim financial statements as of and for the three months ended September 30, 1997 and 1996, included herein are unaudited. Such information reflects all ajustments, consisting solely of normal recurring adjustments, which are in the opinion of management necessary for a fair presentation of the balance sheet as of September 30, 1997 and the results of operations and cash flows for the three months ended September 30, 1997 and 1996. Due to the seasonality of the business, the reported results are not necessarily indicative of those expected for the entire year. Certain information and disclosures normally included in annual financial statements in accordance with generally accepted accounting principles have been excluded or omitted in presentation of the interim financial statements. 2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES Organization WKA El Con Associates (the Partnership) is a joint venture organized under the General Partnership Law of the State of New York, pursuant to a Joint Venture Agreement (the Agreement) dated January 9, 1990, as amended, for the purpose of becoming a general and limited partner of El Conquistador Partnership L.P. (El Con). The Partnership is owned 46.54% by WHG El Con Corp. (formerly known as WMS El Con Corp.), which is wholly-owned by WHG Resorts & Casino Inc., 37.23% by AMK Conquistador, S.E. and 16.23% by Hospitality Investor Group, S.E. The Partnership shall continue to exist until January 9, 2040, unless terminated earlier pursuant to the Agreement. Net profits or losses of the Partnership will be allocated to the partners in accordance with the terms of the Agreement. The Partnership is a 50% limited partner in Las Casitas Development Company I, S en C (S.E.) ("Las Casitas"), a joint venture constructing and selling condominiums on property adjacent to El Con. Basis of Presentation The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investments in Affiliated Companies The investments in affiliated companies are accounted for under the equity method. El Con equity is recorded by the Partnership based on El Con's fiscal year of March 31. Las Casitas equity is recorded by the Partnership based on Las Casitas' fiscal year of June 30. Capitalized interest is being amortized by the straight-line method over the estimated useful life of the El Conquistador property. Deferred Debt Issuance Costs and Other Assets Deferred debt issuance costs include legal and bank fees incurred in connection with the issuance of the debt, and are being amortized over the maturity of the related debt. Certain other capital and pre-opening costs relating to El Con were incurred by the Partnership and are being amortized over 5 to 50 years. Fair Values of Financial Instruments Note payable: The carrying amount of the note payable at June 30, 1997 approximates fair value. The fair value was estimated using discounted cash flows, based on the current borrowing rates for similar types of borrowing arrangements. F-141 WKA EL CON ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1997 3. NOTES RECEIVABLE FROM AFFILIATED COMPANY At June 30, 1997 and 1996 notes receivable from El Con consisted of the following:
1997 1996 ----------- ----------- Note receivable due on demand......................... $ 136,000 $ 136,000 Note receivable due through May, 2002 (See Note 5)....... 4,000,000 4,000,000 Subordinated notes receivable due in 2003 to 2005 (See Note 4).............................................. 8,229,700 8,229,700 Accrued interest receivable........................... 3,977,500 2,800,300 Deficiency loan participation......................... 2,000,000 950,000 ----------- ----------- $18,343,200 $16,116,000 =========== ===========
Repayment of the notes, including accrued interest, is subordinated to other long-term debt of El Con. 4. INVESTMENT IN AFFILIATED COMPANIES In 1991, the Partnership borrowed $9,000,000 from Williams Hospitality Group Inc. (Williams Hospitality), a hotel/casino management company that is an affiliated company, and invested the proceeds in the partnership capital of El Con, a joint venture organized to acquire the El Conquistador property. The Partnership owns a 50% interest, as both a general and limited partner, of El Con (See Note 4). Summarized financial information for El Con as of March 31, 1997 and 1996 and for the years then is as follows:
1997 1996 ------------ ------------ Total assets...................................... $205,430,000 $211,691,000 Total liabilities................................. 218,359,000 215,216,000 Deficiency in partners capital.................... 12,929,000 3,525,000 Revenues.......................................... 92,958,000 89,214,000 Net loss.......................................... 9,403,000 12,241,000
The Partnership's investment in Las Casitas amounts to $5,000. 5. DUE TO AFFILIATED COMPANY AND PARTNERS At various times, the partners loaned the Partnership $8,229,700 under the terms of loan agreements. The notes are payable in 2003 to 2005 and bear interest at the prime rate commencing on various dates. The Partnership has advanced the same amount under a subordinated note to El Con under the same terms as the borrowing from the partners. (See Note 3). In November 1993, the partners advanced $782,500 to the Partnership that was invested in a bank certificate of deposit. During fiscal year 1996 the remaining balance of $682,500 was withdrawn from the certificate and distributed to the partners. The certificate of deposit was held in escrow and was pledged as collateral to the bank for a bank loan of an equal amount to El Con. Interest accrued on the partners' advances at the same interest rate earned on the certificate of deposit. During fiscal year 1997 and 1996, respectively, the Partnership purchased from Williams Hospitality $1,050,000 and $950,000, respectively, of participation in a deficiency loan to El Con. The loan and interest at 9.16% are payable from specified future cash flow of El Con. The partnership guarantees a revolving credit facility with a bank in the aggregate amount of up to $4,000,000 of El Conquistador. F-142 WKA EL CON ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1997 6. LONG-TERM NOTE PAYABLE The long-term note payable to a bank includes accrued interest of $1,527,400 and $1,197,000 at June 30, 1997 and 1996, respectively. The note is payable in quarterly installments of $250,000 commencing in May 2000. Any unpaid principal and interest is payable in May 2002. The note bears interest at a variable rate, computed quarterly, equal to LIBOR, plus 1.75%. Under the terms of the Credit Facility Agreement dated May 5, 1992, interest payments are deferred during the first five years. The $4,000,000 borrowing was loaned to El Conquistador under similar terms. (See Note 3). The note is collateralized by second mortgages on parcels of land owned by Williams Hospitality and Posadas de Puerto Rico Associates, Incorporated, affiliated companies through common ownership, with a cost of approximately $3,761,000, and a guarantee of $1,000,000 by WHG Resorts & Casino Inc., the ultimate owner of WHG El Con Corp. 7. INCOME TAXES The Partnership is not taxable for Puerto Rico income tax purposes pursuant to an election submitted to the Puerto Rico Treasury Department. Instead, each partner reports their distributive share of the Partnership's profit or losses in their respective income tax returns and, therefore, no provision for income taxes has been made in the accompanying financial statements. Income or loss of the Partnership for Federal income tax purposes is reported by the partners. 8. REFINANCING El Con, a partnership 50% owned by the Partnership, has not renewed or replaced a letter of credit collateralizing $120,000,000 of Industrial Revenue Bonds, which expires on March 9, 1998. The debt is required to be repaid on February 1, 1998 in the event the letter of credit is not renewed or replaced prior to November 9, 1997. El Con has retained an investment banking firm to assist in structuring the refinancing of El Con's debt. Based on operating history of the El Con resort, El Con's management believes such refinancing will be achieved, but there can be no assurance thereof. If such refinancing is not renewed or replaced, it raises substantial doubt about El Con's and the Partnership's ability to continue as going-concerns. F-143 REPORT OF INDEPENDENT AUDITORS The Partners El Conquistador Partnership L.P. We have audited the accompanying balance sheets of El Conquistador Partnership L.P. as of March 31, 1997 and 1996, and the related statements of operations and (deficiency in) partners' capital, and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of El Conquistador Partnership L.P. at March 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that El Conquistador Partnership L.P. will continue as a going-concern. As more fully described in Note 14, to date El Conquistador Partnership L.P. has not renewed or replaced a letter of credit collateralizing $120,000,000 of indebtedness. In the event that the letter of credit is not renewed or replaced prior to November 9, 1997, the debt will be required to be repaid on February 1, 1998. This condition raises substantial doubt about the El Conquistador Partnership L.P.'s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classifications of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP San Juan, Puerto Rico May 2, 1997 F-144 EL CONQUISTADOR PARTNERSHIP L.P. BALANCE SHEETS
MARCH 31, JUNE 30, -------------------------- 1997 1997 1996 ------------- ------------ ------------ (UNAUDITED) ASSETS - ------ Current assets: Cash.............................................. $ 937,088 $ 2,380,218 $ 856,983 Restricted cash and investments held by bank...... 3,438,722 3,360,607 2,879,355 Trade accounts receivable, less allowance for doubtful accounts of $269,115 and $301,765 at March 31, 1997 and 1996, respectively, and $263,336 at June 30, 1997.................... 5,259,173 4,764,607 5,302,884 Due from affiliated companies..................... 496,268 428,987 314,999 Inventories....................................... 1,722,260 1,662,877 1,522,463 Prepaid expenses and other current assets......... 1,506,524 1,020,716 945,905 ------------- ------------ ------------ Total current assets............................ 13,360,035 13,618,012 11,822,589 Due from affiliated company........................ 258,185 418,957 817,868 Land, building and equipment: Land.............................................. 14,372,707 14,372,707 14,372,707 Building.......................................... 158,039,190 158,039,190 158,039,190 Furniture, fixture and equipment.................. 32,968,909 32,664,796 31,359,202 ------------- ------------ ------------ 205,380,806 205,076,693 203,771,099 Less accumulated depreciation..................... 22,721,318 21,116,551 14,777,283 ------------- ------------ ------------ 182,659,488 183,960,142 188,993,816 Operating equipment, net........................... 1,463,570 1,592,219 1,469,350 Deferred debt issuance costs, net of accumulated amortization of $5,709,747 and $4,731,745 at March 31, 1997 and 1996, respectively, and $3,921,345 at June 30, 1994....................... 2,736,120 2,980,622 3,958,624 Deferred pre-opening costs, net of accumulated amortization of $10,519,175 and $8,751,425 at March 31, 1997 and 1996, respectively, and $10,961,112 at June 30, 1997...................... 2,418,567 2,860,504 4,628,254 ------------- ------------ ------------ Total assets.................................... $ 202,895,965 $205,430,456 $211,690,501 ============= ============ ============ LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL - ----------------------------------------------- Current liabilities: Trade accounts payable............................ $ 5,037,984 $ 5,474,496 $ 7,657,546 Bank overdraft.................................... 1,023,130 -- -- Advance deposits.................................. 2,192,643 5,572,317 3,568,390 Accrued interest.................................. 1,701,436 1,785,687 1,510,080 Other accrued liabilities......................... 5,070,540 5,271,335 4,673,189 Due to affiliated companies....................... 768,358 545,824 652,896 Note payable to bank.............................. 3,500,000 1,500,000 2,773,359 Current portion of long-term debt................. 120,000,000 120,000,000 -- Current portion of chattel mortgages and capital lease obligations................................ 2,679,819 2,679,819 2,444,993 ------------- ------------ ------------ Total current liabilities....................... 141,973,910 142,829,478 23,280,453 Long-term debt..................................... 25,000,000 25,000,000 145,000,000 Chattel mortgages and capital lease obligations, net of current portion............................ 1,038,142 1,660,040 4,324,358 Due to affiliated companies........................ 12,246,673 11,491,977 8,531,671 Due to partners.................................... 37,900,913 37,377,424 34,079,309 Deficiency in partners' capital: Limited partners.................................. (12,974,122) (10,989,193) (2,996,497) General partners.................................. (2,289,551) (1,939,270) (528,793) ------------- ------------ ------------ Total deficiency in partners' capital........... (15,263,673) (12,928,463) (3,525,290) ------------- ------------ ------------ Total liabilities and deficiency in partners' capital.......................................... $ 202,895,965 $205,430,456 $211,690,501 ============= ============ ============
See accompanying notes. F-145 EL CONQUISTADOR PARTNERSHIP L.P. STATEMENTS OF OPERATIONS AND (DEFICIENCY IN) PARTNERS' CAPITAL
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31, ---------------------------- ---------------------------------------- 1997 1996 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenues: Rooms............................. $ 10,110,204 $ 9,763,440 $ 40,023,903 $ 38,817,160 $ 37,942,821 Food and beverage................. 7,558,329 8,061,916 26,235,365 26,188,693 27,298,340 Casino............................ 1,278,377 1,395,740 6,005,242 6,179,133 6,054,569 Rental and other income........... 5,691,174 5,057,452 21,959,328 19,165,969 14,652,328 ------------ ------------ ------------ ------------ ------------ 24,638,084 24,278,548 94,223,838 90,350,955 85,948,058 Less casino promotional allowances....................... (200,573) (283,888) (1,265,710) (1,136,499) (1,205,380) ----------- ------------ ------------ ------------ ------------ Net revenues.................... 24,437,511 23,994,660 92,958,128 89,214,456 84,742,678 Costs and expenses: Rooms............................. 3,606,885 3,243,593 12,377,694 12,853,157 14,755,239 Food and beverage................. 4,805,250 5,014,481 17,602,484 17,638,186 20,797,173 Casino............................ 903,494 944,037 3,848,981 3,686,904 3,923,817 Selling, general and administrative................... 4,661,954 4,295,248 14,657,312 12,992,841 18,115,433 Management and incentive management fees.................. 1,450,084 1,479,997 5,680,355 5,394,675 3,703,819 Property operation, maintenance and energy costs................. 2,190,925 1,974,600 12,382,577 12,396,063 14,408,347 Depreciation and amortization..... 2,306,617 2,276,010 9,146,664 10,499,296 11,124,075 Other expenses.................... 2,446,679 2,460,549 9,702,212 9,201,228 9,722,662 ----------- ------------ ------------ ------------ ------------ 22,371,888 21,688,515 85,398,279 84,662,350 96,550,565 ----------- ------------ ------------ ------------ ------------ Income (loss) from operations... 2,065,623 2,306,145 7,559,849 4,552,106 (11,807,887) Interest income..................... -- -- 199,110 228,625 467,922 Interest expense.................... 4,400,833 4,150,594 17,162,132 17,021,764 16,136,755 ----------- ------------ ------------ ------------ ------------ Net loss............................ (2,335,210) (1,844,449) (9,403,173) (12,241,033) (27,476,720) (Deficiency in) partners' capital at beginning of year.................. (12,928,463) (3,525,290) (3,525,290) 8,715,743 36,191,325 Partners' capital contribution...... -- -- -- -- 1,138 ----------- ------------ ------------ ------------ ------------ Deficiency in partners' capital at end of year........................ $ (15,263,673) $ (5,369,739) $(12,928,463) $ (3,525,290) $ 8,715,743 ============= ============ ============ ============ ============
See accompanying notes. F-146 EL CONQUISTADOR PARTNERSHIP L.P. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31, ---------------------------- ---------------------------------------- 1997 1996 1997 1996 1995 ---------------------------- ------------ ------------ ------------ (UNAUDITED) OPERATING ACTIVITIES Net loss............................ $ (2,335,210) $ (1,844,449) $ (9,403,173) $(12,241,033) $(27,476,720) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization..... 2,306,617 2,276,010 9,146,664 10,499,296 11,124,075 Provision for losses on accounts receivable....................... 28,000 45,400 205,400 363,245 1,808,641 Incentive management fees......... 587,751 630,222 2,375,526 2,224,381 679,259 Deferred interest expense to partners and affiliates.......... 562,568 530,471 3,100,085 2,995,431 2,063,981 Changes in operating assets and liabilities: Restricted cash and investments held by bank................... (78,115) (83,038) (481,252) 503,353 2,549,446 Trade accounts receivable....... (522,566) 1,328,065 332,877 1,987,789 2,187,211 Inventories..................... (59,383) 219 (140,414) 529,503 61,249 Prepaid expenses and other current assets................. (501,219) (183,159) (74,811) 26,105 491,032 Trade accounts payable and advance deposits............... (3,816,186) (3,180,618) (179,123) (3,663,803) (1,323,693) Accrued interest and other accrued liabilities............ 738,084 (319,669) 873,753 (1,220,058) 1,156,483 Affiliated companies, net....... 316,025 (79,210) 99,017 (97,985) 1,967,073 ----------- ----------- ---------- ---------- ----------- Net cash provided by (used in) operating activities............... (2,773,634) (879,756) 5,854,549 1,906,224 (4,711,963) INVESTING ACTIVITIES Purchases of property and equipment.......................... (304,113) (189,259) (1,305,594) (826,611) (3,525,762) Usage of operating equipment, net... 128,649 (25,638) (122,869) (37,454) 523,641 ----------- ----------- ---------- ---------- ----------- Net cash used in investing activities......................... (175,464) (214,897) (1,428,463) (864,065) (3,002,121) FINANCING ACTIVITIES Payments of principal on long-term debt............................... (621,898) (262,449) (2,429,492) (2,198,146) (1,976,625) Proceeds from long-term debt........ -- -- -- -- 772,000 Proceeds from notes payable to bank............................... 2,000,000 4,000,000 9,500,000 7,684,685 -- Payments of principal on notes payable to bank.................... -- (2,773,359) (10,773,359) (6,549,685) (200,000) Proceeds from partners' and affiliated loans, and capital contributions...................... 127,866 195,019 800,000 -- 8,698,134 ----------- ----------- ---------- ---------- ----------- Net cash used in financing activities......................... 1,505,968 1,159,211 (2,902,851) (1,063,146) 7,293,509 ----------- ----------- ---------- ---------- ----------- Net increase (decrease) in cash..... (1,443,130) 64,558 1,523,235 (20,987) (420,575) Cash at beginning of year........... 2,380,218 856,983 856,983 877,970 1,298,545 ----------- ----------- ---------- ---------- ----------- Cash at end of year................. $ 937,088 $ 921,541 $ 2,380,218 $ 856,983 $ 877,970 =========== =========== ============ ============ ============ Supplemental disclosure of cash flow information: Interest paid..................... -- -- $ 13,789,097 $ 14,026,453 $ 14,314,600 =========== =========== ============ ============ ============
See accompanying notes. F-147 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997 1. INTERIM INFORMATION (UNAUDITED) The interim financial statements as of and for the three months ended June 30, 1997 and 1996 included herein are unaudited. Such information reflects all adjustments consisting solely of normal recurring adjustments, which are in the opinion of management necessary for a fair presentation of the balance sheet as of June 30, 1997 and the results of operations and cash flows for the three months ended June 30, 1997 and 1996. Due to the seasonality of the business, the reported results are not necessarily indicative of those expected for the entire year. Certain information and disclosures normally included in annual financial statements in accordance with generally accepted accounting principles have been excluded or omitted in presentation of the interim financial statements. 2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES Organization El Conquistador Partnership L.P. (the Partnership), is a limited partnership organized under the laws of Delaware, pursuant to a Joint Venture Agreement dated January 12, 1990 (the Agreement). The Partnership is 50% owned by WKA El Con Associates (WKA El Con), a partnership owned by several partners affiliated with Williams Hospitality Group Inc. (Williams Hospitality), and 50% by Kumagai Caribbean, Inc. (Kumagai), a wholly-owned subsidiary of Kumagai International USA, Inc. The joint venture partners (Partners) are both General Partners and Limited Partners in the Partnership. The Partnership shall continue to exist until March 31, 2030, unless terminated earlier by mutual agreement of the General Partners. The Agreement provides that net profits or losses of the Partnership after deducting a preferred cumulative annual return of 8.5% on the Partners unrecovered capital accounts, as defined, will be allocated to the Partners on a 50-50 ratio subject to certain exceptions, as defined. The Partnership owns and operates a luxury resort hotel and casino in Las Croabas, Puerto Rico (the Resort). Basis of Presentation The financial statements have been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories, which consist mainly of food, beverages and supplies, are valued at the lower of cost (first-in, first-out method) or market. Land, Building and Equipment Land, building and equipment are stated on the basis of cost. Building and equipment are depreciated by the straight-line method over their estimated useful lives. Deferred Debt Issuance Costs Debt issuance costs include legal and underwriting fees, other fees incurred in connection with the financing and other costs. These costs are being amortized on a straight-line basis over the term of the debt. Deferred Pre-Opening Costs Pre-opening costs consist of amounts incurred in connection with the marketing, organization, planning and development of the Resort. Such costs include staffing, marketing, legal and other costs incurred prior to the commencement of operations of the Resort. The costs are being amortized on a straight-line basis over a five year period through November 1998. Casino Revenues Casino revenues are the net win from gaming activities, which is the difference between gaming wins and losses. F-148 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997 Casino Promotional Allowances Casino promotional allowances represent the retail value of complimentary rooms, food, beverage and hotel services furnished to patrons. 3. RESTRICTED CASH AND INVESTMENTS HELD BY BANK Pursuant to the terms of the bond agreement (see Note 9), the Partnership had cash and investments on deposit with the trustee for the following:
