-----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, N0+bDurW6JevNBt9sAGVj5rnid+HWKuLNeZHnvr3fpiNVNnb5C88ftNdmDz5Djii jXbISIqTfEpx/5BEsfwSfg== 0000950109-99-001944.txt : 19990623 0000950109-99-001944.hdr.sgml : 19990623 ACCESSION NUMBER: 0000950109-99-001944 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY INC/DE CENTRAL INDEX KEY: 0000016343 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 940358820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-09319 FILM NUMBER: 99632702 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO DATE OF NAME CHANGE: 19970717 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA JOCKEY CLUB DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WYNDHAM INTERNATIONAL INC CENTRAL INDEX KEY: 0000715273 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS, ROOMING HOUSE, CAMPS & OTHER LODGING PLACES [7000] IRS NUMBER: 942878485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-09320 FILM NUMBER: 99632703 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO\DE DATE OF NAME CHANGE: 19970723 FORMER COMPANY: FORMER CONFORMED NAME: BAY MEADOWS OPERATING CO DATE OF NAME CHANGE: 19920703 10-K/A 1 AMENDED FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X]JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number 1-9319 Commission File Number 1-9320 PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC. - ------------------------------------- ------------------------------------- (Exact name of registrant as specified (Exact name of registrant as specified in its charter) in its charter) Delaware 94-0358820 Delaware 94-2878485 - ------------------------------------- ------------------------------------- (State or other (I.R.S. Employer (State or other (I.R.S. jurisdiction of Identification jurisdiction of Employer incorporation or No.) incorporation or Identification organization) organization) No.) 1950 Stemmons Freeway, Suite 6001 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Dallas, Texas 75207 - ------------------------------------- ------------------------------------- (Address of principal (Zip Code) (Address of principal (Zip Code) executive offices) executive offices) (214) 863-1000 (214) 863-1000 - ------------------------------------- ------------------------------------- (Registrant's telephone number, (Registrant's telephone number, including area code) including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, par Common Stock, par value New York Stock value New York Stock $0.01 per share Exchange $0.01 per share Exchange - ------------------------------------- ------------------------------------- (Title of each (Name of each (Title of each (Name of each class) Exchange on which class) Exchange on which registered) registered) Securities registered pursuant to Section 12(g) of the Act: none none Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [_] The aggregate market value of the paired voting stock held by non-affiliates of Patriot American Hospitality, Inc. and Wyndham International, Inc. as of March 22, 1999 was $970,668,027, based upon a price of $4.50 per paired share. As of March 22, 1999, there were 234,131,492 paired shares of Patriot American Hospitality, Inc. and Wyndham International, Inc. common stock issued and outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. Form 10-K/A Annual Report Index
Form 10-K/A Report Item No. Page - -------- ----------- PART I 1.Business........................................................ 3 2.Properties...................................................... 3 Risk Factors...................................................... 23 PART II 6.Selected Financial Information.................................. 26 7.Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 31 7a.Qualitative and Quantitative Disclosures about Market Risks.... 52 PART III 10.Directors and Executive Officers of the Registrant............. 53 11.Executive Compensation......................................... 63 12.Security Ownership of Certain Beneficial Owners and Management....................................................... 79 13.Certain Relationships and Related Transactions................. 82 SIGNATURES
2 PART I ITEM 1 AND 2. BUSINESS AND PROPERTIES General Development of Business Patriot American Hospitality, Inc. ("Old Patriot") was formed April 17, 1995 as a self-administered real estate investment trust ("REIT"). The Virginia corporation was formed for the purpose of acquiring equity interests in hotel properties. On October 2, 1995, Patriot completed an initial public offering of shares of common stock and commenced operations. On July 1, 1997, Old Patriot merged with and into California Jockey Club, with Cal Jockey being the surviving legal entity. Cal Jockey's shares of common stock were paired with the shares of common stock of Bay Meadows Operating Company. The shares traded as a single unit pursuant to a stock pairing arrangement. In connection with the Cal Jockey merger, Cal Jockey changed its name to "Patriot American Hospitality, Inc." referred to herein after as Patriot and Bay Meadows changed its name to "Patriot American Hospitality Operating Company." As a result of the merger with Wyndham Hotel Company ("Old Wyndham") in January, 1998, the operating company subsequently changed its name to "Wyndham International, Inc." ("Wyndham"). Patriot and Wyndham are now collectively referred to as the Companies. Patriot and Wyndham are both Delaware corporations. The Cal Jockey merger has been accounted for as a reverse acquisition. Cal Jockey is considered to be the acquired company for accounting purposes. Consequently, the historical financial information of Old Patriot is the historical financial information for Patriot. For accounting purposes, Wyndham commenced its operations concurrent with the closing of the Cal Jockey merger on July 1, 1997. The financial statements have been adjusted for the purchase method of accounting whereby the Bay Meadows Racecourse facilities and related leasehold improvements owned by Cal Jockey and Bay Meadows have been adjusted to estimated fair market value. The shares of common stock of Patriot and the shares of common stock of Wyndham are paired on a one-for-one basis and may only be held and transferred in units consisting of one share of Patriot common stock and one share of Wyndham common stock. This single unit herein after is referred to as a paired share. Patriot, through its wholly owned subsidiary, PAH GP, Inc., is the sole general partner and the holder of a 1.0% general partnership interest in Patriot American Hospitality Partnership, L.P. referred herein after to as the Patriot Partnership. In addition, Patriot, through its wholly owned subsidiary, PAH LP, Inc., owns an approximate 88.0% limited partnership interest in the Patriot Partnership as of December 31, 1998. The Patriot Partnership was formed in connection with Old Patriot's initial public offering. Old Patriot contributed its assets to the partnership in exchange for units of limited partnership interest ("OP units"). Wyndham owns a 1.0% general partnership interest and an approximate 86.8% limited partnership interest in Patriot American Hospitality Operating Partnership, L.P. as of December 31, 1998. As a result of the merger with Wyndham Hotel Company, the operating company subsequently changed its name to "Wyndham International Operating Partnership, L.P." referred to herein after to as Wyndham Partnership. The Patriot Partnership and Wyndham Partnership are now collectively referred to as the Operating Partnerships. Generally, Patriot owns and leases hotels to Wyndham, which is responsible for managing a majority of the hotels. In order for Patriot to qualify as a REIT under the Internal Revenue Code of 1986 (the "Code"), Patriot leases a substantial majority of its hotels to Wyndham or to other third-party leasees who are responsible for operating the hotels. The paired share structure facilitated the Companies' strategy to become a fully-integrated, multi-brand, multi-product, multi-tiered hotel operating company. Following the merger with and into California Jockey Club and the creation of Patriot paired shares, the Companies acquired major hotel operating companies and brands. Patriot's ability to utilize the paired share structure was limited as a result of tax legislation adopted in July 1998. 3 During 1998, Patriot and Wyndham, either directly or through the Operating Partnerships and their subsidiaries, invested over $4.5 billion in the acquisition of hotels and other related businesses. These acquisitions were financed primarily with funds drawn on the Companies' revolving credit facility as well as issuance of paired shares and OP units. The following describes these acquisitions. Wyndham Hotel Corporation On January 5, 1998, Wyndham Hotel Corporation ("Old Wyndham") merged with and into Patriot, with Patriot being the surviving corporation ("Wyndham merger"). Patriot, as a result of the Wyndham merger, acquired ownership of ten Old Wyndham hotels and 14 ClubHouse hotels and leased such hotels to Wyndham. Thirteen of the 14 hotel leases assumed by Patriot were sub-leased to Wyndham. Old Wyndham's 52 management and franchise contracts excluding the 16 Patriot hotels that Wyndham managed prior to the merger, the Wyndham and ClubHouse proprietary brand names, and the Wyndham hotel management company were transferred to certain non-controlled subsidiaries. The total purchase consideration for the Wyndham merger was approximately $982.0 million. The consideration consisted of 21,594,137 paired shares; 4,860,876 shares of Series A Convertible Preferred Stock of Patriot (which are convertible on a one-for-one basis into paired shares); cash of approximately $339.0 million to repay debt and pay Old Wyndham shareholders who elected to receive cash (which was financed with funds drawn on Patriot's credit facility); and the assumption of approximately $59.1 million in debt. In 1998, the Companies issued an aggregate 261,224 paired shares valued at approximately $5.8 million in settlement of certain purchase price adjustment arrangements related to Old Wyndham's acquisition of ClubHouse Hotels, Inc. prior to the merger with Patriot. In the first quarter of 1998, the Companies announced conversion of six ClubHouse Inns to Wyndham Garden Hotels. WHG Casinos & Resorts, Inc. and related transactions On January 16, 1998, a subsidiary of Wyndham merged with and into WHG Casinos & Resorts Inc., with WHG being the surviving corporation, ("WHG merger"). As a result of the WHG merger, Wyndham acquired the 570-room Condado Plaza Hotel & Casino, a 50% interest in the partnership that owns the 389-room El San Juan Hotel & Casino and a 23.3% interest in the partnership that owns the 751-room El Conquistador Resort & Country Club, all of which are located in Puerto Rico. In addition, Wyndham acquired a 62% interest in Williams Hospitality Group, Inc., the management company for the three hotels and the Las Casitas Village at the El Conquistador. A total of 5,004,690 paired shares were issued in connection with the WHG merger and approximately $21.3 million of debt was assumed, resulting in total purchase consideration of approximately $159.4 million. Effective March 1, 1998, Patriot acquired from unaffiliated third parties a 40% interest in the El San Juan Hotel & Casino, an aggregate 68.62% equity interest in the El Conquistador and a 38% interest in Williams Hospitality Group, Inc. for approximately $31 million in cash and issuance of 1,818,182 paired shares valued at approximately $49.2 million and the assumption of approximately $169.6 million of debt. On July 13, 1998, Patriot acquired the remaining minority interests held by a third party in entities that own the El Conquistador and the El San Juan Hotel & Casino for a total purchase price of approximately $3.9 million. Wyndham owns the controlling general partner interest in the partnerships that own the El San Juan Hotel & Casino and the El Conquistador. Wyndham also holds voting control of Williams Hospitality Group, Inc. Therefore, the operating results of these entities have been consolidated with those of Wyndham for financial reporting purposes. During 1998, the El San Juan and the El Conquistador were converted to Wyndham Resorts. Arcadian International Limited On April 6, 1998, Patriot announced the completion of its acquisition of all of the issued and to-be-issued shares of Arcadian International Limited for 60 pence per share. Including the exercise of all outstanding options 4 to purchase shares, the assumption of debt and the acquisition of the remaining shares in the Malmaison Group, the total transaction cost was approximately (Pounds)185.9 million (approximately $308.7 million U.S. based on exchange rates at the time of closing). As a result of the transaction, Patriot acquired ten owned hotels located throughout England; one owned hotel in Jersey; five owned and managed Malmaison Hotels; two resorts under development in Tuscany, Italy and Paris, France; and the proprietary Malmaison brand name. Patriot also acquired Arcadian's 50% partnership interest in the redevelopment of the luxury Great Eastern Hotel in London, to be branded as a flagship Wyndham Hotel and operated by Wyndham once the development has been completed. The Arcadian acquisition was financed through a short-term financing agreement with PaineWebber Real Estate Services, Inc., for $160 million, at a rate equal to the borrowing rate on Patriot's credit facility. In addition, Patriot assumed approximately $112.6 million of debt in connection with the Arcadian acquisition. Interstate Hotels Company On June 2, 1998, pursuant to an Agreement and Plan of Merger dated as of December 2, 1997, as thereafter amended, between Patriot, Wyndham and Interstate Hotels Company, Interstate merged with and into Patriot with Patriot being the surviving company ("Interstate merger"). Pursuant to the Interstate merger agreement, stockholders of Interstate could elect to convert each of their shares of Interstate common stock into the right to receive either (i) $37.50 in cash, subject to proration in certain circumstances, or (ii) a number of paired shares of Patriot and Wyndham common stock based on an exchange ratio of 1.341 paired shares for each share of Interstate common stock not exchanged for cash. As a result of the Interstate merger, Patriot acquired controlling interest in, or ownership of, 42 hotels representing over 12,000 rooms; leases for 84 hotels representing over 10,100 rooms and management or service agreements for 82 hotels representing over 20,400 rooms located throughout the United States and in Canada, the Caribbean and Russia. During 1998, the Companies converted two hotels acquired in the Interstate merger to Wyndham Hotels. The total purchase consideration for the Interstate merger of approximately $2.1 billion consisted of 28,825,875 paired shares, cash of approximately $525.4 million to pay Interstate shareholders who elected to receive cash, approximately $787.1 million in debt assumed or refinanced by Patriot and approximately $73.4 million to pay other transaction-related costs. In addition, Interstate shareholders received rights to receive a cash distribution of $0.3997 on each share of Interstate common stock that was converted into paired shares, aggregating approximately $9.1 million. SF Hotel Company, L.P. On June 5, 1998, Patriot, through the Patriot Partnership, acquired all of the partnership interests in SF Hotel Company, L.P. for approximately $298.9 million ("Summerfield acquisition"). The total purchase consideration for the Summerfield acquisition consisted of approximately 3,223,795 OP units, 1,397,281 paired shares, cash of approximately $165.5 million and assumption of debt in the amount of approximately $17.1 million. In addition, the purchase price is subject to future adjustment based on (i) the market price of the paired shares through the end of 1998 (the "1998 Summerfield adjustment") and (ii) achievement of certain performance criteria through 2000 for 24 managed hotels which were not open for business (or had recently opened) as of the date of acquisition, and (iii) fulfillment of the companies obligation to develop seven hotels. As a result of the Summerfield acquisition, Patriot acquired four Summerfield Suites(R) hotels, leasehold and management interests in 24 Summerfield Suites(R), Sierra Suites(R) and Sunrise Suites hotels and management contracts and franchise interests for 12 additional Summerfield Suites(R) and Sierra Suites(R) hotels. Patriot has leased or sub-leased 21 of these hotels to Wyndham. In addition, Patriot acquired the development contracts for several additional hotels. Effective January 15, 1999, an additional 1,311,709 OP units valued at approximately $9.0 million were issued in connection with the Summerfield acquisition as additional consideration pursuant to the purchase agreement in satisfaction of the 1998 Summerfield adjustment. 5 CHC International Merger On June 30, 1998, pursuant to an Agreement and Plan of Merger dated as of September 30, 1997 between Patriot, Wyndham and CHCI ("CHCI merger"), the hospitality-related business of CHCI merged with and into Wyndham with Wyndham being the surviving company. CHCI's gaming operations were transferred to a new legal entity prior to the CHCI merger and such operations were not a part of the transaction. As a result of the CHCI merger, Wyndham, through its subsidiaries, acquired the remaining 50% investment interest in GAH-II, L.P., the remaining 17 leases and 16 of the associated management contracts related to the Patriot hotels leased by CHC Lease Partners, 8 third-party management contracts, two third-party asset management contracts, the Grand Bay proprietary brand name and certain other hospitality management assets. The aggregate purchase price of the 17 leasehold interests was approximately $52.7 million, which is reflected as a cost of acquiring leaseholds in the accompanying statements of operations of Wyndham for the year ended December 31, 1998. By operation of the CHCI merger, all the issued and outstanding shares of common stock, par value $0.005 per share, of CHCI and certain stock option rights were exchanged for an aggregate of 1,781,173 shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per share of Wyndham and 1,781,181 shares of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share, of Wyndham. In addition, Wyndham assumed CHCI's outstanding debt in the amount of approximately $16.6 million. In addition, on September 30, 2000 and September 30, 2002, Wyndham may be obligated to pay the CHCI stockholders and a subsidiary of Wyndham may be obligated to pay a Gencom-related entity additional consideration, in each case based upon the performance of certain specific assets. During 1998, the Companies converted 4 hotels acquired in the CHCI merger to proprietary branded hotels. Other In July 1998, Wyndham acquired an approximate 49% limited partnership interest in a partnership with affiliates of Don Shula's Steakhouse, Inc., for $1.5 million in cash and 156,272 of Preferred OP units of the Wyndham Partnership which were valued at approximately $3.5 million. During 1998, Patriot also re-acquired the leasehold interests for nine of its hotels from the lessees and purchased certain license agreements for an aggregate purchase price of approximately $11.7 million, which is reflected as a cost of acquiring leaseholds in the accompanying statements of operations of Patriot. The Companies issued 118,812 paired shares valued at $3.0 million and paid cash of $8.7 million. Patriot has leased the hotels to Wyndham. During 1998, Patriot, through the Patriot Partnership and its subsidiaries, invested approximately $234.1 million in the acquisition of four hotels with a total of over 1,700 guest rooms and the Golden Door Spa. These acquisitions were financed primarily with funds drawn on Patriot's credit facility, the issuance of 53,989 OP units valued at approximately $1.5 million, the issuance of 390,335 paired shares valued at approximately $10.0 million and the assumption of mortgage debt in the amount of approximately $80.1 million. In addition, Patriot acquired an office building that will be converted into a hotel for approximately $33.9 million. During 1998, Patriot sold its interest in four hotel assets: Courtyard by Marriott Hotel in Orange, Connecticut, Courtyard by Marriott Hotel in St. Louis, Missouri, Residence Inn in Pittsburgh, Pennsylvania and the Courtyard by Marriott in Westborough, Massachusetts, collectively hereinafter referred to as the Fine Transaction, for a net purchase price of approximately $32.5 million. Patriot recognized no gain or loss on sale as a result of the transaction. The assets were sold to an affiliate of an independent member of the Board of Directors of Patriot. Additionally in December 1998, Patriot sold its interest in three hotel assets previously leased to NorthCoast Hotels, LLC ("NorthCoast") (a third party lessee of Patriot); the WestCoast Roosevelt Hotel, the WestCoast Gateway Hotel located in Seattle, Washington and the WestCoast Wenatchee Hotel located in Wenatchee, Washington to an affiliate of NorthCoast. Patriot received net cash proceeds of approximately $23.7 million plus 6 a mortgage note receivable in the amount of $2.0 million. Patriot has also contracted with an affiliate of NorthCoast to sell a fourth hotel, the WestCoast Long Beach Hotel and Marina located in Long Beach, California, for a total purchase price of approximately $7.0 million. Patriot recognized a loss on sale of approximately $9.5 million as a result of the sale of these assets. Upon completion of the sale, the Companies will no longer have leases on owned hotels with third-party lessees. Recent Developments Asset sales On March 3, 1999, Patriot sold its interest in the Holiday Inn Crockett Hotel located in San Antonio, Texas. The Companies received cash proceeds of approximately $18.0 million after payment of legal costs and other closing costs. Patriot will recognize an estimate gain on sale of asset of $3.3 million in 1999. In connection with the transaction, Patriot terminated its lease to Wyndham for the hotel. In February 1999, Patriot sold its interest in the Bay Meadows Racecourse located in San Mateo, California. The Companies received cash proceeds of approximately $3.4 million after payment of legal costs and other closing costs. Patriot has recognized an estimated impairment loss on assets held for sale of $42.3 million related to the Racecourse facility in 1998. In connection with the transaction, Patriot terminated its lease to Wyndham for the Racecourse facilities. During the first quarter of 1999, the Companies entered into two new management contracts including the conversion of the Marriott I-Drive in Orlando, Florida to a Wyndham and the addition of the Lodge at Mountain Village in Telluride, Colorado as a Wyndham Resort. Acquisitions In January 1999, Patriot acquired the remaining 25% minority interests in each of the five following hotels; Embassy Suites Schaumburg, the Hilton Dania, the Marriott Suites at Valley Forge, the Marriott Boston Andover and the Marriott Tysons Corner from CIGNA. The acquisition of such interests was financed through additional mortgage indebtedness totaling $49.8 million and the transfer of an additional 10% interest in the Marriott Warner Center. Consulting Agreements On February 26, 1999, Patriot, Wyndham and Paul A. Nussbaum entered into a Separation Agreement (the "Separation Agreement") whereby Mr. Nussbaum resigned his position as Chairman of the Board of Directors and Chief Executive Officer of Patriot, effective immediately. Pursuant to the Separation Agreement, Mr. Nussbaum has been named Chairman Emeritus of the Board of Directors of Patriot and will remain as a Director of Wyndham. In addition, pursuant to the terms of the Separation Agreement, Mr. Nussbaum has agreed to provide consulting services to the Companies for two years. Securities Purchase Agreement On February 18, 1999, Patriot, Wyndham, Patriot Partnership, Wyndham Partnership and affiliates of each of Apollo Real Estate Management III, L.P., Apollo Management IV, L.P., Thomas H. Lee Equity Fund IV, L.P., Beacon Capital Partners, L.P. and Rosen Consulting Group, entered into a purchase agreement under which the investors will purchase $1 billion of a new series B preferred stock of Wyndham. Patriot and Wyndham currently plan to use the proceeds from the investment to settle their forward equity contracts, as described below, to repay indebtedness, and for working capital and growth purposes. Wyndham will pay dividends on its series B preferred stock quarterly, on a cumulative basis, at a rate of 9.75% per year. For the first six years, dividends will be payable partly in cash and partly in additional shares of preferred stock, with the cash component initially equal to 30% for the first dividend payment and declining over the period to approximately 19.8% for the final dividend payment. Each share of series B preferred stock may be 7 converted, at the option of its holder, into that number of shares of Wyndham common stock equal to $100.00 divided by the conversion price of the series B preferred stock. Initially the conversion price will be $8.59, but is subject to adjustment under certain circumstances. Restructuring Under the terms of the purchase agreement, relating to the $1 billion equity investment, Patriot and Wyndham are required to complete a restructuring of their existing paired share REIT structure prior to the investment. Under the terms of the restructuring, the following events will occur: . A reverse stock split of the common stock of Wyndham and Patriot. . A wholly-owned subsidiary of Wyndham will merge with and into Patriot with Patriot surviving. . The pairing agreement between Patriot and Wyndham will terminate. . Patriot will terminate its status as a real estate investment trust effective January 1, 1999. . The non-voting stock of specified corporate subsidiaries held by the Patriot Partnership will be transferred so that it will be owned directly by Patriot and/or Wyndham, rather than through the Patriot Partnership. . The third party partners in both the Patriot Partnership and the Wyndham Partnership will be offered an opportunity to exchange their limited partner interests for Wyndham common stock. . The preferred stockholders of Wyndham will be offered an opportunity to exchange their preferred stock for Wyndham common stock. Reverse Stock Splits Prior to the merger of a subsidiary of Wyndham into Patriot, both Wyndham and Patriot will implement a one-for-twenty reverse stock split of their common stock. Redemption Option For a period of 170 days following the completion of the $1 billion equity investment, Wyndham may redeem up to $300 million of the series B preferred stock at a redemption price of $102.00 per share (102% of the stated amount $100.00) plus all accrued dividends. Wyndham currently plans to fund this redemption through the issuance of $300 million of series A preferred stock to its stockholders. The series A preferred stock has the same economic terms as the series B preferred stock. New Debt Financing New Credit Facility. Patriot has recently signed a commitment letter with Chase Securities Inc. and The Chase Manhattan Bank for senior credit facilities for Wyndham in the amount of $1.8 billion, comprised of a term loan facility and a revolving loan facility. Definitive agreements relating to the new credit facility are expected to be finalized at the same time that the $1 billion equity investment is consummated. The commitment letter provided that the Chase Manhattan Bank will act as the administrative agent and Chase Securities Inc. will act as the lead arranger for a syndicate of lenders which will provide Wyndham with $1 billion in term loans and up to $800 million under the revolving loan facility, of which a maximum of $560 million may be drawn at the closing of the investment. The term loan facility and the revolving facility carry terms of 7 years and 5 years, respectively. The commitment letter based interest rates for the new credit facility upon LIBOR spreads varying from 1.50% to 3.00% per annum (for the revolving loan facility) and 3.00% to 3.75% per annum (for the term loan facility), based both on Wyndham's leverage ratio and on whether any increasing rate loans (described below) are outstanding. However, at Wyndham's election or under other specified circumstances, the term loans and revolving loans may instead bear interest at an alternative base rate plus the applicable spread. The 8 alternative base rate is equal to the greater of The Chase Manhattan Bank's prime rate or federal funds rate plus 0.5%, and the alternative spread is 1.0% below the applicable LIBOR spread. Subject to limited agreed-upon exceptions, the New Credit Facility will be guaranteed by the domestic subsidiaries of Wyndham, and will be secured by pledges of equity interests held by Wyndham and its subsidiaries. The proceeds from the term loan facility will be used to finance the restructuring of Wyndham and Patriot. The proceeds from the revolving loan facility will be used for working capital and general corporate purposes. Increasing Rate Loans. Wyndham and Patriot have signed a commitment letter with The Chase Manhattan Bank, Chase Securities Inc., Bear, Stearns & Co. Inc., and The Bear Stearns Companies Inc. providing that The Chase Manhattan Bank, The Bear, Stearns Companies Inc. and a possible syndicate of other lenders will provide an increasing rate loan facility in the amount of up to $650 million. The increasing rate loans carry a term of 5 years. Interest rates for the increasing rate loans are based on LIBOR spreads and are initially set at 0.25% below the initial LIBOR spread on the term loan facility, but increase by 0.50% every three months, with a cap of LIBOR plus 4.75%. However, under other specified circumstances, interest accrues at an alternate rate equal to the rate borne by three-month treasury securities plus 1.0%, plus the applicable spread. The lenders under the increasing rate loans receive the benefit of the same guarantees and pledges of security provided under the New Credit Facility. The proceeds from the increasing rate loans will be used to finance the restructuring of Wyndham and Patriot. After the six month anniversary of the closing of the investment, lenders transferring increasing rate loans may exchange the increasing rate loans for exchange notes carrying identical terms to the increasing rate loans. To the extent any increasing rate loans or exchange notes are outstanding 180 days after the closing of the investment, Wyndham must by such date file and maintain a shelf registration statement with the Securities and Exchange Commission allowing the resale of any exchange notes outstanding thereafter. Wyndham may also offer registered substitute notes in exchange for all outstanding increasing rate loans and exchange notes. Wyndham's ability to borrow under its revolving facility is subject to Wyndham's compliance with a number of customary financial and other covenants, including total leverage and interest coverage ratios, limitations on additional indebtedness, and limitations on investments and stockholder dividends. In May 1999, The Chase Manhattan Bank and Chase Securities Inc. notified the companies that they were exercising their rights under the "market flex" provisions of the commitment letters to change the terms of the senior credit facilities and the increasing rate loan facility. The revolving credit facility has been reduced from $800 million to $600 million, the maximum that may be drawn at the closing has been reduced from $560 million to $400 million and the term loan facility has been increased from $1 billion to $1.2 billion. Forward Equity Contracts Patriot is party to forward equity contracts with three counterparties involving the sale of an aggregate of 13.3 million paired shares, with related price adjustment mechanisms. Upon entering into these contracts, the companies agreed to sell a varying number of paired shares to each of the counterparties at future settlement dates at prices adjusted for the then current market price of the paired shares. None of the forward contracts provided for any floor on the settlement price per share. Under the terms of the forward contract entered into with UBS on December 31, 1997, the Companies issued 3.25 million unregistered paired shares to UBS on that date, for a purchase price per paired share of $28.125, or aggregate consideration of approximately $93.6 million. Under the terms of the forward contract entered into with Nations on February 26, 1998, the Companies issued 4.9 million unregistered paired shares to Nations on that date, for a purchase price per paired share of $24.8625, or aggregate consideration of approximately $121.8 million. Under the terms of the forward contract entered into with PaineWebber on April 6, 1998, the Companies issued 5.15 million unregistered paired shares to PaineWebber on that date for a purchase price per paired share of $27.01125, or aggregate consideration of approximately $139.1 million. The proceeds of these placements were used by the Companies to repay borrowings under the Companies' Credit Facility. The Credit Facility was then used to fund the cash portion of the Companies mergers and acquisitions. Patriot's aggregate total remaining obligation under the forward equity 9 transactions was approximately $321.9 million at April 12, 1999. As of such date, Patriot had delivered an aggregate of 84.7 million shares to the counterparties as collateral, including approximately 4 million shares issued as dividends on the collateral shares, in addition to approximately 12.5 million original paired shares currently owned by the counterparties or their affiliates. Based on the $5.3125 closing price of the paired shares on May 21, 1999 and assuming an average of 2% selling expenses, the forward counterparties would have to sell approximately 62 million paired shares, to settle all of the forward equity transactions in full. Under the terms of the forward equity transactions, the Companies sold paired shares to each of the counterparties and simultaneously entered into a forward contract under which they agreed to "settle" the transaction at a stated maturity date based upon the adjusted price of the purchased shares at maturity. During the term of the forward contract, the price of the purchased shares increases at a rate that corresponds to an agreed-upon interest rate. At maturity, the forward contracts provide that each counterparty will sell a number of shares sufficient to generate proceeds equal to the total adjusted purchase price of the purchased shares. Shares may be sold to the public through an underwritten public offering or by other methods, or to private investors. If the counterparty does not receive sufficient proceeds from its sales of the originally purchased shares, the Companies must issue more paired shares to that counterparty for resale until the obligation has been satisfied. The Companies may pay their obligation under the forward equity contracts in cash as well as paired shares. As of May 21, 1999, the Companies have paid an aggregate of $54.3 million to the counterparties under the forward equity contracts, in addition to the cash dividends paid on the purchased shares. On February 28, 1999, all three counterparties agreed, subject to specified conditions, not to require settlement under their respective forward agreements or to sell paired shares in connection with the forward agreements until the earlier of the closing of the $1 billion equity investment or June 30, 1999. In connection with the standstill agreements, the Companies agreed to pay a 2% fee to the three counterparties. The agreements provide that the standstill obligations terminate if, among other events, the price of the paired shares fell to a specified threshold. As of the date of this Form 10- K/A, the price of the paired shares has fallen below each of the thresholds. As a result, each of the forward counterparties has the right to require an immediate settlement of its forward equity transaction. As of the date of this Form 10 K/A, none of the counterparties has made any sale of paired shares, other than the sale of 754,525 paired shares by one counterparty in December 1998, or required settlement of its forward transaction. However, the Companies cannot assure you that the forward counterparties will not sell paired shares or require settlement in the future. The Companies may settle the forward transactions by delivering either cash or paired shares. Sources of cash are not currently available for the Companies to make the payments that would be required to settle one or more of the forward transactions in cash. Moreover, the Companies cannot assure that the bank lenders would consent to any cash settlements prior to the closing of the $1 billion equity investment. Generally, the Companies may settle by delivering paired shares only if a registration statement covering such paired shares is effective. There are currently effective registration statements covering the sale by the three forward counterparties of up to 40 million paired shares and the sale of one counterparty of an additional 4 million paired shares of which 754,525 paired shares were sold by that counterparty in December 1998. The Companies can make no assurances that these registration statements will remain effective. Given the current market price of the paired shares, any settlement in paired shares would have severely dilutive effects on our capital stock. Based on the $5.3125 closing price of the paired shares on May 21, 1999 and assuming an average of 2% selling expenses, the forward counterparties would have to sell approximately 62 million paired shares, to settle all of the forward equity transactions in full. The number of shares required would substantially increase if the market price of the paired shares decreases as a result of the sales of paired shares by the forward counterparties. If any of the counterparties sells paired shares, the conversion price of the preferred stock to be issued to the investors will be adjusted downward to the extent that the price recognized by us on the sale is less than $8.75 per share. The Companies intend to settle in full all of the forward transactions, with a portion of the proceeds of the $1 billion equity investment. The estimated aggregate dollar value of the settlement on June 30, 1999 is approximately $333.6 million. If the Companies settle the forward transactions in cash, the counterparties must deliver to the Companies all paired shares then owned by them or held by them as collateral under the forward agreement. 10 Agreements Relating to Existing Credit Facility. Patriot and Wyndham's existing credit facility with The Chase Manhattan Bank, Chase Securities, Inc. and PaineWebber Real Estate consists of a $900 million revolving credit facility and a series of term loans in the aggregate amount of $1.8 billion. Interest rates on the existing Credit Facility are based on Patriot's and Wyndham's leverage ratio and vary from 1.5% to 2.5% over LIBOR. Under the original terms of the Credit Facility, two of the term loans were scheduled to matured on January 31, 1999 ($350 million) and March 31, 1999 ($400 million), respectively. All of the requisite lenders under the Credit Facility have agreed to extend the maturity of these two terms loans to June 30, 1999. If the Companies do not consummate the Investment by June 30, 1999, or our agreement with the Investor Group otherwise terminates, the maturity on these two term loans will be extended to March 31, 2000 and the Companies will be required to make a $300 million amortization payment by December 31, 1999. Additionally, the Companies will be required to secure the Credit Facility with mortgages and other security interests by June 30, 1999. In connection with their agreement to extend the maturities of the term loans to June 30, 1999, the Companies have paid approximately $11.7 million in fees. Interstate's Third-Party Hotel Management Business In May, 1998, the Companies along, with Interstate Hotels Company ("Interstate") entered into a settlement agreement (as amended, the "Settlement Agreement") with Marriott International, Inc. ("Marriott") which addressed certain claims asserted by Marriott in connection with Patriot's then proposed merger with Interstate. The Settlement Agreement provided for the dismissal of litigation brought by Marriott, and allowed Patriot's merger with Interstate to close. In addition to dismissal of the Marriott litigation, the Settlement Agreement provides for the re-branding of ten Marriott hotels under the Wyndham name, Marriott's assumption of the management (the "Assumed Management Contracts") of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and the divestiture of the third-party management business which was operated by Interstate no later than June 14, 1999. If the Companies do not complete the spin-off by June 14, 1999, Marriott will be entitled to receive liquidated damages. The Companies will also be subject to additional penalties including Marriott's right to purchase, subject to third-party consents, the hotels to be submanaged by Marriott and six additional Marriott hotels owned by Patriot at their then appraised values. Moreover, subject to any defenses the Companies may have, the Companies would owe Marriott liquidated damages with respect to the hotels converted to the Wyndham brand, those to be submanaged by Marriott, and the six additional Marriott hotels Marriott would have the option to purchase. The Companies also anticipate that Marriott would require third-party owners of Marriott-branded hotels that Wyndham manages to replace Wyndham as manager of their hotels. As a result, each respective hotel would either: (1) lose the Marriott brand, at which time the Companies would have to compensate Marriott for any lost franchise fees or (2) terminate the management contract with Wyndham and enter into a contract with another manager. The Companies would owe liquidated damages on any third-party Marriott-franchised hotel which chooses to convert its brand. Description of Business The Companies are a fully-integrated and multi-branded hotel enterprise that operates primarily in the upscale and luxury segments. Through a series of acquisitions, the Companies have grown from 20 hotels at the time of its initial public offering in 1995 to become one of the largest U.S. based hotel operators with a portfolio totaling 472 hotels and approximately 101,000 rooms. The Companies classify their business into proprietary brand and non- proprietary brand hotel divisions, under which they manage the business. Among its proprietary branded hotels, the Companies are positioned in the luxury segment under the Grand Bay Hotels & Resorts(R); in the upscale segment under Wyndham(TM); and in the mid-priced segment under the ClubHouse. The core Wyndham brand offers upscale, full-service accommodations to business and leisure 11 travelers, ensures a quality and consistent product, and delivers outstanding service through any of its four products: Wyndham Hotels, Wyndham Resorts, Wyndham Garden Hotels(R), Wyndham Grand Heritage Hotels(R). Additionally, the Companies offer proprietary branded all-suite accommodations through its upscale Summerfield Suites and its mid-priced Sierra Suites. Other proprietary hotel brands owned and developed by the Companies include Malmaison, Grand Heritage(R) and Carefree(R). The Companies primary growth strategy is to develop their proprietary hotel brands through increasing distribution, generating greater customer awareness, building brand loyalty, and maintaining customer satisfaction. The Companies intends to continue to expand and diversity its hotel portfolio through the rebranding of existing non-proprietary brand hotels to one of its proprietary brands and through the selective acquisition and development of hotels in major metropolitan areas and destination. In 1998, the Companies converted 33 owned hotels to one of its proprietary upscale or luxury hotel brands. Additionally, the Companies have 10 hotels under development which are expected to open in mid to late 1999. These newly constructed hotels will be proprietary branded and are situated in major metropolitan markets including Boston, Chicago, Atlanta and London. Additionally, the Companies own 93 non-proprietary branded hotels which consists of 86 full service hotels, 3 resort hotels and 4 limited service hotels. All but 5 of these hotels are operated under franchise or brand affiliations with nationally recognized hotel companies, including Marriott(R), Crowne Plaza(R), Hilton(R), Hyatt(R), Radisson(R), Holiday Inn(R), Doubletree(R), Embassy Suites(R), Ramada(R), Four Points by Sheraton(R), WestCoast(R), Hampton Inn(R), Courtyard by Marriott(R). The Companies non-proprietary brand hotels are mostly operated by one of two divisions, Patriot American Hospitality Management Services or Interstate Hotel Management. Both divisions are focused on maximizing hotel profitability at the owned hotels or for our third-party hotel owners. The Companies non- proprietary branded business will continue to seek investments in hotels where management believes that profits can be increased by the introduction of more professional and efficient management techniques, a change of franchise affiliation or the injection of capital for market repositioning, renovating, or expanding a property. Proprietary Brands Grand Bay Hotels & Resorts are five-star, luxury hotel properties located in major metropolitan markets and destination locations. Catering to the upscale business and leisure traveler, Grand Bay hotels feature between 150 and 300 rooms, numerous fine dining options, the exclusive Golden Door Spa or Golden Door CitySpa and other luxury amenities. Grand Bay Resorts include the former Carefree Resorts, which are internationally renowned, signature resorts distinguished by unique architecture that complements the indigenous landscape; a wide variety of outdoor activities; Golden Door spas; innovative service; and retail shopping. Wyndham is a four-star, upscale hotel brand that offers full-service accommodations to business and leisure travelers. Wyndham ensures a quality and consistent product and delivers outstanding service through any of its four products described below. Each product is geared to the customers specific needs based on the properties' location and character. . Wyndham Hotels are typically located in major urban centers, providing an average of 400 hotel rooms, generally between 15,000 and 250,000 square feet of meeting space, and a full range of guest services and amenities, including room service and recreational facilities. Wyndham Hotels are marketed primarily to corporate groups as well as individual business travelers. . Wyndham Resorts are full-service, destination resorts targeted to upscale and luxury leisure and incentive travelers. Primary destinations currently include Orlando, South Florida and the Caribbean. Due to the strength and size of the Wyndham Resorts portfolio, the chain is the largest chain in the Caribbean. . Wyndham Garden Hotels are located principally in suburban markets, catering to individual business travelers and small business groups. These full-service hotels feature between 150 and 225 guest rooms, up to 5,000 square feet of meeting space, a three-meal restaurant, signature "Garden" libraries and laundry and room service. 12 . Wyndham Grand Heritage Hotels are the newest addition to the Wyndham brand, introduced in early 1998. Wyndham Grand Heritage Hotels are distinguished by their unique combination of historic ambiance and modern services and amenities. Usually situated in secondary and tertiary markets throughout the United States, Wyndham Grand Heritage Hotels are known for their aesthetic and historic appeal as well as their architectural significance. ClubHouse Inns are mid-priced, limited service hotels located principally in secondary markets throughout the Midwest and the Southwest. ClubHouse Inns are targeted at corporate individual travelers and featuring an average of 135 rooms, two meeting rooms, full-service breakfast buffets and evening receptions. Summerfield Suites and Sierra Suites are upscale and mid-priced, all-suite hotel brands, respectively. Both brands focus on the needs of business travelers attending corporate training programs but at different price points. All-suite properties are designed for the business and leisure traveler who usually anticipates a one to two week stay (suite hotels generally offer weekly rates to their guests). The suite properties usually have limited public space and no or limited food and beverage services. However, these properties generally provide guests with larger partitioned rooms, a full kitchen, or two rooms for added workspace. Malmaison, located in the United Kingdom, are full-service, upscale hotels typically housed in historic buildings that have been redeveloped and retrofitted. Named "Best Hotels in the World Under (Pounds)100 Per Night" by England's Tatler magazine, Malmaison hotels are a European equivalent in size and service to Wyndham Gardens, with award-winning brasseries, which quickly become popular gathering spots. Operating Statistics--Owned Hotels
Occupancy ADR REVPAR ------------ --------------- --------------- 1998 1997 1998 1997 1998 1997 ----- ----- ------- ------- ------- ------- Wyndham Branded Hotels.......... 70.50% 70.80% $119.57 $112.32 $ 84.35 $ 79.54 Grand Bay Hotels & Resorts...... 67.00 70.50 287.30 266.64 192.52 187.86 Summerfield Suites.............. 79.70 74.20 129.42 123.01 103.17 91.27 Malmaison....................... 83.50 75.40 125.65 117.27 104.89 88.44 Clubhouse....................... 66.40 71.50 68.07 65.75 45.23 47.01 Arcadian........................ 68.80 63.80 142.67 128.43 98.10 81.92 Non Proprietary -- Limited Service........................ 67.80 74.10 74.57 65.87 50.54 48.83 Non Proprietary Brands.......... 71.70 71.20 99.59 94.29 71.39 67.16 ----- ----- ------- ------- ------- ------- Weighted Average............... 71.10% 71.00% $109.94 $103.53 $ 78.15 $ 73.55
13 List of Owned Properties The following table sets forth certain information for the hotels the Companies owned as of December 31, 1998, and excludes those leased, managed or franchised from third-party owners.
Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Wyndham Brand Properties: Wyndham Bel Age Hotel Los Angeles California 200 1984 Wyndham Bristol Place Hotel Toronto Canada 287 1974 Wyndham Buena Vista Palace Resort & Spa (1) Orlando Florida 1,014 1977/1983 Wyndham Buttes Resort (1) Tempe Arizona 353 1986 Wyndham City Centre (2) Washington District of Columbia 352 1969 Wyndham Emerald Plaza San Diego California 436 1991 Wyndham Resort & Spa (1) Fort Lauderdale Florida 496 1961 Wyndham Franklin Plaza Philadelphia Pennsylvania 758 1979 Wyndham Greenspoint Hotel Houston Texas 472 1985 Wyndham Miami Beach Resort (1) Miami Florida 424 1963 Wyndham Gateway--Miami Airport (1) Miami Florida 408 1976 Wyndham Myrtle Beach Resort & Golf Club (1) Myrtle Beach South Carolina 385 1974 Wyndham Northwest Chicago Chicago Illinois 408 1983 Wyndham Peachtree Conference Center (1) Atlanta Georgia 250 1984 Wyndham Toledo (1) Toledo Ohio 241 1985 Wyndham Riverfront Hotel New Orleans Louisiana 202 1996 Wyndham Washington D.C. (1) Washington District of Columbia 400 1983 Wyndham Westshore Hotel (1) Tampa Florida 324 1984 Wyndham Wind Watch Hotel & Golf Club Hauppage New York 360 1989 Wyndham El Conquistador Resort & Club (1) San Juan Puerto Rico 751 1962 Wyndham El San Juan Resort & Casino (1) San Juan Puerto Rico 382 1958 Wyndham Rose Hall Golf & Beach Resort Montego Bay Jamaica 489 1984 Wyndham Garden Hotel--Brookfield Brookfield Illinois 178 1990 Wyndham Garden Hotel--Charlotte Charlotte North Carolina 173 1989 Wyndham Garden Hotel--Commerce Los Angeles California 201 1991 Wyndham Garden Hotel--Market Center Dallas Texas 228 1968/1997 Wyndham Garden Hotel--Park Central (1) Dallas Texas 197 1998 Wyndham Garden Hotel--Indianapolis Indianapolis Indiana 171 1990 Wyndham Garden Hotel--K.C. Airport (1) Kansas City Missouri 138 1992 Wyndham Garden Hotel--Knoxville (1) Knoxville Tennessee 137 1989 Wyndham Garden Hotel--LaGuardia Airport New York New York 229 1988 Wyndham Garden Hotel--Las Colinas Dallas Texas 168 1986 Wyndham Garden Hotel--Midtown Atlanta Georgia 191 1987 Wyndham Garden Hotel--Novi Detroit Michigan 148 1988 Wyndham Garden Hotel--Omaha (1) Omaha Nebraska 137 1991 Wyndham Garden Hotel--Overland Park Overland Park Kansas 180 1971/1997 Wyndham Garden Hotel--Pleasanton Pleasanton California 171 1985 Wyndham Garden Hotel--Richardson (1) Richardson Texas 137 1996 Wyndham Garden Hotel--Schaumburg Schaumburg Illinois 188 1985 Wyndham Garden Hotel--West Port (1) St. Louis Missouri 142 1997
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Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Wyndham Garden Hotel-- Vinings Atlanta Georgia 159 1985 Wyndham Garden Hotel-- Wichita (1) Wichita Kansas 120 1985 Wyndham Garden Hotel-- WoodDale Chicago Illinois 162 1986 Wyndham Grand Heritage-- Ambassador West (1) Chicago Illinois 219 1924 Wyndham Grand Heritage-- Bourbon Orleans (1) New Orleans Louisiana 216 1800s Wyndham Grand Heritage-- The Fairmount (1) San Antonio Texas 37 1906 Wyndham Grand Heritage-- The Mayfair (1) St. Louis Missouri 182 1925 Wyndham Grand Heritage-- The Tutwiler (1) Birmingham Alabama 147 1913 Wyndham Grand Heritage-- Tremont House (1) Boston Massachusetts 322 1925 Wyndham Grand Heritage-- Union Station (1) Nashville Tennessee 124 1986 Grand Bay Hotels & Resort: Carmel Valley Ranch Carmel California 144 1987 Grand Bay Hotel Coconut Grove Miami Florida 178 1983 The Boulders Scottsdale Arizona 160 1985 The Lodge at Ventana Canyon Tucson Arizona 49 1985 The Peaks Resort & Spa Telluride Colorado 174 1992 Las Casitas Spa & Villas San Juan Puerto Rico 157 Summerfield Suites: Summerfield--Denver South Denver Colorado 136 1997 Summerfield--Hanover Whippany New Jersey 136 1997 Summerfield--Morristown (Hanover South) Morristown New Jersey 133 1997 Summerfield--Seattle Downtown (1) Seattle Washington 193 1985 Summerfield--Waltham Waltham Massachusetts 136 1997 Malmaison: Malmaison Edinburgh Edinburgh United Kingdom 60 1994 Malmaison Glasgow Glasgow United Kingdom 72 1997 Malmaison Manchester Manchester United Kingdom 112 1998 Malmaison Newcastle Newcastle United Kingdom 116 1998 ClubHouse Inns: ClubHouse Inn--Nashville Airport Nashville Tennessee 135 1988 ClubHouse Inn-- Albuquerque Albuquerque New Mexico 137 1987 ClubHouse Inn--Atlanta (Norcross) Atlanta Georgia 147 1988 ClubHouse Inn--Overland Park Overland Park Kansas 143 1988 ClubHouse Inn--Savannah Savannah Georgia 138 1989 ClubHouse Inn--Topeka Topeka Kansas 121 1986 ClubHouse Inn--Valdosta Valdosta Georgia 121 1988 ClubHouse Inn & Conference Center Nashville Tennessee 285 1991 Non-Proprietary Brand Properties: Marriott Albany Albany New York 359 1985 Marriott Arlington Arlington Texas 310 1985 Marriott Atlanta North Central Atlanta Georgia 287 1975