MARCH 31, --------------------- 1997 1996 ---------- ---------- Interest due May 1.................................. $1,778,961 $1,584,000 Interest due August 1............................... 1,581,646 1,295,355 ---------- ---------- $3,360,607 $2,879,355 ========== ==========
4. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable consisted of the following:
MARCH 31, --------------------- 1997 1996 ---------- ---------- Trade accounts receivable--hotel................... $4,559,108 $5,259,478 Less allowance for doubtful accounts............... 144,615 217,362 ---------- ---------- 4,414,493 5,042,116 Trade accounts receivable--casino.................. 474,614 345,171 Less allowance for doubtful accounts............... 124,500 84,403 ---------- ---------- 350,114 260,768 ---------- ---------- Trade accounts receivable, net..................... $4,764,607 $5,302,884 ========== ==========
5. TRANSACTIONS WITH RELATED PARTIES The Partnership has an Operating and Management Agreement (the Management Agreement) with Williams Hospitality. The Management Agreement provides that Williams Hospitality will manage the Resort for a period of 20 years for a basic management fee of 3.5% of the Resorts' gross revenues, as defined, and an incentive management fee of 10% of the Resorts' operating profit, as defined. Incentive management fees accrued each year are not payable until significant cash flows levels are achieved. In addition, the Partnership is required to pay certain administrative expenses incurred by Williams Hospitality in connection with management of the Resort. During fiscal years 1997 and 1996, basic management fees amounted to $3,305,000 and $3,170,000, respectively. Incentive management fees amounted to approximately $2,376,000 and $2,224,000 during fiscal years 1997 and 1996, respectively. In addition, Williams Hospitality charged the Partnership approximately $3,258,000 and $2,728,000 in fiscal years 1997 and 1996, respectively, for services provided to the Resort. In addition, the Partnership was charged by Posadas de Puerto Rico Associates, Incorporated (Posadas de Puerto Rico), hotel and casino operations affiliated through common ownership, approximately $410,000 and $437,000 in fiscal years 1997 and 1996, respectively, for services provided to the Resort. F-149 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997 As of March 31, 1997 each partner had advanced $8,365,685 to the Partnership under notes that are due for various periods up to ten years with interest at the Citibank, N.A. in New York base rate. Repayment of interest and principal is subordinated to other long-term debt. In addition, each partner had advanced to the Partnership $4,000,000 under a May 5, 1992 loan agreement. The loan agreement provides for the payment of interest at a variable rate, computed quarterly, equal to LIBOR plus 1.75%. Interest payments will be deferred during the first five years. The principal and deferred interest accrued at March 31, 1997 is payable in quarterly installments of $250,000 commencing in March 2000 and a final lump-sum payment in February 2002. The loan is collateralized by a subordinated pledge of the Partnership's assets. As of March 31, 1997 each partner had provided $3,800,000 to cover cash flow deficiency in the Partnership's operations as provided by the Agreement. The deficiency loans consist of $3,800,000 in cash by Kumagai, and the conversion of amounts due from the Partnership to Williams Hospitality to loans for WKA El Con. The deficiency loans bear interest at 9.16%. Repayment of interest and principal is subordinated to other long-term debt. As of March 31, 1997, the outstanding balance of advances made by the Partnership to Williams Hospitality for the purchase of transportation equipment leased to the Partnership under a five year service agreement amounted to $727,200. Service agreement payments by the Partnership are equal to the $39,819 monthly amounts receivable under the advance. Repayment of the advances by Williams Hospitality are limited to amounts payable under the service agreement. This transportation equipment is pledged as collateral by Williams Hospitality to the Partnership's chattel mortgage notes. In addition, a subsidiary of Williams Hospitality financed other transportation equipment from an external borrowing amounting to $441,000 repayable over five years. Monthly payments amount to $9,699. Also, in February 1997, a subsidiary of Williams Hospitality financed a ferryboat from an external borrowing amounting to $456,000, repayable over seven years. Monthly payments amount to $7,561. The Partnership chartered the transportation equipment and ferryboat under terms similar to the transaction described in the preceding paragraph. In October 1996, each partner advanced $400,000 as required by a loan agreement (see Note 7). The notes bear interest at the prime rate at the Chase Bank in the New York base rate. Repayment of principal are subordinated to other debt. The chattel mortgage notes payable (see Note 8) are collateralized by a bank standby letter of credit of $3,423,000. The letter of credit is collateralized by certificates of deposit for $2,000,000 issued by the bank in equal amounts to Williams Hospitality and Kumagai. The chattel mortgage notes, and capital leases are guaranteed by Williams Hospitality and Kumagai. 6. NOTES PAYABLE TO BANK On October 4, 1996 the Partnership entered into an amendment to a loan agreement whereby the Government Development Bank for Puerto Rico (GDB) extended the Partnership a $6,000,000 credit facility. The notes issued under the credit facility will bear interest at 1% over LIBOR, and are secured by a mortgage note on the Partnership's real property and a leasehold mortgage note on leased land of $120,000. At March 31, 1997 the Partnership had outstanding borrowings of $1,500,000 with an interest rate at March 31, 1997 of 6.56%. As of March 31, 1996, the Partnership's borrowings of $2,500,000 with a bank were repaid during fiscal year 1997. F-150 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997 7. DUE TO AFFILIATED COMPANIES AND PARTNERS Amounts due to affiliated companies consist of fees earned by Williams Hospitality, funds advanced to the Partnership and other payments made by Williams Hospitality, and for services rendered by Posadas de Puerto Rico and Posadas de San Juan. Amounts due to affiliated companies consisted of the following:
MARCH 31, ---------------------- 1997 1996 ----------- ---------- Current: Due to Williams Hospitality: Basic management fees............................ $ 435,309 $ 414,718 Other............................................ 83,891 195,523 Due to Posadas de Puerto Rico.................... 26,624 37,380 Due to Posadas de San Juan....................... -- 5,275 ----------- ---------- $ 545,824 $ 652,896 =========== ========== Non current: Affiliate: Due to Williams Hospitality: Incentive management fees...................... $ 5,542,528 $3,167,002 Interest at 10% on incentive management fees... 338,405 89,350 Advances....................................... 3,800,000 3,800,000 Interest on advances........................... 856,282 503,368 Other.......................................... 375,528 375,528 ----------- ---------- 10,912,743 7,935,248 Due to KG Caribbean.............................. 579,234 596,423 ----------- ---------- $11,491,977 $8,531,671 =========== ==========
MARCH 31, ----------------------- 1997 1996 ----------- ----------- Partners: Due to WKA El Con: Advances......................................... $12,765,685 $12,365,685 Interest on advances............................. 3,594,886 2,522,285 Due to Kumagai: Advances......................................... 16,565,685 16,165,685 Interest on advances............................. 4,451,168 3,025,654 ----------- ----------- $37,377,424 $34,079,309 =========== ===========
F-151 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997 8. CHATTEL MORTGAGES AND CAPITAL LEASE OBLIGATIONS Chattel mortgages and capital lease obligations on equipment consisted of the following:
MARCH 31, --------------------- 1997 1996 ---------- ---------- Chattel mortgage notes payable bearing interest at 9%, payable in monthly installments of $215,784, including interest, through 1998, collateralized with personal property.............................. $3,868,202 $6,023,820 Capital lease obligations bearing interest at 11.5%, payable in monthly installments of $28,335, including interest, through 1998, collateralized with personal property, net of $48,307 in 1997 and $121,571 in 1996 representing interest.............. 471,657 745,531 ---------- ---------- 4,339,859 6,769,351 Less current portion................................. 2,679,819 2,444,993 ---------- ---------- $1,660,040 $4,324,358 ========== ==========
Maturities of chattel mortgages and capital lease obligations are as follows: 1998........................................................... $2,679,819 1999........................................................... 1,660,040 ---------- $4,339,859 ==========
See Note 5 for additional collateral and guarantees. Assets and accumulated depreciation recorded under capital lease obligations are included in land, building and equipment as follows:
MARCH 31, --------------------- 1997 1996 ---------- ---------- Equipment............................................. $1,288,373 $1,288,373 Less accumulated depreciation......................... 880,393 622,717 ---------- ---------- $ 407,980 $ 665,656 ========== ==========
9. LONG-TERM DEBT At March 31, 1997 and 1996, long-term debt consisted of the following:
MARCH 31, ------------------------- 1997 1996 ------------ ------------ Industrial Revenue Bonds Series A................. $ 90,000,000 $ 90,000,000 Industrial Revenue Bonds Series B................. 30,000,000 30,000,000 Government Development Bank of Puerto Rico........ 25,000,000 25,000,000 ------------ ------------ 145,000,000 145,000,000 Less current portion.............................. 120,000,000 -- ------------ ------------ $ 25,000,000 $145,000,000 ============ ============
F-152 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997 On February 7, 1991 the Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority (the Authority) sold industrial revenue bonds (Bonds) for $120,000,000 and loaned the proceeds to the Partnership to be used for the payment of project costs pursuant to a Loan Agreement. The Loan Agreement provides that the Partnership will pay all interest and principal on the Bonds. The Authority issued 1991 Series A, Industrial Revenue Bonds for $90,000,000 and 1991 Series B, Industrial Revenue Bonds for $30,000,000. Commencing on May 1, 1996, the Bonds are subject to redemption at the Partnership's option at par plus accrued interest, if any. The Bonds are due on November 1, 1999 and interest is payable quarterly. The 1991 Series A Bonds and the 1991 Series B Bonds bear interest at a variable rate, computed quarterly, equal to 100% and 94%, respectively, of a LIBOR rate minus 1/8th of 1%. Effective November 1, 1996, the interest rate on the 1991 Series A Bonds increased to 100% of the LIBOR rate. On February 7, 1991 the Partnership entered into an Interest Swap Agreement that expires on March 8, 1998 by which the Partnership agrees to pay, effective May 1, 1991, a fixed rate of 7.55% on the outstanding principal of $120,000,000 in exchange for the counterparty's obligation to pay the variable interest rate described above. The Loan Agreement provides that the Partnership will deposit with the trustee all interest which will become due not later than the 124th day preceding the date of payment. The Bonds are collateralized by a letter of credit, that terminates on February 7, 1998, issued by the Mitsubishi Bank, Limited. The Partnership pays an annual letter of credit fee of approximately 1.25% of the Bond principal except under certain circumstances the rate may be reduced to 1.2%. In addition, in connection with the letter of credit the Partnership pays an annual agent's fee of approximately .25% of the Initial Stated Amount, as defined. Under the provisions of a term loan agreement with the GDB, the Partnership borrowed $25,000,000 for the payment of project costs. The loan is due on February 7, 2006. The loan agreement provides for a variable interest rate equivalent to a LIBOR rate minus .5% plus an add-on margin as provided in the loan agreement. Interest is payable quarterly in arrears. Commencing on April 1, 1993, the Partnership is required to deposit annually with an escrow agent 50% of the Available Cash Flow, as defined in the Loan Agreement with GDB, up to a maximum of $1,666,700 plus any prior year requirement in arrears. Through March 31, 1997, there had been no amounts deposited in escrow under this provision. The Bonds and the term loan with GDB are collateralized by a first and second mortgage lien on the Resort, a chattel mortgage on personal property, and an assignment of various contracts and a management agreement with a related party. The collateral is subject to a subordination agreement in favor of the Mitsubishi Bank, Limited. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial Accounting Standards Board Statement No. 107 "Disclosures About Fair Value of Financial Instruments", requires the disclosure of the fair value of the Partnership's financial instruments at March 31, 1997 and 1996. The carrying amount of cash and investments, notes payable to bank, chattel mortgage notes and capitalized leases approximates fair value because of the short maturity of the instruments or recent issuance. The fair value of the Partnership's long-term debt has not been determined because similar terms and conditions may no longer be available. F-153 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997 11. INCOME TAXES The Partnership is not taxable for Puerto Rico income tax purposes pursuant to an election submitted to the Puerto Rico Treasury Department. Instead, each Partner reports their distributive share of the Partnership's profit and losses in their respective income tax returns and, therefore, no provision for income taxes has been made in the accompanying financial statements. During 1997, the Partnership was granted a tax exemption grant under the provisions of the Puerto Rico Tourism Incentives Act of 1993 (the Tourism Act). The Tourism Act provides for a ten-year grant which may be extended for an additional ten-year term. Major benefits of this Act are: a 90% exemption from income taxes on hotel income, and a 90% exemption from municipal real and personal property taxes through the entire term of the grant. The Partnership's casino operations are not covered by the tax exemption grant and are fully taxable. 12. ADVERTISING COSTS The Partnership recognizes the costs of advertising as expense in the year in which they are incurred. Advertising costs amounted to approximately $1,446,000 and $847,000 for fiscal years 1997 and 1996, respectively. 13. COMMITMENTS The Partnership leases land under an operating lease agreement for thirty- one years with renewal options for two five-year periods. Following are the minimum annual rental payments on the operating lease subsequent to March 31, 1997: 1998........................................................... $ 190,000 1999........................................................... 210,000 2000........................................................... 210,000 2001........................................................... 210,000 2002........................................................... 210,000 Thereafter..................................................... 5,840,000 ---------- $6,870,000 ==========
Total rent expense for fiscal years 1997, and 1996 amounted to approximately $1,391,000 and $985,000, respectively. 14. REFINANCING The Industrial Revenues Bonds amounting to $120,000,000 at March 31, 1997 are collateralized by a letter of credit which expires on March 9, 1998. Under the terms of the loan agreement, such debt is required to be repaid on February 1, 1998 in the event the letter of credit is not renewed or replaced prior to November 9, 1997 (See Note 9). El Conquistador Partnership L.P. has engaged an investment banking firm to assist in structuring the refinancing of El Conquistador Partnership L.P.'s debt. Based on operating history of the Resort, El Conquistador Partnership L.P.'s management believes such refinancing will be achieved, but there can be no assurance thereof. If such refinancing is not renewed or replaced, it raises substantial doubt about El Conquistador Partnership L.P.'s ability to continue as a going-concern. F-154 Report of Independent Certified Public Accountants -------------------------------------------------- To the Board of Directors and Shareholders of CHC International, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of the hospitality division of CHC International, Inc. at November 30, 1995 and 1996, and the results of its operations and its cash flows for the years ended November 30, 1995 and 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements were prepared on the basis of presentation as described in Note 1. /s/ Price Waterhouse, LLP Miami, Florida October 3, 1997 F-155
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) November 30, August 31, ------------ 1995 1996 1997 -------- --------- ----------- Assets (unaudited) ------ Current Assets Cash and cash equivalents $ 1,105 $ 1,627 $ 1,261 Trade accounts receivable , net of allowance for doubtful accounts of $1,352, $699 and $523 at November 30, 1995 and 1996 and August 31, 1997, respectively 1,150 1,482 2,308 Trade accounts receivable - affiliates, net of allowance for doubtful accounts of $488, $716 and $696 at November 30, 1995, 1996 and August 31, 1997, respectively 1,261 1,108 2,133 Notes and stock subscription receivable - affiliates and officers 340 480 2,039 Receivables, net 7,200 - - Other current assets 713 921 401 -------- -------- -------- Total current assets 11,769 5,618 8,142 Property and equipment, net 623 669 1,891 Investments in and advances to affiliates 8,324 8,457 7,846 Receivables, net 1,900 1,900 1,950 Deferred charges, net 1,932 1,609 948 Intangibles, net 6,716 6,047 5,616 Other assets 1,859 1,939 2,352 -------- -------- -------- Total Assets $ 33,123 $ 26,239 $ 28,745 ======== ======== ======== Liabilities and Stockholders' Equity (Deficit) --------------------------------------------- Current Liabilities Accounts payable $ 903 $ 672 $ 1,911 Due to affiliates and officers 1,069 1,617 2,220 Accrued interest 70 414 820 Accrued expenses 5,204 5,878 7,339 Current portion of long-term debt and capital lease obligations 1,566 12,069 13,869 -------- -------- -------- Total current liabilities 8,812 20,650 26,159 Deferred compensation plan liability 5,537 6,102 6,891 Long-term debt 17,272 5,459 5,282 Other liabilities 1,710 108 193 -------- -------- -------- Total liabilities 33,331 32,319 38,525 -------- -------- -------- Commitments and contingencies (Note 11) - - - Stockholders' Equity (Deficit) Preferred stock, $.01 par value; 1,000 sharesauthorized; no shares issued or outstanding - - - Common stock, $.005 par value; 20,000 shares authorized; 10,355, 10,621 and 10,621 shares issued and outstanding at November 30, 1995 and 1996 and August 31, 1997, respectively 52 53 53 Additional paid-in capital 17,050 13,853 15,177 Accumulated deficit (10,217) (12,012) (17,238) Notes receivable stock purchases - affiliates (6,686) (7,675) (7,675) Unearned compensation (407) (299) (97) -------- -------- -------- Total stockholders' equity (deficit) (208) (6,080) (9,780) -------- -------- -------- Total liabilities and stockholders' equity (deficit) $ 33,123 $ 26,239 $ 28,745 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-156 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION STATEMENTS OF OPERATIONS (IN THOUSANDS)
Nine Months Ended Year Ended ------------------ November 30, August 31, -------------------- ------------------ 1995 1996 1996 1997 --------- --------- -------- -------- (Unaudited) Revenues Rooms $ 4,638 $ 5,282 $ 3,703 $ 4,164 Food and beverage 3,907 4,351 3,047 3,559 Management service fees - from affiliates 5,212 4,284 3,636 3,041 Management service fees - from non-affiliates 5,391 4,748 3,616 3,706 ------- ------- ------- ------- Total revenues 19,148 18,665 14,002 14,470 ------- ------- ------- ------- Operating Expenses Rooms 1,075 1,223 858 902 Food and beverage 2,386 2,772 2,005 2,291 Other costs and expenses 14,455 14,097 10,341 11,276 Depreciation and amortization 832 853 659 792 ------- ------- ------- ------- Total operating expenses 18,748 18,945 13,863 15,261 ------- ------- ------- ------- Income (loss) from operations before equity in net earnings of affiliates 400 (280) 139 (791) Equity in net earnings of affiliates 355 1,003 1,297 (131) ------- ------- ------- ------- Income from operations 755 723 1,436 (922) ------- ------- ------- ------- Other Income (Expense) Interest income 1,720 686 519 590 Interest expense (2,365) (3,304) (2,387) (1,934) Loss on impairment of notes (4,431) - - - receivable Merger and other costs - - - (3,000) Other income (expense) (104) 29 29 - ------- ------- ------- ------- Total other income (expense) (5,180) (2,589) (1,839) (4,344) Minority interests 148 163 118 114 ------- ------- ------- ------- Income (loss) before provision for income taxes (4,277) (1,703) (285) (5,152) Provision for income taxes 131 92 46 74 ------- ------- ------- ------- Net income (loss) $(4,408) $(1,795) $ (331) $(5,226) ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-157 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED NOVEMBER 30, 1995 AND 1996 AND NINE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) (IN THOUSANDS)