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Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Marriott Boston Andover Andover Massachusetts 293 1985 Marriott Boston Westborough Westbourough Massachusetts 223 1985 Marriott Houston Greenspoint North Houston Texas 391 1981 Marriott Minneapolis Southwest Minnetonka Minnesota 320 1988 Marriott Colorado Springs Colorado Springs Colorado 311 1989 Marriott Harrisburg Harrisburg Pennsylvania 348 1980 Marriott Indian River Plantation Resort Stuart Florida 297 1987 Marriott Casa Marina Resort Key West Florida 311 1980 Marriott Troy Troy Michigan 350 1990 Marriott Reach Resort Key West Florida 149 1978 Marriott Suites At Valley Forge Valley Forge Pennsylvania 229 1985 Marriott Philadelphia West West Conshohocken Pennsylvania 286 1991 Marriott Pittsburgh Airport Pittsburgh Pennsylvania 314 1987 Marriott Roanoke Airport Roanoke Virginia 320 1983 Marriott San Diego Mission Valley San Diego California 350 1988 Marriott St. Louis West St. Louis Missouri 300 1990 Marriott Syracuse East Syracuse New York 250 1977 Marriott Tysons Corner Tysons Corner Virginia 390 1981 Marriott Warner Center Woodland Hills California 463 1986 Courtyard by Marriott Beachwood Ohio 113 1986 Crowne Plaza Ravinia Atlanta Georgia 495 1986 Doubletree Hotel Anaheim Orange California 454 1984 Doubletree Hotel Corporate Woods Overland Park Kansas 356 1982 Doubletree Hotel Post Oak Houston Texas 449 1982 Doubletree Hotel St. Louis St. Louis Missouri 223 1984 Doubletree Hotel Allen Center Houston Texas 341 1978 Doubletree Guest Suites Glenview Illinois 252 1988 Doubletree Hotel Westminster Denver Colorado 180 1980 Doubletree Hotel Tallahassee Florida 244 1977 Doubletree Hotel Des Plaines Chicago Illinois 242 1969 Doubletree Hotel Minneapolis Minnesota 230 1986 Doubletree Hotel Tulsa Oklahoma 417 1982 Doubletree Park Place Minneapolis Minnesota 298 1981 Doubletree Miami Airport Miami Florida 266 1975 Embassy Suites Chicago Illinois 358 1991 Embassy Suites Schaumburg Illinois 209 1984 Embassy Suites Hunt Valley Maryland 223 1985 Embassy Suites Phoenix North Phoenix Arizona 314 1985 Hyatt Newporter Newport Beach California 410 1962 Hyatt Regency Lexington Kentucky 365 1977 Hilton Cleveland South Independence Ohio 191 1980 Hilton Gateway Newark Newark New Jersey 253 1971 Hilton Columbus Columbus Georgia 177 1982 Hilton Del Mar San Diego California 245 1989 Hilton Greenwood Village Denver Colorado 305 1982 Hilton Dania Fort Lauderdale Florida 388 1988 Hilton Huntington Melville New York 302 1988 Hilton Parsipanny Parsippany New Jersey 510 1981 Hilton Melbourne Airport Melbourne Florida 237 1986
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Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Holiday Inn (3) Sebring Florida 148 1983 Holiday Inn San Angelo Texas 148 1984 Holiday Inn--YO Ranch Kerrville Texas 200 1984 Holiday Inn Aristocrat Dallas Texas 172 1925 Holiday Inn Beachwood (3) Beachwood Ohio 172 1974 Holiday Inn Crockett (4) San Antonio Texas 204 1909 Holiday Inn Lenox Atlanta Georgia 297 1987 Holiday Inn Northwest Houston Texas 193 1982 Holiday Inn Northwest Plaza Austin Texas 193 1984 Holiday Inn Select-- Farmers Branch Dallas Texas 379 1979 Holiday Inn Westlake Beachwood Ohio 266 1980 Holiday Inn Brentwood Brentwood Tennessee 247 1989 Holiday Inn San Francisco California 224 1964 Redmont Hotel Birmingham Alabama 112 1925 Omni Inner Harbor Hotel Baltimore Maryland 707 1968 Radisson Burlington Burlington Vermont 255 1975 Radisson Hotel & Suites Dallas Texas 198 1986 Radisson Englewood Englewood New Jersey 192 1989 Radisson Suite Hotel Kansas City Kansas 240 1931 Radisson Hotel Lisle Illinois 242 1987 Radisson New Orleans Hotel New Orleans Louisiana 759 1924 Radisson Northbrook Northbrook Illinois 310 1976 Radisson Overland Park Overland Park Kansas 190 1974 Radisson Riverwalk Jacksonville Florida 322 1979 Radisson Plaza Hotel San Jose Airport San Jose California 185 1985 Radisson Suites Town & Country Houston Texas 173 1986 Radisson Hotel Beachwood Ohio 196 1968 Radisson Hotel Akron Ohio 130 1989 Ramada Hotel San Francisco California 323 1962 Sheraton Four Points Blacksburg Virginia 148 1971 Sheraton Four Points Saginaw Michigan 156 1984 WestCoast Hotel & Marina (3) Long Beach California 195 1978 WestCoast Valley River Inn Eugene Oregon 257 1973 Condado Plaza Hotel & Casino San Juan Puerto Rico 570 Fort Magruder Inn & Conference Center Williamsburg Virginia 303 1975 Pickwick Hotel San Francisco California 189 1928 Park Shore Honolulu Honolulu Hawaii 227 1968 Regency Hotel San Juan Puerto Rico 127 1963 Limited Service Hotels: Hampton Inn (3) Canton Ohio 107 1985 Hampton Inn (3) Rochester New York 113 1986 Hampton Inn Cleveland Airport (3) North Olmsted Ohio 113 1986 Hampton Inn Jacksonville Airport (3) Jacksonville Florida 113 1985 Arcadian Hotels: Arcadian--Brandschatch Brandschatch Place United Kingdom 41 1980 Arcadian--Chilston Park Chilston Park United Kingdom 53 1985 Arcadian--Ettington Park Ettington Park United Kingdom 48 1984 Arcadian--Haycock Haycock United Kingdom 59 1632 Arcadian--L'Horizon L'Horizon United Kingdom 107 1954
17
Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Arcadian--Mollington Banastre Mollington Banastre United Kingdom 63 1953 Arcadian--Nutfield Priory Nutfield Priory United Kingdom 60 1988 Arcadian--Priest House Priest House United Kingdom 45 Arcadian--Rookery Hall Rookery Hall United Kingdom 45 1960 Arcadian--Wood Hall Wood Hall United Kingdom 43 1988 Arcadian--Woodlands Park Woodlands Park United Kingdom 59 1988 Other: Bay Meadows Racecourse (4) San Mateo California 1934 Golden Door Spa Escondido California 1954 ------ 43,893 ======
- -------- Notes: (1) Converted to Wyndham in 1998. (2) Converted to Wyndham subsequent to December 31, 1998. (3) Assets sold subsequent to December 31, 1998. (4) Assets sold subsequent to December 31, 1998. Total Portfolio
(Number of Hotels as of December 31, 1998) Owned Leased Managed Franchised Total ----------------------- ----- ------ ------- ---------- ----- Total Wyndham Brand Hotels & Resorts..... 50 14 40 10 114 Grand Bay Hotels & Resorts............... 6 0 0 0 6 Summerfield Suites and Sierra Suites..... 5 25 17 1 48 ClubHouse Inns........................... 8 0 2 1 11 Malmaison Hotels......................... 4 0 0 0 4 Arcadian and Grand Heritage Hotels....... 11 0 7 0 18 --- --- --- --- --- Proprietary Brand Hotels--Subtotal..... 84 39 66 12 201 Non-Proprietary Brand Hotels........... 94 82 95 0 271 --- --- --- --- --- Total.................................... 178 121 161 12 472 === === === === ===
Operation of the Hotels As of March 22, 1999, Patriot and Wyndham, either directly or through the Operating Partnerships and other subsidiaries, own interests in 178 hotels with an aggregate of over 43,800 rooms (excluding hotels under development). In order for Patriot to qualify for favorable tax status as a real estate investment trust ("REIT") under the Code, Patriot leases each of its hotels, to Wyndham or a third party lessee. Currently, Patriot leases all of its hotels to Wyndham except for one hotel (the WestCoast Long Beach Hotel and Marina) which is currently leased to NorthCoast which is under contract to be sold and those hotels which are separately owned through special purpose entities. Currently, Wyndham leases 206 hotels from Patriot pursuant to participating lease agreements. Wyndham manages 184 of these hotels through certain of its hotel management subsidiaries and has entered into separate management agreements with third-party operators to manage 22 of the hotels. In addition, the Companies lease 121 hotels from third parties, manage 161 hotels for independent owners and franchise 12 hotels. All of the leased hotels are managed with 39 franchised under proprietary brands of the Companies. Patriot leases each of the hotels, except those hotels which are separately owned through special purpose entities to Wyndham pursuant to separate participating leases. The Participating Leases with various expiration dates through 2008, subject to earlier termination upon the occurrence of certain contingencies described in the Participating Leases (including, particularly, irreparable damage or destruction of the hotel, condemnation of the 18 hotel property, failure to meet performance goals, or disposition of the hotel). The variation of the lease terms is intended to provide Patriot protection from the risk inherent in simultaneous lease expirations. In general, each participating lease requires the lessee of each hotel to pay the greater of (i) base rent in a fixed amount or (ii) participating rent based on percentages of room revenue, food and beverage revenue and other revenue at each hotel leased by it, plus certain additional charges. In general, Patriot is responsible for paying (i) real estate and personal property taxes on the hotels (except to the extent that personal property associated with the hotels is owned by the Lessee), (ii) casualty insurance on the hotels, (iii) business interruption insurance on the hotels and (iv) ground rent with respect to certain of the hotels. Wyndham is required to pay for all liability insurance on the hotels it leases, with extended coverage, including comprehensive general public liability, workers' compensation and other insurance appropriate and customary for properties similar to the hotels, with Patriot as an additional named insured. Franchise and Brand Affiliations As of December 31, 1998, all but 5 of the Companies' hotels are operated under franchise or brand affiliations with nationally recognized hotel companies. Franchisors and brand operators provide a variety of benefits for hotels which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems. Wyndham generally is the licensee under the franchise agreement related to such hotel. Wyndham is responsible for making all payments under the franchise agreements to the franchisors. Franchise royalties and fees generally range up to approximately 10% of room revenue. The duration of the franchise agreements are varied, but generally may be terminated upon prior notice and/or upon payment of certain specified fees. However, Wyndham is not entitled to terminate the franchise license for a hotel without prior written consent of Patriot. The franchisors have agreed that upon the occurrence of certain events of default by a lessee under a franchise license, the franchisors will transfer the franchise license for the hotel to Patriot (or its designee) or make other arrangements to continue the hotel as part of the franchisor's system. Wyndham's rights related to branded hotels are generally contained in the management agreements related to such hotels. The lessees do not pay additional franchise royalties or fees other than those specified in the management agreements for use of the brands. Generally, the lessees' rights to use the brands terminate upon any termination of the applicable management agreement. Management of the Hotels Wyndham has entered into management agreements with affiliated entities and other third parties to operate and manage each of the hotels leased from Patriot. As of December 31, 1998, all but 23 of Patriot's hotels were managed by operators affiliated with Wyndham. The management agreements provide for management fees based upon a percentage of total revenue at each of the hotels managed by them. The management fees generally range from 2% to 5% of total revenues. Generally, in the event of the termination of any of the Participating Leases with the hotel lessees, the related management agreement also terminates. Generally, the management agreements also provide for the subordination of certain management fee payments to Wyndham's obligations pursuant to the Participating Leases. Maintenance and Improvements The Participating Leases obligate Patriot to establish annually a reserve for capital improvements at the hotels leased to the Lessees (including the periodic replacement and refurbishment of furniture, fixtures and equipment ("FF&E"). Patriot and Wyndham agree on the use of funds in these reserves, and Patriot has the right to approve Wyndham's annual and long-term capital expenditure budgets. The aggregate minimum amount of such reserves average 4.0% of total revenue for the hotels. Patriot, at its election, may choose to expend more 19 than 4.0% on any hotel. Any unexpended amounts will remain the property of Patriot upon termination of the Participating Leases. Otherwise, Wyndham is required, at their own expense, to make repairs (other than capital repairs) which may be necessary and appropriate to keep their leased hotels in good order and repair. Competition The hotel industry is highly competitive and the Companies' hotels are subject to competition from other hotels for guests. Many of the Companies' competitors may have substantially greater marketing and financial resources than the Companies. Each of the Companies' hotels compete for guests primarily with other similar hotels in its immediate vicinity and secondarily with other similar hotels in its geographic market. Management believes that brand recognition, location, the quality of the hotel and services provided, and price are the principal competitive factors affecting the Companies' hotels. Patriot and Wyndham may compete for acquisition and development opportunities with entities that have greater financial resources than the Companies or which may accept more risk than the Companies. Competition may generally reduce the number of suitable investment opportunities and increase the bargaining power of property owners seeking to sell. Further, the Companies' management believes that it will face competition for acquisition opportunities from entities organized for purposes substantially similar to the objectives of Patriot or Wyndham. Seasonality The hotel industry is seasonal in nature. Revenue at certain of the Companies' hotels are greater in the first and second quarters of a calendar year and at other hotels in the second and third quarters of a calendar year. Seasonal variations in revenue at the hotels may cause quarterly fluctuations in Patriot's lease revenues and in Wyndham's hotel-related revenues. Employees As of March 22, 1999, Patriot employs 14 persons, including Messrs. Carreker, Evans and Jones, the executive officers of Patriot, and retains appropriate support personnel to manage its operations in lieu of retaining an advisor. Wyndham employs approximately 54,000 persons, including Messrs. Carreker, Alibhai, Koonce, Bentley and Jones, the executive officers of Wyndham, and retains appropriate support personnel to manage its operations, including operation of the 206 hotels leased from Patriot. Environmental Matters Neither Patriot, Wyndham, the Patriot Partnership nor the Wyndham Partnership has been identified by the United States Environmental Protection Agency or any similar state agency as a responsible or potentially responsible party for, nor have they been the subject of any involuntary governmental proceedings with respect to, any hazardous waste contamination. Two of the hotels owned by subsidiaries of the Patriot Partnership are participating in the Texas voluntary clean-up program, the costs of which are to be absorbed by others pursuant to certain indemnification agreements obtained at the time of purchase. If Patriot, Wyndham or any of their respective subsidiaries were to be identified as a responsible party, they would in most circumstances be strictly liable, jointly and severally with other responsible parties, for environmental investigation and clean-up costs incurred by the government and, to a more limited extent, by private persons. Phase I environmental site assessments have been performed on substantially all Patriot hotels owned by the Companies. To date, these assessments have not revealed any environmental liability or compliance concerns that management believes would have a material adverse effect on the Companies' business, assets, results of operations or liquidity. Based on the results of these assessments, the Companies and their outside consultants believe that the Companies' overall potential for environmental impairment is low. 20 Based upon the environmental reports described above, the Companies believe that a substantial number of the hotels incorporate potentially asbestos- containing materials. Under applicable current federal, state and local laws, asbestos need not be removed from or encapsulated in a hotel unless and until the hotel is renovated or remodeled. The Companies have asbestos operation and maintenance plans for each property testing positive for asbestos. Based upon the above-described environmental reports and testing, future remediation costs are not expected to have a material adverse effect on the results of operations, financial position or cash flows of Patriot or Wyndham and compliance with environmental laws has not had and is not expected to have a material adverse effect on the capital expenditures, earnings or competitive position of the Companies. Tax Status Cal Jockey has elected to be taxed as a REIT under Sections 856 through 860 of the Code since 1983. Patriot, as the successor to Cal Jockey in the Cal Jockey Merger, has continued to be taxed as a REIT. As a REIT, Patriot generally has not been subject to federal income tax on its taxable net income that is distributed currently to its shareholders. On March 1, 1999, Patriot announced that it had signed an agreement with an investor group, including affiliates of Apollo Real Estate Management III, L.P., Apollo Management IV, L.P., Thomas H. Lee Equity Fund IV, Beacon Capital Partners, L.P. and Rosen Consulting Group, providing for an equity investment of up to $1 billion in the Companies. In connection with this investment and the related restructuring transactions Patriot would become a subsidiary of Wyndham and convert from a REIT to a C corporation. The termination of REIT status would have a retroactive date of January 1, 1999. The consummation of this investment is subject to numerous conditions, including approval by Patriot shareholders. If the equity investment is consummated in 1999 as planned, or if Patriot otherwise terminates its REIT status beginning in 1999, Patriot will be subject to tax as a C corporation in 1999 and subsequent years. Therefore, Patriot will be subject to federal income tax at regular corporate tax rates, although the Companies will be eligible to file a consolidated federal income tax return following the consummation of the proposed equity investment. Distributions to shareholders will no longer be deductible or required, and the amount of distributions is likely to be reduced. The termination of Patriot's REIT status will also cause Patriot to permanently lose its special status as a grandfathered paired share REIT under the rules described below. If Patriot failed to qualify as a REIT for any year prior to 1999. Patriot would also be taxed as a C corporation beginning in such year. Patriot would therefore be subject to federal income tax and the loss of its status as a grandfathered paired share REIT. Legislation Affecting the Paired Share Structure Patriot's ability to qualify as a REIT is dependent upon its continued exemption from the anti-pairing rules of Section 269B(a)(3) of the Code. Section 269B(a)(3) would ordinarily prevent a corporation from qualifying as a REIT if its stock is paired with the stock of a corporation, such as Wyndham, whose activities are inconsistent with REIT status. The "grandfathering" rules governing Section 296B generally provide, however, that Section 296B(a)(3) does not apply to a paired REIT if the REIT and the paired operating company were paired on June 30, 1983. There are, however, no judicial or administrative authorities interpreting this "grandfathering" rule in the context of a merger or otherwise. Moreover, although Patriot's and Wyndham's respective predecessors, Cal Jockey and Bay Meadows, were paired on June 30, 1983, if for any reason Cal Jockey failed to qualify as a REIT in 1983 the benefit of the grandfathering rule would not be available to Patriot and Patriot would not qualify as a REIT for any taxable year. Patriot's ability to utilize the paired structure was limited as a result of the Internal Revenue Service Restructuring and Reforming Act of 1998 (the "IRS Reform Act of 1998"), which was signed into law by the President on July 22, 1998. Included in the IRS Reform Act of 1998 is a freeze on the grandfathered status of paired share REITs such as Patriot. Under this legislation, the anti-pairing rules generally apply to real property 21 interests acquired after March 26, 1998 by Patriot and Wyndham, or a subsidiary or partnership which a 10% or greater interest is owned by Patriot or Wyndham (collectively, the "REIT Group"), unless (i) the real property interests are acquired pursuant to a written agreement which is binding on March 26, 1998 and all times thereafter or (ii) the acquisition of such real property interests were described in a public announcement or in a filing with the Securities and Exchange Commission on or before March 26, 1998. In addition, the grandfathered status of any property under the foregoing rules would be lost if the rent on a lease entered into or renewed after March 26, 1998, with respect to such property exceeds an arm's-length rate. The IRS Reform Act of 1998 also provides that a property held by Patriot or Wyndham that is not subject to anti-pairing rules would become subject to such rules in the event of an improvement placed in service after December 31, 1999 that changes the use of the property and the cost of which is greater than 200 percent of (x) the undepreciated cost of the property (prior to the improvement) or (y) in the case of property acquired where there is a substituted basis, the fair market value of the property on the day it was acquired by Patriot and Wyndham. There is an exception for improvements placed in service before January 1, 2004 pursuant to a binding contract in effect as of December 31, 1999 and at all times thereafter. The IRS Reform Act of 1998 also provides an exception that permits Patriot to acquire new assets through taxable subsidiaries of Patriot, although in order to comply with the general REIT rules, Wyndham or persons unrelated to Patriot must own the voting securities of any such taxable subsidiaries. To the extent of Wyndham's proportionate interest in such subsidiaries the Act requires Patriot to treat gross revenues from the assets as nonqualifying REIT income for purposes of the REIT income tests (which generally limit the total amount of such revenues to 5% of Patriot's gross income determined for tax purposes). In addition, Patriot must account for its stock in such subsidiaries and any unsecured loans it makes to them as nonqualifying assets under the REIT asset tests (which generally limit the total value of Patriot's non-real estate assets of 25% of its total assets). Issues Regarding REIT Status As noted above, if Patriot ceases or fails to qualify as a REIT in any year, Patriot will be subject to federal income tax on its taxable income for the entire year of disqualification, and for future taxable years, at regular corporate rates. If the proposed equity investment is not consummated and if Patriot decides to retain its status as a REIT, Patriot will not qualify as a REIT for 1999 or subsequent years unless it operates in accordance with the various REIT qualification requirements imposed by the Internal Revenue Code. These requirements impose numerous restrictions on the Companies' activities and could preclude the Companies from engaging in activities that might otherwise be beneficial. Moreover, compliance with those requirements is more difficult in the case of a paired REIT such as Patriot, is further complicated by the additional requirements of the IRS Reform Act of 1998, and could be impacted by future legislation. Goodwin, Procter & Hoar LLP, special tax counsel to Patriot, has previously rendered an opinion to Patriot dated April 30, 1998 to the effect that commencing with the taxable year ending December, 13, 1983 to the date of such opinion, Patriot had been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and that as of the date of such opinion Patriot's proposed method of operation would enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. Patriot has not received any similar REIT qualification opinion subsequent to April 30, 1998. Stockholders should be aware, however, that opinions of counsel are not binding upon the IRS or any court. Goodwin, Procter & Hoar LLP's opinion was based on certain assumptions and representations or about the date of such opinion as to factual matters, including representations regarding the nature of Patriot's properties and the future conduct of Patriot's business. Any inaccuracy in such assumptions and representations (including as a result of Patriot's activities subsequent to the date of the opinion) could adversely affect the opinion. Pending Adoption of Authoritative Statements Derivative Instruments and Hedging Activities In June 1998, Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in 22 years beginning after June 15, 1999. The Companies expect to adopt Statement 133 effective January 1, 2000. Statement 133 will require the Companies to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Companies. Hotel Industry Risks Operating Risks The Companies primary business is buying, selling, leasing and managing hotels. Patriot leases its hotels to Wyndham and to third-party lessees (the "Lessees") pursuant to separate participating leases (the "Participating Leases"). Consequently, Patriot is dependent on the ability of Wyndham, the Lessees and the hotel management entities that manage the hotels (the "Operators") to manage the operations of the hotels that are leased to or operated by them. The Companies business is subject to operating risks common to the hotel industry. These risks include, among other things, (1) competition for guests from other hotels, a number of which may have greater marketing and financial resources and experience than the Companies do, (2) increases in operating costs due to inflation and other factors, which increases may not have been offset in past years, and may not be offset in future years, by increased room rates, (3) dependence on business and commercial travelers and tourism, which business may fluctuate and be seasonal, (4) increases in energy costs and other expenses of travel, which may deter travelers and (5) adverse effects of general and local economic conditions. These factors could adversely affect the ability of Wyndham and the Lessees to generate revenues. The Companies are also subject to the risk that in connection with the acquisition of hotels and hotel operating companies it may not be possible to transfer certain operating licenses, such as food and beverage licenses, to the Lessees, the Operators or Wyndham, or to obtain new licenses in a timely manner in the event such licenses cannot be transferred. Although hotels can provide alcoholic beverages under interim licenses or licenses obtained prior to the acquisition of these hotels, there can be no assurance that these licenses will remain in effect until Patriot or Wyndham obtains new licenses or that new licenses will be obtained. The failure to have alcoholic beverages licenses or other operating licenses could adversely affect the ability of the affected Lessees, and Operators or Wyndham to generate revenues. Operating Costs and Capital Expenditures; Hotel Renovation Hotels, in general, have an ongoing need for renovations and other capital improvements, particularly in older structures, including periodic replacement or refurbishment of furniture, fixtures and equipment ("F F& E"). Under the terms of the Participating Leases, Patriot is obligated to establish a reserve to pay the cost of certain capital expenditures at its hotel and pay for periodic replacement or refurbishment of F F& E. If capital expenditures exceed Patriot's expectations, the additional cost could have an adverse effect on Patriot's financial condition and results of operations. In addition, Patriot may acquire hotels where significant renovation is either required or desirable. Renovation of hotels involves certain risks, including the possibility of environmental problems, construction cost overruns and delays, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other hotels. Competition for Hotel Acquisition Opportunities The Companies may be competing for investment opportunities with entities that have substantially greater financial resources. These entities may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of a hotel operator or the geographic proximity of its investments. Competition may generally reduce the number of suitable investment opportunities offered to us and increase the bargaining power of property owners seeking to sell. 23 Seasonality The hotel industry is seasonal in nature. Revenues at certain hotels are greater in the first and second quarters of a calendar year and at other hotels in the second and third quarters of a calendar year. Seasonal variations in revenue at our hotels may cause quarterly fluctuations in our revenues. Real Estate Investment Risks General Risks The Companies investments will be subject to varying degrees of risk generally incidental to the ownership of real property. The underlying value of Patriot's real estate investments and its income will be dependent upon the ability of the Lessees, the Operators and Wyndham to operate Patriot's hotels in a manner sufficient to maintain or increase revenues and to generate sufficient income in excess of operating expenses to make rent payments under their leases with Patriot. Income from Patriot's hotels may be adversely affected by changes in national economic conditions, changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, particularly in older structures, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws, civil unrest, acts of God, including earthquakes and other natural disasters (which may result in uninsured losses), acts of war and other factors which are beyond our control. Value and Illiquidity of Real Estate Real estate investments are relatively illiquid. The Companies ability to vary our portfolio in response to changes in economic and other conditions is limited. If the Companies must sell an investment, there can be no assurance that the Companies will be able to dispose of it in the time period desired or that the sales price of any investment will equal or exceed the amount of our investment. Property Taxes The Companies hotels are subject to real property taxes. The real property taxes on the Companies hotel properties may increase or decrease as property tax rates change and as the value of the properties are assessed or reassessed by taxing authorities. If property taxes increase, the Companies financial condition and results of operations could be adversely affected. Consents of Ground Lessor Required for Sale of Certain Hotels Certain of the Companies hotels are subject to ground leases with third party lessors. In addition, the Companies may acquire hotels in the future that are subject to ground leases. Any proposed sale by the Companies of a property that is subject to a ground lease or any proposed assignment of the Companies leasehold interest in the ground lease may require the consent of third party lessors. As a result, the Companies may not be able to sell, assign, transfer or convey the Companies interest in any such property in the future absent the consent of such third parties. Environmental Matters The Companies operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, or in such property. Such laws often impose liability whether or not the owner or operator knew of, or 24 was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the owner's ability to borrow by using such real property as collateral. Persons who arrange for the transportation, disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could be used to impose liability for releases of hazardous materials, including asbestos-containing materials ("ACMs"), into the environment, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs or other hazardous materials. Environmental laws may also impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated, and these restrictions may require expenditures. In connection with the ownership and operation of any of our hotels, we may be potentially liable for any such costs. The cost of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could materially adversely affect our results of operations and financial condition. Phase I environmental site assessments ("ESAs") have been conducted at substantially all of our hotels by qualified independent environmental engineers. The purpose of Phase I ESAs is to identify potential sources of contamination for which any of our hotels may be responsible and to assess the status of environmental regulatory compliance. The ESAs have not revealed any environmental liability or compliance concerns that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we aware of any such liability or concerns. Nevertheless, it is possible that these ESAs did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware. We have not been notified by any governmental authority, and have no other knowledge of, any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of the hotels. Uninsured and Underinsured Losses Each of the Participating Leases specifies comprehensive insurance to be maintained on each of the applicable leased hotels, including liability, fire and extended coverage. The Companies believe such specified coverage is of the type and amount customarily obtained for or by an owner of hotels. Leases for subsequently acquired hotels will contain similar provisions. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods, that may be uninsurable or not economically insurable. The Companies will use discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on the Companies investments at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not be adequate to restore the Companies economic position with respect to such property. Acquisition and Development Risks The Companies currently intend to pursue acquisitions of additional hotels and, under appropriate circumstances, may pursue development opportunities. Acquisitions entail risks that such acquired hotels will fail to perform in accordance with expectations and that estimates of the cost of improvements necessary to market, acquire and operate properties will prove inaccurate as well as general risks associated with any new real estate acquisition. In addition, hotel development is subject to numerous risks, including risks of construction delays or cost overruns that may increase project costs, new project commencement risks such as receipt of zoning, occupancy and other required governmental approvals and permits and the incurrence of development costs in connection with projects that are not pursued to completion. 25 Dependence on Management Contracts Management contracts are acquired, terminated, renegotiated or converted to franchise agreements in the ordinary course of our business. These management contracts generally may be terminated by the owner of the hotel property if the hotel manager fails to meet certain performance standards, if the property is sold to a third party, if the property owner defaults on indebtedness encumbering the property and/or upon a foreclosure of the property. Other grounds for termination of our upscale hotel management contracts include a hotel owner's election to close a hotel and, in the case of the Wyndham Anatole, Dallas, Texas, if James Carreker ceases to be Chairman and Chief Executive Officer of Patriot and Wyndham. The Companies can make no assurances that the Companies will be able to replace terminated management contracts, or that the terms of renegotiated or converted contracts will be as favorable as the terms that existed before such renegotiation or conversion. The Companies are also subject to the risk of deterioration in the financial condition of a hotel owner and such owner's ability to pay management fees to the Companies. In addition, in certain circumstances, the Companies may be required to make loans to or capital investments or advances in hotel properties in connection with management contracts. A material deterioration in the operating results of one or more of these hotel properties and/or a loss of the related management contracts could adversely affect the value of our investment in such hotel properties. Risks Relating to Gaming Operations Regulation of Gaming Operations We own and operate several casino gaming facilities at certain of our hotels, including El San Juan, El Conquistador, Condado Plaza and Old San Juan in Puerto Rico. Each of these gaming operations is subject to extensive licensing, permitting and regulatory requirements administered by various governmental entities. Typically, gaming regulatory authorities have broad powers with respect to the licensing of gaming operations. They may revoke, suspend, condition or limit our gaming approvals and licenses, impose substantial fines and take other actions, any of which could have a material adverse effect on our business and the value of our hotel/casinos. Our directors, officers and some key employees, are subject to licensing or suitability determinations by various gaming authorities. If any of those gaming authorities were to find someone unsuitable, we would have to sever our relationship with that person. Risks Associated with High-End Gaming The high-end gaming business is more volatile than other forms of gaming. Variability in high-end gaming could have a positive or negative impact on cash flow, earnings and other financial measures in any given quarter. In addition, a portion of our table gaming is attributable to the play of a relatively small number of international customers. The loss of, or a reduction in play of, the most significant of such customers could have an effect on our future operating results. PART II ITEM 6. SELECTED FINANCIAL INFORMATION The following tables set forth selected separate and combined historical financial information for Patriot and Wyndham. The following financial information should be read in conjunction with, and is qualified in its entirety by, the historical financial statements and notes thereto of Patriot and Wyndham included elsewhere in this Annual Report on Form 10-K. 26 PATRIOT AND WYNDHAM SELECTED CONDENSED COMBINED HISTORICAL FINANCIAL DATA
Period October 2, 1995 Year Ended December 31, (Inception of ---------------------------------- Operations) through 1998 1997 1996 December 31, 1995 ---------- ----------- --------- ------------------- (in thousands, except per share data) Operating Data: Total revenue........... $2,056,341 $ 335,035 $ 76,493 $ 11,095 (Loss) income before income tax provision, minority interest and extraordinary item..... (112,508) 4,142 44,813 7,064 (Loss) income before extraordinary item..... (126,406) 362 37,991 6,096 Net (loss) income....... $ (158,223) $ (2,172) $ 37,991 $ 5,359 Per Share Data (1): Basic earnings per share: (Loss) income before extraordinary item... $ (1.13) $ 0.01 $ 0.84 $ 0.16 Extraordinary item, net of minority interest............. (0.23) (0.04) -- (0.02) ---------- ----------- --------- --------- Net (loss) income per paired share......... $ (1.36) $ (0.03) $ 0.84 $ 0.14 ========== =========== ========= ========= Diluted (loss) earnings per share (2).......... $ (2.57) $ (0.03) $ 0.83 $ 0.14 ========== =========== ========= ========= Dividends per paired share (3).............. $ 1.0362 $ 1.0878 $ 0.9154 $ 0.2236 ========== =========== ========= ========= Cash Flow Data: Cash provided by operating activities... $ 244,493 $ 108,110 $ 61,196 $ 7,618 Cash used in investing activities............. (2,076,359) (1,202,124) (419,685) (306,948) Cash provided by financing activities... 1,943,384 1,134,846 360,324 304,099 As of December 31, ------------------------------------------------------- 1998 1997 1996 1995 ---------- ----------- --------- ------------------- (in thousands) Balance Sheet Data: Investment in real estate and related improvements and land held for development, at cost, net........... $5,585,616 $ 2,044,649 $ 641,825 $ 265,759 Total assets............ 7,415,670 2,507,853 760,931 324,224 Total debt.............. 3,857,521 1,112,709 214,339 9,500 Minority interest in Operating Partnerships........... 253,970 220,177 68,562 41,522 Minority interest in consolidated subsidiaries........... 229,537 49,694 11,711 -- Stockholders' equity.... 2,603,037 989,892 437,039 261,778 Period October 2, 1995 Year Ended December 31, (Inception of ---------------------------------- Operations) through 1998 1997 1996 December 31, 1995 ---------- ----------- --------- ------------------- (in thousands) Other Data: Funds from operations (4).................... $ 86,362 $ 57,043 $ 64,463 $ 9,798 Cash available for distribution (5)....... 217,885 94,396 55,132 8,603 Weighted average number of common shares and OP units outstanding (6).. 163,532 76,040 52,259 44,060 Ratio of earnings to fixed charges ......... 0.59 1.08 7.00 80.37 Deficiency of earnings to fixed charges....... $ 112,508 -- -- --
27 PATRIOT SELECTED CONDENSED CONSOLIDATED HISTORICAL FINANCIAL DATA (in thousands, except per share amounts)
Period October 2, 1995 Year Ended December 31, (Inception of --------------------------- Operations) through 1998 1997 1996 December 31, 1995 -------- -------- ------- ------------------- Operating Data: Total revenue.................. $595,410 $185,554 $76,493 $11,095 (Loss) income before income tax, minority interests and extraordinary item............ (3,404) 3,769 44,813 7,064 (Loss) income before extraordinary item............ (14,328) 382 37,991 6,096 Net (loss) income.............. $(44,888) $ (2,152) $37,991 $ 5,359 Per Share Data (1): Basic earnings per share: (Loss) income before extraordinary item.......... $ (0.30) $ 0.01 $ 0.84 $ 0.16 Extraordinary item, net of minority interests.......... (0.22) (0.04) -- (0.02) -------- -------- ------- ------- Net (loss) income per common share....................... $ (0.52) $ (0.03) $ 0.84 $ 0.14 ======== ======== ======= ======= Diluted (loss) earnings per share (2)..................... $ (1.73) $ (0.03) $ 0.83 $ 0.14 ======== ======== ======= ======= Dividends per common share (3)........................... $ 1.0362 $ 1.0878 $0.9154 $0.2236 ======== ======== ======= =======
WYNHDAM INTERNATIONAL SELECTED CONDENSED CONSOLIDATED HISTORICAL FINANCIAL DATA (in thousands, except per share amounts)
Year Six Months Ended Ended December 31, December 31, 1998 1997 ------------ ------------ Operating Data: Total Revenue....................................... $2,002,227 $204,134 (Loss) income before income tax provision, minority interests and extraordinary item................... (77,826) 373 (Loss) before extraordinary item.................... (111,162) (20) Net loss............................................ $ (112,419) $ (20) Per Share Data (1): Basic loss per share: (Loss) before extraordinary item.................... $ (0.83) $ -- Extraordinary item, net of minority interest........ (0.01) -- ---------- -------- Loss per paired share............................... $ (0.84) $ -- ========== ======== Diluted loss per share (2).......................... $ (0.84) $ -- ========== ======== Dividend per common share........................... $ -- $ -- ========== ========
See accompanying notes on following page. 28 Notes to Patriot and Wyndham Selected Financial Information (1) On January 30, 1997, the Old Patriot Board of Directors declared a 2- for-1 stock split effected in the form of a stock dividend on March 18, 1997 to stockholders of record on March 7, 1997. On July 1, 1997, by operation of the Cal Jockey merger, each issued and outstanding share of Old Patriot Common Stock was converted into 0.51895 paired shares. In addition, on July 10, 1997, the respective Boards of Directors of Patriot and Wyndham declared a 1.927- for-1 stock split on their 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. All references herein to the number of shares, per share amounts and market prices of the paired shares and options to purchase paired shares have been restated to reflect the impact of the Cal Jockey Merger and the above- described stock splits, as applicable. In addition, 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. The earnings per share amounts presented herein have been restated to reflect the impact of Statement 128. On December 21, 1998, Patriot declared a stock dividend of $0.44 cents per share of common stock for the fourth quarter ended December 31, 1998 (the "Dividend"). The Dividend was payable on January 25, 1999 to shareholders of record on December 30, 1998. Each shareholder received the option to receive the Dividend in the form of additional paired shares or shares of Series B Cumulative Perpetual Preferred Stock, par value $0.01 per share of Patriot. Earnings per common share, weighted average shares outstanding and all stock option activity have been restated to reflect the stock dividend. (2) For 1998 the dilutive effect of unvested stock grants of 880,000 the option to purchase common stock of 753,000 and shares issued in connection with forward equity contracts of 2,507,000 and 6,613,000 preferred shares were not included in the computation of diluted earnings per share for the year ended December 31, 1998 because they are anti-dilutive. For 1997, the dilutive effect of unvested stock grants of 804 and the option to purchase common stock of 1,017,000 were excluded in the computation of diluted earnings per share for the year ended December 31, 1997 because they are anti-dilutive. (3) Dividends paid for the year ended December 31, 1997 include a special dividend of $0.06 per share paid by Old Patriot on June 30, 1997. To maintain its qualification as a REIT prior to consummation of the Cal Jockey merger, Old Patriot was required to distribute to its shareholders any undistributed "real estate investment trust taxable income" of Old Patriot for Old Patriot's short taxable year ending with the consummation of the Cal Jockey merger. No dividends have been paid by Wyndham for the six months ended December 31, 1997. (4) In accordance with the resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), funds from operations ("FFO") represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains or losses from debt restructuring or sales of property, plus depreciation of real property, and after adjustments for unconsolidated partnerships, joint ventures and corporations. Adjustments for Patriot's unconsolidated subsidiaries are calculated to reflect FFO on the same basis. Patriot and Wyndham have also made certain adjustments to FFO for real estate related amortization expense and the write off of certain costs of acquiring leaseholds. FFO should not be considered as an alternative to net income or other measurements under generally accepted accounting principles as an indicator of operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. Under the Participating Leases, Patriot is obligated to establish a reserve for capital improvements at its hotels (including the replacement or refurbishment of FF&E) and to pay real estate and personal property taxes and casualty insurance. Management believes that FFO is helpful to investors 29 as a measure of performance of an equity REIT, because, along with cash flows from operating activities, investing activities and financing activities, it provides investors with an understanding of the ability of Patriot and Wyndham to incur and service debt and to make capital expenditures. Patriot and Wyndham's FFO may not be comparable to FFO reported by other REITs due to varying interpretations of the NAREIT definition. In order to facilitate a clear understanding of its operating results, management believes FFO should be examined in conjunction with net income (loss) as presented in the audited consolidated combined financial statements of the Companies. See detailed FFO calculation on page 51. (5) Cash available for distributions represents FFO, as adjusted for certain non-cash items (e.g., non-real estate related depreciation and amortization), less reserves for capital expenditures. The reconciliation from FFO to cash available for distribution is as follows:
Period October 2, 1995 (Inception of Operations) Year ended December 31, through ---------------------------- December 31, 1998 1997 1996 1995 -------- -------- -------- --------------- FFO.......................... $ 86,362 $ 57,043 $ 64,463 $ 9,798 Amortization of Unearned Compensation................ 7,622 4,686 1,068 71 Non-Real Estate Related Depreciation and Amortization................ 28,660 2,543 495 93 Settlement on treasury lock and other non-recurring charges..................... 52,292 -- -- -- Loss on sale of assets....... 9,453 -- -- -- Impairment loss on assets held for sale............... 51,081 -- -- -- Cost of acquiring leaseholds.................. 64,407 54,499 -- -- FF&E Reserve ................ (81,992) (24,375) (10,894) (1,359) -------- -------- -------- ------- Cash Available for Distribution................ $217,885 $ 94,396 $ 55,132 $ 8,603 ======== ======== ======== =======
(6) The number of limited partnership units of the Operating Partnerships ("OP units") used in the calculation is based on the equivalent number of paired shares issuable upon redemption (after giving effect to the change in the OP unit conversion factor which coincides with the 2-for-1 stock split, the conversion of shares in the Cal Jockey merger and the 1.927-for-1 stock split). 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements with respect to future events, including, without limitation, statements regarding availability of equity or debt financing, the Companies' ability to successfully refinance or extend the maturity of existing indebtedness, and the Companies' ability to successfully negotiate a settlement to the forward equity contracts in this form 10-K constitute "forward-looking statements" as that term is defined under (S)21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "intend", estimate", and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Although forward- looking statements reflect management's good faith beliefs, forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievement of the Companies to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Companies undertake no obligation to publicly update or revise any forward- looking statement, whether as a result of new information, future events or otherwise. Certain factors that might cause a difference include, but are not limited to, risks associated with the availability of equity or debt financing at terms and conditions favorable to the Companies, the willingness of the Companies' existing lenders to refinance, extend or amend the terms of existing indebtedness, the willingness of the counterparties to the Companies' forward equity contracts to enter into settlements regarding those agreements; the Companies' ability to effect sales of assets on favorable terms and conditions; risks associated with the hotel industry and real estate markets in general; risks associated with debt financing; as well as other risks described in this Form 10-K. BACKGROUND Organization Patriot American Hospitality, Inc. ("Old Patriot") was formed April 17, 1995 as a self-administered real estate investment trust ("REIT"). The Virginia corporation was formed for the purpose of acquiring equity interests in hotel properties. On October 2, 1995, Patriot completed an initial public offering of shares of common stock and commenced operations. Between October 2, 1995 and July 1, 1997, Old Patriot acquired interests in 56 hotel properties. These hotels were leased to various third party lessees. On July 1, 1997, Patriot merged with and into California Jockey Club, with Cal Jockey being the surviving legal entity, hereinafter referred to as the "Cal Jockey merger". Cal Jockey's shares of common stock are paired and trade together with the shares of common stock of Bay Meadows Operating Company ("Bay Meadows") as a single unit pursuant to a stock pairing agreement. In connection with the Cal Jockey merger, Cal Jockey changed its name to "Patriot American Hospitality, Inc." ("Patriot") and Bay Meadows changed its name to "Patriot American Hospitality Operating Company". Subsequent to year end, as a result of the merger of Wyndham Hotel Corporation with and into Patriot as discussed below, Patriot Operating Company changed its name to Wyndham International, Inc. and is referred to herein, collectively with its subsidiaries, as "Wyndham". The term "Companies" as used herein includes Patriot, Wyndham and their respective subsidiaries. Generally, Patriot owns and leases hotels to Wyndham, which is responsible for managing a majority of the hotels. In order for Patriot to qualify as a REIT under the Internal Revenue Code of 1986, Patriot leases a substantial majority of its hotels to Wyndham or to other third party lessees who are responsible for operating the hotels. The paired share structure facilitated the Companies' strategy to become a fully-integrated, multi-brand, multi- product, multi-tiered hotel operating company. Following the merger with and into California Jockey Club and the creation of Patriot paired shares, the Companies acquired major hotel operating companies and brands. Patriot's ability to utilize the paired share structure was limited as a result of tax legislation adopted in July 1998. 31 Subsequent to the Cal Jockey merger through December 31, 1998, the Companies acquired ownership and leasehold interests in an additional 243 hotels through the Wyndham merger, the WHG merger, the Arcadian acquisition, the Interstate merger, the Summerfield acquisition and the CHCI merger. At December 31, 1998, the Companies had 173 management and franchise agreements through these mergers and acquisitions. See Items 1 and 2, "Business and Properties," for a more detailed discussion of these merger agreements. As of December 31, 1998, Patriot and Wyndham, either directly or through the Operating Partnerships and other subsidiaries, own interests in 178 hotels with an aggregate of over 43,800 rooms (excluding hotels under development). The Companies' portfolio consists of proprietary brand hotels including; WyndhamSM, Wyndham Hotels & Resorts, Wyndham Garden Hotels(R), Wyndham Grand Heritage(R), Grand Bay Hotels & Resorts, Summerfield Suites, Sierra Suites, Malmaison and Clubhouse. These hotels are diversified by brand affiliation, service level, price point and location and most serve primarily major U.S. business centers, including Atlanta, Boston, Chicago, Cleveland, Dallas, Denver, Houston, Los Angeles, Miami, Minneapolis, San Diego, San Francisco and Seattle as well as the United Kingdom. Additionally, the Companies offer luxury and upscale resort accommodations through its luxury Grand Bay brand and its upscale Wyndham Resort product, situated in major tourist and destination locations. As of December 31, 1998, the Companies proprietary brand portfolio of owned hotels include 50 Wyndhams (including Wyndham Resorts, Wyndham Grand Heritage and Wyndham Gardens Hotels), 6 Grand Bay, 5 Summerfield Suites, 4 Malmaison Hotels and 8 ClubHouse Inns. Additionally, the Companies have 94 non-proprietary branded hotels which consists of 87 full service hotels, and 3 resort hotels, 4 limited service hotels. All but 5 of these hotels are operated under franchise or brand affiliations with nationally recognized hotel companies, including Marriott(R), Crowne Plaza(R), Hilton(R), Hyatt(R), Radisson(R), Holiday Inn(R), Doubletree(R), Embassy Suites(R), Ramada(R), Four Points by Sheraton(R), WestCoast(R), Hampton Inn(R), and Courtyard by Marriott(R). The Companies also leases 121 hotels from third parties, manages 161 hotels for independent owners and franchises 12 hotels. Additionally, the Companies have 10 hotels under development which are expected to open in mid to late 1999. All of the leased hotels are managed by Wyndham or its subsidiaries with 39 franchised under proprietary brands of the Companies. Patriot leases each of its hotels, except those hotels which are separately owned through special purpose entities, to Wyndham or to third party lessees who are responsible for operating the hotels. As of December 31, 1998, 203 owned and leased hotels were leased to Wyndham and its affiliates and 5 hotels were leased to third party lessees. Certain hotel acquisitions were structured without lessees and are managed directly by Wyndham or other third party operators. Wyndham manages 185 of its hotels through certain of its hotel management subsidiaries and has entered into separate management agreements with third party hotel operators to manage 18 of its hotels. 