Notes Receivable Common Stock Additional Stock Stockholders' ---------------- Paid-in Accumulated Purchases Unearned Equity Shares Amount Capital Deficit Affiliates Compensation (Deficit) -------- ------ ----------- ------------ ----------- ------------- -------------- Balance, November 30, 1994 10,355 $ 52 $ 22,645 $ (5,809) $ (7,350) $ (523) $ 9,015 Receipts from notes receivable stock purchases - affiliates - - - - 664 - 664 Amortization of unearned compensation - - - - - 116 116 Net change in gaming division - - (5,595) - - - (5,595) intercompany account Net loss - - - (4,408) - - (4,408) -------- ------ ---------- ----------- ---------- ----------- ----------- Balance, November 30, 1995 10,355 52 17,050 (10,217) (6,686) (407) (208) -------- ------ ---------- ----------- ---------- ----------- ----------- Additional common shares issued 266 1 2,999 - (3,000) - - Receipts from notes receivable stock purchases - affiliates - - - - 2,011 - 2,011 Amortization of unearned compensation - - - - - 108 108 Net change in gaming division - - (6,196) - - - (6,196) intercompany account Net loss - - - (1,795) - - (1,795) -------- ------ ---------- ----------- ---------- ----------- ----------- Balance, November 30, 1996 10,621 53 13,853 (12,012) (7,675) (299) (6,080) -------- ------ ---------- ----------- ---------- ----------- ----------- Amortization of unearned compensation - - - - - 202 202 Net change in gaming division - - 1,324 - - - 1,324 intercompany account Net loss - - - (5,226) - - (5,226) -------- ------ ---------- ----------- ---------- ----------- ----------- Balance, August 31, 1997 (unaudited) 10,621 $ 53 $ 15,177 $ (17,238) $ (7,675) $ (97) $ (9,780) ======== ====== ========== =========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-158 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION STATEMENTS OF CASH FLOWS (IN THOUSANDS) (PAGE 1 OF 2)
Year Ended Nine Months Ended November 30, August 31, -------------------- ------------------- 1995 1996 1996 1997 --------- --------- -------- --------- (Unaudited) Cash flows from operating activities: Net loss $(4,408) $(1,795) $ (331) $(5,226) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Provision (benefit) for losses or impairments on receivables and equity investments 5,765 (212) 154 (11) Depreciation and amortization 832 853 659 792 Amortization of deferred charges 844 1,533 1,023 871 Undistributed equity in net earnings of affiliates (355) (1,003) (1,297) 131 Minority interests (148) (163) (118) (114) Change in assets and liabilities: (Increase) decrease in: Trade accounts receivable (292) 313 263 (635) Trade accounts receivable - affiliates (796) 227 (19) (835) Deferred charges (28) (1,084) (1,084) 89 Other assets and other receivables (964) (707) (387) (405) Increase (decrease) in: Accounts payable (667) (231) 3 1,238 Accrued interest 37 344 (41) 4 Accrued expenses (239) (822) (1,921) 1,415 Deferred compensation plan liability 600 565 411 788 Other liabilities (34) 56 133 200 ------- ------- ------- ------- Net cash provided (used) by operating activities 147 (2,126) (2,552) (1,698) ------- ------- ------- ------- Cash flows from investing activities: Sales of notes receivable - 7,200 7,200 - Purchases of property and equipment (168) (134) (94) (1,538) Investments in and advances to affiliates (2,645) (50) - (1,451) Sales of or distributions from investments in affiliates 959 834 659 1,932 Project loans and advances (1,900) - - (50) ------- ------- ------- ------- Net cash flows (used) provided by investing activities (3,754) 7,850 7,765 (1,107) ------- ------- ------- ------- Cash flows from financing activities: Receipts from notes receivable stock purchases - affiliates 7,756 2,011 106 - Increase (decrease) in due to affiliates (1,145) 408 61 (508) Borrowings 2,900 500 - 2,255 Payments of debt and capital lease obligations and other deferred charges (577) (1,926) (1,294) (632) Net change in gaming division intercompany account (5,595) (6,195) (5,088) 1,324 ------- ------- ------- ------- Net cash flows provided (used) by financing activities 3,339 (5,202) (6,215) 2,439 ------- ------- ------- ------- Net increase (decrease) in cash and equivalents (268) 522 (1,002) (366) Cash and cash equivalents at beginning of period 1,373 1,105 1,105 1,627 ------- ------- ------- ------- Cash and cash equivalents at end of period $ 1,105 $ 1,627 $ 103 $ 1,261 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-159 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION STATEMENTS OF CASH FLOWS (IN THOUSANDS) (PAGE 2 OF 2)
Year Ended Nine Months Ended November 30, August 31, ---------------- --------------- 1995 1996 1996 1997 ------- ------- ------ ------- (Unaudited) Supplemental disclosure of cash flow information: Cash paid during the period for interest (net of amount capitalized) $1,626 $ 1,718 $1,110 $ 981 ====== ======= ====== ====== Cash paid during the period for income taxes $ 96 $ 89 $ 48 $ 30 ====== ======= ====== ====== Cash received during the period for income taxes $ 29 $ 34 Supplemental Schedule of noncash ======= ====== investing and financing activities: Investments in Affiliates: Loan for purchase of interest in GAH-II, L.P. $3,750 Loan for investment in CHC Lease Partners 1,088 Operating partnership units received as payment of interest 572 Operating partnership units received as payment of notes receivable stock 388 purchases - affiliates ------ Total investments in affiliates $5,798 ====== Other: Common stock issued for notes receivable stock purchase-affiliates $ 3,000 ======= Capital leases $ 166 $ 41 $ 41 ====== ======= ======
The accompanying notes are an integral part of these financial statements. F-160 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - --------------------- The financial statements of CHC International, Inc. - Hospitality Division (the "Company") have been prepared pursuant to the Agreement and Plan of Merger by and among Patriot American Hospitality Operating Company ("Opco"), Patriot American Hospitality, Inc. ("PAH") and CHC International, Inc. ("CHC") dated as of September 30, 1997 (the "Merger Agreement"). The Merger Agreement contemplates, subject to appropriate approvals, (i) CHC's contribution of its gaming business to a wholly-owned subsidiary ("Spinco"), (ii) CHC's distribution of all of the common stock of Spinco to the stockholders of CHC pro rata based on their ownership in CHC, (iii) CHC's retention of its hospitality business and (iv) CHC merging into OpCo subsequent to the distribution of Spinco. CHC's major operations consist of (i) the hospitality business including managing, leasing and developing of and investing in hotel and resort properties and (ii) the gaming business including owning, managing and developing casino properties. The financial statements have been prepared as if the Company has operated as an independent, stand alone entity for all periods presented and give no effect to the net changes of assets and liabilities contemplated by the Merger Agreement. Such financial statements have been prepared using the historical basis of accounting and include all of the assets, liabilities, revenues and expenses previously included in CHC's consolidated financial statements prior to the transactions contemplated by the Merger Agreement, except for all the assets, liabilities, (including contingent liabilities), revenues and expenses of the gaming business of CHC and its subsidiaries. Consequently, these financial statements include certain balances for goodwill and other assets and liabilities related to the Company that were previously included in CHC's consolidated financial statements including (i) the allocation of certain fixed assets and related depreciation expense, (ii) notes receivable and borrowings and related interest income and expense and (iii) other liabilities and related expenses. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 55 ("SAB 55"), the Company's financial statements exclude certain corporate expenses incurred by CHC on the gaming division's behalf. The Company's fiscal year ends on November 30. All significant intercompany balances and transactions have been eliminated. Investments in less than majority-owned non-gaming businesses, in which a significant equity ownership interest is held, are accounted for on the equity method. Summary of Significant Accounting Policies - ------------------------------------------ These financial statements have been prepared in accordance with generally accepted accounting principles. Significant accounting policies are summarized below. F-161 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Accounting Estimates - -------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - ------------------- Hotel room and food and beverage revenues and expenses from leased hotel operations are included in the statements of operations during the lease term. Revenues from rooms and food and beverage sales are recognized at the time the related service is performed. Revenue from management service fees for management of hotels are based upon contracted terms and are recognized when the services are performed. Reimbursed Operating Expenses - ----------------------------- The Company is fully reimbursed by certain managed hotels for salaries and related costs for hotel personnel employed by the Company in accordance with management contract terms and the administration of services consisting primarily of sales, marketing and reservations. These costs amounted to $47,324 and $50,237 for the years ended November 30, 1995 and 1996, respectively. All such costs and related reimbursements have been netted in the statements of operations, with reimbursable amounts and accrued salaries and related costs reflected as trade accounts receivable and accrued expenses, respectively, in the balance sheets. During the year ended November 30, 1995 the Company was reimbursed for $1,400 of costs incurred in conjunction with an unconsummated transaction previously expensed in the statements of operations during the period inception (February 3, 1994) to November 30, 1994. Stock Based Compensation - ------------------------ In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". SFAS No. 123, the disclosure provisions of which must be implemented for fiscal years beginning subsequent to December 15, 1995, establishes a fair value based method of accounting for stock based compensation plans, the effect of which can either be disclosed or recorded. The Company intends to adopt the provisions of SFAS No. 123 in fiscal 1997 and upon adoption intends to retain its intrinsic value method of accounting for stock based compensation. F-162 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include short-term investments with original purchase maturities of 90 days or less. Trade Accounts Receivable and Trade Accounts Receivable - Affiliates - -------------------------------------------------------------------- Trade accounts receivable are from non-affiliated hotels under management and lease, and hotel customers. Trade accounts receivable - affiliates are receivables from hotel or other entities in which the Company, CHC, its stockholders or officers have an investment interest. The Company provides an allowance for doubtful accounts based upon a periodic review of outstanding receivables and evaluation of aggregate collectibility. Property and Equipment - ---------------------- Property and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over estimated useful lives of the assets. Useful lives range from three to five years. Expenditures for repairs and maintenance are charged to expenses as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing equipment, are capitalized and depreciated. Equipment held under capital leases is amortized over the lesser of useful life or lease term. Deferred Charges - ---------------- Costs incurred in connection with the Company's term loan are recorded as deferred charges and are amortized over the term of the loan. Trademark and organization costs are amortized on a straight line basis over 40 and 5 years, respectively. Deferred charges consist of the following at November 30,:
1995 1996 -------- -------- Deferred debt costs $ 2,022 $ 3,197 Trademark and organization costs 1,180 1,110 ------- ------- 3,202 4,307 Accumulated amortization (1,270) (2,698) ------- ------- Deferred charges, net $ 1,932 $ 1,609 ======= =======
F-163 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Intangibles - ----------- Goodwill is amortized on a straight line basis over 30 to 40 years. Management contract intangibles are amortized on a straight-line basis over 9 to 25 years. The Company periodically assesses the future benefit associated with management contract intangibles through a review on a contract by contract basis of estimated undiscounted future operating cash flow. Any impairment of intangible assets is charged to operations and reflected as a reduction of the related intangible asset account. Impairment of Long-Lived Assets - ------------------------------- The Company during fiscal 1996 adopted SFAS No. 121, "Accounting for Impairment of Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-term assets, including related goodwill, be reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Income Taxes - ------------ Income taxes are provided based on the liability method of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are recorded to reflect tax consequences on future years' differences between tax bases of assets and liabilities and their financial reporting amounts at each year-end as if the Company were a stand alone taxpayer. Interim Unaudited Financial Information - --------------------------------------- The consolidated financial statements for the nine months ended August 31, 1996 and 1997 are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month periods ended August 31, 1996 and 1997 are not necessarily indicative of the results that may be expected for a full year. Concentration of Credit Risk - ---------------------------- Financial instruments which potentially subject The Company to concentrations of credit risk exist principally in receivable balances. The Company provides its services to the hotel industry. Hotel management services are contracted for terms normally ranging from 1 to 20 years, and in limited instances on a month-to-month basis. To reduce credit risk, the Company, through its management of such hotels, monitors the hotels' financial condition. The Company does not generally require collateral. Five management contracts accounted for 26% of management service fees revenues for each of the years ended November 30, 1995 and 1996. F-164 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The Company has a note receivable from the Rhode Island Convention Center Authority in conjunction with agreements to develop and operate a hotel. To reduce credit risk with respect to the note receivable from the Rhode Island Convention Center Authority, the Company, through its management of the property, which is the primary source of repayment, monitors the hotel's financial condition, and management believes the credit risk related to the receivable is minimal. The Company has notes receivable from certain stockholders for the purchase of the Company's common stock. Management believes the concentration of credit risk with respect to the notes from certain stockholders for the purchase of company common stock is minimal. (See note 13.) The estimated fair value of financial instruments have been determined by the Company using available market and effective interest rate information for such instruments and the carrying amounts approximate their fair value. Common Share Data - ----------------- In February 1996, the Company's common stock was adjusted pursuant to a 2-for-1 stock split where each share of the Company's common stock, $.01 par value per share was converted into two shares of the Company's common stock, $.005 par value per share. All share and per share amounts have been retroactively adjusted to give effect to the stock splits. NOTE 2 - RECEIVABLES Noncurrent receivables consist of a $1,900 note receivable from the Rhode Island Convention Center Authority (the "Authority") with an interest rate equal to the lesser of manager share of net cash flow as defined or 11% (effective interest rate of 3.90% and 1.0% as of November 30, 1995 and 1996, respectively) payable annually, interest only, with principal due on earlier of December 30, 2024 or the date the management agreement between the Authority and the Company is terminated. The Company owned nonrecourse subordinated notes in the amount of $12,500 ("Notes Receivable Crystal Palace") secured by a leasehold interest in the Crystal Palace Hotel. The Company originally recorded a discount of $1,000 on the Notes Receivable Crystal Palace. On December 29, 1995, The Company sold its interest in the Notes Receivable Crystal Palace to the issuer for $7,200, plus accrued interest. The Company recorded a loss on the impairment in value for the Notes Receivable Crystal Palace of $4,431 during the year ended November 30, 1995. F-165 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consists of the following at November 30,:
1995 1996 ------- ------- Furniture, fixtures and other equipment $ 509 $ 615 Leasehold improvements 195 198 Equipment under capital leases 335 384 ------ ------ 1,039 1,197 Accumulated depreciation and (416) (528) amortization ------ ------ Property and equipment, net $ 623 $ 669 ====== ======
Depreciation expense was $82 and $129 for the years ended November 30, 1995 and 1996, respectively. NOTE 4 - LEASES Capital Leases - -------------- The Company leases certain equipment under capital leases. Minimum rentals under such capital leases are as follows at November 30, 1996:
Year ending November 30,: ------------------------- 1997 $ 69 1998 70 1999 59 2000 55 2001 9 ---- Total minimum lease payments 262 Less amount representing interest 54 ---- Net obligations 208 Less current portion 47 ---- Long-term portion $161 ====
The long-term portion of capital lease obligations is included in long-term debt. F-166 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Operating Leases - ---------------- The Company leases office and warehouse space under operating lease agreements. The Company also leases office space from a partnership owned 58% by certain of its officers under an operating lease whose term runs through April 30, 2004 (see Note 14). The Company entered into an agreement to lease and operate the Washington Duke Inn, located in Durham, North Carolina. The initial lease term, which is through July 31, 1997 and can be extended through July 31, 1998, includes payment of $95 on or before August 1, 1996 and a monthly rent of $134 plus 6% of gross revenues through July 31, 1996; $134 plus 7% of gross revenues through July 31, 1997; and $155 plus 7% of gross revenues from August 1, 1997 through July 31, 1998 (See Note 15). Future minimum lease payments, for all operating leases with non-cancelable terms in excess of one year are as follows at November 30, 1996:
Year ending November 30,: ------------------------- 1997 $2,008 1998 1,558 1999 319 2000 319 2001 319 Thereafter 772 ------ Total minimum lease payments $5,295 ======
Rental expense amounted to $2,143, and $2,437 for the years ended November 30, 1995 and 1996, respectively. F-167 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5 - INVESTMENTS IN AND ADVANCES TO AFFILIATES On October 2, 1995 the Company and a principal owner of the Gencom group of companies (which includes GAH-II, L.P. noted below) formed CHC Lease Partners, with each owning 50%. At November 30, 1996, CHC Lease Partners leases 24 hotels pursuant to operating leases with terms averaging 11 years from Patriot American Hospitality Partnership, L.P. (the "Operating Partnership"), a majority owned subsidiary of Patriot American Hospitality, Inc., a publicly traded, self- administered real estate investment trust. CHC Lease Partners entered into separate management agreements with a wholly-owned subsidiary of the Company and the Company's 50% owned subsidiary, GAH-II, L.P. ("GAH"), a Houston, Texas based hotel management business, to manage the leased hotels. Management fees earned under such agreements are subordinate to CHC Lease Partners' obligations to the Operating Partnership under the lease agreements. If, after payment of management fees at the contract rate, CHC Lease Partners would be deficient in lease payments to the Operating Partnership under any of the lease agreements in any year, the Company and GAH would be required to refund and forego the management fee for each of the hotels which are deficient in lease payments. If after the management fees are refunded and foregone, CHC Lease Partners would still be deficient in lease payments under any of the lease agreements, the Company and GAH would each be required to pay CHC Lease Partners up to 50% of the total management fees earned. Summarized balance sheet and statement of operations information for CHC Lease Partners, which is accounted for using the equity method, at November 30, 1995 and 1996 and the period from inception (October 2, 1995) to November 30, 1995 and the year ended November 30, 1996 are as follows:
Summarized balance sheet information - ------------------------------------ November 30, ------------ 1995 1996 ------- ------- Current assets $18,768 $25,245 Investments 5,100 5,100 Other assets 100 391 ------- ------- Total assets $23,968 $30,736 ======= ======= Current liabilities $12,530 $19,376 Long-term liabilities 2,020 2,369 ------- ------- Total liabilities 14,550 21,745 ------- ------- Net assets $ 9,418 $ 8,991 ======= =======