32 PATRIOT AMERICAN HOSPITALITY, INC. Results of Operations: Year Ended December 31, 1998 Compared with Year Ended December 31, 1997 Patriot's Participating Lease revenue from the lessees (including Wyndham) for the year ended December 31, 1998 increased 220% from $180,451,000 in 1997 to $578,029,000 in 1998. This increase is primarily due to the net increase in owned and leased hotel properties to 299 at December 31, 1998 from 91 at December 31, 1997. Also included in Participating Lease revenue is the income related to the lease of the Racecourse facility and land to Wyndham which increased from $2,792,000 for the year ending December 31, 1997 to $5,594,000 for the year ended December 31, 1998. This increase is due to 1998 including a full year of revenue related to the racecourse, 1997 included only the period subsequent to the acquisition of Cal Jockey by Patriot in July 1997. Interest and other income increased from $5,103,000 in 1997 to $17,381,000 in 1998 which is primarily attributable to the mergers and acquisitions of Interstate, Summerfield, Wyndham Hotel Corporation and Arcadian during 1998, the subscription notes payable from Wyndham and interest and dividend income earned on cash investments. Real estate and personal property taxes and casualty insurance was $55,352,000 for the year ended December 31, 1998, compared to $17,958,000 for the year ended December 31, 1997. This increase is primarily due to the increase in owned and leased hotel properties to 299 at December 31, 1998 from 91 at December 31, 1997. General and administrative expenses were $29,784,000 for the year ended December 31, 1998, compared to $11,157,000 for 1997. The increase is primarily attributable to additional general and administrative expenses incurred related to the growth of the Company's portfolio during 1998 of which the largest component is salaries and wages. General and administrative expenses also include the amortization of unearned stock compensation of $7,622,000 for 1998 which increased from $4,686,000 for 1997. This increase is due to a full year's amortization in 1998 of stock grants issued in 1997. Also included in general and administrative expenses are the costs associated with evaluating properties and companies which were ultimately not acquired of $2,455,000 in 1998 increasing from $1,068,000 in 1997. Although general and administrative expenses increase in dollar value in 1998 over 1997, the expenses expressed as a percentage of total revenues decreased to 5.0% in 1998 from 6.0% in 1997. Ground lease expense increased from $4,117,000 for the year ended December 31, 1997 to $44,972,000 for the year ended December 31, 1998. This increase is attributable to the acquisition of leasehold interests in hotel properties during 1998. Interest expense for the year ended December 31, 1998 was $245,205,000 compared to $51,000,000 in 1997. The primary components of this increase are an increase of approximately $126,355,000 related to additional borrowings, the Credit Facility and Term Loans, an increase of approximately $33,551,000 related to additional mortgage notes, an increase of approximately $22,319,000 related to additional amortization of deferred financing costs and an increase of approximately $21,530,000 related to subscription notes due to Wyndham, other amounts due to Wyndham, unsecured debt, swap arrangements and capital lease obligations. These increases are the result of the increase in Patriot's outstanding debt obligations from $1,112,709,000 as of December 31, 1997 to $3,612,076,000 as of December 31, 1998. The increase in the Company's debt outstanding is the result of borrowings to fund the cash purchase prices of acquisitions of hotel properties and companies during 1998 and the assumption of debt in connection with the various mergers executed during 1998. Additionally, Patriot capitalized interest totaling $12,112,000 and $2,562,000 for the years ended December 31, 1998 and 1997, respectively, associated with major renovations of certain hotel properties. In connection with Patriot's acquisition of 9 leasehold interests and certain license agreements in 1998 for hotels that Patriot owns, Patriot recognized expense of $11,686,000 related to the cost of acquiring these leasehold interests. In connection with Patriot's acquisition of eight leasehold interests in 1997 for hotels that 33 Patriot owns and leased to CHC Lease Partners, Patriot recognized expense of $54,499,000 related to the cost of acquiring these leasehold interests. During 1998, Patriot recorded a $49,334,000 one-time charge to earnings as a result of the settlement of three treasury interest rate lock agreements. These agreements were executed to protect the Companies against the possibility of rising interest rates in anticipation of closing mortgage loans in the near future. Under the rate lock agreements, Patriot received or made payments based on the difference between specified interest rates, 6.06%, 6.07% and 5.62%, and the actual 10-year U.S. Treasury interest rate on a principal amount of $525,000,000. Due to the substantial downward movement in the underlying treasury security market and the Company's liquidity situation, the agreements were settled and the settlement cost was recorded as a charge against earnings. In connection with the sale of three assets in 1998, Patriot recognized a loss on sale of assets of $9,453,000 based on the excess book value over cash proceeds received in the sale. For the year ended December 31, 1998, Patriot recognized approximately $27,897,000 of impairment losses related to assets held for sale. In accordance with SFAS No. 121, when management identifies an asset held for sale a fair value, less cost to sell, is estimated. If the fair value of the asset is less than the carrying amount, a reserve for impairment is established. Depreciation and amortization expense was $161,857,000 for the year ended December 31, 1998, compared to $49,069,000 for the same period in 1997. This increase is primarily due to the net increase in owned and leased hotel properties to 299 at December 31, 1998 from 91 at December 31, 1997. Patriot's share of income from unconsolidated subsidiaries increased to $36,726,000 for the year ended December 31, 1998, compared to $6,015,000 in 1997. This increase is due to unconsolidated subsidiaries acquired through various mergers and acquisitions during 1998. Minority interest share of income in the Patriot Partnership was $98,000 and $1,713,000 for the years ended December 31, 1998 and 1997, respectively. The decrease is due to the dilution of the minority interest as a result of the common shares issued in connection with the various mergers occurring during 1998 and certain non-recurring expenses recognized by the Patriot Partnership during 1998. Minority interest share of income in Patriot's other consolidated subsidiaries was $8,084,000 in 1998 and $1,674,000 in 1997. The increase is due to the various mergers and acquisitions during 1998. Extraordinary items for debt extinguishment increased from $2,534,000 in 1997 to $30,560,000 in 1998. The increase is due to the repayment of certain debt obligations of Old Wyndham, Interstate and Summerfield in 1998. In connection with these repayments, Patriot incurred prepayment penalties and wrote-off the remaining balance of unamortized deferred financing costs associated with such debt. In 1997, the extraordinary item relates to the write-off of the remaining balance of unamortized deferred financing costs associated with the Old Credit Facility which was repaid in 1997. As a result of the factors discussed above, primarily due to non-recurring charges and the costs of acquiring leaseholds, net loss was $44,888,000 for the year ended December 31, 1998, as compared to net loss of $2,152,000 for the year ended December 31, 1997. Results of Operations: Year Ended December 31, 1997 Compared with Year Ended December 31, 1996 Patriot's Participating Lease revenue from the lessees (including Wyndham) for the year ended December 31, 1997 increased 137.7% from $75,893,000 in 1996 to $180,451,000 in 1997. This increase is primarily due to the net increase in owned hotel properties to 91 at December 31, 1997 from 46 at December 31, 1996. Also 34 included in Participating Lease revenue for the year ending December 31, 1997 is the income related to the lease of the Racecourse facility and land to Wyndham of $2,792,000 which was acquired during 1997. Interest and other income increased from $600,000 in 1996 to $5,103,000 in 1997 which is primarily attributable to additional investments in mortgage notes receivable during 1997 and interest and dividend income earned on cash investments. Real estate and personal property taxes and casualty insurance was $17,958,000 for the year ended December 31, 1997, compared to $7,150,000 for the year ended December 31, 1996. This increase is primarily due to the net increase in owned hotel properties to 91 at December 31, 1997 from 46 at December 31, 1996. General and administrative expenses were $11,157,000 for the year ended December 31, 1997, compared to $4,500,000 for 1996. The increase is primarily attributable to additional general and administrative expenses incurred related to the growth of the Company's portfolio during 1997 of which the largest component is salaries and wages. Also included in general and administrative expenses is the amortization of unearned stock compensation which increased to $4,686,000 for 1997 from $1,068,000 for 1996. This increase is due to a full year's amortization in 1997 of stock grants issued in 1996 as well as amortization of stock grants issued in 1997. Also included in general and administrative expenses are the costs associated with evaluating properties and companies which were ultimately not acquired of $1,068,000 in 1997 which increased from $173,000 in 1996. Although general and administrative expenses increased in dollar value in 1997 over 1996, the expenses expressed as a percentage of total revenues remained relatively constant at 6.0% in 1997 and 5.8% in 1996. Ground lease expense increased from $1,075,000 for the year ended December 31, 1996 to $4,117,000 for the year ended December 31, 1997. This increase is primarily due to the ground lease payments for the Race course facility acquired in July of 1997. Interest expense for the year ended December 31, 1997 was $51,000,000 compared to $7,380,000 in 1996. The primary components of this increase are an increase of approximately $29,466,000 related to borrowings under the Credit Facility and Term Loan an increase of approximately $12,585,000 related to additional borrowings under the Old Line of Credit and mortgage financing obtained in 1997, an increase of approximately $2,150,000 related to amortization of deferred financing costs and an increase of approximately $1,890,000 related to additional subscription notes due to Wyndham and other miscellaneous note and commitments payable (including swap arrangements) entered into in 1997. These increases are the result of the increase in Patriot's outstanding debt obligations from $214,339,000 as of December 31, 1996 to $1,112,709,000 at December 31, 1997. The increase in the Company's debt outstanding is the result of borrowings to fund the cash purchase prices of acquisitions of hotel properties and companies during 1997 and the assumption of debt in connection with these acquisitions. Additionally, Patriot capitalized interest totaling $2,562,000 and $91,000 for the years ended December 31, 1997 and 1996, respectively, associated with major renovations of certain hotel properties. In connection with Patriot's acquisition of eight leasehold interests in 1997 for hotels that Patriot owns and leased to CHC Lease Partners, Patriot recognized expense of $54,499,000 related to the cost of acquiring these leasehold interests. Depreciation and amortization expense was $49,069,000 for the year ended December 31, 1997, compared to $17,420,000 for the same period in 1996. This increase is primarily due to the net increase in owned hotel properties to 91 at December 31, 1997 from 46 at December 31, 1996. Minority interest share of income in the Patriot Partnership was $1,713,000 and $6,767,000 for the years ended December 31, 1997 and 1996, respectively. The decrease is due to the dilution of the minority interest as a result of the common shares issued in connection with the various mergers and common stock offerings occurring during 1997. 35 Minority interest share of income in Patriot's other consolidated subsidiaries was $1,674,000 in 1997 and $55,000 in 1996. The increase is due to the acquisition of properties during 1997 in which minority interest holders owned an interest. Concurrent with the repayment of the Old Line of Credit, Patriot wrote off the remaining balance of unamortized deferred financing costs associated with the Old Line of Credit in the amount of $2,534,000. This amount, net of minority interest share of the net loss, has been reported as an extraordinary item for the year ended December 31, 1997. No such write-offs were incurred during 1996. As a result of the factors above, primarily due to the costs of acquiring leaseholds, net loss was $2,152,000 for the year ended December 31, 1997, compared to net income of $37,991,000 for the year ended December 31, 1996. Results of Operations: Year Ended December 31, 1996 Compared with the Period October 2, 1995 (inception of operations) through December 31, 1995 Old Patriot completed its initial public offering of common stock on October 2, 1995 and commenced operations with the acquisition of 20 hotels. Because 1995 was a short fiscal year for Patriot, the operating results for the year ended December 31, 1996 are not directly comparable to 1995. For the year ended December 31, 1996, Patriot's Participating Lease revenue from the Lessees was $75,893,000, compared $10,582,000 in 1995. Interest and other income was $600,000 for the year ended December 31, 1996, compared to $513,000 in 1995. In 1995, interest and other income consisted primarily of interest earned on invested cash balances resulting from the net proceeds of the initial public offering. For the year ended December 31, 1996 as compared to the period October 2, 1995 (inception of operations) through December 31, 1995, Patriot experienced similar increases in expenses as a result of the short fiscal year for Patriot in 1995, as discussed above. General and administrative expenses were $4,500,000 for the year ended December 31, 1996, compared to $607,000 for 1995. General and administrative expenses include the amortization of unearned stock compensation of $1,068,000 for 1996 and $71,000 for 1995. Ground lease expense totaled $1,075,000 in 1996 (none in 1995). Real estate and personal property taxes and insurance was $7,150,000 for 1996, compared to $901,000 for 1995 Patriot reported $7,380,000 of interest expense for the year ended December 31, 1996, compared to $89,000 in 1995. Patriot's outstanding debt obligations as of December 31, 1996 and 1995 were approximately $214,339,000 and $9,500,000, respectively. Interest expense in 1996 consisted primarily of $6,755,000 of interest incurred on the Revolving Credit Facility, the Old Line of Credit and mortgage note balances outstanding and $431,000 of amortization of deferred financing costs. Interest expense in 1995 consisted of $62,000 of interest incurred on the Old Line of Credit balance and $27,000 of amortization of deferred financing costs. Depreciation and amortization expense was $17,420,000 for 1996, compared to $2,590,000 for 1995. Patriot's share of income from unconsolidated subsidiaries was $5,845,000 in 1996, compared to $156,000 in 1995. Minority interest's share of income of the REIT Partnership was $6,767,000 for the year ended December 31, 1996, compared to $968,000 in 1995. Minority interest's share of income of other consolidated Patriot subsidiaries was $55,000 for 1996 (none in 1995). Patriot reported extraordinary losses in 1995 totaling $737,000 (net of the minority interest share of the loss) related to the pay-off of assumed mortgage debt on hotel properties acquired. 36 As a result, net income was $37,991,000 for the year ended December 31, 1996, compared to net income of $5,359,000 for the period October 2, 1995 (inception of operations) through December 31, 1995. WYNDHAM INTERNATIONAL, INC. Results of Operations: Year Ended December 31, 1998 Compared with Six Months Ended December 31, 1997 Concurrent with the closing of the Cal Jockey merger, the entity now known as Wyndham began leasing four hotels from the Patriot Partnership and commenced its hotel management operations on July 1, 1997. During the remainder of 1997, Wyndham acquired the leases for 51 additional Patriot hotels. At December 31, 1997, Wyndham leased 55 hotels from PAH, managing 24 of those hotels, and managed 27 for third parties. As of December 31, 1998, Wyndham leased 203 hotels from Patriot, managing 185 of those hotels, and manages 163 hotels for third parties. Hotel revenues were $1,842,682,000 for the year ended December 31, 1998 as compared to $167,727,000 for the six months ended December 31, 1997. The increase in revenues is due not only to the increase in the number of leased hotels from 51 in 1997 to 203 in 1998, but also due to the increases in REVPAR experienced by the hotel portfolio as a whole (see statistical information). Hotel expenses increased to $1,251,548,000 for the year ended December 31, 1998 as compared to $118,317,000 for the six months ended December 31, 1997. The increases are due to the full year's results in 1998 for hotels leased during 1997 and the additional hotel leases acquired during 1998. As a percentage of hotel revenues, hotel expenses decreased from 70.5% for the 1997 period to 67.9% for 1998 due to the cyclical nature of the revenue stream. The first six months of revenues are higher, but fixed expenses remain constant, which caused the percentage of expenses to revenue to be higher in 1997. Racecourse facility revenue increased from $26,344,000 for the six months ended December 31, 1997 to $51,259,000 for the year ended December 31, 1998. Racecourse facility expenses increased from $24,245,000 for the six months ended December 31, 1997 to $43,198,000 for the year ended December 31, 1998. The increase is due to the number of race days in 1998 of 106 as opposed to the number of race days in 1997 of 63. As a percentage of racecourse facility revenues, racecourse facility expenses decreased from 92.0% for the 1997 period to 84.3% for 1998 due to reductions in administrative payroll expenses. Management fee and service fee income increased from $7,088,000 for the six months ended December 31, 1997 to $89,983,000 for the year ended December 31, 1998. This increase is primarily the result of the acquisition of third party management contracts during 1998. Interest and other income increased from $2,975,000 for the six months ended December 31, 1997 to $18,303,000 for the year ended December 31, 1998. The increase is primarily attributable to the mergers and acquisitions of the hotel management and related businesses of Interstate, Summerfield, Wyndham and Arcadian during 1998, the subscription notes payable from Patriot and interest and dividend income earned on cash investments. General and administrative expenses increased from $6,024,000 for the six months ended December 31, 1997 to $87,882,000 for the year ended December 31, 1998 of which salaries and wages is the major component. This increase is due primarily to the overhead required due to the growth in portfolio of managed and leased hotels during 1998. Also, Wyndham recorded costs associated with evaluating properties and companies which were ultimately not acquired of $12,358,000. Wyndham acquired 17 leaseholds of hotels owned by Patriot during the year ended December 31, 1998 resulting in cost of acquiring leaseholds of approximately $52,721,000. 37 For the year ended December 31, 1998, Wyndham recognized approximately $23,184,000 of impairment losses related to assets held for sale. In accordance with SFAS No. 121, when management identifies an asset held for sale a fair value is estimated. If the fair value of the asset is less than the carrying amount, a reserve for impairment is established. Depreciation and amortization expense was $69,375,000 for the year ended December 31, 1998, compared to $3,616,000 for the six months ended December 31, 1997. This increase is primarily due to amortization of goodwill, management contracts and trade names of approximately $39,286,000. It also includes approximately $30,089,000 in depreciation and amortization, predominantly from the WHG acquisition as well as other miscellaneous acquisitions. Participating Lease expense increased to $519,589,000 for the year ended December 31, 1998 from $50,626,000 for the six months ended December 31, 1997. The increase is due to a full year's expense for the leases acquired in 1997 and the expense related to the leases acquired in 1998. As a percentage of hotel revenues, Participating Lease expense remained constant after accounting for the effect of eliminating lease expense and lease revenue with Wyndham. Interest expense increased to $35,690,000 for the year ended December 31, 1998 from $933,000 for the six months ended December 31, 1997. The increase is primarily due to approximately $19,555,000 in interest expense and loan amortization for the WHG assets, the subscription and other notes with Patriot of approximately $12,493,000 and approximately $1,977,000 in interest expense on the capital lease of the Harbour Island Hotel. Wyndham's share of income from unconsolidated subsidiaries was $3,134,000 during 1998 resulting from the acquisition of hotels owned through unconsolidated subsidiaries during 1998. The provision for income taxes increased from $481,000 for the six months ended December 31, 1997 to $14,381,000 for the year ended December 31, 1998. The increase is due to the operation of certain special purpose Wyndham controlled subsidiaries which separately report and pay taxes on their taxable income. For federal income tax purposes, the taxable income from these Wyndham controlled subsidiaries can not be consolidated with Wyndham's taxable income or loss and can not be offset by net operating losses created at Wyndham. Minority interest's share of loss in the Wyndham Partnership was $12,750,000 for the year ended December 31, 1998 and $29,000 for the six months ended December 31, 1997. The increase is due to the increase in the net loss before minority interest resulting from the increases in the revenues and expenses discussed above. Minority interest's share of income in Wyndham's other consolidated subsidiaries was $31,705,000 for the year ended December 31, 1998 and the minority interest's share of the loss was $59,000 for the six months ended December 31, 1997. The increase is due to Patriot's 99.0% ownership of most of the decontrolled subsidiaries consolidated by Wyndham. As a result of the factors discussed above, primarily due to the non- recurring charges and the costs of acquiring leaseholds, net loss was $112,419,000 for the year ended December 31, 1998, as compared to net loss of $20,000 for the six months ended December 31, 1997. Results of Reporting Segments: For the year ended December 31, 1998 Compared with the year ended December 31, 1997 The Companies' management reviews Patriot's and Wyndham's results of operations on a combined basis. Patriot's revenues and the majority of its expenses are classified in the "other" reportable segment. Patriot classifies real estate and personal property taxes and casualty insurance and ground lease expense with their related hotel operations. Wyndham's results of operations are classified into all six reportable segments. 38 The results of reporting segments discussion includes 12 months of 1998 for Patriot and Wyndham, 12 months of 1997 for Patriot and 6 months of 1997 for Wyndham. The Companies manage the business in six reportable segments. Those segments include Wyndham hotels, resort properties, all suite properties, other proprietary branded properties, non-proprietary branded properties and other. Wyndham hotels properties include Wyndham Hotels, Wyndham Gardens and Wyndham Grand Heritage and represent approximately 29.7% and 3.2% of total revenue for 1998 and 1997, respectively. Total revenue was $610,523,000 for the year ended December 31, 1998 compared to $10,711,000 in 1997. The increase is primarily due to the additional lease agreements entered into with Patriot as a result of the acquisition of hotels and mergers in 1998. Operating income for the Wyndham hotels was $153,723,000 for the year ended December 31, 1998 compared to $2,388,000 for 1997. Resort properties including Grand Bay and Wyndham, represent approximately 15.4% and 9.1% of total revenue for 1998 and 1997, respectively. Total revenue was $315,674,000 for the year ended December 31, 1998 compared to $30,334,000 in 1997. The increase is primarily due to the additional lease agreements entered into with Patriot as a result of the acquisition of hotels and mergers in 1998. Operating income for the resort properties was $76,349,000 for the year ended December 31, 1998 compared to $6,628,000 for 1997. All suite properties, including Summerfield and Sierra, represent approximately 3.6% of total revenue for 1998. Patriot purchased 4 properties and Patriot and Wyndham acquired 26 leaseholds in 1998 and leased them to Wyndham. Total revenue was $74,333,000 for the year ended December 31, 1998 and operating income was $14,690,000 in 1998. Other proprietary branded properties including Malmaison, Grand Heritage, Clubhouse and hotels acquired in the Arcadian acquisition, represent approximately 3.9% and 2.9% of total revenue for 1998 and 1997, respectively. Total revenue was $80,998,000 for the year ended December 31, 1998 compared to $9,595,000 in 1997. The increase is primarily due to the additional lease agreements entered into with Patriot as a result of the acquisition of hotels and mergers in 1998. Operating income for these properties was $26,492,000 for the year ended December 31, 1998 compared to $1,436,000 for 1997. Non-proprietary branded properties including Hampton, Hilton, Holiday Inn, Marriott, Ramada, Radisson and other major hotel franchises, represent approximately 37.0% and 34.4% of total revenue for 1998 and 1997, respectively. Total revenue was $761,154,000 for the year ended December 31,1998 compared to $115,223,000 in 1997. The increase is primarily due to the additional lease agreements entered into with Patriot as a result of the acquisition of hotels and mergers in 1998. Operating income for these properties was $183,703,000 for the year ended December 31, 1998 compared to $29,947,000 for 1997. Other represents revenue from various operating businesses including Bay Meadows racetrack, management and other service companies as well as participating lease revenue for those hotels leased to third parties. Total revenue for the other segment was $213,659,000 and $169,172,000 for the years ended December 31, 1998 and 1997, respectively. The increase in total revenue is a result of a full year of operations reflected in 1998 compared to six months of operations in 1997. Operating loss of the other segment was $576,963,000 for the year ended December 31, 1998 compared to $42,272,000. The increase in operating loss is a result of the following items: the treasury lock settlement of $49,334,000; the loss on the sale of the Fine Transaction assets of $9,453,000; the impairment loss on assets held for sale (including the Bay Meadows racetrack) of $51,081,000; the increase in the costs of acquiring leaseholds in 1998 over 1997 of $9,908,000; the increase in interest expense of $209,572,000 as a result of the increased borrowings to fund the 1998 mergers and acquisitions; and the increase in depreciation and amortization of $178,548,000 as a result of the 1998 mergers and acquisitions. 39 Statistical Information During 1998, Patriot's and Wyndham's portfolio of 178 owned hotels experienced strong growth in both average daily rate ("ADR") and revenue per available room ("REVPAR") of approximately 6.2% and 6.3%, respectively, while occupancy remained relatively stable. Management attributes this growth to continued marketing efforts throughout the portfolio on hotels that have been newly renovated, and repositioned in certain cases, as well as to the current strength of market conditions in the U.S. lodging industry. The following table sets forth certain statistical information for the Companies' 178 owned hotels as of December 31, 1998 and 1997 as if the hotels were owned at the beginning of the periods presented.
Occupancy ADR REVPAR ------------ --------------- --------------- 1998 1997 1998 1997 1998 1997 ----- ----- ------- ------- ------- ------- Wyndham Branded Hotels.......... 70.50% 70.80% $119.57 $112.32 $ 84.35 $ 79.54 Grand Bay Hotels & Resorts...... 67.00 70.50 287.30 266.64 192.52 187.86 Summerfield Suites.............. 79.70 74.20 129.42 123.01 103.17 91.27 Malmaison....................... 83.50 75.40 125.65 117.27 104.89 88.44 Clubhouse....................... 66.40 71.50 68.07 65.75 45.23 47.01 Arcadian........................ 68.80 63.80 142.67 128.43 98.10 81.92 Non Proprietary -- Limited Service........................ 67.80 74.10 74.57 65.87 50.54 48.83 Non Proprietary Brands.......... 71.70 71.20 99.59 94.29 71.39 67.16 ----- ----- ------- ------- ------- ------- Weighted average............... 71.10% 71.00% $109.94 $103.53 $ 78.15 $ 73.55
COMBINED LIQUIDITY AND CAPITAL RESOURCES Combined cash and cash equivalents as of December 31, 1998 were $158.9 million, including restricted cash of $35.9 million. Combined cash and cash equivalents as of December 31, 1997 were $47.4 million, including capital improvement reserves of $5.0 million. The increase is primarily the result of net cash provided by operating and financing activities exceeding the net cash used in investing activities. Cash Flow Provided by Operating Activities The Companies' principal source of cash to fund operating expenses and distributions to its shareholders is cash flow provided by operating activities. Patriot's principal source of revenue is rent payments from the lessees, including Wyndham, under the participating leases. Wyndham's principal source of cash flow is from the operation of the hotels it leases and manages. Wyndham's ability to make the rent payments to Patriot is dependent upon their ability to efficiently manage the hotels and generate sufficient cash flow from operation of the hotels. Combined cash flows from operating activities of the Companies were $244.5 million for the year ended December 31, 1998, which represent a combination of the collection of rents under participating leases with third party lessees and cash flows generated by the hotels operated by Wyndham. Cash flows from operating activities were $108.1 million for the year ended December 31, 1997, which primarily represent the collection of rents under participating leases. The increase is due primarily to the results of operations or the lease payments for 208 hotels acquired during 1998. Cash Flows from Investing and Financing Activities During 1998, the Companies continued to experience rapid growth through the merger and acquisition of hotel properties and management companies. These transactions were funded with a combination of issuance and or assumption of debt as well as sale of registered securities, issuance of OP units and proceeds from the forward equity transactions. The proceeds from the forward equity transaction were used to repay borrowings under the Companies' Credit Facility. The Credit Facility was then used to fund the cash portion of the Companies mergers and acquisitions. 40 Combined cash flows used in investing activities of the Companies were $2.1 billion for the year ended December 31, 1998, resulting primarily from the merger and acquisition of various hotel properties and management companies, and the renovation expenditures at certain hotels. Combined cash flows used in investing activities of the Companies were $1.2 billion for the year ended December 31, 1997, resulting primarily from the Cal Jockey merger, the acquisition of various hotel properties and management companies, and the renovation expenditures at certain hotels. Combined cash flows used in investing activities were $419.7 million for the year ended December 31, 1996, resulting primarily from the acquisition of hotel properties. Combined cash flows from financing activities of $1.9 billion for the year ended December 31, 1998 were primarily related to borrowings on the Credit Facility, the Term Loans and mortgage notes and net proceeds from public and private placement of equity securities, net of payments of dividends and distributions. Combined cash flows from financing activities of $1.1 billion for the year ended December 31, 1997 were primarily related to borrowings on the Credit Facility, the Term Loans and mortgage notes and net proceeds from public and private placement of equity securities, net of payments of dividends and distributions. Cash flows from Patriot's financing activities of $360.3 million for the year ended December 31, 1996 were primarily related to borrowings on the Old Line of Credit and net proceeds from public and private placement of equity securities, net of payments of dividends and distributions. In June 1998 in connection with the Interstate merger, the Companies closed on the commitment from The Chase Manhattan Bank and Chase Securities, Inc. and Paine Webber Real Estate Securities, Inc. to increase Patriot's existing credit facilities to an aggregate of $2.7 billion (an increase of $1.5 billion from the prior $1.25 billion credit package). The increased credit facilities include the $900 million revolving credit facility ("Credit Facility") and a series of term loans in the aggregate amount of up to $1.8 billion (the "Term Loans"). Proceeds from the increased credit facilities were used to fund the cash portion of the Interstate merger consideration, as well as to refinance certain outstanding indebtedness of the Patriot Companies. Interest rates will be based on the Companies' leverage ratio and may vary from 1.5% to 2.5% over LIBOR. As of December 31, 1998 the effective rate of interest was 7.314% for all borrowings under the credit facility except for Tranche B which was 7.564%. Patriot incurred approximately $27.4 million in loan fees and other expenses associated with this financing arrangement. As of December 31, 1998, the Companies had no additional availability under the Credit Facility. The weighted average interest rate in effect for the Credit Facility for the period ended December 31, 1998 was 7.90% per annum. As of December 31, 1998, there was $875.6 million outstanding under the Credit Facility. Additionally, Patriot had outstanding letters of credit totaling $24.4 million as of December 31, 1998. The Credit Facility matures July 2000. The Term Loans had maturities of January 31, 1999 ($350 million); March 31, 1999 ($400 million); March 31, 2000 ($450 million); and March 31, 2003 ($599 million). All of the lenders under the Credit Facility have agreed to extend maturity of the two term loans which were scheduled to mature on January 31, 1999 and March 31, 1999 to June 30, 1999, subject to Patriot and Wyndham consummating the Investment by that date. If the Companies do not consummate the Investment by June 30, 1999, or the agreement with the Investor Group otherwise terminates, the maturity on these two term loans will be extended to March 31, 2000 and the Companies will be required to make a $300 million amortization payment by December 31, 1999. Additionally, the Companies will be required to secure the Credit Facility with mortgages and other security interest. Fees of $11.7 million have been paid to the lenders under the Credit Facility in connection with their agreement to extend the maturities of the term loans to June 30, 1999. As of March 22, 1999, the Companies had approximately $875.6 million outstanding under the Credit Facility and $1.8 billion outstanding on the Term Loans. Additionally, the Companies had outstanding letters of credit totaling $24.4 million. As of March 22, 1999, Patriot also had over $993 million of mortgage debt outstanding that encumbered 49 hotels and 3 hotels under development and approximately $241 million in other debt, resulting in total indebtedness of approximately $3.9 billion. As of March 22, 1999, the Companies had no additional availability under the Credit Facility. 41 As of March 22, 1999, the Companies have entered into four interest rate swap arrangements to swap floating rate LIBOR-based interest rates for fixed rate interest amounts as a hedge against $822 million of the outstanding balance on the Credit Facility. The interest rate swaps cover borrowings under the Credit Facility and related Term Loans and fixes the LIBOR portion of the Credit Facility and Term Loans interest rate at 5.80%, 6.255% (as amended), 5.84%, and 5.56% respectively. The interest rate swap arrangements expire December 2000 ($72 million--entered January 31, 1996), November 2002 ($375 million--entered February 28, 1999), November 2002 ($125 million--entered January 9, 1998) and June 2003 ($250 million--entered July 1, 1998). If the actual LIBOR rate is less than the specified fixed interest rate, Patriot is obligated to pay the differential interest amount, such amount being recorded as incremental interest expense. If the LIBOR is greater than the specified fixed interest rate, the differential interest amount is refunded to Patriot. The Companies have entered into two additional interest rate swap arrangements to swap floating rate LIBOR-based interest rates for a fixed rate interest amount as a hedge against $51 million of the outstanding balance on specific property related debt. The interest rate swap fixes the LIBOR portion of the debt interest rate at 5.31% per annum through January 2000 ($20 million--entered January 4, 1999) and 5.42% per annum through March 2001 ($31 million--entered January 4, 1999). If the actual LIBOR rate is less than the specified fixed interest rate, Patriot is obligated to pay the differential interest amount, such amount being recorded as incremental interest expense. If the LIBOR is greater than the specified fixed interest rate, the differential interest amount is refunded to Patriot. As of March 22, 1999, Patriot has six interest rate cap arrangements as follows: an interest rate cap that limits LIBOR to 6% on up to $105 million of indebtedness through June 1999; an interest rate cap that limits LIBOR to 7% on up to $208.8 million of indebtedness through October 1999; an interest rate cap that limits LIBOR to 7% on up to $1.5 billion of indebtedness through April 2000; an interest rate cap that limits LIBOR to 8.5% on up to $29.1 million of indebtedness through August 2004; an interest rate cap that limits LIBOR to 7.83% on up to $38 million of indebtedness through October 2001; and an interest rate cap that limits LIBOR to 6.75% on up to $19.5 million of indebtedness through March 2001. Forward Equity Contracts. In addition to its debt obligations and related interest payments, Patriot is a party to forward equity contracts with three counterparties involving the sale of an aggregate of 13.3 million paired shares, with related price adjustment mechanisms. After consideration of the decreasing amount of available funds under the Credit Facility and the funding requirements of the anticipated closings of several mergers and acquisitions, management of the Companies decided that the forward equity transactions would be an appropriate source of capital to meet these requirements. Upon entering into these contracts, the companies agreed to sell a varying number of paired shares to each of the counterparties at future settlement dates at prices adjusted for the then current market price of the paired shares. None of the forward contracts provided for any floor on the settlement price per share. Under the terms of the forward contract entered into with UBS on December 31, 1997, the Companies issued 3.25 million unregistered paired shares to UBS on that date, for a purchase price per paired share of $28.125, or aggregate consideration of approximately $93.6 million. Under the terms of the forward contract entered into with Nations on February 26, 1998, the Companies issued 4.9 million unregistered paired shares to Nations on that date, for a purchase price per paired share of $24.8625, or aggregate consideration of approximately $121.8 million. Under the terms of the forward contract entered into with PaineWebber on April 6, 1998, the Companies issued 5.15 million unregistered paired shares to PaineWebber on that date for a purchase price per paired share of $27.01125, or aggregate consideration of approximately $139.1 million. The proceeds of these placements were used by the Companies to repay borrowings under the Companies' Credit Facility. The Credit Facility was then used to fund the cash portion of the Companies mergers and acquisitions. Patriot's aggregate total remaining obligation under the forward equity transactions was approximately $321.9 million at April 12, 1999. As of such date, Patriot had delivered an aggregate of 84.7 million shares to the counterparties as collateral, including approximately 4 million shares issued as dividends on the collateral shares, in addition to approximately 12.5 million original paired shares currently owned by the counterparties or their affiliates. Based on the $5.3125 closing price of the paired shares on May 21, 1999 and assuming an average of 2% selling expenses, the forward counterparties would have to sell approximately 62 million paired shares, to settle all of the forward equity transactions in full. 42 Under the terms of the forward equity transactions, the Companies sold paired shares to each of the counterparties and simultaneously entered into a forward contract under which they agreed to "settle" the transaction at a stated maturity date based upon the adjusted price of the purchased shares at maturity. During the term of the forward contract, the price of the purchased shares increases at a rate that corresponds to an agreed-upon interest rate. At maturity, the forward contracts provide that each counterparty will sell a number of shares sufficient to generate proceeds equal to the total adjusted purchase price of the purchased shares. Shares may be sold to the public through an underwritten public offering or by other methods, or to private investors. If the counterparty does not receive sufficient proceeds from its sales of the originally purchased shares, the Companies must issue more paired shares to that counterparty for resale until the obligation has been satisfied. The Companies may pay their obligation under the forward equity contracts in cash as well as paired shares. As of May 21, 1999, the Companies have paid an aggregate of $54.3 million to the counterparties under the forward equity contracts, in addition to the cash dividends paid on the purchased shares. On February 28, 1999, all three counterparties agreed, subject to specified conditions, not to require settlement under their respective forward agreements or to sell paired shares in connection with the forward agreements until the earlier of the closing of the $1 billion equity investment or June 30, 1999. In connection with the standstill agreements, the Companies agreed to pay a 2% fee to the three counterparties. The agreements provide that the standstill obligations terminate if, among other events, the price of the paired shares fell to a specified threshold. As of the date of this Form 10- K/A, the price of the paired shares has fallen below each of the thresholds. As a result, each of the forward counterparties has the right to require an immediate settlement of its forward equity transaction. As of the date of this Form 10 K/A, none of the counterparties has made any sale of paired shares, other than the sale of 754,525 paired shares by one counterparty in December 1998, or required settlement of its forward transaction. However, the Companies cannot assure you that the forward counterparties will not sell paired shares or require settlement in the future. The Companies may settle the forward transactions by delivering either cash or paired shares. Sources of cash are not currently available for the Companies to make the payments that would be required to settle one or more of the forward transactions in cash. Moreover, the Companies cannot assure that the bank lenders would consent to any cash settlements prior to the closing of the $1 billion equity investment. Generally, the Companies may settle by delivering paired shares only if a registration statement covering such paired shares is effective. There are currently effective registration statements covering the sale by the three forward counterparties of up to 40 million paired shares and the sale of one counterparty of an additional 4 million paired shares of which 754,525 paired shares were sold by that counterparty in December 1998. The Companies can make no assurances that these registration statements will remain effective. Given the current market price of the paired shares, any settlement in paired shares would have severely dilutive effects on our capital stock. Based on the $5.3125 closing price of the paired shares on May 21, 1999 and assuming an average of 2% selling expenses, the forward counterparties would have to sell approximately 62 million paired shares, to settle all of the forward equity transactions in full. The number of shares required would substantially increase if the market price of the paired shares decreases as a result of the sales of paired shares by the forward counterparties. If any of the counterparties sells paired shares, the conversion price of the preferred stock to be issued to the investors will be adjusted downward to the extent that the price recognized by us on the sale is less than $8.75 per share. The Companies intend to settle in full all of the forward transactions with a portion of the proceeds of the $1 billion equity investment. The estimated aggregate dollar value of the settlement on June 30, 1999 is approximately $333.6 million. If the Companies settle the forward transactions in cash, the counterparties must deliver to the Companies all paired shares then owned by them or held by them as collateral under the forward agreement. Securities Purchase Agreement Investment As of February 18, 1999, Patriot, Wyndham, Patriot Partnership, Wyndham Partnership and affiliates of each of Apollo Real Estate Management III, L.P., Apollo Management IV, L.P., Thomas H. Lee Equity Fund 43 IV, L.P., Beacon Capital Partners, L.P. and Rosen Consulting Group, entered into a purchase agreement under which the investors will purchase $1 billion of a new series B preferred stock of Wyndham. Patriot and Wyndham currently plan to use the proceeds from the investment to settle their forward equity contracts, as described above, to repay indebtedness, and for working capital and growth purposes. Wyndham will pay dividends on its series B preferred stock quarterly, on a cumulative basis, at a rate of 9.75% per year. For the first six years, dividends will be payable partly in cash and partly in additional shares of preferred stock, with the cash component initially equal to 30% for the first dividend payment and declining over the period to approximately 19.8% for the final dividend payment. Each share of series B preferred stock may be converted, at the option of its holder, into that number of shares of Wyndham common stock equal to $100.00 divided by the conversion price of the series B preferred stock. Initially the conversion price will be $8.59, but is subject to adjustment under certain circumstances. Restructuring Under the terms of the purchase agreement, relating to the $1 billion equity investment, Patriot and Wyndham are required to complete a restructuring of their existing paired share REIT structure prior to the investment. Under the terms of the restructuring, the following events will occur: . A reverse stock split of the common stock of Wyndham and Patriot. . A wholly-owned subsidiary of Wyndham will merge with and into Patriot with Patriot surviving. . The pairing agreement between Patriot and Wyndham will terminate. . Patriot will terminate its status as a real estate investment trust effective January 1, 1999. . The non-voting stock of specified corporate subsidiaries held by the Patriot Partnership will be transferred, and subsequently will be owned directly by Patriot and/or Wyndham, rather than through the Patriot Partnership. . The third party partners in both the Patriot Partnership and the Wyndham Partnership will be offered an opportunity to exchange their limited partner interests for Wyndham common stock. . The preferred stockholders of Wyndham will be offered an opportunity to exchange their preferred stock for Wyndham common stock. Reverse Stock Splits Prior to the merger of a subsidiary of Wyndham into Patriot, both Wyndham and Patriot will implement a one-for-twenty reverse stock split of their common stock. Redemption Option For a period of 170 days following the completion of the $1 billion equity investment, Wyndham may redeem up to $300 million of the series B preferred stock at a redemption price of $102.00 per share (102% of the stated amount $100.00) plus all accrued dividends. Wyndham currently plans to fund this redemption through the issuance of $300 million of series A preferred stock to its stockholders. The series A preferred stock has the same economic terms as the series B preferred stock. Liquidity As a condition of the $1 billion equity investment, the Companies are required to restructure their existing organization. As discussed above, the pairing agreement between Wyndham and Patriot will terminate, Patriot's status as a REIT will terminate effective January 1, 1999 and Patriot will become a taxable corporation at that date. As a result of that transaction, the Company will be required to record a charge for deferred income taxes for the difference between the income tax basis and the recorded carrying value of assets and liabilities. The Company is continuing its analysis of the expected effects of this non-cash charge. Currently the estimate is in 44 the range of $750 million, however; this amount could vary when the analysis is completed. In addition, the Company will charge off the value of an intangible asset associated with the paired share structure of approximately $84.2 million. In the event that the equity and related debt transaction referred to above are not completed, management has determined that additional capital would have to be raised from other sources or the Companies would have to sell significant amounts of assets to produce proceeds sufficient to meet its existing current debt maturity obligations. These asset sales could include resort properties or Wyndham-managed properties in major cities and could negatively impact operations. Management believes these alternatives, if necessary, represent a viable plan to address Company's liquidity needs. New Debt Financing New Credit Facility. Patriot has recently signed a commitment letter with Chase Securities Inc. and The Chase Manhattan Bank for senior credit facilities for Wyndham in the amount of $1.8 billion, comprised of a term loan facility and a revolving loan facility. Definitive agreements relating to the new credit facility are expected to be finalized at the same time that the $1 billion equity investment is consummated. The commitment letter provided that the Chase Manhattan Bank will act as the administrative agent and Chase Securities Inc. will act as the lead arranger for a syndicate of lenders which will provide Wyndham with $1 billion in term loans and up to $800 million under the revolving loan facility, of which a maximum of $560 million may be drawn at the closing of the investment. The term loan facility and the revolving facility carry terms of 7 years and 5 years, respectively. The commitment letter based interest rates for the new credit facility upon LIBOR spreads varying from 1.50% to 3.00% per annum (for the revolving loan facility) and 3.00% to 3.75% per annum (for the term loan facility), based both on Wyndham's leverage ratio and on whether any increasing rate loans (described below) are outstanding. However, at Wyndham's election or under other specified circumstances, the term loans and revolving loans may instead bear interest at an alternative base rate plus the applicable spread. The alternative base rate is equal to the greater of The Chase Manhattan Bank's prime rate or federal funds rate plus 0.5%, and the alternative spread is 1.0% below the applicable LIBOR spread. Subject to limited agreed-upon exceptions, the New Credit Facility will be guaranteed by the domestic subsidiaries of Wyndham, and will be secured by pledges of equity interests held by Wyndham and its subsidiaries. The proceeds from the term loan facility will be used to finance the restructuring of Wyndham and Patriot. The proceeds from the revolving loan facility will be used for working capital and general corporate purposes. Increasing Rate Loans. Wyndham and Patriot have signed a commitment letter with The Chase Manhattan Bank, Chase Securities Inc., Bear, Stearns & Co. Inc., and The Bear Stearns Companies Inc. providing that The Chase Manhattan Bank, The Bear, Stearns Companies Inc. and a possible syndicate of other lenders will provide an increasing rate loan facility in the amount of up to $650 million. The increasing rate loans carry a term of 5 years. Interest rates for the increasing rate loans are based on LIBOR spreads and are initially set at 0.25% below the initial LIBOR spread on the term loan facility, but increase by 0.50% every three months, with a cap of LIBOR plus 4.75%. However, under other specified circumstances, interest accrues at an alternate rate equal to the rate borne by three-month treasury securities plus 1.0%, plus the applicable spread. The lenders under the increasing rate loans receive the benefit of the same guarantees and pledges of security provided under the New Credit Facility. The proceeds from the increasing rate loans will be used to finance the restructuring of Wyndham and Patriot. After the six month anniversary of the closing of the investment, lenders transferring increasing rate loans may exchange the increasing rate loans for exchange notes carrying identical terms to the increasing rate loans. To the extent any increasing rate loans or exchange notes are outstanding 180 days after the closing of the investment, Wyndham must by such date file and maintain a shelf registration statement with the Securities and Exchange Commission allowing the resale of any exchange notes outstanding thereafter. Wyndham may also offer registered substitute notes in exchange for all outstanding increasing rate loans and exchange notes. 45 Wyndham's ability to borrow under its revolving facility is subject to Wyndham's compliance with a number of customary financial and other covenants, including total leverage and interest coverage ratios, limitations on additional indebtedness, and limitations on investments and stockholder dividends. In May 1999, The Chase Manhattan Bank and Chase Securities Inc. notified the companies that they were exercising their rights under the "market flex" provisions of the commitment letters to change the terms of the senior credit facilities and the increasing rate loan facility. The revolving credit facility has been reduced from $800 million to $600 million, the term loan facility has been increased from $1 billion to $1.2 billion and the maximum that may be drawn at the closing has been reduced from $560 million to $400 million. Wyndham and Patriot have agreed to pay to the agents and the lenders customary fees for a facility of this nature of approximately $61 million. Interstate's Third-Party Hotel Management Business In May, 1998, Patriot along, with Interstate Hotels Company ("Interstate") entered into a settlement agreement (as amended, the "Settlement Agreement") with Marriott International, Inc. ("Marriott") which addressed certain claims asserted by Marriott in connection with Patriot's then proposed merger with Interstate. The Settlement Agreement provided for the dismissal of litigation brought by Marriott, and allowed Patriot's merger with Interstate to close. In addition to dismissal of the Marriott litigation, the Settlement Agreement provides for the Companies re-branding of ten Marriott hotels under the Wyndham name, Marriott's assumption of the management (the "Assumed Management Contracts") of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and the divestiture of the third-party management business which was operated by Interstate no later than June 14, 1999. If the Companies do not complete the spin-off by June 14, 1999, Marriott will be entitled to receive liquidated damages. We will also be subject to additional penalties including Marriott's right to purchase, subject to third- party consents, the hotels to be submanaged by Marriott and six additional Marriott hotels owned by Patriot at their then appraised values. Moreover, subject to any defenses the Companies may have, we would owe Marriott liquidated damages with respect to the hotels converted to the Wyndham brand, those to be submanaged by Marriott, and the six additional Marriott hotels Marriott would have the option to purchase. The Companies also anticipate that Marriott would require third-party owners of Marriott-branded hotels that Wyndham manages to replace Wyndham as manager of their hotels. As a result, each respective hotel would either: (1) lose the Marriott brand, at which time the Companies would have to compensate Marriott for any lost franchise fees or (2) terminate the management contract with us and enter into a contract with another manager. The Companies would owe liquidated damages on any third-party Marriott-franchised hotel which chooses to convert its brand. Renovations and Capital Improvements During 1998, the Companies completed approximately $175 million in total capital improvements and renovations on various hotel properties, including (i) costs related to converting hotels to one of the Companies' proprietary brands; (ii) costs related to recurring maintenance capital expenditures (iii) costs related to enhancing the revenue-producing capabilities of its hotels. Approximately $76 million of the total capital costs related to 33 hotels that were converted to proprietary brands in 1998. These major renovations included upgrading the quality of the furniture and fixtures in guest rooms, public meeting space and lobby areas as well as adding additional rooms to certain of the hotels. Patriot completed over $82.2 million of capital improvements and renovations during 1997. During 1997, approximately $56.9 million of total capital improvement expenditures were related to significant renovations at certain of the hotel properties. Pursuant to the Participating Leases, Patriot is obligated to establish a reserve for each hotel for capital improvements, including the periodic replacement or refurbishment of furniture, fixtures and equipment ("F F&E"). Management reserves an average of 4.0% of total hotel revenues and believes such amounts are 46 sufficient to fund recurring capital expenditures for the hotels. Capital expenditures, exclusive of renovations, may exceed 4.0% of total revenues in a single year. The Companies attempt to schedule renovations and improvements during traditionally lower occupancy periods in an effort to minimize disruption to the hotel's operations. Therefore, management does not believe such renovations and capital improvements will have a material effect on the results of operations of the hotels. However, no assurance can be made that such renovations and capital improvements will not impact the results of operations. Capital expenditures will be financed through the capital expenditure reserves, the Credit Facility, other financing sources, or with working capital. Legislation Affecting the Paired Share Structure Patriot's ability to qualify as a REIT is dependent upon its continued exemption from the anti-pairing rules of Section 269B(a)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Section 269B(a)(3) of the Code would ordinarily prevent a corporation from qualifying as a REIT if its stock is paired with the stock of a corporation whose activities are inconsistent with REIT status, such as Wyndham. The "grandfathering" rules governing Section 296B generally provide, however, that Section 296B(a)(3) does not apply to a paired REIT if the REIT and its paired operating company were paired on June 30, 1983. There are, however, no judicial or administrative authorities interpreting this "grandfathering" rule in the context of a merger into a grandfathered REIT or otherwise. Moreover, although Patriot's and Wyndham's respective predecessors, Cal Jockey and Bay Meadows, were paired on June 30, 1983, if for any reason Cal Jockey failed to qualify as a REIT in 1983 the benefit of the grand fathering rule would not be available to Patriot and Patriot would not qualify as a REIT for any taxable year. Patriot's exemption from the anti-pairing rules could be lost, or its ability to utilize the paired structure could be revoked or limited, as a result of future legislation. In this regard, legislation to freeze the grandfathered status of paired share REITS such as Patriot was included in the Internal Revenue Service Restructuring and Reform Act of 1998 (the "IRS Reform Act of 1998"), which was