F-168 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Summarized statement of operations information - ---------------------------------------------- November 30, ------------ 1995 1996 ------- -------- Revenues $22,807 $156,086 ------- -------- Income before lessee income (expense) $ 957 $ 2,921 ------- -------- Lessee income (expense) $ (639) $ (2,258) ------- -------- Net income $ 318 $ 663 ------- --------
CHC Lease Partners is required to maintain minimum net worth and adequate working capital for the term of the leases. At inception, the Company and its partner each contributed to CHC Lease Partners cash of $2,000 and units of limited partnership interest in the Operating Partnership ("O.P. Units"), which after an appropriate discount from the fair market value of Patriot American Hospitality, Inc. common stock, were valued at $2,550. The O.P. Units may be redeemed for, subject to certain restrictions, the common stock of PAH. The Company received distributions from CHC Lease Partners of $545 for the year ended November 30, 1996. On October 2, 1995 the Company purchased a 50% ownership interest in GAH from Patriot American Hospitality, L.P. for a nonrecourse note in the amount of $3,750 (See Note 9) and also contributed $150 to GAH. Summarized balance sheet and statement of operations information for GAH, which is accounted for using the equity method, at December 31, 1995 and 1996 and the period date of acquisition (October 2, 1995) to December 31, 1995 and the year ended December 31, 1996 is as follows:
Summarized balance sheet information - ------------------------------------ December 31, ------------ 1995 1996 ------ ------ Current assets $ 761 $1,983 Other assets 344 1,077 ------ ------ Total assets $1,105 $3,060 ====== ====== Current liabilities $ 640 $1,586 Long-term liabilities 103 107 ------ ------ Total liabilities 743 1,693 ------ ------ Net assets $ 362 $1,367 ====== ====== Summarized statement of operations information - ---------------------------------------------- December 31, ------------ 1995 1996 ------ ------ Revenues $1,149 $7,284 ====== ====== Income (loss) before minority interest $ (30) $1,211 ====== ====== Net income (loss) $ (33) $1,194 ====== ======
F-169 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The cost of the Company's initial investment in excess of its interest in the net assets has been assigned principally to management contracts and goodwill which are being amortized on a straight-line basis over 12 and 30 years, respectively. The unamortized excess of the Company's investment over the Company's interest in GAH is $3,627 and $3,425 at November 30, 1995 and 1996 respectively. The Company received distributions of $123 from GAH for the year ended November 30, 1996. The Company's remaining investments in and advances to affiliates in the aggregate are not significant. NOTE 6 - INTANGIBLES Intangibles are summarized as follows:
Management Contract Total Intangibles Goodwill Intangibles ----------- ---------- ------------ Net balance, November 30, 1994 $2,389 $4,966 $7,355 Amortization, net (490) (149) (639) ------ ------ ------ Net balance, November 30, 1995 1,899 4,817 6,716 Amortization, net (521) (148) (669) ------ ------ ------ Net balance, November 30, 1996 $1,378 $4,669 $6,047 ====== ====== ======
The Company has included in amortization the write-off of $35 and $83 of management contract intangibles related to terminated contracts for the years ended November 30, 1995 and 1996, respectively. NOTE 7 - EMPLOYEE BENEFIT PLANS The Company maintains a non-qualified defined benefit deferred compensation plan which covers most management employees and provides an annual retirement benefit, after twenty-five years of service, equal to 50% of the participant's average last five years, pay reduced by social security benefits and further reduced for years of service less than twenty-five, on a pro rata basis. Benefits are vested on an eleven year cliff basis. Assets designated to cover plan liabilities include cash, accounts receivable, life insurance policies on the lives of certain participants, short-term investments and a loan to an officer. While it is the intention of management to utilize the assets designated for the deferred compensation plan to pay plan benefits, such assets have not been placed in trust and are not otherwise restricted and accordingly, they are available for general corporate purposes. F-170 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Under the terms of the life insurance policies, the Company receives the cash surrender value if the policies are terminated or all benefits due upon the death of the insured. In addition, the Company can borrow against the available net cash surrender value of the policies. The following is a summary of the assets designated for the deferred compensation plan which are included in other assets at November 30,:
1995 1996 -------- -------- Gross cash surrender value of insurance policies $ 1,170 $ 1,225 Less policy loans (1,085) (1,157) ------- ------- Cash surrender value of insurance policies, net 85 68 Accounts receivable 82 82 Cash and cash equivalents 625 614 Loan to officer 1,006 1,077 ------- ------- Total assets designated for the deferred compensation plan $ 1,798 $ 1,841 ======= =======
Deferred compensation plan costs, net of forfeitures, included in the combined statements of operations for the years ended November 30, 1995 and 1996 were approximately $569 and $374, respectively. The earnings rate for the deferred compensation plan benefit liability was 7% for the years ended November 30, 1995 and 1996. Deferred compensation plan costs, net of forfeitures, for the years ended November 30, 1995 and 1996, includes the following components:
1995 1996 --------- --------- Service cost $ 381 $ 142 Interest cost on projected benefit obligation 188 232 ------- ------- Deferred compensation plan costs $ 569 $ 374 ======= ======= The following table details the status of the plan at November 30: 1995 1996 ------- ------- Actuarial present value of benefit obligations: Vested benefits $ 4,257 $ 5,016 Non-vested benefits 1,280 1,086 ------- ------- Projected benefit obligations $ 5,537 $ 6,102 ======= ======= Plan assets less than projected benefit obligations $(5,537) $(6,102) ======= =======
F-171 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The Company plans to adopt a new non-qualified defined contribution deferred compensation plan which, when enacted, will be effective retroactively to January 1, 1992. The cost of the new plan will be substantially the same as the existing plan. NOTE 8 - INCOME TAXES The Company files income tax returns as part of CHC's consolidated group. Income taxes in the accompanying financial statements are computed as if the Company had been a separate taxable entity. The Company's provision for income taxes attributable to continuing operations is comprised of the following for the years ended November 30, 1995 and 1996:
1995 1996 ----- ----- Current tax expense: State $ 81 $ 52 Foreign 50 40 ----- ----- Total provision for income taxes $ 131 $ 92 ===== =====
The Company generated a tax net operating loss carryforward of approximately $3,661 during the year ended November 30, 1996 and has accumulated tax net operating loss carryforwards of approximately $4,221 as of November 30, 1996. Approximately $560 and $3,661 of the net operating loss carryforwards will expire in the years 2009 and 2011, respectively. The tax net operating loss carryforward is generally available to offset future taxable earnings. The difference between the taxes provided for continuing operations at the U.S. federal statutory rate and the Company's actual tax provision is reconciled below for the years ended November 30, 1995 and 1996:
1995 1996 ----- ----- Taxes provided at statutory rate $ - $ - State tax expense 81 52 Foreign tax expense 50 40 ----- ----- Total provision for income taxes $ 131 $ 92 ===== =====
F-172 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The approximate effect of the Company's temporary differences and carryforwards that give rise to deferred tax balances at November 30, were as follows:
1995 1996 -------- -------- Net operating loss carryforwards $ 224 $ 1,688 Deferred compensation plan liability 2,106 2,330 Allowance for doubtful accounts 559 800 receivable Valuation allowance for notes receivable 1,772 - Other, net 1,275 878 ------- ------- 5,936 5,696 Deferred tax asset valuation allowance (5,936) (5,696) ------- ------- Noncurrent deferred tax asset $ - $ - ======= =======
In accordance with SFAS No.109, the Company recorded a valuation allowance on the entire amount of the deferred tax asset at November 30, 1995 and 1996 because the Company sustained taxable losses and there was no assurance that a deferred tax asset would be realized. The net decrease in the valuation allowance for deferred tax assets of approximately $240 during the year ended November 30, 1996 was primarily due to increases in deferred tax assets in net operating loss carryforwards and allowance for doubtful receivables reduced for the sale of Notes Receivable Crystal Palace. F-173 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9 - LONG-TERM DEBT Long-term debt is comprised of the following as of November 30,:
1995 1996 -------- --------- Variable-rate term loan (effective interest rate of 10.375% and 10.0% at November 30, 1995 and 1996, respectively) interest payable quarterly with balance due at maturity February 28, 1997 (see below) $11,500 $ 11,500 Variable rate non-recourse loan (effective interest rate of 9.0% at November 30, 1995 and 1996) interest and principal payable quarterly from 25% of net cash flow of GAH, as defined, with balance due October 2, 2000 3,750 3,750 Variable rate loan (effective interest rate of 10.75% and 10.25% at November 30, 1995 and 1996, respectively) interest payable monthly and principal payable in annual installments of $190 from December 30, 1995 with balance due December 30, 1997 1,900 1,710 Variable rate unsecured demand loans (effective interest rate of 9.75% at November 30, 1995) interest payable monthly. 1,000 - 8% note payable - interest payable annually and principal payable in annual installments of $120 through October 10, 1999 480 360 Capital lease obligations (see Note 4) 208 208 ------- -------- Total debt 18,838 17,528 Current portion (1,566) (12,069) ------- -------- Total long-term debt $17,272 $ 5,459 ======= ========
Aggregate principal payments for the long-term debt including capital lease obligations are as follows at November 30, 1996:
Year ending November 30: ------------------------ 1997 $12,069 1998 1,906 1999 381 2000 3,163 2001 9 ------- Total $17,528 =======
F-174 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The Company's $11,500 variable-rate term loan (the "Term Loan"), as amended, (i) bears interest at the bank's base lending rate plus 2.0% or, at the Company's option, London Interbank Market Rate (LIBOR) plus 4 1/2%, (ii) is secured by substantially all of the Company's assets and (iii) matures February 28, 1997. On February 28, 1997, the Term Loan was further amended whereby the Term Loan (i) bears interest at the bank's lending rate plus 1.5% or, at the Company's option, LIBOR plus 2.5% and (ii) matures in quarterly installments of 2.5% of the principal amount outstanding commencing June 30, 1997 with the balance due June 30, 1998. The Company has also agreed to pay the lender a fee equal to 1.5% of the fair market value of the Company, but in no event less than $2,500 or more than $6,000. The fee is payable at the lender's option at any time during the ten-year period commencing February 28, 1997. Interest expense for the years ended November 30, 1995 and 1996 include $500 and $1,200 respectively related to the lender fee. The Term Loan agreement contains customary financial covenants, and various covenants including limitations on indebtedness, liabilities, liens, distributions, dividends, redemptions, prepayments of other indebtedness, mergers, purchases and sales of assets, loans, investments and guarantees, and prohibitions of any change of control. In December, 1994, the Company entered into a loan agreement with a commercial bank in the amount of $1,900. The loan bears interest at the bank prime rate plus 2% per annum payable monthly. Principal is payable in annual installments of $190 in December 1995 and 1996, with the balance due in December 1997. In October 1995, in connection with the Company's purchase of a 50% interest in GAH (see Note 5), the Company entered into a nonrecourse loan agreement with the seller in the amount of $3,750. The loan bears interest at the lesser of 9.0% and the maximum non-usurious amount permissible. Interest and principal are payable quarterly commencing January 25, 1996 from 25% of GAH net cash flow, as defined, continuing until the earlier of October 2, 2000 and the date all amounts outstanding under the nonrecourse term loan are paid in full. In January 1996, CHC established a $1,500,000 line of credit on an unsecured basis with a commercial bank guaranteed by two shareholders of CHC. Advances under the line of credit bear interest at the bank rate plus 1% per annum payable on demand. No amounts are currently outstanding under the line of credit. F-175 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Related Party Borrowings - ------------------------ In October 1995, the Company borrowed 53,314 O.P. Units from certain shareholders. As permitted by the securities loan agreement, the O.P. Units, valued after an appropriate discount, at $1,088, were contributed by the Company to CHC Lease Partners (see Note 5). The Company must return O.P. Units to the shareholders on demand and pay to the shareholders interest equal to distributions received by the Company from the O.P. Units. The obligation under the O.P. Units borrowing is included in due to affiliates and officers in the balance sheets. NOTE 11 - COMMITMENTS AND CONTINGENCIES In the ordinary course of its business, the Company is named as defendant in legal proceedings resulting from incidents taking place at hotels it manages, or in which it has an ownership interest. The Company maintains comprehensive liability insurance and also requires hotel owners to maintain adequate insurance coverage. Management believes such coverage to be of a nature and amount sufficient to ensure that the Company is adequately protected from any material financial loss as a result of such claims. The Company owns a 30% interest in Plaza Associates Limited Partnership ("Plaza Associates") which owns and operates the Holiday Inn - Dayton Mall in Dayton, Ohio. The Company has joint and severally guaranteed partial payment of two Plaza Associates notes payable. The joint and several guaranty is mitigated by a contribution agreement among Plaza Associates partners which reduced the Company's obligation to 30% of the guaranty. The total maximum potential liability to the Company under the guaranty after giving effect to the contribution agreement is as follows: through December 31, 1999 up to $375; January 1, 2000 to December 31, 2002 up to $225; January 1, 2003 to March 1, 2004 up to $150 and zero thereafter. In addition, The Company has joint and severally guaranteed payment of certain other Plaza Associates obligations, the maximum potential liability to the Company is $540. In November 1996, the Company entered into an agreement with Grant Hotels, Inc. to manage the Sam Lord's Castle Resort in Barbados, West Indies and provide consulting and technical services with respect to the conversion of the resort to a Carnival Resort. The agreement provides the Company will loan the resort up to $900 for conversion of the resort, working capital, referral fees and certain other expenses of which no amounts have been advanced as of November 30, 1996. NOTE 12 - MINORITY INTEREST The Company owns a 75% interest in the TCC-Registry Joint Venture (the "Registry Venture") acquired in October 1994. The Company's combined financial statements include 100% of the assets, liabilities and operations of the Registry Venture. The effects of the minority interests have F-176 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) been reflected in the accompanying combined statements of operations. Included in other liabilities in the accompanying combined balance sheets is minority interest of the Registry Venture of $78 and $108 as of November 30, 1995 and 1996, respectively. NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIT) As a result of the basis of presentation as outlined in Note 1, including the allocation of certain assets and liabilities to the gaming division, the Company's equity (deficit) includes balances arising from the net change in the gaming divisions' intercompany account with the Company. In June 1994, the Company granted to an executive officer 155,000 shares of common stock valued at $3.75 per share, subject to forfeiture if employment is terminated prior to vesting. The stock grant originally scheduled to vest over five years has been accelerated and now vests as to 50% of the shares of common stock in January 1997 and 50% of the shares of common stock in January 1998. The amortization period of the unearned compensation has been revised accordingly. The stock grant also becomes fully vested on the earlier to occur of any termination of employment due to death or disability, or May 1997, if the Company does not offer to extend the employment agreement until May 1999 for any reason other than cause. Compensation expense for the stock grant was $116 and $108 for the years ended November 30, 1995 and 1996, respectively. Pursuant to the terms of a stock purchase agreement dated November 30, 1994 between the Company, Carnival Corporation and certain shareholders, the Company agreed to sell to such persons an aggregate of 4,000,000 shares of common stock at $6.25 per share. The aggregate purchase price of $25,000 was satisfied by the conversion of a $10,000 principal balance due by the Company to Carnival Corporation under a revolving credit loan, $9,350 in notes payable to the Company due November 1998 and the balance in cash. The notes bear interest at 7.1% payable annually with principal installments due annually of $2,337. The installment due November 30, 1995, was partially satisfied by cash payments of $2,106 and $125 of O.P. Units. In addition, prepayments totaling $432 of O.P. Units were received during the year ended November 30, 1995. The installment due November 30, 1996 less prepayments received was satisfied by cash payments of $2,011. The notes are secured by a pledge of all purchased shares of common stock. Pursuant to the terms of a stock purchase agreement dated November 29, 1996 between the Company and CHC Investor Partners, L.P. ("CHC Investor"), a Texas limited partnership controlled by a principal owner of the Gencom group of companies, the Company agreed to sell 265,513 shares of common stock at $11.30 per share and grant non-qualified stock options to purchase 61,130 shares of common stock at a per share exercise price of $11.30. The aggregate purchase price of $3,000 was satisfied with a note. The note is due in installments of $500 on November 29, 1997 and $2,500 on November 29, 1998; however, the note plus accrued interest becomes due and payable 180 days after any public offering by the Company. The note bears interest at 7.1% payable annually. F-177 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The Company has an Employee Stock Option Plan (the "Plan") which provides for the grant to employees of both incentive stock options (within the meaning of Section 422 of the Internal Revenue Code) and non-statutory stock options to eligible employees (including officers and directors) and non-employee directors. A total of 1,700,000 shares of common stock has been reserved for issuance under the Plan. The table below summarizes common stock option activity as of and for the years ended November 30, 1995 and 1996:
1995 1996 -------- ----------- Options outstanding, beginning of period 988,052 988,052 Granted - 264,317 Returned - (30,564) -------- ---------- Options outstanding, end of year 988,052 1,221,805 -------- ---------- Options exercisable end of year 197,610 419,672 -------- ---------- Exercise price per share $ 6.25 $ 6.25 of options exercisable to to during the period $ 6.25 $ 11.50 -------- ----------