signed into law by the President on July 22, 1998. Under the IRS Reform Act of 1998, the anti-pairing rules generally apply to real property interests acquired after March 26, 1998 by Patriot and Wyndham, or a subsidiary or partnership in which a 10% or greater interest is owned by Patriot or Wyndham (collectively, the "REIT Group"), unless (i) the real property interests are acquired pursuant to a written agreement which is binding on March 26, 1998 and all times thereafter or (ii) the acquisition of such real property interests were described in a public announcement or in a filing with the Securities and Exchange Commission on or before March 26, 1998. In addition, the grandfathered status of any property under the foregoing rules will be lost if the rent on a lease entered into or renewed after March 26, 1998, with respect to such property exceeds an arm's-length rate. The IRS Reform Act of 1998 also provides that a property held by Patriot or Wyndham that is not subject to the anti-pairing rules would become subject to such rules in the event of an improvement placed in service after December 31, 1999 that changes the use of the property and the cost of which is greater than 200 percent of (x) the undepreciated cost of the property (prior to the improvement) or (y) in the case of property acquired where there is a substituted basis, the fair market value of the property on the day it was acquired by Patriot and Wyndham. There is an exception for improvements placed in service before January 1, 2004 pursuant to a binding contract in effect as of December 31, 1999 and at all times thereafter. The IRS Reform Act of 1998 generally permits Patriot to continue its current method of operations with respect to its existing assets, including the assets acquired in the Interstate merger, the Arcadian acquisition, the Summerfield acquisition and the CHCI merger. However, the legislation would require Patriot to modify its method of operations with respect to newly acquired assets. Year 2000 Compliance Many computer systems were not designed to interpret any dates beyond 1999, which could lead to business disruptions in the United States and internationally (the "Year 2000 issue"). The Companies recognize the 47 importance of minimizing the number and seriousness of any disruptions that may occur as a result of Year 2000 and have adopted an extensive compliance program. The Companies' compliance program involves three major program areas: . corporate information technology infrastructure and reservation systems . other electronic assets (such as, but not limited to, automated time clocks, point-of-sale systems, non-information technology systems, including embedded technologies that operate fire-life safety systems, phone systems, energy management systems and other similar systems) . third parties with whom the Companies conduct business The Companies are applying a three phase approach to each program area: . Inventory Phase (identify systems and third parties that may be affected by Year 2000 issues) . Assessment Phase (prioritize the inventoried systems and third parties, assess their Year 2000 readiness, plan corrective actions) . Remediation Phase (implement corrective actions, verify implementation, formulate contingency plans) The Companies engaged a consulting firm to conduct the inventory and assessment phases of the compliance program. The Companies have completed inventory and assessment phases with respect to their corporate information technology infrastructure and reservation systems. The Companies have also completed the inventory and assessment phases with respect to the information technology and other electronic assets that are located in the Companies' Hotels, other than some of the Hotels which are either managed by Wyndham but not owned by Patriot or owned by Patriot but not leased or operated by Wyndham (the "Third Party Compliance Hotels"). Based on those assessments, the Companies, working with their consultants, determined which systems were not Year 2000 compliant and developed appropriate remediation plans. The Companies have begun the necessary work to remediate those systems at their owned and leased Hotels, and have completed 10 percent of that work. The Companies previously engaged a consulting firm to provide the support and additional skills to effect the necessary remediation in sufficient time for testing and any necessary modifications. Of the 93 Third Party Compliance Hotels that were not acquired in the merger with Interstate Hotels (the "Interstate merger"), 66 Third Party Compliance Hotels have been assessed as part of the Companies' compliance program and the Companies have begun to implement remediation plans at 21 of those hotels. The owners of the other 45 Third Party Compliance Hotels that were assessed have to date neither taken any action to effect the necessary remediation identified in the assessment nor authorized the Companies to effect the remediation on behalf of the owners. While none of the remaining 27 Third Party Compliance Hotels have been assessed by the Companies, 4 of the owners have informed the Companies that the owners completed their own assessments. The Companies are continuing to monitor the status of the Third Party Compliance Hotels and have reminded the owners of the importance of making the Third Party Compliance Hotels Year 2000 compliant in sufficient time to permit adequate testing. The Companies have begun surveying the Year 2000 compliance of the owners of the hotels that are franchised under the Wyndham brand but not managed by Wyndham, and have informed those owners of the appropriate standards to make the equipment operating Wyndham's systems Year 2000 compliant. However, as the systems at the Third Party Compliance Hotels and franchised hotels are not under the Companies' control, the Companies will be required to rely on the information provided by those owners or managers/operators and will not be able to test the assessment or remediation effected by third parties at the Third Party Compliance Hotels or the franchised hotels. The Companies presently expect to expend approximately $34 million in connection with Year 2000 issues. To date, the Companies have incurred $1.75 million in connection with the inventory and assessment phases of their compliance program and $4.6 million to remediate their systems. However, the Companies' anticipated expenditures may increase as the Companies effect the remediation plans. 48 As part of the settlement of litigation arising out of the Interstate merger, the Companies agreed to contribute to a new company management of the Third Party Compliance Hotels acquired in that merger, and then dispose of substantially all of that new company's stock by means of a spin-off to the Companies' shareholders or otherwise. As the hotels acquired in the Interstate merger whose management will be contributed to the new company are owned by third parties, the Companies expect those owners to bear all costs related to the inventory, assessment and remediation of those hotels. The Companies have identified the vendors and service providers that are critical to the Companies' businesses and have requested those parties to provide information concerning their Year 2000 compliance and remediation efforts. The Companies are now seeking additional information from those parties that did not respond or did not provide sufficient information, but cannot guarantee that all vendors or service providers will comply with the Companies' requests. More importantly, the Companies must rely on the information provided by the third parties and will not be able to test the third parties' compliance. As a result, the Companies may not be able to accurately determine the Year 2000 compliance of those vendors or service providers. Based on preliminary responses, the Companies believe that their most critical vendors and service providers will not cause the Companies' operations to be materially disrupted as a result of Year 2000 issues. During 1999, the Companies intend to determine the extent to which they will be able to replace vendors and service providers that are expected to be non- compliant. Due to the lack of an alternative source, there may be instances in which the Companies will have no alternative but to remain with non-compliant vendors or service providers. As the Companies identify the non-compliant vendors and service providers, they will then determine appropriate contingency plans. The Companies believe that their current compliance program will allow them sufficient time to identify which of their systems and other electronic assets are not Year 2000 compliant and to effect the necessary remediation to avoid substantial problems arising from Year 2000 induced failures. The Companies believe that their reprogramming, upgrading and systems replacements will be implemented by the end of the third quarter of 1999. The Companies believe that this should provide adequate time to further correct any problems that did not surface during the implementation and testing for those systems. Notwithstanding that, the Companies do recognize that some vendors and the owners and managers/operators of the Third Party Compliance Hotels may not comply with their present schedules and could affect the Companies' timing and remediation efforts generally. If the Companies are not successful in implementing their Year 2000 compliance plan, the Companies may suffer a material adverse impact on their consolidated results of operations and financial condition. In addition to those systems within the Companies' control and the control of its vendors and suppliers, there are other systems that could have an impact on the Companies' businesses and which may not be Year 2000 compliant by January 1, 2000. These systems could affect the operations of the air traffic control system and airlines or other segments of the lodging and travel industries, or the economy and travel generally. In addition, these systems could affect the Third Party Compliance Hotels or the Hotels franchised under the Companies' brands whose owners and managers/operators are implementing their own compliance programs. These systems are outside of the Companies' control or influence and their compliance may not be verified by the Companies. However, these systems could adversely affect the Companies' financial condition or results of operation. During the second quarter of 1999, the Companies intend to develop contingency plans to address potential Year 2000 induced failures. Because the Companies have no control over third party assessment and remediation efforts, the Companies expect to focus most of their contingency planning on externally caused disruptions. In addition, the Companies will develop their plans on their belief that the consequences of Year 2000 induced failures will be local in nature. These plans will be based on existing contingency plans for operations during storms and other natural disasters. While each Hotel will develop a contingency plan, any disruption in utilities or other key local services could have the effect of disrupting operations of several Hotels located in the affected geographic area. As part of the Companies' contingency planning, they also expect to evaluate their continued management of the Third Party Compliance Hotels that do not become Year 2000 compliant. 49 Inflation Operators of hotels in general possess the ability to adjust room rates quickly. However, competitive pressures may limit Wyndham's and the Lessees' ability to raise room rates in the face of inflation. Seasonality The hotel industry is seasonal in nature. Revenues for certain of Patriot's hotels are greater in the first and second quarters of a calendar year and at other hotels in the second and third quarters of a calendar year. Seasonal variations in revenue at the hotels may cause quarterly fluctuations in the Patriot Companies' revenues. FUNDS FROM OPERATIONS Combined Funds from Operations of the Companies (as defined and computed below) $86.4 million for the year ended December 31, 1998 and $57.0 million for the year ended December 31, 1997. Funds from Operations, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring or sales of property, plus depreciation of real property, amortization of goodwill and amortization of management contracts and trade names, and after adjustments for unconsolidated partnerships, joint ventures and corporations. Adjustments for Patriot's unconsolidated subsidiaries are calculated to reflect Funds from Operations on the same basis. The Companies believe that Funds from Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating, financing, and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures, and to fund other cash needs. The Companies believe that in order to facilitate a clear understanding of their operating results, Funds from Operations should be examined in conjunction with net income (loss) as presented in the audited combined financial statements of the Companies. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and should not be considered as an alternative to net income or other measurements under generally accepted accounting principles as an indicator of operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. Funds from Operations does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. 50 The following reconciliation of net (loss) income to Funds from Operations illustrates the difference between the two measures of operating performance for the years ended December 31, 1998, 1997 and 1996 and for the period October 2, 1995 (inception of operations) through December 31, 1995:
Period October 2, 1995 Year Ended December 31, (inception of operations) --------------------------- through 1998(1) 1997(2) 1996 December 31, 1995 --------- ------- ------- ------------------------- (in thousands) Net (loss) income....... $(158,223) $(2,172) $37,991 $5,359 Add: Extraordinary loss from early extinguishment of debt................. 31,817 2,534 -- 737 Minority interest in the Operating Partnerships......... (12,651) 1,684 6,767 968 Minority interest in consolidated subsidiaries......... (8,185) -- -- -- Depreciation of buildings and improvements and furniture, fixtures and equipment........ 176,059 47,694 17,302 2,529 Amortization of goodwill............. 28,702 1,851 -- -- Amortization of management contracts and trade names...... 24,323 1,886 204 50 Adjustment for Funds from Operations of unconsolidated subsidiaries: Equity in earnings of unconsolidated subsidiaries......... (9,498) (6,015) (5,845) (156) Funds from Operations of unconsolidated subsidiaries......... 14,018 9,581 8,044 311 --------- ------- ------- ------ Funds from Operations... $ 86,362 $57,043 $64,463 $9,798 ========= ======= ======= ====== Weighted average shares and OP units outstanding: Basic................. 152,778 74,219 51,721 43,923 ========= ======= ======= ====== Diluted............... 163,532 76,040 52,259 44,060 ========= ======= ======= ======
- -------- (1) In accordance with NAREIT's white paper definition of FFO, for the year ended December 31, 1998, FFO on an as adjusted basis would be $263,595 after adjusting for the following non-recurring items: settlement of treasury lock and other non-recurring charges of $52,292; loss on sale of assets of $9,453; impairment loss on assets held for sale of $51,081; and cost of acquiring leaseholds of $64,407. (2) In accordance with NAREIT's white paper definition of FFO, for the year ended December 31, 1997, FFO on an as adjusted basis would be $111,542 after adjusting for the non-recurring charge of cost of acquiring leaseholds of $54,499. 51 ITEM 7a. QUALITATIVE AND QUANTATIVE DISCLOSURES ABOUT MARKET RISKS The Companies' primary market risk exposure is to future changes in interest rates related to the Companies' derivative financial instruments and other financial instruments including debt obligations, interest rate swaps, interest rate caps, future debt commitments, and interest rate sensitive forward equity contracts. In addition to the risk of interest rate fluctuations, Patriot is exposed to market risk with respect to forward stock contracts that are sensitive to changes in the price of the Companies' common stock. Patriot manages its debt portfolio by periodically entering into interest rate swaps and caps to achieve an overall desired position of fixed and floating rates or to limit the Companies' exposure to rising interest rates. The following table provides information about the Companies' derivative and other financial instruments that are sensitive to changes in interest rates and the market price of the Companies' stock. . For fixed rate debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity date and contracted interest rates at December 31, 1998. For variable rate debt obligations, the table presents principal cash flows by expected maturity date and contracted interest rates at December 31, 1998. . Variable rate debt commitments represent commitments from lenders for future credit facilities that may be obtained to replace portions of the current fixed and variable debt obligations. The debt commitments were entered into subsequent to December 31, 1998 and are not binding at this time. For variable rate debt commitments, the table presents principal cash flows by expected maturity date and expected average contracted interest rates at December 31, 1998. . For interest rate swaps and caps, the table presents notional amounts and weighted-average interest rates or strike rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at December 31, 1998. . For forward equity contracts which are both interest rate and stock price sensitive, the table presents the notional amounts, the weighted-average interest rates and the stock price at December 31, 1998 by expected maturity dates. Upon completion of the new credit facility, most of the maturities of the variable rate debt obligations will be replaced with the maturities of the variable rate debt commitments. The "market flex" provisions of the debt commitments permit the lenders to change the allocation of debt among the credit facilities and the increasing rate loan facility, as well as adjust the interest rate spreads applicable to the debt. If the lenders allocate debt from a less expensive to a more expensive facility, or if the lenders increase the interest rate applicable to the debt, Wyndham will incur higher interest expense. 52
Face Fair 1999 2000 2001 2002 2003 Thereafter Value Value ---------- ---------- -------- ------- -------- ---------- ---------- ---------- (in thousands, except for per share data) Debt Long-term Debt obligations including Current Portion Fixed Rate............. $ 8,169 $ 18,767 $ 8,881 $48,163 $ 8,393 $ 301,531 $ 393,904 $ 393,904 Average Interest Rate.. 9.38% 8.60% 9.13% 9.01% 9.02% 8.26% Variable Rate.......... $1,266,749 $1,348,500 $134,603 $17,300 $652,431 $ 44,034 $3,463,617 $3,463,617 Average Interest Rate.. 7.27% 7.29% 7.29% 7.56% 7.24% 6.39% Debt Commitment Variable Rate.......... -- -- $ 10,000 $10,000 $ 10,000 $2,420,000 $2,450,000 $2,450,000 Average Interest Rate.. 8.61% 8.86% 8.90% 8.90% 8.90% 8.84% Interest Rate Derivative Financial Instruments Related to Debt and Equities Interest Rate Swaps Pay Fixed/Receive Variable.............. -- $ 72,000 -- $50,000 $250,000 -- $ 822,000 $ (24,836) Average Pay Rate....... 5.93% 5.93% 5.94% 5.94% 5.84% -- Avg. Receive Rate...... 5.08% 5.08% 5.09% 5.09% 5.12% -- Interest Rate Caps Notional Amount........ $ 313,750 -- $ 38,000 -- -- $ 29,125 $ 380,875 $ 144 Strike Rate............ 6.92% 8.12% 8.12% 8.50% 8.50% 8.50% Forward Rate........... 4.98% 4.95% 5.18% 5.24% 5.36% 5.45% Forward Equity Contracts Notional Amount........ $ 313,300 -- -- -- -- -- $ 313,300 $ 313,300 Average Interest Rate.. 10.06% -- -- -- -- -- Financial Instrument Related to Equity Forward Equity Contracts Notional Amount........ $ 313,300 -- -- -- -- -- $ 313,300 $ 313,300 Stock Price per share.. $ 6.00 -- -- -- -- --
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following individuals are the principal executive officers of Wyndham and Patriot: James D. Carreker has served as the Chairman of the Board of Directors and Chief Executive Officer of Wyndham as well as a director of Patriot since January 1998. In February 1999, Mr. Carreker was also named Chief Executive Officer of Patriot. Prior to the merger of Wyndham Hotel Corporation with the companies in January 1998, Mr. Carreker had served as President and Chief Executive Officer of Wyndham Hotel Corporation from May 1988 to January 1998 and as a director of Wyndham Hotel Corporation from February 1996 to January 1998. He also served as Chief Executive Officer of Trammell Crow Company, a national real estate company, from August 1994 to December 1995. Prior to 1988, Mr. Carreker served as President of Burdine's, the Miami based division of Federated Department Stores. Mr. Carreker also serves as a director of Trammell Crow Company and of Carreker-Antinori, Inc., a computer service company that completed its initial public offering in May 1998. Mr. Carreker holds a B.S. and a Master of Business Administration from Oklahoma State University. Mr. Carreker is 51 years old. William W. Evans III currently serves as the President and Chief Operating Officer and a director of Patriot. He also serves as an Executive Vice President of Wyndham. Mr. Evans has been an executive officer of the companies since March 1997, and a director since July 1997. Prior to joining the companies, Mr. Evans was a Managing Director in PaineWebber's Real Estate Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody and Co. Incorporated in December 1994. Prior to joining Kidder, Peabody in 1992, Mr. Evans was a First Vice President and head of the Real Estate Financing Division of Swiss Bank Corporation. Mr. Evans is a graduate of the University of Virginia. Mr. Evans is 48 years old. 53 Richard Mahoney became Chief Financial Officer of Wyndham in May 1999. Before joining Wyndham, Mr. Mahoney served as Executive Vice President and Chief Operating Officer of Starwood Hotels & Resorts' gaming division. From [ ] 1993 to [ ] 1998, Mr. Mahoney served as Executive Vice President and Chief Financial Officer of Westin Hotels & Resorts. From [ ] to [ ], he served as Vice President and Controller of Carnival Hotels and Casinos. Mr. Mahoney holds an M.S. in Finance from Boston College. Mr. Mahoney is 46 years old. Anne L. Raymond became Chief Investment Officer of Wyndham in May 1999. Ms. Raymond became an Executive Vice President of Patriot in January 1998 in connection with the closing of the Wyndham merger. In addition, Ms. Raymond served as Chief Financial Officer of Patriot from the closing of the Wyndham merger in January 1998 until May 1999. Ms. Raymond also served as Treasurer of Patriot from January 1998 to March 1998. Ms. Raymond joined Wyndham's predecessor in 1983 as Controller and served in that and other financial capacities through September 1987. From September 1987 to July 1994, she served as Investment Manager for Crow Family Holdings, where her responsibilities included managing and overseeing Crow Family Holdings' interest in the Trammell Crow Company and Wyndham's predecessor. Upon the formation of the Crow Investment Trust in August 1994, Ms. Raymond was named Director--Capital Markets and had responsibility for developing and maintaining investment relationships with real estate capital sources. In March 1995, Ms. Raymond rejoined Wyndham's predecessor as Executive Vice President and Chief Financial Officer, and was elected a director of Wyndham's predecessor in April 1996. Ms. Raymond holds a B.S. in Business Administration from the University of Missouri. Ms. Raymond is 41 years old. Leslie V. Bentley became an Executive Vice President of Wyndham in January 1998. He was employed by Wyndham Hotel Corporation since March 1985, served as Executive Vice President and President of the Wyndham Garden Division since May 1990 and was elected a director of Wyndham Hotel Corporation in January 1997. From January 1987 to June 1988, Mr. Bentley served as Regional Vice President of Wyndham Hotel Corporation. From June 1988 to December 1988, Mr. Bentley served as Vice President of Operations of Wyndham Hotel Corporation and from December 1988 to May 1990, he served as Senior Vice President of Operations of Wyndham Hotel Corporation. Prior to joining Wyndham Hotel Corporation, Mr. Bentley was employed by Marriott International Hotels for eight years. Mr. Bentley holds a B.S. in Hotel and Restaurant Administration from Pennsylvania State University. Mr. Bentley is 47 years old. Robert R.A. Breare serves as Executive Vice President of Wyndham and is the divisional President of the Companies European division, which includes Arcadian and Malmaison. Mr. Breare founded Arcadian International PLC in April 1990 with an initial focus on leisure resort development and served as its chief executive officer until the acquisition of Arcadian by the companies. Previously, Mr. Breare served in the publishing industry and joined Parkdale Holdings PLC in 1987 as CEO. He was educated at Eton before completing an MA in law at Cambridge University. Mr. Breare is 46 years old. Michael A. Grossman serves as Executive Vice President of Wyndham and divisional president of the management services division of the Companies. From 1977 to 1993, Mr. Grossman owned and operated Grossman and Associates, a hotel management company. Mr. Grossman joined Patriot American in August 1993 as a Senior Vice President heading up its hotel division. Mr. Grossman was subsequently appointed Chief Operating Officer of Gencom American Hospitality (GAH), which initially served as a third party manager for Old Patriot and was subsequently acquired by Patriot. Mr. Grossman holds a B.B.A. from the University of Texas and a J.D. from Southern Methodist University. Mr. Grossman is 46 years old. Richard A. Holtzman serves as Executive Vice President of Wyndham and is the divisional President of Grand Bay Hotels and Resorts which is a division of Wyndham International, Inc. in January 1997. Mr. Holtzman served as president and chief operating officer with Westcor Resorts from July 1998. Mr. Holtzman is a graduate of Cornell University with a B.A. in hotel administration. Mr. Holtzman is 45 years old. Lawrence S. Jones was named Executive Vice President and Treasurer of Patriot and Wyndham in March 1998. Mr. Jones joined Coopers & Lybrand in 1972 and continued there as a partner until March 1998 where he 54 served as Chairman of the firm's REIT industry practice. Mr. Jones holds a B.S. from the University of Berkeley and an M.S. from UCLA. Mr. Jones is a certified public accountant. Mr. Jones is 52 years old. Stanley M. Koonce, Jr. became Executive Vice President--Marketing and Strategic Planning of Wyndham in January 1998. He served as Executive Vice President--Marketing, Planning and Technical Services of Wyndham Hotel Corporation since October 1994, was elected a director of Wyndham Hotel Corporation in January 1997 and served as Senior Vice President of Sales and Marketing of Wyndham Hotel Corporation from October 1989 to October 1994. Mr. Koonce served as President of CUC Travel Services, a division of CUC International, in Stamford, Connecticut from 1986 to 1989, as Vice President of the Marketing Department with American Express from 1979 to 1986 and as a Director of Finance and Planning for American Airlines from 1976 to 1979. Mr. Koonce holds a B.S. in Mathematics and an M.B.A. from the University of North Carolina. Mr. Koonce is 50 years old. Thomas W. Lattin became an Executive Vice President of Wyndham Hotel Corporation in October 1997. He became President and Chief Operating Officer of Patriot American Hospitality, Inc., a Virginia corporation, in April 1995 and continued in such capacity for Patriot American Hospitality Operating Company from July 1997. From 1987 through 1994, he served as the National Partner of the hospitality industry consulting practice of Laventhol & Horwarth and subsequently as a partner in the national hospitality consulting group of Coopers & Lybrand L.L.P. In 1994, he joined the Hospitality Group of Kidder, Peabody & Co. Incorporated as a Senior Vice President and later served as a Senior Vice President with PaineWebber Incorporated. Mr. Lattin holds a B.S. and M.S. in Hotel Management from the Cornell School of Hotel Administration. He is a certified public accountant. Mr. Lattin is 54 years old. Carla S. Moreland was named Executive Vice President-General Counsel of Wyndham in April 1999. She served as Senior Vice President-General Counsel of Wyndham since January 1998. Ms. Moreland served as general counsel of Wyndham Hotel Corporation since April 1994. From 1987 to 1994 she practiced law with the firm of Weil Gotshol and Manges. Ms. Moreland holds a B.A. and J.D. from The College of William and Mary. Ms. Moreland is 39 years old. Paul Novak was named Executive Vice President--Acquisitions and Development of Patriot in January 1998. From June 1997 through January 1998, Mr. Novak served as Executive Vice President--Acquisitions and Development of Wyndham. From 1994 through June 1997, Mr. Novak was President and Chief Executive Officer of Bedrock Partners, a private investment group established in 1994 to acquire hotel properties and convert them to Wyndham Hotels or Wyndham Garden Hotels. From 1992 through 1994, Mr. Novak was a principal in his own consulting firm where he directed real estate development, marketing and acquisition assignments for numerous clients. Prior thereto, he served as a Senior Vice President of Marriott International from 1981 until 1992 with responsibility for developing more than 400 properties. Mr. Novak is a member of the Urban Land Institute, The National Realty Committee and the Travel and Tourism Research Association. He holds a B.A. from Michigan State University. Mr. Novak is 52 years old. Mr. Novak's employment with the companies terminated effective May 1999. Current Directors of Wyndham The following is a biographical summary of the experience of the directors of Wyndham: Karim Alibhai served as the President and Chief Operating Officer of Wyndham until his resignation on May 21, 1999. He has served as a director of Wyndham since October 1997. Prior to joining Wyndham in October 1997, Mr. Alibhai was the President and Chief Executive Officer of the Gencom Group, an affiliated group of companies that acquired, developed, renovated, leased and managed hotel properties in the United States and Canada through Gencom American Hospitality. He holds a B.A. from Rice University. Mr. Alibhai is 34 years old. 55 Leonard Boxer has served as a director of Wyndham since July 1997. He had served as a director of Patriot and its predecessor from September 1995 to July 1997. He has been a partner and chairman of the real estate department of the law firm of Stroock & Stroock & Lavan in New York, New York since 1987. Previously, he was a founder and managing partner and head of the real estate department of Olnick Boxer Blumberg Lane & Troy, a real estate law firm in New York. Mr. Boxer is a member of the Board of Trustees of New York University Law School. He is a member of the New York Regional Cabinet of the United States Holocaust Memorial Museum. Mr. Boxer holds a B.A. and an LL.B. from New York University. Mr. Boxer is 60 years old. James D. Carreker has served as Chairman of the Board of Directors of Wyndham since January 1998. For biographical information on Mr. Carreker, see "--Principal Executive Officers of Wyndham and Patriot." Burton C. Einspruch, M.D. has served as a director of Wyndham since July 1997. Dr. Einspruch is a physician and corporate medical consultant and has practiced medicine since 1960. He holds a B.A. and Sc.B. from Southern Methodist University and an M.D. from Southwestern Medical School of the University of Texas. Dr. Einspruch is the Medical Director of First Southwest Company, a national brokerage firm, and also currently serves as a director of Dallas National Bank. He has served as a board member and advisor to numerous corporations and philanthropies and is currently Chairman of the Holocaust Studies Program Advisory Board at the University of Texas at Dallas, as well as the Executive Board of the Libraries of Southern Methodist University. Dr. Einspruch has attained the academic rank of Clinical Professor of Psychiatry of Southwestern Medical School and Clinical Associate Professor of Psychiatry at New York University Medical Center. Dr. Einspruch is 64 years old. Susan T. Groenteman has served as a director of Wyndham since January 1998. Ms. Groenteman had served as a director of Wyndham Hotel Corporation from April 1996 to January 1998. Ms. Groenteman is a Director and chief operating officer of Crow Family Holdings, an investment company managing investments in a variety of real estate related businesses, along with other industries, a position she has held since 1988. In any given year within the past five years, Ms. Groenteman has served as an executive