All options issued were granted at the fair market value of CHC's common stock on the date of grant, have a term of ten years, and generally become exercisable with respect to 20% of the covered shares commencing one year after grant, and are generally exercisable with respect to an additional 20% of the covered shares after each additional year until fully exercisable. NOTE 14 - RELATED PARTY TRANSACTIONS AND ALLOCATIONS The Company provides services and pays certain costs which are reimbursable under management agreements with hotels, which are affiliated with the Company by virtue of common ownership. Total fees earned from affiliated hotels for the years ended November 30, 1995 and 1996 were $5,212 and $4,284, respectively. Total fees and reimbursable expenses due from affiliated hotels were $1,261 and $1,108 at November 30, 1995 and 1996, respectively. In March, 1994, CHC and Carnival Corporation entered into a 20 year Trademark License Agreement providing for CHC's use of the "Carnival" trademark so that CHC may do business as "Carnival Hotels and Casinos" (and the Company may do business as "Carnival Hotels and Resorts"). Fees due under the agreement are the greater of $100, or 1% of CHC's revenues, as defined. The trademark license fees for the Company the years ended November 30, 1995 and 1996 were $115 and $150, respectively. F-178 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Certain of the Company's officers hold a 58% interest in a partnership which owns the office building in which the Company's executive offices are located. Under this lease, rental expense for the years ended November 30, 1995 and 1996 were $401 and $375, respectively. The Company provides accounting services, at cost, to certain entities owned and controlled by certain of its officers. The entities are obligated to reimburse the Company for such services provided. The cost of such services were $175 and $145 for the years ended November 30, 1995 and 1996, respectively. Pursuant to the terms of a stock purchase agreement dated November 30, 1994 between certain shareholders and Carnival Corporation, certain shareholders agreed to buy at $6.25 per share, 2,610,000 shares of Company common stock from Carnival Corporation. The aggregate purchase price of $16,313 was paid in promissory notes due November 30, 1998 subject to certain condition as defined in the stock purchase agreement. The notes bear interest at 6.0% payable at maturity. The stock purchase agreement provides certain shareholders a put option which requires Carnival Corporation to repurchase at $6.25 per share plus a rate of return of 6.1% per annum, all of the 2,610,000 shares of Company common stock, by November 30, 1998. The stock purchase agreement also requires Carnival Corporation to reduce its ownership in the Company's common stock (assuming exercise of the put option ) to less than 25% of the Company's outstanding common stock no later than November 30, 1998, as defined in the stock purchase agreement (See Note 13). Pursuant to the terms of a stock purchase agreement dated November 29, 1996 between the Company, certain shareholders and CHC Investor, CHC Investor agreed to buy at $11.30 per share 265,513 shares of Company common stock from certain shareholders for $3,000 in cash (See Note 13). The Company entered into a borrowing arrangement with certain shareholders (See Note 9). CHC has allocated a portion of its corporate expenses to the gaming division. These expenses include management and corporate overhead; benefit administration; risk management/insurance administration, and other support and executive functions. Allocations and charges were based on either a direct cost pass through or a percentage allocation for such services provided based on factors such as revenues, management time, or headcount. Such allocations and charges totaled $3,734 and $3,720 for the years ended November 30, 1995 and 1996, respectively. Management believes that the basis used for allocating corporate services is reasonable and that the terms of these transactions would not materially differ from those that would result from transactions among unrelated parties. F-179 CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 15 - SUBSEQUENT EVENTS Effective January 1, 1997, the Company entered into a new agreement to lease and operate the Washington Duke Inn which supersedes the previous agreement. The term which is through December 31, 2002 includes rent for each year of 22% of gross revenues up to $10,000, adjusted annually, plus 30% of gross revenues in excess of $10,000, adjusted annually, provided in any event a minimum rent of $1,800. Rent is payable monthly. In addition, the Company purchased $1,505 of furniture, fixtures and equipment in exchange for a promissory note and is required to fund a reserve account for furniture, fixtures and equipment expenditures in an amount not less than 3% of gross revenues in 1997 and 4% of gross revenues thereafter. The loan bears interest at 7% per annum. Principal and interest are payable monthly installments of $26 with balance due December 31, 2002. The loan is secured by the furniture, fixtures and equipment and limits the sale or encumbrance of the furniture, fixtures and equipment. In connection with the expiration of the lease, the Company has the right to resell the furniture, fixtures and equipment to the original seller and the original seller has the right to repurchase the furniture, fixtures and equipment for $1,505. **************************** F-180 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Interstate Hotels Company: We have audited the accompanying consolidated balance sheets of Interstate Hotels Company (the Company) as of December 31, 1995 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1995 and 1996, and the consolidated results of its operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. 600 Grant Street Pittsburgh, Pennsylvania February 12, 1997, except for Note 21, Note 22 and the last paragraph of Note 2, as to which the date is December 2, 1997 F-181 INTERSTATE HOTELS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, ------------------ SEPTEMBER 30, 1995 1996 1997 -------- -------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................. $ 14,035 $ 32,323 $ 31,924 Accounts receivable, net................... 10,654 21,556 48,653 Stock subscription receivable, net......... -- 14,286 -- Deferred income taxes...................... -- 1,649 2,283 Prepaid expenses and other assets.......... 712 11,961 14,161 -------- -------- ---------- Total current assets..................... 25,401 81,775 97,021 Restricted cash.............................. 2,096 15,995 7,745 Property and equipment, net.................. 1,894 709,151 1,140,291 Investments in hotel real estate............. 12,884 5,605 24,518 Officers and employees notes receivable...... 1,219 4,643 5,184 Affiliates notes receivable.................. 8,718 -- -- Intangible and other assets.................. 9,189 66,592 75,494 -------- -------- ---------- Total assets............................. $ 61,401 $883,761 $1,350,253 ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable--trade.................... 926 12,152 14,297 Accounts payable--health trust............. 5,505 2,440 7,372 Accrued payroll and related benefits....... 3,026 15,072 19,584 Income taxes payable....................... -- -- 142 Other accrued liabilities.................. 5,546 23,926 56,005 Current portion of long-term debt.......... 363 11,767 61,059 -------- -------- ---------- Total current liabilities................ 15,366 65,357 158,459 Long-term debt............................... 35,907 396,044 714,445 Deferred income taxes........................ -- 4,081 13,878 Other liabilities............................ -- 1,213 1,213 -------- -------- ---------- Total liabilities........................ 51,273 466,695 887,995 -------- -------- ---------- Minority interests........................... 872 7,768 17,141 Commitments and contingencies................ -- -- -- -------- -------- ---------- Shareholders' equity: Preferred stock, $.01 par value; 25,000 shares authorized; no shares outstanding.. -- -- -- Common stock, $.01 par value; 75,000 shares authorized; 35,421 shares issued and out- standing as of September 30, 1997......... 3 352 354 Paid-in capital............................ 26,883 407,784 411,644 Retained (deficit) earnings................ (12,737) 1,432 33,932 Unearned compensation...................... (3,263) (270) (813) Receivable from shareholders............... (1,630) -- -- -------- -------- ---------- Total shareholders' equity............... 9,256 409,298 445,117 -------- -------- ---------- Total liabilities and shareholders' equi- ty...................................... $ 61,401 $883,761 $1,350,253 ======== ======== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-182 INTERSTATE HOTELS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------ ------------------- 1994 1995 1996 1996 1997 ------- ------- -------- -------- --------- (UNAUDITED) Lodging revenues: Rooms........................ $ -- $ -- $ 89,930 $ 37,351 $ 318,132 Food and beverage............ -- -- 42,502 16,792 90,886 Other departmental........... -- -- 8,685 3,840 27,250 Management fees................ 22,285 27,022 29,304 21,872 18,915 Other management-related fees.. 14,441 17,996 19,964 13,916 14,406 ------- ------- -------- -------- --------- 36,726 45,018 190,385 93,771 469,589 ------- ------- -------- -------- --------- Lodging expenses: Rooms........................ -- -- 20,900 8,064 72,227 Food and beverage............ -- -- 31,033 12,513 68,498 Other departmental........... -- -- 3,936 1,680 11,928 Property costs............... -- -- 41,707 16,618 123,411 General and administrative..... 8,302 9,811 10,912 7,240 10,628 Payroll and related benefits... 12,420 15,469 17,529 12,564 15,711 Non-cash compensation.......... -- -- 11,896 11,896 -- Lease expense.................. -- -- 3,477 -- 54,910 Depreciation and amortization.. 3,659 4,201 14,862 7,762 28,524 ------- ------- -------- -------- --------- 24,381 29,481 156,252 78,337 385,837 ------- ------- -------- -------- --------- Operating income........... 12,345 15,537 34,133 15,434 83,752 Other income (expense): Interest, net................ 30 99 (12,421) (5,315) (29,496) Other, net................... 14 203 (270) 329 (1,802) ------- ------- -------- -------- --------- Income before income tax expense................... 12,389 15,839 21,442 10,448 52,454 Income tax expense............. -- -- 15,325 11,145 19,954 ------- ------- -------- -------- --------- Income (loss) before ex- traordinary items......... 12,389 15,839 6,117 (697) 32,500 Extraordinary loss from early extinguishment of debt, net of tax benefit................... -- -- 7,733 7,643 -- ------- ------- -------- -------- --------- Net income (loss).......... $12,389 $15,839 $ (1,616) $ (8,340) $ 32,500 ======= ======= ======== ======== ========= Earnings per common share and common share equivalent (Note 19)........................... $ .91 ========= Weighted average number of common shares and common share equivalents outstanding....... 35,638 =========
The accompanying notes are an integral part of the consolidated financial statements. F-183 INTERSTATE HOTELS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
RETAINED RECEIVABLE COMMON PAID-IN (DEFICIT) UNEARNED PARTNERS' FROM STOCK CAPITAL EARNINGS COMPENSATION CAPITAL STOCKHOLDERS TOTAL ------ -------- --------- ------------ --------- ------------ -------- Balance at December 31, 1993................... $ 57 $ 17,856 $ (269) $ -- $1,962 $(2,979) $ 16,627 Effect of recapitalization...... (21) 21 -- -- -- -- -- Common stock of new entities and capital contributions......... 6 3 -- -- -- -- 9 Net decrease in receivable from shareholders.......... -- -- -- -- -- 776 776 Distributions paid..... -- -- (5,987) -- (4,956) -- (10,943) Net income............. -- -- 5,517 -- 6,872 -- 12,389 ---- -------- ------- ------ ------ ------- -------- Balance at December 31, 1994................... 42 17,880 (739) -- 3,878 (2,203) 18,858 Effect of reorganization........ (42) 4,520 -- -- (4,478) -- -- Assumption of liability by principal shareholder........... -- 1,220 -- -- -- -- 1,220 Common stock of new entities and capital contributions......... 3 -- -- -- 600 -- 603 Stock options granted.. -- 3,263 -- (3,263) -- -- -- Assumption of shareholders' liability............. -- -- (12,995) -- -- -- (12,995) Net decrease in receivable from shareholders.......... -- -- -- -- -- 573 573 Distributions paid..... -- -- (14,842) -- -- -- (14,842) Net income............. -- -- 15,839 -- -- -- 15,839 ---- -------- ------- ------ ------ ------- -------- Balance at December 31, 1995................... 3 26,883 (12,737) (3,263) -- (1,630) 9,256 Cancellation of stock options issued in 1995.................. -- (3,263) -- 3,263 -- -- -- Issuance of stock (Note 11)................... 8 12,154 -- (379) -- -- 11,783 Unearned compensation recognized............ -- -- -- 109 -- -- 109 Net decrease in receivable from shareholders.......... -- -- -- -- -- 1,630 1,630 Dividends and capital distributions......... -- (30,000) (8,423) -- -- -- (38,423) Contribution of IHC's net assets for Common Stock................. 125 (24,333) 24,208 -- -- -- -- Issuance of Common Stock, net............ 186 357,287 -- -- -- -- 357,473 Stock subscription receivable, net....... 6 14,280 -- -- -- -- 14,286 Issuance of Common Stock for acquisitions.......... 24 54,776 -- -- -- -- 54,800 Net loss............... -- -- (1,616) -- -- -- (1,616) ---- -------- ------- ------ ------ ------- -------- Balance at December 31, 1996................... 352 407,784 1,432 (270) -- -- 409,298 Unearned compensation recognized............ -- -- -- 24 -- -- 24 Issuance of stock...... -- 567 -- (567) -- -- -- Issuance of Common Stock................. 2 3,070 -- -- -- -- 3,072 Options exercised...... -- 223 -- -- -- -- 223 Net income............. -- -- 32,500 -- -- -- 32,500 ---- -------- ------- ------ ------ ------- -------- Balance at September 30, 1997 (Unaudited)....... $354 $411,644 $33,932 $ (813) -- -- $445,117 ==== ======== ======= ====== ====== ======= ========
The accompanying notes are an integral part of the consolidated financial statements. F-184 INTERSTATE HOTELS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- --------------------- 1994 1995 1996 1996 1997 -------- -------- --------- ---------- --------- (UNAUDITED) Cash flows from operating activities: Net income (loss)....... $ 12,389 $ 15,839 $ (1,616) $ (8,340) $ 32,500 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amorti- zation................. 3,659 4,201 14,862 7,762 28,524 Minority interests' share of equity (loss) income from investments in hotel real estate... -- (10) 503 (106) 2,636 Non-cash compensation... -- -- 11,896 11,896 -- Deferred income taxes... -- -- 6,671 1,835 9,163 Write-off of deferred financing fees......... -- -- 6,169 6,231 -- Other................... (53) (299) (231) (340) (537) Cash (used in) provided by assets and liabili- ties: Accounts receivable, net.................... (2,652) (2,377) 1,280 (3,348) (27,097) Prepaid expenses and other assets........... (17) (257) (11,289) (3,486) (2,122) Accounts payable........ 915 4,775 2,953 (2,566) 7,077 Income taxes payable.... -- -- -- 2,373 142 Accrued liabilities..... 1,077 3,456 10,073 2,799 36,591 -------- -------- --------- ---------- --------- Net cash provided by operating activities.. 15,318 25,328 41,271 14,710 86,877 -------- -------- --------- ---------- --------- Cash flows from investing activities: Change in restricted cash................... (814) (811) (13,899) (2,661) (36,035) Acquisition of hotels, net of cash received... -- -- (417,601) (236,673) (338,315) Purchase of property and equipment, net......... (607) (438) (16,253) (1,148) (60,718) Restricted funds used to purchase property and equipment.............. -- -- 10,383 674 44,285 Investments in hotel real estate............ -- (13,038) (5,605) (5,146) (18,525) Change in notes receiv- able, net.............. 529 (7,686) (3,424) (3,289) (541) Other................... (2,960) (885) (3,015) 2,172 (10,641) -------- -------- --------- ---------- --------- Net cash used in in- vesting activities.... (3,852) (22,858) (449,414) (246,071) (420,490) -------- -------- --------- ---------- --------- Cash flows from financing activities: Proceeds from long-term debt................... 3,548 35,000 360,100 265,750 369,400 Repayment of long-term debt................... (2,642) (15,265) (247,939) (241,689) (56,857) Financing costs paid, net.................... (33) (2,088) (14,997) (9,349) (3,925) Minority interests, net.................... -- 882 6,896 (1,736) 6,737 Proceeds from issuance of Common Stock, net... -- -- 357,473 263,752 17,859 Capital contributions... 9 603 -- -- -- Repayment of funds ad- vanced to shareholders, net.................... 776 573 1,630 1,630 -- Repayment of notes pay- able to shareholders... -- -- (30,000) (30,000) -- Dividends and capital distributions paid..... (10,943) (14,842) (6,732) (6,732) -- -------- -------- --------- ---------- --------- Net cash (used in) pro- vided by financing ac- tivities.............. (9,285) 4,863 426,431 241,626 333,214 -------- -------- --------- ---------- --------- Net change in cash and cash equivalents........ 2,181 7,333 18,288 10,265 (399) Cash and cash equivalents at beginning of period.. 4,521 6,702 14,035 14,035 32,323 -------- -------- --------- ---------- --------- Cash and cash equivalents at end of period........ $ 6,702 $ 14,035 $ 32,323 $ 24,300 $ 31,924 ======== ======== ========= ========== =========
The accompanying notes are an integral part of the consolidated financial statements. F-185 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. ORGANIZATION AND BASIS OF PRESENTATION: Interstate Hotels Company (the Company) was formed on April 19, 1996 in anticipation of an initial public offering of the Company's Common Stock (see Note 3). As of December 31, 1996, the Company owned 18 hotels and had a majority equity interest in nine other hotels (collectively, the Owned Hotels). As a result of the transactions discussed in Notes 3 and 4, the consolidated financial statements of the Company consist of the historical results of Interstate Hotels Corporation and Affiliates (IHC), the Company's predecessor, and the operations of the Owned Hotels from the respective dates of their acquisitions. Prior thereto, the consolidated financial statements reflect only the historical activity of IHC. The working capital and operating results of hotels operated under long-term operating leases (the Leased Hotels) are also included in the Company's consolidated financial statements because the operating performance associated with such hotels is guaranteed by the Company (see Note 9). The Company provides management and other related services principally to owned, managed and leased hotels through its wholly owned subsidiaries. The Company provides these services to hotels located in 34 states, the District of Columbia, Canada, Israel, the Caribbean, Thailand, Panama and Russia, with the largest concentration of hotels in the states of Florida and California. These hotels are operated under a number of franchise agreements, with the largest franchisors being Marriott International, Inc. and Promus Hotels, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation: The consolidated financial statements include the accounts of the Company and entities more than 50% owned. All significant intercompany transactions and balances have been eliminated in consolidation. The Company accounts for investments in less than 50% but greater than 20% owned entities in which it can exert significant influence under the equity method of accounting. All other investments are accounted for under the cost method. These investments are included in investments in hotel real estate in the consolidated balance sheets. Minority interests represent the proportionate share of the equity that is owned by third parties in entities more than 50% owned by the Company. The net income or loss of such entities is allocated to the minority interests based on their percentage ownership throughout the year and is included in other income (expense) in the consolidated statements of operations. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Cash and Cash Equivalents: All unrestricted, highly liquid investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. Restricted Cash: The long-term debt agreements discussed in Note 8 and the franchise agreements referred to in Note 17 provide that cash from hotel operations be restricted for the future acquisition or replacement of property and equipment each year based on a percentage of gross hotel revenues. The requirements range from 3% to 6%. F-186 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Capital restricted under applicable government insurance regulations is also included in restricted cash, and represents 20% of the annual insurance premiums written by the Company (see Note 15). Property and Equipment: Property and equipment are recorded at cost, which includes the allocated purchase price for hotel acquisitions, and are depreciated primarily on the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs are expensed as incurred. Expenditures for major renewals and betterments that significantly extend the useful life of existing property and equipment are capitalized and depreciated. The cost and related accumulated depreciation applicable to property no longer in service are eliminated from the accounts and any gain or loss thereon is included in operations. The Company is currently in the process of finalizing certain purchase price allocations for hotel acquisitions that occurred in the fourth quarter of 1996. Management anticipates that such purchase price allocations will be finalized in the first half of 1997. Adjustments, if any, would not result in material changes in the results of operations, but may result in the reclassification of certain long-term assets. Officers and Employees Notes Receivable: Officers notes receivable consist principally of notes from two executives. Such notes bear interest, are fully recourse to the borrowers and are forgiven and expensed ratably, if certain conditions are met, until the notes mature in June 2006. The Company also makes loans from time to time to other employees, which are payable upon demand and generally do not bear interest until such demand is made. Certain officers and employees notes receivable may be forgiven and expensed provided certain conditions are satisfied. Intangible and Other Assets: Intangible and other assets consist of the amounts paid to obtain management and lease contracts and deferred financing fees. Goodwill is also included in intangible and other assets, and represents the excess of the purchase price over the net assets of businesses acquired. Intangible and other assets are amortized on the straight-line method over the life of the underlying contracts or estimated useful lives. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of: The carrying values of long-lived assets, which include property and equipment and all intangibles, are evaluated periodically in relation to the operating performance and future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of expected future net cash flows is less than book value. Deferred Income Taxes: Deferred income taxes are recorded using the liability method. Under this method, deferred tax assets and liabilities are provided for the differences between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Revenue Recognition: Management fees and other management-related fees are recognized when earned. The Owned Hotels and Leased Hotels recognize revenue from their rooms, food and beverage and other departments as earned on the close of each business day. Hotels managed under short-term operating leases with certain lessee and lessor cancellation clauses are treated as management contracts, with the revenue earned from those leases recognized when earned. F-187 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reimbursable Expenses: The Company is reimbursed for costs associated with providing insurance services, purchasing and renovation services, MIS support, centralized accounting, leasing, training and relocation programs to owned, managed and leased hotels. These revenues are included in other management-related fees and the corresponding costs are included in general and administrative and payroll and related benefits in the consolidated statements of operations. Insurance: Insurance premiums are recorded as income on a pro-rata basis over the life of the related policies, with the portion applicable to the unexpired terms of the policies in force recorded as unearned premium reserves. Losses are provided for reported claims, claims incurred but not reported and claims settlement expense at each balance sheet date. Such losses are based on management's estimate of the ultimate cost of settlement of claims. Actual liabilities may differ from estimated amounts. Any changes in estimates are reflected in current earnings. Concentration of Credit Risk: The Company maintains cash and cash equivalents with various financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. Management believes the credit risk related to these cash and cash equivalents is minimal. Financial Instruments: The Company uses interest rate hedge contracts for the purpose of hedging interest rate exposures, which involve the exchange of fixed and floating rate interest payments without the exchange of the underlying principal amounts. The amounts to be paid or received are accrued as interest rates change and recognized over the life of the contracts as an adjustment to interest expense. Gains and losses realized from the termination of interest rate hedges are recognized over the remaining life of the hedge contract. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes. Reclassifications: Certain amounts in previously issued financial statements have been reclassified to conform to the presentation adopted in the 1996 consolidated financial statements. Unaudited Financial Statements: The unaudited consolidated balance sheet as of September 30, 1997 and the unaudited consolidated statements of operations, shareholders' equity and cash flows for the nine months ended September 30, 1996 and 1997, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all significant adjustments (consisting primarily of normal recurring adjustments) considered necessary for a fair presentation of the results of these interim periods. The data disclosed in these notes to the consolidated financial statements for these periods are also unaudited. Operating results for the nine-month period ended September 30, 1997 are not necessarily indicative of the results for the entire year. 3. PUBLIC OFFERINGS: Initial Offering: In June 1996, the Company completed an initial public offering of its Common Stock resulting in the sale of 12,448,350 shares (including 1,448,350 shares from the underwriters' exercise of over-allotment options) at a F-188 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) price of $21 per share (the Initial Offering). Net proceeds to the Company were $240,453. In connection with the Initial Offering, Blackstone Real Estate Advisors, L.P. and certain of its affiliates (collectively, Blackstone) exercised an option to receive 2,133,333 shares of Common Stock of the Company for an exercise price of $23,300. In connection with the Initial Offering, the Company acquired all of Blackstone's equity interests in 13 of the Owned Hotels for a cash purchase price of $124,400, and Blackstone contributed to the Company its equity interest in one Owned Hotel in consideration of $8,300 of Common Stock of the Company. Additionally, in connection with the Initial Offering, the principal shareholders of IHC contributed to the Company all of the outstanding shares of common stock of IHC and their equity interests in these 14 Owned Hotels in exchange for Common Stock of the Company. The acquisition of Blackstone's equity interests has been accounted for using the purchase method of accounting, except that carryover basis was used for 9.3% of the acquired interests. The contributions of IHC's common stock and equity interests in hotels in exchange for Common Stock of the Company have been accounted for using carryover bases. Follow-on Offering: In December 1996, the Company completed a follow-on public offering of 4,000,000 shares of its Common Stock at a price of $25 per share (the Follow- on Offering). In January 1997, the underwriters purchased an additional 600,000 shares of Common Stock at $25 per share pursuant to over-allotment options. Net proceeds to the Company were $93,720 from the Follow-on Offering and $14,286 from the exercise of the over-allotment options. The Company recorded the exercise of the over-allotment options as stock subscription receivable, net of the underwriting discount, in the consolidated balance sheets as of December 31, 1996. 4. POST-INITIAL OFFERING ACQUISITIONS: Subsequent to the Initial Offering and related transactions discussed in Note 3, the Company acquired 13 hotels with an aggregate purchase price of approximately $323,579. On November 15, 1996, the Company acquired for 1,957,895 shares of Common Stock the management and leasing businesses affiliated with Equity Inns, Inc., a publicly traded real estate investment trust, which resulted in goodwill of approximately $21,691. The businesses consisted of eight management contracts and 48 long-term lease contracts. The above acquisitions were accounted for using the purchase method of accounting. One of the hotels acquired since the Initial Offering was purchased from an entity partially owned by a significant shareholder (see Note 17). 5. PRO FORMA FINANCIAL INFORMATION (UNAUDITED): The following unaudited pro forma information is presented as if the transactions discussed in Notes 3, 4 and 8 had occurred on January 1, 1995. In management's opinion, all pro forma adjustments necessary to reflect the effects of these transactions have been made. The pro forma information does not include earnings on the Company's pro forma cash and cash equivalents or certain one-time charges to income, and does not purport to present what the actual results of operations of the Company would have been if the previously mentioned transactions had occurred on such date or to project the results of operations of the Company for any future period.
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 ----------- ----------- Total revenues..................................... $445,472 $477,506 Operating income................................... 59,891 81,265 Net income......................................... 19,023 32,948 Pro forma earnings per common share and common share equivalent.................................. .54 .93 Weighted average common shares and common share equivalents....................................... 35,387,677 35,387,677
F-189 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, --------------- SEPTEMBER 30, 1995 1996 1997 ------ -------- ------------- (UNAUDITED) Land......................................... $ -- $ 95,192 $ 139,369 Buildings and improvements (15 to 40 years).. 678 545,565 901,977 Furniture, fixtures and equipment (5 to 10 years)...................................... 3,776 112,808 171,853 Construction in progress..................... -- 669 15,026 ------ -------- ---------- 4,454 754,234 1,228,225 Less accumulated depreciation................ 2,560 45,083 87,934 ------ -------- ---------- $1,894 $709,151 $1,140,291 ====== ======== ==========
Depreciation expense was approximately $421, $467 and $8,420 for the years ended December 31, 1994, 1995 and 1996, respectively. 7. INTANGIBLE AND OTHER ASSETS: Intangible and other assets consisted of the following:
DECEMBER 31, --------------- SEPTEMBER 30, 1995 1996 1997 ------- ------- ------------- (UNAUDITED) Management contracts (3 to 10 years)........... $22,794 $24,825 $ 8,194 Lease contracts (15 years)..................... -- 22,600 24,932 Goodwill (25 years)............................ -- 21,691 22,225 Deferred financing fees (3 to 7 years)......... 2,101 14,862 17,995 Other.......................................... 2,088 4,477 12,515 ------- ------- ------- 26,983 88,455 85,861 Less accumulated amortization.................. 17,794 21,863 10,367 ------- ------- ------- $ 9,189 $66,592 $75,494 ======= ======= =======
8. LONG-TERM DEBT: Long-term debt consisted of the following:
DECEMBER 31, ---------------- SEPTEMBER 30, 1995 1996 1997 ------- -------- ---------------- (UNAUDITED) REFER TO NOTE 21 Term Loans and Revolving Credit Facili- ty...................................... $ -- $321,600 $613,150 CGL Loan................................. -- 29,250 29,250 Owned Hotel Loans........................ -- 56,420 132,434 IHC revolving credit and term loan facil- ity..................................... 35,000 -- -- Other.................................... 1,270 541 670 ------- -------- -------- 36,270 407,811 775,504 Less current portion..................... 363 11,767 61,059 ------- -------- -------- $35,907 $396,044 $714,445 ======= ======== ========
In June 1996, the Company entered into a $195,000 Term Loan and a $100,000 Revolving Credit Facility (collectively, the Credit Facilities). In October 1996, the Company amended the Credit Facilities by converting F-190 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) the borrowings outstanding under the Revolving Credit Facility to a $100,000 Term Loan and increasing the Revolving Credit Facility capacity to $200,000. The Term Loans are payable through June 2003 in escalating quarterly installments and a final balloon payment. The Revolving Credit Facility, payable in June 2003, provides for borrowings under letters of credit, revolving loans for working capital and acquisition loans to be used to finance additional hotel acquisitions. The Credit Facilities include certain mandatory prepayment provisions. The Company purchased a subordinated participation interest in the $119,250 mortgage indebtedness of Interstone/CGL Partners, L.P., a majority-owned subsidiary of the Company (the CGL Loan). As of December 31, 1996, on a consolidated basis, the Company had outstanding, in addition to the Credit Facilities, $29,250 of the CGL Loan. The CGL Loan requires no principal payments until the indebtedness matures in June 2003. All other terms of the CGL Loan, including interest and covenants, are identical to the Credit Facilities. Interest on the Credit Facilities and the CGL Loan is payable subject to the Company's election of the base rate option or the Eurodollar option. The base rate option is the lender's prime rate plus 1%. The Eurodollar option is LIBOR plus 2%. The Company elected the Eurodollar option to be in effect as of December 31, 1996, which was 7.69%. Additionally, the Company has entered into five interest rate hedge contracts: an interest rate cap that limits LIBOR to 6% on up to $105,000 of the indebtedness through June 1999; an interest rate cap that limits LIBOR to 6% on up to $234,750 of the indebtedness through October 1997; an interest rate cap that limits LIBOR to 6% on up to $225,900 of the indebtedness from October 1997 through October 1998; an interest rate cap that limits LIBOR to 7% on up to $208,750 of the indebtedness from October 1998 through October 1999; and an interest rate swap that provides for a fixed LIBOR rate of 5.8% on $72,000 of the indebtedness through December 2000. A nonrefundable commitment fee equal to 3/8 of 1% of the unused portion of the Revolving Credit Facility is payable quarterly. Additionally, letter of credit fees equal to 2.25% of the outstanding letters of credit are payable quarterly. The Credit Facilities and the CGL Loan contain certain restrictive covenants, including several financial ratios and restrictions on the payment of dividends, among other things. The Company has pledged substantially all of the assets of the Company and an interest in the rights to the cash flows of certain of the Owned Hotels as collateral for the Credit Facilities and the CGL Loan. In December 1996, the Company incurred loans (the Owned Hotel Loans) totaling $56,420 related to the acquisitions of two hotels. One of the Owned Hotel Loans is non recourse and is due in the form of a balloon payment of $31,000 in January 1998. The other loans are payable monthly through October 2005 and include certain mandatory prepayment provisions. Interest is payable monthly on the Owned Hotel Loans at rates between 7.5% and 9.08% as of December 31, 1996. The Owned Hotel Loans are collateralized by the assets of the two hotels. Aggregate scheduled maturities of long-term debt for each of the five years ending December 31 and thereafter are as follows: 1997............................................................. $ 11,767 1998............................................................. 50,495 1999............................................................. 31,024 2000............................................................. 46,057 2001............................................................. 57,581 Thereafter....................................................... 210,887 --------- $ 407,811 =========
F-191 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. COMMITMENTS AND CONTINGENCIES: The Company provides financial guarantees to the owners of the Leased Hotels for certain minimum operating performance levels, which are annually increased by the consumer price index and expire through 2011. Presently, management does not expect to incur any claims against these lease guarantees. Minimum future lease payments are computed based on the base rent of each lease, as defined, and are as follows: 1997.............................................................. $ 25,709 1998.............................................................. 25,709 1999.............................................................. 25,709 2000.............................................................. 25,709 2001.............................................................. 25,709 Thereafter........................................................ 254,944 -------- $383,489 ======== The Company accounts for the leases of office space (the office leases expire at varying times through 2002), certain office equipment (the equipment leases expire at varying times through 2003) and land leases associated with two of the Owned Hotels (the land leases expire at varying times through 2086) as operating leases. Total rent expense amounted to approximately $739, $912 and $2,922 for the years ended December 31, 1994, 1995 and 1996, respectively. The following is a schedule of future minimum lease payments under these leases: 1997.............................................................. $ 2,975 1998.............................................................. 2,692 1999.............................................................. 2,358 2000.............................................................. 1,988 2001.............................................................. 1,728 Thereafter........................................................ 35,527 -------- $ 47,268 ========
In the ordinary course of business, various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company. Based on currently available facts, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 10. PREFERRED AND COMMON STOCK: The Company has the authority to issue up to 25,000,000 shares of preferred stock having such rights, preferences and privileges as designated by the Board of Directors of the Company. The rights of the holders of the Company's Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of such preferred stock that may be issued in the future. F-192 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following represents shares of Common Stock authorized for issuance under the Company's stock plans:
NUMBER OF SHARES --------- Equity Incentive Plan, including the Stock Option Plan for Non-Employee Directors....................................... 2,500,000 Employee Stock Purchase Plan.................................. 500,000 Management Bonus Plan......................................... 250,000 --------- 3,250,000 =========
The Equity Incentive Plan provides for options to be granted to eligible employees to purchase shares of Common Stock. The option price is established at the grant date at a price not less than the current market value. The options generally vest over a three year period and expire after ten years. The Employee Stock Purchase Plan is designed to be a non-compensatory plan, whereby eligible employees may elect to withhold a maximum of 8% of their salary and use such amounts to purchase Common Stock. The Management Bonus Plan provides for bonuses to be paid to key executives of the Company based upon the achievement of specified goals of both the Company and the executive. Bonuses are based on a percentage of the individual's annual salary, and up to 20% of each executive's bonus, at the discretion of management, may be payable in the form of shares of Common Stock. The Company has elected to account for stock-based employee compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" rather than Statement of Financial Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based Compensation." If compensation cost had been determined based on the fair value at the grant dates according to SFAS No. 123, the Company's net loss would have been increased to the pro forma amount shown below:
1996 -------- Net loss: As reported.................................................... $ (1,616) Pro forma...................................................... (2,781)
The effect on earnings per share is not meaningful and, therefore, has not been provided (see Note 19). The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions:
1996 ---- Weighted average risk-free interest rate............................... 6.3% Expected dividend yield................................................ -- Expected volatility.................................................... 30.3% Expected life (number of years)........................................ 3
F-193 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The transactions for stock options issued under the Equity Incentive Plan and the Stock Option Plan for Non-Employee Directors were as follows:
WEIGHTED AVERAGED ------------------------------- NUMBER OF REMAINING VALUE EXERCISE RANGE OF OPTIONS LIFE (YEARS) PER SHARE PRICE EXERCISE PRICE --------- ------------ --------- -------- -------------- Outstanding, December 31, 1995............... -- Granted................. 1,589,250 $22.66 $21.00--$26.75 Exercised............... -- -- -- Canceled................ 12,500 $21.00 $21.00 --------- Outstanding, December 31, 1996............... 1,576,750 9.6 $6.44 $22.66 $21.00--$26.75 ========= Exercisable, December 31, 1996............... -- Shares reserved for future options as of December 31, 1996...... 923,250
11. NON-CASH COMPENSATION: In December 1995, IHC granted stock options to certain officers to purchase shares of common stock of IHC. The exercise price of certain stock options was determined to be below fair market value based on an independent market valuation. No stock options were exercisable at December 31, 1995. The unearned compensation related to the stock options granted by IHC was being charged to expense over the vesting period. Prior to the Initial Offering, the Company issued 785,533 shares of Common Stock to certain employees in consideration for the cancellation of the stock options issued by IHC in 1995. The shares were valued based on the estimated value of the Common Stock at the time the shares were issued. As a result of the cancellation of the stock options issued by IHC in 1995 and the issuance of the Common Stock at no cost to the recipients, the Company reversed the unamortized unearned compensation recorded by IHC in 1995 and recorded non- cash compensation expense of $11,896. 12. INCOME TAXES: Prior to the consummation of the Initial Offering, the Company's predecessors were organized as S corporations, partnerships and limited liability companies for federal and state income tax purposes. Accordingly, the predecessors were not subject to income tax because all taxable income or loss of the predecessors was reported on the tax returns of their owners. As a result of the change in the Company's tax status to a C corporation concurrent with the Initial Offering, the Company recorded income tax expense of $4,881 to establish deferred taxes existing as of the date of the change in tax status. F-194 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The provision for income taxes for the year ended December 31, 1996 consisted of: Current Federal.......................................................... $ 4,153 State............................................................ 504 ------- 4,657 ------- Deferred: Federal.......................................................... 6,223 State............................................................ 448 ------- 6,671 ------- Income tax expense................................................ 11,328 Income tax benefit from extraordinary loss........................ 3,997 ------- $15,325 =======
A reconciliation of the Company's effective tax rate to the federal statutory rate for the year ended December 31, 1996 follows: Federal statutory rate................................................ 35% State taxes, net of federal benefit................................... 2 IHC loss as an S corporation.......................................... 23 Conversion from S corporation to C corporation........................ 50 Other................................................................. 7 --- Effective tax rate.................................................... 117% ===
The components of net deferred tax assets and liabilities as of December 31, 1996 consisted of:
DEFERRED TAX ------------------ ASSETS LIABILITIES ------ ----------- Depreciation and amortization........................... $ -- $10,809 Minority interests...................................... 7,298 -- Payroll and related benefits............................ 1,588 -- Self-insured health trust............................... 927 -- Other................................................... -- 1,436 ------ ------- $9,813 $12,245 ====== =======
13. EXTRAORDINARY ITEMS: In 1996, the Company recorded an extraordinary loss of $7,733, net of a tax benefit of $3,997, as a result of the early extinguishment of certain debt. The extraordinary loss related principally to the payment of prepayment penalties and loan commitment fees and the write-off of deferred financing fees. F-195 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 14. SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest and income taxes consisted of:
NINE MONTHS ENDED SEPTEMBER 30, ------------------ 1994 1995 1996 1996 1997 ---- ---- ------- -------- --------- (UNAUDITED) Interest................................ $261 $507 $13,629 $ 5,957 $ 29,729 Income taxes............................ -- -- 7,710 -- 8,039
Non-cash investing and financing activities consisted of:
NINE MONTHS ENDED SEPTEMBER 30, ----------------- 1994 1995 1996 1996 1997 ------ ------- ------- -------- -------- (UNAUDITED) Notes payable issued to acquire contracts....................... $1,176 $ -- $ -- $ -- $ -- Assumption of liability by principal shareholder........... -- 1,220 -- -- -- Assumption of shareholders' liability....................... -- 12,295 -- Unearned compensation related to 1995 stock options.............. -- 3,263 (3,263) -- -- Unearned compensation related to Common Stock (Note 11).......... -- -- 379 -- -- Notes payable issued to shareholders.................... -- -- 30,000 30,000 -- Stock subscription receivable, net............................. -- -- 14,286 -- -- Issuance of Common Stock for acquisitions.................... -- -- 54,800 8,300 -- Assumption of long-term debt related to acquisitions......... -- -- -- -- 55,150
15. INSURANCE: The Company provides certain insurance coverage to hotels under the terms of the various management and lease contracts. This insurance is generally arranged through a third-party carrier. Northridge Insurance Company (Northridge), a subsidiary of the Company, reinsures a portion of the coverage from this third-party primary insurer. The policies provide for layers of coverage with minimum deductibles and annual aggregate limits. The policies are for coverage relating to innkeepers' losses (general/comprehensive liability), wrongful employment practices, garagekeeper's legal liability, replacement cost automobile losses and real and personal property insurance. All policies are short-duration contracts and expire through March 1997. The Company is liable for any deficiencies in the IHC Employee Health and Welfare Plan (and related Health Trust), which provides employees of the Company with group health insurance benefits. The Company has a financial indemnity liability policy with Northridge which indemnifies the Company for certain obligations for the deficiency in the related Health Trust. The premiums for this coverage received from the properties managed by the Company, net of intercompany amounts paid for employees at the Company's corporate offices and Owned and Leased Hotels, are recorded as direct premiums written. There was no deficiency in the related Health Trust at December 31, 1996. All accounts of Northridge are classified with assets and liabilities of a similar nature in the consolidated balance sheets. The consolidated statements of operations include the insurance income earned and related F-214 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) insurance expenses incurred. The insurance income earned has been included in other management-related fees in the consolidated statements of operations and is comprised of the following:
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 1996 ------- ------- ------- Reinsurance premiums written....................... $ 3,428 $ 4,981 $ 4,848 Direct premiums written............................ 2,581 2,477 2,032 Reinsurance premiums ceded......................... -- (422) (414) Change in unearned premiums reserve................ 42 (62) 158 Loss sharing premiums.............................. 910 698 1,101 ------- ------- ------- Insurance income................................... $ 6,961 $ 7,672 $ 7,725 ======= ======= =======
16. FINANCIAL INSTRUMENTS: The carrying values and fair values of the Company's financial instruments at December 31 consisted of:
1995 1996 ---------------- ----------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------- -------- -------- Cash and cash equivalents............... $14,035 $14,035 $ 32,323 $ 32,323 Restricted cash......................... 2,096 2,096 15,995 15,995 Investment in marketable securities..... -- -- 540 540 Noncurrent receivables.................. 9,937 9,937 4,643 4,643 Interest rate caps...................... -- -- 5,056 3,268 Interest rate swap...................... -- -- -- 976 Long-term debt, including current por- tion................................... 36,207 36,207 407,811 406,835
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents and restricted cash: The carrying amounts approximate fair value because of the short maturity of these investments. Investment in marketable securities: The fair value of the investment in marketable securities is based on the quoted market price at December 31, 1996, and is included in investments in hotel real estate in the consolidated balance sheets. Noncurrent receivables: The fair value of noncurrent receivables is based on anticipated cash flows and approximates carrying value. Interest rate hedges: The Company manages its debt portfolio by using interest rate caps and swaps to achieve an overall desired position of fixed and floating rates. The fair value of interest rate hedge contracts is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that the Company would expect to receive or pay to terminate the contracts. Credit and market risk exposures are limited to the net interest F-197 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) differentials. The Company is exposed to credit loss in the event of nonperformance by counterparties on the above instruments, but does not anticipate nonperformance by any of the counterparties. Long-term debt: The fair value of long-term debt is based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. The fair value of the notional amount of long-term debt hedged by the swap has been reduced by the fair value of the swap. 17. FRANCHISE AGREEMENTS AND RELATED PARTY TRANSACTIONS: Franchise Agreements: The Owned Hotels and the Leased Hotels are generally operated under franchise agreements with various franchisors. The Owned Hotels are licensed under the following franchise names: Marriott (13), Hilton (4), Radisson (4), Embassy Suites (2), Westin (2) and Holiday Inn (1). The Leased Hotels are licensed under the following franchise names: Hampton Inn (32), Holiday Inn (5), Residence Inn (5), Super 8 Motel (5), Sleep Inn (4), Homewood Suites (3) and Comfort Inn (3). The terms of the franchise agreements range from 2 to 28 years and require ongoing fees principally based on a percentage of hotel room revenues and food and beverage revenues. Revenues and Accounts Receivable: Of the total revenues earned, approximately $6,678, $7,886 and $7,386 for the years ended December 31, 1994, 1995 and 1996, respectively, was earned from hotels in which a significant shareholder of the Company has an ownership interest. Accounts receivable of approximately $1,028 and $302 at December 31, 1995 and 1996, respectively, was due from these hotels. The Company has waived the management fees for one of these hotels through November 1998. Transaction with Significant Shareholders: In December 1996, the Company acquired a 97.12% interest in one hotel for $23,787, which includes a $10,000 contribution for future capital expenditures and $9,627 in loans to the previous owners. Significant shareholders of the Company previously owned a 50% interest in the hotel, one of which retained a 1.44% limited partnership interest as a result of the acquisition. The $9,627 in loans incurred as a result of the acquisition includes a $2,733 note payable to the significant shareholder, which is included in the Owned Hotel Loans described in Note 8. 18. PREDECESSOR ENTITY EQUITY TRANSACTIONS: In 1994, IHC recapitalized certain companies and created two classes of common stock. The recapitalization resulted in the reclassification of $21 between common stock and paid-in capital. Pursuant to a reorganization in 1995, IHC merged a number of companies and created subsidiaries for certain other entities which were all under common control. The reorganization was accounted for in a manner similar to that used in pooling-of-interests accounting. Additionally, concurrent with the reorganization, IHC assumed a $12,995 obligation of its principal shareholder that was accounted for as a distribution of capital. IHC also recorded a contribution of capital when indebtedness in the amount of $1,220 that was owed to an affiliate was assumed by the principal shareholder. The reorganization resulted in the reclassification of $42 between common stock and paid-in capital and the reclassification of $4,478 between partners' capital and paid-in capital. F-198 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) In March 1996, the Company made a capital distribution by issuing notes payable to the shareholders of IHC in the aggregate amount of $30,000. Such notes were repaid in June 1996 with the proceeds from the Initial Offering. 19. EARNINGS PER SHARE: Prior to the consummation of the Company's Initial Offering, the predecessors of the Company were organized as S corporations, partnerships and limited liability companies. Accordingly, the Company believes that the earnings per share calculations required to be presented are not meaningful for periods prior to the Initial Offering and, therefore, have not been provided. As such, earnings per share for the three-month periods ended September 30, 1996 and December 31, 1996 and pro forma earnings per share for the years ended December 31, 1995 and 1996 are a more meaningful measure of the Company's results of operations (see Notes 5 and 20). 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): The following table sets forth certain items included in the Company's unaudited consolidated financial statements for each quarter of fiscal 1996 and 1995:
FIRST SECOND THIRD FOURTH ------- -------- ---------- ---------- FISCAL 1996: Total revenues..................... $12,295 $ 15,946 $ 65,530 $ 96,614 Operating income (loss)............ 4,607 (5,775) 16,602 18,699 Income (loss) before extraordinary items............................. 4,236 (12,299) 7,366 6,814 Net income (loss).................. 4,236 (19,942) 7,366 6,724 Earnings per common share and common share equivalent (Note 19)............................... -- -- .26 .22 Weighted average common shares and common share equivalents.......... -- -- 28,664,549 30,586,186 FISCAL 1995: Total revenues..................... $10,249 $ 11,403 $ 11,236 $ 12,130 Operating income................... 3,293 4,636 4,409 3,199 Net income......................... 3,345 4,712 4,472 3,310
21. SUBSEQUENT EVENTS: Merger: On December 2, 1997, the Company entered into an Agreement and Plan of Merger with Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company (collectively, Patriot) pursuant to which the Company will merge into Patriot, with Patriot being the survivor. The transaction is contingent upon approval by the shareholders of the Company and Patriot. Long-Term Debt: In May 1997, the Company amended its credit facilities by converting certain borrowings outstanding under the revolving credit facility to a $135 million term loan and increasing the revolving credit facility from $250 million to $350 million. In addition, the Company's permitted non-recourse and subordinated debt capacity was increased from $250 million to $290 million. The interest rate on the revolving credit facility and certain term debt was amended to be subject to reduced rates based on leveraged EBITDA ratio benchmarks. The interest rate on the $135 million term loan is based on a fixed percentage of 2.25 over a reserve-adjusted Eurodollar rate. Acquisitions: During the nine months ended September 30, 1997, the Company acquired 11 Owned Hotels with a total of 3,619 rooms and minority interests in four other hotels for a total acquisition price of $406,700 with closing F-199 INTERSTATE HOTELS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) costs of approximately $5,300. Such acquisitions were accounted for using the purchase method of accounting. In connection with three of these acquisitions, the Company entered into operating leases for certain furniture, fixtures and equipment of these hotels with an approximate fair market value of $17,000. In addition, one Owned Hotel with 121 rooms, which the Company developed for a total cost of approximately $9,700, was opened in September 1997. The Company also entered into long-term operating leases with Equity Inns, Inc. for 40 hotels during this same period. 22. NEW ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 128 "Earnings Per Share." The new standard, which is effective for the fiscal year ending December 31, 1997, revises the disclosure requirements and simplifies the computations of earnings per share. Management believes that the impact of this standard will not be material. In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." The new standard, which is effective for the fiscal year ending December 31, 1998, requires that all public business enterprises report information about operating segments, as well as specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. Management has not yet determined the impact of this standard. F-200 INTERSTATE HOTELS COMPANY INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS The following unaudited Pro Forma Statements of Income of the Company for the year ended December 31, 1996 and for the nine months ended September 30, 1997 assume the following transactions have occurred at the beginning of the periods presented: (i) the Initial Offering and Follow-on Offering (ii) the acquisitions of 39 Owned Hotels in connection with and since the Initial Offering through September 30, 1997 (iii) the acquisition of the management and leasing business affiliated with Equity Inns, Inc., in which the Company entered into long-term operating leases for 88 Leased Hotels through September 30, 1997 (the Equity Inns Transaction) (iv) the Company's original debt financing associated with the Initial Offering and all subsequent refinancings through September 30, 1997 In management's opinion, all material pro forma adjustments necessary to reflect the effects of these transactions have been made. The pro forma information does not include earnings on the Company's pro forma cash and cash equivalents or certain other one-time charges to income (such as non-recurring takeover and repositioning costs associated with acquisitions), and does not purport to present what the actual results of operations of the Company would have been if the previously mentioned transactions had occurred on such dates or to project the results of operations of the Company for any future periods. F-201 INTERSTATE HOTELS COMPANY PRO FORMA STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
HISTORICAL ACQUISITION PRO FORMA COMPANY ADJUSTMENTS(A) TOTAL ------------ --------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Hotel revenues................ $ 141,117 $ 551,047 $ 692,164 Management and related fees... 49,268 (8,510) 40,758 Interest income............... 1,656 -- 1,656 ------------ ------------ ------------ Total revenues.............. 192,041 542,537 734,578 ------------ ------------ ------------ Expenses: Departmental costs--hotel op- erations..................... 55,869 197,533 253,402 Direct operating costs of man- agement company.............. 17,529 1,365 18,894 General and administrative.... 22,978 48,693 71,671 Repairs and maintenance....... 6,079 25,161 31,240 Utilities..................... 5,835 23,344 29,179 Real estate and personal property taxes and casualty insurance.................... 5,206 16,815 22,021 Marketing..................... 12,172 52,222 64,394 Management fees............... 349 312 661 Non-cash compensation......... 11,896 (11,896)(B) -- Lease expense................. 3,477 77,667 (C) 81,144 Depreciation and amortiza- tion......................... 14,862 33,162 (D) 48,024 ------------ ------------ ------------ 156,252 464,378 620,630 ------------ ------------ ------------ Operating income................ 35,789 78,159 113,948 ------------ ------------ ------------ Other expenses: Interest expense.............. 14,077 45,009 (E) 59,086 Minority interests, net....... 270 2,483 (F) 2,753 ------------ ------------ ------------ 14,347 47,492 61,839 ------------ ------------ ------------ Income before income tax ex- pense.......................... 21,442 30,667 52,109 Income tax expense.............. 15,325 4,476 (G) 19,801 ------------ ------------ ------------ Net income...................... $ 6,117 $ 26,191 $ 32,308 ============ ============ ============ Pro forma earnings per common share and common share equivalent..................... $ 0.90 ============ Pro forma weighted average number of common shares and common share equivalents outstanding.................... 35,738 ============
See notes on page . F-202 INTERSTATE HOTELS COMPANY PRO FORMA STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
HISTORICAL ACQUISITION PRO FORMA COMPANY ADJUSTMENTS(A) TOTAL ------------ --------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Hotel revenues................ $ 436,268 $ 116,483 $ 552,751 Management and related fees... 33,321 (2,444) 30,877 Interest income............... 1,214 -- 1,214 ------------ ------------ ------------ Total revenues.............. 470,803 114,039 584,842 ------------ ------------ ------------ Expenses: Departmental costs--hotel operations................... 152,653 43,913 196,566 Direct operating costs of management company........... 15,711 -- 15,711 General and administrative.... 45,509 10,177 55,686 Repairs and maintenance....... 18,505 4,985 23,490 Utilities..................... 17,905 3,991 21,896 Real estate and personal property taxes and casualty insurance.................... 12,834 3,392 16,226 Marketing..................... 38,455 10,507 48,962 Management fees............... 831 (66) 765 Lease expense................. 54,910 14,763 (C) 69,673 Depreciation and amortization................. 28,524 5,655 (D) 34,179 ------------ ------------ ------------ 385,837 97,317 483,154 ------------ ------------ ------------ Operating income................ 84,966 16,722 101,688 ------------ ------------ ------------ Other expenses: Interest expense.............. 30,710 9,947 (E) 40,657 Minority interests, net....... 1,802 234 (F) 2,036 ------------ ------------ ------------ 32,512 10,181 42,693 ------------ ------------ ------------ Income before income tax expense........................ 52,454 6,541 58,995 Income tax expense.............. 19,954 2,464 (G) 22,418 ------------ ------------ ------------ Net income...................... $ 32,500 $ 4,077 $ 36,577 ============ ============ ============ Pro forma earnings per common share and common share equivalent..................... $ 1.02 ============ Pro forma weighted average number of common shares and common share equivalents outstanding.................... 35,738 ============
See notes on following page. F-203 INTERSTATE HOTELS COMPANY NOTES TO PRO FORMA STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS) (A) Represents adjustments to reflect addition of pro forma revenues and operating expenses for the Owned and Leased Hotels acquired after the Initial Offering for the period prior to ownership by IHC. (B) Adjustment to reflect the elimination of one-time non-cash compensation associated with the Initial Offering. (C) Adjustment to reflect the pro forma lease expense related to the acquisition of hotel leases in the Equity Inns transaction. (D) Adjustment to reflect the pro forma depreciation and amortization expense related to the acquisitions of the Owned and Leased Hotels acquired after the initial offering for the period prior to ownership by IHC. Property and equipment is depreciated using the straight-line method over estimated useful lives ranging between 15 and 40 years. Furniture, fixtures and equipment is depreciated using the straight-line method over estimated useful lives ranging between 5 and 10 years. Deferred expenses are amortized using the straight-line method over the estimated useful life of the assets. (E) Represents adjustment to reflect the net increase in interest expense as follows:
YEAR ENDED NINE MONTHS DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- Pro forma interest expense related to the IHC Term Loans...................................... $ 32,598 $ 23,854 Pro forma interest expense related to the IHC Re- volving Credit Facility......................... 13,388 7,021 Pro forma interest expense related to the unused commitment fee on the IHC Revolving Credit Facility........................................ 587 440 Pro forma interest expense related to various ho- tel non-recourse loans.......................... 12,513 9,342 Elimination of historical interest expense of IHC............................................. (14,077) (30,710) -------- -------- $ 45,009 $ 9,947 ======== ========
Pro forma interest expense on the $430,000 IHC Term Loans is calculated assuming: (i) principal of $223,000 bears interest at LIBOR (assumed to be 5.5%) plus 2%, (ii) $72,000 bears interest at 7.8%, and (iii) the remainder bears interest at LIBOR (5.5%) plus 2.25%. Pro forma interest expense on the IHC Revolving Credit Facility is calculated at LIBOR (5.5%) plus 2%. Pro forma interest expense related to the unused commitment fee is calculated at 3/8 of 1% on the available debt remaining on the facility. Interest on the various hotel non-recourse loans is calculated at rates varying from LIBOR (5.5%) plus 1.5% to a fixed rate of 9.5% with varying amortization and maturity dates. (F) Represents adjustment to reflect the net increase in minority interests resulting from acquisitions. (G) Represents adjustment to record estimated income tax expense related to the pro forma adjustments using an effective income tax rate of 38%. F-204 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Royal Palace Hotel Associates Tampa, Florida We have audited the accompanying balance sheets of Royal Palace Hotel Associates (the Partnership) as of December 31, 1996 and 1995, and the related statements of operations, partners' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Royal Palace Hotel Associates as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. Tampa, Florida January 17, 1997, except for Note 7, as to which the date is November 25, 1997 F-205 ROYAL PALACE HOTEL ASSOCIATES BALANCE SHEETS December 31, 1996 and 1995 and September 30, 1997
December 31, September 30, ASSETS 1996 1995 1997 ----------- ----------- ----------- (unaudited) Current assets: Cash and cash equivalents $ 255,127 $ 1,370,927 $ 1,063,452 Restricted cash 2,826,659 1,369,471 3,685,785 Accounts receivable, less allowance for doubtful accounts of approximately $57,000 and $32,000 for 1996 and 1995, respectively 3,760,964 2,369,002 3,894,881 Receivables from related parties 0 5,389 0 Inventories 413,086 350,419 464,412 Prepaid expenses: Insurance 43,943 103,186 44,315 Other 89,288 119,386 243,544 ----------- ----------- ----------- Total current assets 7,389,067 5,687,780 9,396,389 Property and equipment, less accumulated depreciation 71,636,939 70,771,796 72,410,128 Restricted cash designated for property and equipment 2,835,311 3,000,000 1,536,450 Deferred loan costs, net of accumulated amortization 1,411,391 999,616 1,357,621 Other 17,246 17,246 17,371 ----------- ----------- ----------- $83,289,954 $80,476,438 $84,717,959 =========== =========== =========== LIABILITIES AND PARTNERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,146,048 $ 902,640 $ 1,193,102 Accounts payable 2,492,279 2,329,501 2,317,145 Accrued expenses: Ground lease rent 1,132,701 1,016,984 1,006,700 Other 2,277,612 2,250,890 4,168,998 Advance deposits 1,586,061 1,287,851 2,023,042 Deferred revenue 479,361 698,205 411,125 ----------- ----------- ----------- Total current liabilities 9,114,062 8,486,071 11,120,112 Long-term debt, less current portion 50,542,151 51,600,882 49,653,721 Commitments and contingencies (Note 6) Partners' equity 23,633,741 20,389,485 23,944,126 ----------- ----------- ----------- $83,289,954 $80,476,438 $84,717,959 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-206 ROYAL PALACE HOTEL ASSOCIATES STATEMENTS OF OPERATIONS for the years ended December 31, 1996 and 1995 and nine-month period ended September 30, 1997 and 1996
Year Ended Nine Months Ended December 31, September 30, --------------------------- --------------------------- 1996 1995 1997 1996 ------------ ------------ ------------ ------------ (unaudited) (unaudited) Net revenue $ 61,913,161 $ 58,603,431 $ 51,058,987 $ 46,753,031 Departmental expenses: Cost of sales 6,267,339 6,032,575 4,897,046 4,771,670 Payroll and related expenses 13,400,453 12,486,088 10,875,092 10,205,303 Other expenses 5,392,038 4,996,441 4,453,226 3,906,149 ------------ ------------ ------------ ------------ 25,059,830 23,515,104 20,225,364 18,883,122 ------------ ------------ ------------ ------------ Gross operating income 36,853,331 35,088,327 30,833,623 27,869,909 ------------ ------------ ------------ ------------ Unallocated operating expenses: Payroll and related expenses 5,066,791 4,594,669 3,984,532 3,803,719 Other expenses 9,795,801 9,528,735 7,220,762 7,341,575 ------------ ------------ ------------ ------------ 14,862,592 14,123,404 11,205,294 11,145,294 ------------ ------------ ------------ ------------ Income before fixed charges 21,990,739 20,964,923 19,628,329 16,724,615 ------------ ------------ ------------ ------------ Fixed charges: Depreciation and amortization 4,246,044 4,282,499 3,510,896 3,153,749 Interest expense 4,797,247 9,768,373 3,571,282 3,607,535 Rent, property taxes and insurance 7,291,728 7,086,887 5,864,473 5,582,595 Loss (gain) on disposal of property and equipment 34,516 (3,416) 4,236 27,796 ------------ ------------ ------------ ------------ 16,369,535 21,134,343 12,950,887 12,371,675 ------------ ------------ ------------ ------------ Net income (loss) $ 5,621,204 $ (169,420) 6,677,442 4,352,940 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-207 ROYAL PALACE HOTEL ASSOCIATES STATEMENTS OF PARTNERS' EQUITY for the years ended December 31, 1996 and 1995 and nine-month period ended September 30, 1997
THE EQUITABLE LIFE ASSURANCE HOTEL VENTURE SOCIETY OF THE TOTAL PARTNERS, LTD. UNITED STATES ------------- -------------- -------------- Balance, January 1, 1995 $(27,939,532) $(14,819,619) $(13,119,913) Partner contributions 48,498,437 21,824,296 26,674,141 Net loss (169,420) (84,710) (84,710) ------------ ------------ ------------ Balance, December 31, 1995 20,389,485 6,919,967 13,469,518 Distributions to partners (2,376,948) (1,069,627) (1,307,321) Net income 5,621,204 2,529,542 3,091,662 ------------ ------------ ------------ Balance, December 31, 1996 23,633,741 8,379,882 15,253,859 ============ ============ ============ Distributions to partners (unaudited) (6,367,057) (2,865,176) (3,501,881) Net income (unaudited) 6,677,442 3,004,849 3,672,593 ------------ ------------ ------------ Balance, September 30, 1997 (unaudited) $ 23,944,126 $ 8,519,555 $ 15,424,571 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-208 ROYAL PALACE HOTEL ASSOCIATES STATEMENTS OF CASH FLOWS for the years ended December 31, 1996 and 1995 and the nine month periods ended September 30, 1997 and 1996
Year Ended Nine Months Ended December 31, September 30, 1996 1995 1997 1996 ----------- ------------ ----------- ----------- (unaudited) (unaudited) Cash flows from operating activities: Net income (loss) $ 5,621,204 $ (169,420) $ 6,677,442 $ 4,352,940 ----------- ------------ ----------- ----------- Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation 4,171,540 4,082,997 3,407,328 3,097,871 Amortization 74,504 199,502 103,568 55,878 Bad debt expense (57,134) (32,102) (20,506) (49,831) Loss (gain) on disposal of equipment 34,516 (3,416) 4,236 27,796 Increase (decrease) in cash due to changes in assets and liabilities: Restricted cash (1,457,188) (283,164) (859,126) (3,015,532) Accounts receivable (1,334,828) 104,507 (131,322) (149,797) Receivables from related parties 5,389 21,320 0 5,389 Inventories (62,667) (16,586) (51,326) (110,727) Prepaid insurance 59,243 7,576 (372) (121,502) Prepaid other 30,098 (46,989) (154,256) (177,533) Other assets (560,155) 52,910 (32,243) (497,347) Accounts payable 162,778 945,547 (175,134) (1,175,285) Accrued ground lease rent 115,717 30,857 (126,001) (10,284) Accrued property and real estate taxes 0 (1,321,028) 0 0 Accrued expenses, other 26,721 418,719 1,891,385 2,010,351 Advance deposits 298,210 21,583 436,981 274,430 Deferred revenue (218,844) (292,959) (68,236) 314,087 ----------- ------------ ----------- ----------- Total adjustments 1,287,900 3,889,274 4,224,976 477,964 ----------- ------------ ----------- ----------- Net cash provided by operating activities 6,909,104 3,719,854 10,902,418 4,830,904 ----------- ------------ ----------- ----------- Cash flows from investing activities: Proceeds from disposal of property and equipment 7,956 15,035 0 7,956 Payments made to acquire property and equipment (5,005,278) (2,014,407) (4,184,521) (3,086,495) Decrease (increase) in restricted cash designated for property and equipment 164,689 (3,000,000) 1,298,861 31,738 ----------- ------------ ----------- ----------- Net cash used in investing activities (4,832,633) (4,999,372) (2,885,660) (3,046,801) ----------- ------------ ----------- ----------- Cash flows from financing activities: Repayment of long-term debt (815,323) (1,562,197) (841,377) (542,347) Bank overdraft 0 0 0 100,946 Contributions by partners 0 3,836,993 0 0 Distributions to partners (2,376,948) 0 (6,367,057) (2,713,629) ----------- ------------ ----------- ----------- Net cash (used in) provided by financing activities (3,192,271) 2,274,796 (7,208,434) (3,155,030) ----------- ------------ ----------- ----------- Net (decrease) increase in cash and cash equivalents (1,115,800) 995,278 808,324 (1,370,927) Cash and cash equivalents, beginning of year 1,370,927 375,649 255,128 1,370,927 ----------- ------------ ----------- ----------- Cash and cash equivalents, end of year $ 255,127 $ 1,370,927 1,063,452 0 =========== ============ =========== =========== Supplemental information to cash flow information: Cash paid during the year for interest expense $ 4,877,461 $ 9,923,000 3,565,815 3,482,267 =========== ============ =========== ===========
The accompanying notes are an integral part of these financial statements. F-209 ROYAL PALACE HOTEL ASSOCIATES NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS - The Partnership owns and operates a 1014-room hotel in Lake Buena Vista, Florida known as the Buena Vista Palace. The hotel commenced operations in March 1983. CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. RESTRICTED CASH - Restricted cash consists of amounts required under the terms of the Partnership's mortgage debt facility more fully described in Note 4. Amounts classified as current will be used to fund current liabilities; restricted cash classified as long-term is designated for property and equipment. INVENTORIES - Inventories consist of food, beverage and attraction tickets and are stated at cost, which is determined on the first-in, first-out basis. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation is being provided for financial reporting purposes on the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred, while major renewals and betterments are capitalized. The cost and related allowance for depreciation or amortization of assets sold or otherwise disposed of are removed from the related accounts and the resulting gains or losses are reflected in income. Operating assets consist of china, glassware, silver and linen and are stated at cost, which is generally determined on the first-in, first-out basis. DEFERRED LOAN COSTS - Loan costs are stated at cost and are being amortized using the straight-line method over the term of the related indebtedness. DEFERRED REVENUE - Deferred revenue represents cancellation fees which, under agreements, may be used by the canceling parties as future credits for a given period. The Partnership will reduce deferred revenue as credits are used. Any remaining amount at the end of the agreement period will be recognized as revenue. INCOME TAXES - Partnership income and losses are allocated to the partners in accordance with the terms of the Partnership Agreement; accordingly, any income tax liability or benefit resulting from the operations of the Partnership is the responsibility of the Partners, and is not reflected in the accompanying financial statements. F-210 ROYAL PALACE HOTEL ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: CONCENTRATIONS OF CREDIT RISK - The Partnership has no instruments which subject it to off-balance-sheet risk. Financial instruments which potentially subject the Partnership to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Partnership maintains its temporary cash investments in highly liquid instruments with high credit quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Partnership's customer base and their dispersion across many different industries and geographies. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. PARTNERSHIP AGREEMENT: In accordance with the terms of the Partnership Agreement, profits are allocated 55 percent to the corporate partner and 45 percent to the non- corporate partner, while losses are allocated equally among the two partners (the Partners). 3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following:
1996 1995 Building $ 88,760,494 $ 87,880,615 Furniture and equipment 16,730,875 13,811,113 Land improvements 471,209 281,334 ------------ ------------ 105,962,578 101,973,062 Less accumulated depreciation (35,563,860) (32,365,612) ------------ ------------ 70,398,718 69,607,450 Operating assets 1,238,221 1,164,346 ------------ ------------ $ 71,636,939 $ 70,771,796 ============ ============
F-211 ROYAL PALACE HOTEL ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT: Long-term debt consists of the following:
1996 1995 Mortgage note payable, with interest at 9.11%; monthly installments of principal and interest of $473,657 through November 2015; collateralized by substantially all property and equipment and accounts receivable $ 51,355,362 $ 52,000,000 Note payable, with interest at 12.5%; monthly installments of principal and interest of $12,545 through June 1998; remaining principal balance together with accrued interest thereon due June 15, 1998; collateralized by equipment 204,932 321,792 Note payable, with interest at 8.5%; monthly installments of principal and interest of $5,600 through January 1999; collateralized by equipment 127,905 181,730 ------------ ------------ 51,688,199 52,503,522 Less current portion (1,146,048) (902,640) ------------ ------------ $ 50,542,151 $ 51,600,882 ============ ============
Annual maturities of long-term debt subsequent to December 31, 1996 are as follows:
Year ending December 31, ----------------------- 1997 $ 1,146,048 1998 $ 1,183,546 1999 $ 1,153,671 2000 $ 1,258,762 2001 $ 1,380,078 2002 and thereafter $45,566,094
F-212 ROYAL PALACE HOTEL ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT, CONTINUED: On December 8, 1995, the Partnership refinanced its mortgage note payable, the terms of which are summarized in the long-term debt summary. Under the provisions of the transaction, the Partners reduced the outstanding mortgage debt by $13,929,000 on behalf of the Partnership and refinanced the remaining balance of $52,000,000. In addition, the Partners paid approximately $1,015,000 of loan costs at closing. These non-cash transactions have been excluded from the accompanying statement of cash flows. The new loan contains certain financial covenants, the most restrictive of which requires the Partnership to maintain a minimum quarterly debt service coverage ratio of not less than 1.2 to 1.0, as defined, with other required ratios if the debt service ratio is not met. In addition, the Partnership is required to make monthly deposits into the following escrow accounts: Tax and Insurance Escrow Fund, Replacement Reserve Fund, Ground Lease Escrow Fund, and the Capital Reserve Fund, as defined. The deposits to these accounts are classified as restricted cash in the Partnership's balance sheet. 5. RELATED PARTY TRANSACTIONS: The hotel is managed by BVP Management Associates, which is affiliated with one of the general partners through common ownership. Terms of the management agreement provide for annual management fees equal to 3% of gross receipts each year plus an incentive fee, as defined. Management fees were approximately $1,677,000 for 1996 and 1995, of which approximately $42,000 and $118,000 were unpaid at December 31, 1996 and 1995, respectively, and are included in accrued expenses in the accompanying balance sheets. The Partnership purchases their medical insurance for its employees from Buena Vista Investment Fund, which is affiliated with one of the general partners through common ownership. Insurance expense was approximately $1,734,000 and $1,363,000 for the years ended December 31, 1996 and 1995, respectively. Certain management expenses common to hotel properties were shared by the Buena Vista Palace and other properties affiliated with one of the general partners through common ownership. These costs consisted principally of shared management salaries. The affiliated properties' share of such costs aggregated approximately $88,946 and $9,100 for 1996 and 1995, respectively, of which no amounts were due from the affiliates at December 31, 1996 and 1995. The management agreement is subordinate to the mortgage debt facility more fully described in Note 4. During the year ended December 31, 1995, notes payable to partners were converted to partners' equity, resulting in a non-cash transaction of approximately $29,717,000. F-213 ROYAL PALACE HOTEL ASSOCIATES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. COMMITMENTS AND CONTINGENCIES: On December 11, 1980, simultaneous with the formation of the Partnership, the Partnership leased land on which the hotel is built (ground lease) from Lake Buena Vista Communities, Inc. The ground lease terminates on the earlier of (1) the 50th anniversary of the date of completion of the building, as defined, or (2) the 55th anniversary of the ground lease (defined as initial term). The lease agreement provides for an automatic 25-year extension at the expiration of the initial term. Rent under the ground lease is based on a percentage of net revenue, as defined, with minimum annual rental payments of $160,000. Such rent aggregated approximately $4,600,000 and $4,330,000 for 1996 and 1995, respectively. The Partnership is involved in certain legal actions and claims arising in the ordinary course of its business. It is the opinion of management (based on advice of legal counsel) that such litigation and claims will be resolved without material adverse effect on the Partnership's financial position. 7. SUBSEQUENT EVENTS During 1997, Patriot American Hospitality, Inc. ("Patriot") entered into several agreements with the partners of the Partnership to acquire an aggregate 95% equity interest in the hotel for an aggregate of approximately $97,250,000 and the assumption of an existing first leasehold mortgage with a current balance of approximately $50,700,000 and ground lease. 8. INTERIM INFORMATION (UNAUDITED) The interim financial statements are unaudited but, in the opinion of management reflect all adjustments necessary for a fair presentation of the results of operations and financial position for such periods. All such adjustments reflected in the interim financial statements are considered to be of normal recurring nature. The results of operations for any interim period are not necessary indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto for the years ended December 31, 1996 and 1997. F-214 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (C) EXHIBITS Exhibit Number Description ------- ----------- 23.1 Consent of Arthur Andersen LLP -- Dallas, Texas 23.2 Consent of Ernst & Young LLP -- San Juan, Puerto Rico 23.3 Consent of Coopers & Lybrand LLP -- Pittsburgh, Pennsylvania 23.4 Consent of Coopers & Lybrand LLP -- Tampa, Florida 23.5 Consent of Price Waterhouse LLP -- Miami, Florida 3 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrants have duly caused the report to be signed on their behalf by the undersigned thereunto duly authorized. DATED: December 8, 1997 PATRIOT AMERICAN HOSPITALITY, INC. By: /s/ Rex E. Stewart ------------------------------------------ Rex E. Stewart Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY By: /s/ Rex E. Stewart ------------------------------------------ Rex E. Stewart Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) EX-23.1 2 CONSENT OF ARTHUR ANDERSEN -- DALLAS, TEXAS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the Joint Registration Statement on Form S-3 (File No. 333-29671 and 333-29671-01) and the Joint Registration Statement on Form S-4 (File No. 333-39875 and 333-39875-01) of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company of our report dated September 17, 1997 on the combined financial statements of the Crow Family Hotel Partnerships (and to all references to our Firm), which are included in the Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company dated December 10, 1997. /s/ Arthur Andersen LLP Dallas, Texas December 5, 1997 EX-23.2 3 CONSENT OF ERNST & YOUNG -- SAN JUAN, PUERTO RICO EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Joint Registration Statement on Form S-3 (File No. 333-29671 and 333-29671-01) and the Joint Registration Statement on Form S-4 (File No. 333-39875 and 333-39875-01) of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company of our reports (a) dated August 7, 1997 (except for Note 18, as to which the date is September 17, 1997) with respect to the Consolidated Financial Statements of WHG Resorts & Casinos Inc. and related financial statement schedule; (b) dated August 7, 1997 with respect to the financial statements of Posadas de San Juan Associates and related financial statement schedule; (c) dated August 11, 1997 with respect to the financial statements of WKA El Con Associates; and (d) dated May 2, 1997 with respect to the financial statements of El Conquistador Partnership L.P.; all of which are included in the Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company, dated December 10, 1997. /s/ ERNST & YOUNG LLP San Juan, Puerto Rico December 5, 1997 EX-23.3 4 CONSENT OF COOPERS & LYBRAND -- PITTSBURGH, PENN. EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-29671 333-29671-01) and the Joint Registration Statement on Form S-4 (File No. 333-39875 and 333-39875-01) of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company as amended of our reports dated (i) February 12, 1997, except for Note 21, Note 22 and the last paragraph of Note 2, as to which the date is December 1, 1997, of our audit of the consolidated financial statements of Interstate Hotels Company, (ii) dated January 17, 1996, on our audit of the financial statements of Troy Hotel Investors and (iii) dated February 7, 1995, on our audit of the financial statements of Troy Park Associates. /s/ Coopers & Lybrand L.L.P. Pittsburgh, Pennsylvania December 8, 1997 EX-23.4 5 CONSENT OF COOPERS & LYBRAND -- TAMPA, FLORIDA EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-29671 333-29671-01) and the Joint Registration Statement on Form S-4 (File No. 333-39875 and 333-39875-01) of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company as amended of our report dated January 17, 1997, except for Note 7, as to which the date is November 25, 1997, on our audit of the financial statements of Royal Palace Hotel Associates. /s/ Coopers & Lybrand L.L.P. Tampa, Florida December 8, 1997 EX-23.5 6 CONSENT OF PRICE WATERHOUSE -- MIAMI, FLORIDA EXHIBIT 23.5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (File No. 333-29671 and 333-29671-01) and the Registration Statement on Form S-4 (File No. 333-39875 and 333-39875-01) of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company of our report dated October 3, 1997 relating to the financial statements of CHC International, Inc. Hospitality Division for the years ended November 30, 1995 and 1996 which appears in the Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company. /s/ Price Waterhouse LLP Miami, Florida December 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----