officer or director in over 1,000 partnerships (or affiliates of partnerships) or corporations. In the past five years, Ms. Groenteman has served as an executive officer or director of approximately 57 partnerships or corporations, or for affiliates of such entities, that filed for protection under federal bankruptcy laws. In addition, in the past five years, Ms. Groenteman served as an executive officer or director in approximately 15 partnerships or corporations, or affiliates of such partnerships or corporations, that were placed in receivership. Ms. Groenteman holds a Bachelor of Business Administration from the University of Texas at Arlington. Ms. Groenteman is 45 years old. Arch K. Jacobson has served as a director of Wyndham since July 1997. He has served as President of Jacobson-Berger Capital Group, Inc., a commercial mortgage banking firm, since 1993. From 1986 to 1993, Mr. Jacobson was Chairman of Union Pacific Realty Co., a real estate management and development company. He served in various capacities with the Real Estate Department of the Prudential Insurance Company from 1955 to 1980 and was President and Chief Executive Officer of the Prudential Development Company (a subsidiary of the Prudential Insurance Company) from 1982 to 1986. Mr. Jacobson currently serves as a director of Walden Residential Properties, Inc., a publicly traded, multifamily apartment REIT. He was formerly a director of La Quinta Limited Partners, and chaired the committee of independent directors that negotiated the tender offer for and purchase of that company in 1994. Mr. Jacobson holds a B.S. from Texas A&M University. Mr. Jacobson is 71 years old. James C. Leslie has served as a director of Wyndham since January 1998. He had served as a director of Wyndham Hotel Corporation from June 1996 to January 1998. Mr. Leslie has served as President and Chief Operating Officer of The Staubach Company since March 1996. Mr. Leslie served as Chief Financial Officer of The Staubach Company from 1982 to 1992 and President-Staubach Financial Services from January 1992 to 56 March 1996. Mr. Leslie is also President and a board member of Wolverine Holding Company and serves on the board of Columbus Realty Trust, FM Properties, Inc., Forum Retirement Partners, L.P. and The Staubach Company, as well as other private corporations and charitable organizations. Mr. Leslie is a certified public accountant. Mr. Leslie holds a B.S. from the University of Nebraska and an M.B.A. from the University of Michigan. Mr. Leslie is 43 years old. Paul A. Nussbaum has served as a director of Wyndham since January 1998. Currently, he serves as Chairman Emeritus of the Board of Directors of Wyndham and Patriot. Prior to his association with Patriot, Mr. Nussbaum practiced real estate and corporate law in New York for 20 years, the last 12 years of which he was chairman of the real estate department of Schulte Roth & Zabel. Mr. Nussbaum serves as a member of the Board of Directors of the Dallas Symphony and is a member of the Urban Land Institute, the American College of Real Estate Lawyers and the Advisory Board of the Real Estate Center of the Wharton School of Business, University of Pennsylvania. Mr. Nussbaum is a member of the Board of Visitors of the Georgetown University Law Center and a Trustee of Colby College, Waterville, Maine. He also serves on the Board of Directors of Mack-Cali Realty Corporation. He holds a B.A. from the State University of New York at Buffalo and a J.D. from the Georgetown University Law Center. Mr. Nussbaum is 51 years old. Rolf E. Ruhfus became a director of Wyndham in June 1998. Mr. Ruhfus served as Chairman of the Board of Directors and Chief Executive Officer of Summerfield Hotel Corporation from 1987 through June 1998 when Summerfield was acquired by Wyndham. Prior to founding Summerfield, Mr. Ruhfus served as President of Residence Inn Corporation from 1983 until the franchise and management system assets were sold to Marriott Corporation. Mr. Ruhfus holds a B.A. from Western Michigan University, an M.B.A. from the Wharton School of Business and a Ph.D. in Marketing from the University of Munster, Germany. Mr. Ruhfus is 54 years old. Sherwood M. Weiser has served as a director of Wyndham since October 1997. Currently, Mr. Weiser is the Chairman and Chief Executive Officer of Carnival Hotels & Casinos, a hotel and gaming management and development firm. In 1970, Mr. Weiser founded The Continental Companies. Carnival Hotels & Casinos was a successor to The Continental Companies. In June 1998, Wyndham acquired the hospitality-related businesses of CHCI, the parent corporation of Carnival Hotels & Casino. Mr. Weiser is a director of Carnival Corporation, United National Bank and Winsloew Furniture Group. He is a graduate of the Ohio State University School of Business and holds a J.D. from the Case Western Reserve University School of Law. Mr. Weiser is 68 years old. Current Directors of Patriot The following is a biographical summary of the experience of the directors of Patriot: James D. Carreker has served as a director of Patriot since January 1998. For biographical information on Mr. Carreker, see "--Principal Executive Officers of Wyndham and Patriot." John H. Daniels has served as a director of Patriot and its predecessor since September 1995. He has served as President of The Daniels Group Inc., a real estate development and management company, since 1984. Prior to forming The Daniels Group Inc., Mr. Daniels served as Chairman and Chief Executive Officer of Cadillac Fairview Corporation, a publicly held real estate development and management company. Mr. Daniels is also a director of Cineplex-Odeon Corporation, Consolidated H.C.I. Corporation, Samoth Capital Corporation and Anitech Enterprises Inc. Mr. Daniels holds a B.S. in Architecture from the University of Toronto. Mr. Daniels is 73 years old. John C. Deterding has served as a director of Patriot and its predecessor since September 1995. He has been the owner of Deterding Associates, a real estate consulting company, since June 1993. From 1975 until June 1993, he served as Senior Vice President and General Manager of the Commercial Real Estate division of General Electric Capital Corporation. From November 1989 to June 1993, Mr. Deterding served as Chairman of the General Electric Real Estate Investment Company, a privately held REIT. He served as Director of GECC Financial Corporation from 1986 to 1993. He holds B.S. from the University of Illinois. Mr. Deterding is 67 years old. 57 Gregory R. Dillon has served as a director of Patriot and its predecessor since September 1995. He has been Vice Chairman Emeritus of Hilton Hotels Corporation since 1993. He has been a director of Hilton since 1977 and was elected Vice Chairman in 1990. Mr. Dillon served as an Executive Vice President of Hilton from 1980 until 1993. Mr. Dillon was also Executive Vice President of Hilton's franchise company, Hilton Inns, Inc., from 1971 to 1986. He is a director of the Conrad N. Hilton Foundation and is a founding member of the American Hotel Association's Industry Real Estate Financing Advisory Council and the National Association of Corporate Real Estate Executives. In addition to his undergraduate degree, Mr. Dillon holds an LL.B. from DePaul University. Mr. Dillon is 76 years old. William W. Evans III has served as a director of Patriot since July 1997. For biographical information on Mr. Evans, see "--Principal Executive Officers of Wyndham and Patriot." Milton Fine became a director of Patriot in June 1998. Mr. Fine co-founded Interstate Hotels Company in 1961 and was Chairman of the Board of Interstate prior to Wyndham's acquisition of Interstate in June 1998. Mr. Fine also served as the Chief Executive Officer of Interstate through March 1996. He is a life trustee of the Carnegie Institute and Chairman of the Board of Trustees of the University of Pittsburgh and a member of the Board of Directors of the Andy Warhol Museum in Pittsburgh, Pennsylvania. Mr. Fine completed his undergraduate studies magna cum laude, and also holds a J.D., from the University of Pittsburgh. Mr. Fine is 72 years old. Arch K. Jacobson has served as a director of Patriot and its predecessor since September 1995. For biographical information on Mr. Jacobson, see "-- Directors of Wyndham." Paul A. Nussbaum founded Patriot in 1991 and served as its Chief Executive Officer and Chairman of its Board until February 1999. For biographical information on Mr. Nussbaum, see "--Directors of Wyndham." Philip J. Ward has served as a director of Patriot since January 1998. Prior to such time, he had served as a director of Wyndham Hotel Corporation since June 1996. Mr. Ward is the Senior Managing Director in charge of the Real Estate Investment Division of CIGNA Investments, Inc., a division of CIGNA Corporation, a position he has held since December 1985. Mr. Ward joined Connecticut General's Mortgage and Real Estate Department (a predecessor of CIGNA) in 1971 and became an officer in 1987. Mr. Ward is also a director of the Simon DeBartolo Group, Inc., and a director of the Connecticut Housing Investment Fund. Mr. Ward holds a Bachelor of Arts from Amherst College. Mr. Ward is 50 years old. Directors of Wyndham Following the Investment Following the completion of the $1 billion investment, Karim Alibhai, Leonard Boxer, James Carreker, Milton Fine, Susan Groenteman, Paul Nussbaum, Rolf Ruhfus and Sherwood Weiser will serve on the Board of Directors of Wyndham. Additionally, following the completion of the investment, Leon D. Black, Norman Brownstein, Stephen T. Clark, Paul Fribourg, Thomas H. Lee, Alan M. Leventhal, William Mack, Lee Neibert, Marc Rowan, Scott Schoen and Scott Sperling will join the Board of Directors of Wyndham. The following is biographical information on each of these individuals: Class B Directors Leon D. Black is one of the founding principals of (1) Apollo Advisors, L.P., which, together with its affiliates, acts as the managing general partner of several private securities investment funds; (2) Apollo Real Estate Advisors, L.P. which, together with its affiliates, acts as the managing general partner of several real estate investment funds; and (3) Lion Advisors, L.P., a financial advisor to, and representative of, institutional investors with respect to securities investments. Mr. Black is also a director of Converse, Inc., Samsonite Corporation, Sequa Industries, Inc., Telemundo Group Inc., United Rentals, Inc. and Vail Resorts, Inc. He also serves as a trustee of The Museum of Modern Art, Mount Sinai--NYU Medical Center, Lincoln Center for the Performing Arts and Vail Valley Foundation. Mr. Black is 47 years old. 58 Thomas H. Lee founded Thomas H. Lee Company in 1974 and since that time has served as its President. From 1966 through 1974, Mr. Lee was with First National Bank of Boston where he directed the bank's high technology lending group from 1968 to 1974 and became a Vice President in 1973. Prior to 1966, Mr. Lee was a securities analyst in the institutional research department of L.F. Rothschild & Co. in New York. Mr. Lee serves or has served as a director of numerous public and private corporations including Finlay Enterprises, Inc., General Nutrition Companies, Inc., Playtex Products, Inc., Safelite Glass Corp., Snapple Beverage Corp. and Vail Resorts, Inc. In addition, Mr. Lee serves as a trustee or overseer of a number of civic and charitable organizations including, in Boston, Beth Israel Deaconess Medical Center, Brandeis University, Harvard University and the Museum of Fine Arts, as well as in New York, Lincoln Center for the Performing Arts, Mount Sinai-NYU Medical Center and the Whitney Museum of American Art in New York City. Mr. Lee is a 1965 graduate of Harvard College. Mr. Lee is 55 years old. Alan M. Leventhal is co-founder of Beacon Capital Partners and serves as Chairman and Chief Executive Officer. Prior to founding Beacon, Mr. Leventhal served as President and Chief Executive Officer of Beacon Properties Corporation, a publicly traded REIT. Mr. Leventhal received his Bachelor's degree in Economics from Northwestern University in 1974 and a Master of Business Administration from the Amos Tuck School of Business Administration at Dartmouth College in 1976. Mr. Leventhal is a trustee of Boston University, Northwestern University and the New England Aquarium Corporation and recently served as First Vice Chair of the National Association of Real Estate Investment Trusts. He is also a member of the Board of Overseers of WGBH and Beth Israel Deaconess Medical Center. Mr. Leventhal has lectured at the Amos Tuck School of Business Administration at Dartmouth College and the Massachusetts Institute of Technology Center for Real Estate. Mr. Leventhal has been awarded the Realty Stock Review's "Outstanding CEO Award" for 1996, 1997 and 1998, and the Commercial Property News' "Office Property Executive of the Year" for 1996. Mr. Leventhal is 46 years old. William L. Mack is the managing partner of Apollo Real Estate Advisors, L.P., manager of three opportunistic real estate investment funds, which he founded in 1993, and serves as President of its corporate general partner. Beginning in 1969, Mr. Mack served as Managing Partner of the Mack Company, where he oversaw the growth of the Mack Company's real estate portfolio to approximately 20 million square feet of office, industrial, retail and hotel facilities. Mr. Mack has served as a director of Mack-Cali Realty Corporation since the 1997 merger of the Mack Company's office portfolio into Mack-Cali. Mr. Mack is also a director of The Bear Stearns Companies, Inc., an investment banking firm, Koger Equity, Inc., a REIT which owns and operates suburban office parks in the Southeast and the Southwest, and Vail Resorts, Inc., an owner and operator of Colorado ski resorts. Mr. Mack attended the Wharton School of Business and Finance at the University of Pennsylvania and received a B.S. degree in business administration, finance and real estate from New York University. Mr. Mack is 59 years old. Lee S. Neibart is a partner of Apollo Real Estate Advisors, L.P., with which he has been associated since 1993. From 1979 to 1993, he was Executive Vice President and Chief Operating Officer of the Robert Martin Company, a private real estate development and management firm, with which he was associated for over 14 years. Mr. Neibart is a director of Atlantic Gulf Communities Corp., a land development company, Koger Equity, Inc., NextHealth, Inc., an owner and operator of spa and wellness facilities, and Roland International Corporation, a land development company. Mr. Neibart received a B.A. from the University of Wisconsin and an M.B.A. from New York University. Mr. Neibart is 48 years old. Marc J. Rowan is a founding partner of Apollo Management, L.P., a private investment partnership which manages a series of institutional funds focused on leveraged buyouts, corporate reorganizations and complex equity investments. Mr. Rowan currently serves on several boards of directors including: Samsonite Corporation, the leading manufacturer of luggage; Vail Resorts, Inc., the owner and operator of the Vail, Beaver Creek, Keystone and Breckenridge ski areas; MTL, Inc., a national tank truck/carrier company; and NRT Incorporated, a leading national real estate brokerage company. Mr. Rowan is also active in charitable activities and is a founding member and serves on the executive committee of the Youth Renewal Fund and is a member of the 59 board of directors of National Jewish Outreach Program and the Undergraduate Executive Board of The Wharton School. Mr. Rowan is 36 years old. Scott A. Schoen, a Managing Director at Thomas H. Lee Company, joined the firm in 1986. Prior to joining the firm, Mr. Schoen was in the Private Finance Department of Goldman, Sachs & Co. Mr. Schoen received a B.A. in History from Yale University, a J.D. from Harvard Law School and an M.B.A. from the Harvard Graduate School of Business Administration. He is a member of the New York Bar. Mr. Schoen is or has been a Director of First Alert, Inc., LaSalle Re Holdings Ltd, Rayovac Corporation, Signature Brands, Inc., Syratech Corporation, TransWestern Publishing, United Industries, and a number of private companies. Mr. Schoen is also a director of United Way of Massachusetts Bay. Mr. Schoen is 40 years old. Scott M. Sperling is a Managing Director at Thomas H. Lee Company. In this capacity he is or has been a director of PriCellular Corp., Experian (the former TRW credit and information business), Safelite Glass Corp., The Learning Company, Fisher Scientific International, Inc., General Chemical Corp., Livent, Inc., and a number of private companies. For ten years prior, Mr. Sperling was Managing Partner of the Aeneas Group, the private capital affiliate of the Harvard Management Company, Inc. Prior to 1984, Mr. Sperling was a Senior Consultant with the Boston Consulting Group, Inc. focusing on business and corporate strategies. He holds an M.B.A. degree from Harvard University and a B.S. from Purdue University. Mr. Sperling is 41 years old. Class C Directors Norman Brownstein has been Chairman of the Board of the law firm Brownstein Hyatt & Farber, P.C. Mr. Brownstein is nationally recognized for his extensive experience in real estate law and commercial transactions. Mr. Brownstein is a member of the American College of Real Estate Lawyers and the American, Colorado, and Denver Bar Associations and numerous other professional organizations. Mr. Brownstein is presently a director of the National Jewish Center for Immunology and Respiratory Medicine, a Trustee of the Simon Wiesenthal Center and a Vice President of the American Israel Public Affairs Committee. Mr. Brownstein received a B.S. and a J.D. from the University of Colorado at Boulder. Mr. Brownstein is 56 years old. Stephen T. Clark Since 1995, Mr. Clark has been President of Cypress Realty, Inc., a real estate investor and developer based in Houston, Texas and serves as a director of Beacon Capital Partners, Inc. Previously, Mr. Clark served as Managing Director of Harvard Private Capital Group where he directed the group responsible for real estate investment and management activities. Prior to joining Harvard, Mr. Clark was a partner in Clark-Pilgrim Limited Partnership and in Trammell Crow Company where he was in charge of office and industrial activities in Philadelphia and Delaware. Mr. Clark has extensive investment experience in developmental and distressed real estate assets. He received a Masters in Business Administration degree from Harvard Business School and received his undergraduate degree from Duke University. Mr. Clark serves as Chairman of the Board of Abacoa Development Company. Mr. Clark is years old. Paul J. Fribourg has been President and Chief Executive Officer of Continental Grain Company since [ ]. Since 1976, Mr. Fribourg has held numerous positions with Continental Grain. [Board memberships and other affiliations?] Mr. Fribourg holds a [ ] from Amherst College. Mr. Fribourg is 44 years old. Information Regarding the Board of Directors of Wyndham and Its Committees Meetings. The Board of Directors of Wyndham held 20 meetings during 1998. No director attended less than 75% of the aggregate number of meetings held during 1998 of the board of directors and any board committee of which he was a member. Audit Committee. The audit committee consists of two independent directors: Messrs. Boxer and Einspruch. An "independent director" is a director who is not an officer or employee of Wyndham, any affiliate of an officer or employee or any affiliate of (1) any advisor to Wyndham under an advisory agreement, (2) any lessee of any property of Wyndham, (3) any subsidiary of Wyndham or (4) any partnership which is an affiliate 60 of Wyndham. The audit committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of Wyndham's internal accounting controls. The audit committee held 4 meetings during 1998. Compensation Committee. The compensation committee consists of two independent directors: Messrs. Leslie and Jacobson. The compensation committee determines compensation of Wyndham's executive officers and administers the Wyndham International 1997 Incentive Plan. The compensation committee held more than 20 meetings during 1998. Coordinating Committee. The coordinating committee consists of three independent directors: Messrs. Boxer and Weiser and Ms. Groenteman. The coordinating committee reviews and evaluates various proposals received from potential investors. The coordinating committee held more than 50 meetings during 1998. Information Regarding the Board of Directors of Patriot and Its Committees Meetings. The Board of Directors of Patriot held 20 meetings during 1998. No director of Patriot attended less than 75% of the aggregate number of meetings held during 1998 of the board of directors and any board committee of which he was a member. Audit Committee. Currently, the audit committee consists of two independent directors: Messrs. Deterding and Dillon. An "independent director" is a director who is not an officer or employee of Patriot, any affiliate of an officer or employee or any affiliate of (1) any advisor to Patriot under an advisory agreement, (2) any lessee of any property of Patriot, (3) any subsidiary of Patriot or (4) any partnership which is an affiliate of Patriot. The audit committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of Patriot's internal accounting controls. The audit committee held 4 meetings during 1998. Compensation Committee. The compensation committee consists of three independent directors: Messrs. Deterding, Dillon and Jacobson. The compensation committee determines compensation of Patriot's executive officers, and administers the Patriot American Hospitality, Inc. 1997 Incentive Plan. The compensation committee held more than 20 meetings during 1998. Coordinating Committee. The coordinating committee consists of three independent directors: Messrs. Deterding, Fine and Ward. The coordinating committee reviews and evaluates various proposals received from potential investors. The coordinating committee held more than 50 meetings during 1998. Director Compensation for Wyndham and Patriot Currently, any director who is not an employee of Wyndham or Patriot is paid an annual retainer fee of $25,000. The retainer fee is paid in quarterly installments of $6,250 each. In addition, each director is paid $1,250 for attendance at each meeting of Wyndham's or Patriot's Board of Directors, $1,000 for participating in a telephonic board meeting and $750 for attendance, whether in person or telephonic, at each meeting of a committee of Wyndham's or Patriot's Board of which such director is a member. Both the annual retainer fee and meeting fees are payable in cash, but each director may elect in advance to defer the receipt of all or part of their fees and to receive such deferred fees at a later date in the form of paired shares. In addition, Wyndham and Patriot reimburse directors for their out-of-pocket expenses incurred in connection with their service on the Boards of Directors. Directors who are employees of Wyndham or Patriot do not receive any fees for their service on the Boards of Directors or a committee thereof. 61 Under the Wyndham 1997 Incentive Plan or the Patriot 1997 Incentive Plan, as the case may be, on the date of each annual meeting of stockholders, each non- employee director then in office will receive a grant of non-qualified options to purchase an additional 10,000 paired shares at the then current market price. All options granted to non-employee directors vest immediately upon the date of grant. At the 1998 Annual Meeting of Stockholders, Messrs. Boxer, Crow, Daniels, Deterding, Dillon, Leslie, Lyon, Ward and Weiser, Dr. Einspruch and Ms. Groenteman each were granted a non-qualified option to acquire 10,000 paired shares at an exercise price of $24.125. Mr. Jacobson was granted a non- qualified option to acquire 20,000 paired shares at an exercise price of $24.125 at the 1998 Annual Meeting of Stockholders since he serves on both the Wyndham and Patriot Boards. The Wyndham and Patriot Boards of Directors held numerous board meetings to consider strategic alternatives for the companies, including the negotiations with the investors and the Identified Party and the approval of the investment. A special coordinating committee of the Boards of Directors was also established and met numerous times during the last two months of 1998 and the first two months of 1999. The compensation committee also met several times to discuss special compensation issues. One director, Ms. Groenteman, who served as co-point person of the coordinating committee, worked full-time on these matters. In light of their extraordinary effort, in lieu of the normal meeting fees for the last two months of 1998 and the first two months of 1999, each director not serving on either the compensation committee or the coordinating committee received $20,000 in fees; members of the compensation committees, other than Mr. Deterding, received $40,000 in fees; members of the coordinating committee, other than Mr. Deterding and Ms. Groenteman, received $65,000 in fees; Mr. Deterding, who served on both the coordinating committee and the compensation committee, received $85,000 in fees; and Ms. Groenteman received $200,000 in fees. These fees were payable in 1999 in either cash or deferred paired shares, at the election of each director. Messrs. Crow, Deterding, Dillon, Ward and Weiser and Ms. Groenteman elected to receive their fees in cash. Mr. Jacobson elected to receive his fees in deferred paired shares. Messrs. Boxer, Daniels, Fine, Leslie and Ruhfus and Dr. Einspruch are finalizing their elections as of the date of this joint proxy statement/prospectus. 62 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the base compensation that Patriot paid in 1998, 1997 and 1996 to its Chairman and Chief Executive Officer and to five executive officers other than the Chief Executive Officer of Patriot (collectively, the "Patriot Named Executive Officers") whose base salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1998. Summary Compensation Table
Long Term Annual Compensation(a) Compensation Awards ----------------------------- ------------------------ Securities Name and Restricted Underlying Principal Stock Options All Other Position Year Salary($) Bonus($)(b) Awards($) (#)(c) Compensation($) - --------- ---- --------- ----------- ---------- ---------- --------------- Paul A. Nussbaum (d).... 1998 $555,425 -- -- -- $ 1,630(e) Chief Executive Officer 1997 $407,500 $529,478 $6,930,124(f) 2,790,703(g) $45,869(h) and Chairman of the Board 1996 $247,500 $200,000 -- 161,002(i) -- William W. Evans III............. 1998 $374,461 -- $ 999,996(j) -- $ 289(h) President and Chief 1997 $275,440(k) $303,373 $4,525,068(l) 601,074(m) $ 148(h) Operating Officer Anne L. Raymond (n)..... 1998 $286,992 $ 50,000 -- 117,928(o) $ 252(p) Executive Vice President 1997 $208,300 $168,000 -- -- -- and Chief Financial Officer Paul Novak (q)... 1998 $280,416 -- -- 25,641(r) $ 155(h) Executive Vice President 1997 $131,252 $179,573 $1,286,250(s) 107,335(r) $ 92(h) Lawrence S. Jones........... 1998 (t) (t) (t) (t) (t) Executive Vice President and Treasurer Rex E. Stewart (u)..... 1998 $206,556 -- -- -- $ 75(h) Chief Financial Officer 1997 $207,375 $ 97,961 -- -- $ 201(h) and Treasurer 1996 $174,250 $ 75,000 $ 847,500(v) 42,933(w) --
- -------- (a) No Patriot Named Executive Officer received personal benefits or perquisites in excess of the lesser of $50,000 or 10% of their aggregate salary and bonus in 1997 or 1996. (b) In accordance with the Patriot 1997 Incentive Plan, executive officers of Patriot were allowed to elect to receive all or a portion of their bonus either in cash or in paired shares. For 1997, if an executive officer chose to receive their bonus all or in part in paired shares, they received a 15% discount off of the fair market value of the paired shares as of January 6, 1998. The amounts included in the table above represent the fair market value of the paired shares received. For 1997, Mr. Nussbaum elected to receive his entire bonus in paired shares; Mr. Evans elected to receive $81,000 in cash and $222,373 in the form of paired shares; Mr. Novak elected to receive $82,500 in cash and $97,073 in the form of paired shares; Mr. Stewart elected to receive $45,000 in cash and $52,961 in the form of paired shares. (c) Share amounts reflect the stock dividend distributed on January 25, 1999 to stockholders of record on December 30, 1998. (d) Mr. Nussbaum resigned as an officer of Patriot on February 26, 1999. (e) Such amount includes $360 of term life insurance premiums paid by Patriot for the benefit of Mr. Nussbaum and $1,270 contributed by Patriot to Mr. Nussbaum's 401(k) account. 63 (f) On March 18, 1997, Patriot awarded the equivalent of 280,005 restricted paired shares to Mr. Nussbaum. Taking into account the various stock splits which occurred in 1997, the equivalent to the market value of the paired shares on the date of grant was $24.75 and the market value of such paired shares on December 31, 1998 was $1,680,030. The restrictions on these shares lapsed with respect to one-third of the shares on March 18, 1998. The restrictions with respect to the balance of the shares lapsed on February 26, 1999 in connection with Mr. Nussbaum's resignation. (g) On April 1, 1997, Patriot granted non-qualified options to purchase the equivalent of 2,790,703 paired shares to Mr. Nussbaum. These options were intended to vest five years from the date of grant, on April 1, 2002, but became fully vested and exercisable on February 26, 1999 in connection with Mr. Nussbaum's resignation. (h) Such amount represents term life insurance premiums paid by Patriot for the benefit of the named executive officer. (i) On April 19, 1996, Patriot's predecessor granted non-qualified options to purchase the equivalent of 161,002 paired shares to Mr. Nussbaum. These options were intended to vest in seven equal annual installments beginning April 19, 1997, but became fully vested and exercisable on February 26, 1999 in connection with Mr. Nussbaum's resignation. (j) On December 31, 1998, Patriot awarded the equivalent of 166,666 restricted paired shares to Mr. Evans. The equivalent to the market value of the paired shares on the date of grant was $999,996. One-third of the award will become payable upon the closing of the investment and the related transactions and one-third on each of the first and second anniversary thereof. (k) Such amount includes $940 paid to Mr. Evans to cover commuting expenses. (l) On February 14, 1997, Patriot awarded the equivalent of 200,003 restricted paired shares to Mr. Evans. Taking into account the various stock splits which occurred in 1997, the equivalent to the market value of the paired shares on the date of grant was $22.625 and the market value of such paired shares on December 31, 1998 was $1,200,018. The restrictions lapsed with respect to 25% of the shares on March 1, 1998 and with respect to the balance of the shares on December 31, 1998. (m) On February 14, 1997, Patriot granted non-qualified options to purchase the equivalent of 601,074 paired shares to Mr. Evans. These options were to vest in 12 equal quarterly installments beginning on April 1, 1997, but became fully vested and exercisable on November 27, 1998. (n) Ms. Raymond returned from a leave of absence to the position of Executive Vice President, Chief Investment Officer and interim Chief Financial Officer on April 19, 1999. (o) On February 2, 1998, Patriot granted Ms. Raymond: 1) non-qualified options to purchase the equivalent of 10,733 paired shares which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40% and 2) non-qualified options to purchase the equivalent of 88,925 paired shares which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. On November 13, 1998, pursuant to an option repricing program, the non-qualified options to purchase the equivalent of 10,733 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 1,967 paired shares and the non- qualified options to purchase the equivalent of 88,925 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 16,303 paired shares. See "Patriot Option Repricing Program". (p) Such amount includes $90 of term life insurance premiums paid by Patriot for the benefit of Ms. Raymond and $162 contributed by Patriot to Ms. Raymond's 401(k) account. (q) Mr. Novak's employment with Patriot terminated in May 1999. (r) On June 24, 1997, Patriot granted non-qualified options to purchase the equivalent of 107,335 paired shares to Mr. Novak which options vest in seven equal annual installments on the anniversary of June 24, 1997. On November 13, 1998, pursuant to an option repricing program, such non- qualified options were surrendered and exchanged for non-qualified options to purchase the equivalent of 25,641 paired shares. See "Patriot Option Repricing Program". (s) On June 24, 1997, Patriot awarded the equivalent of 60,000 restricted paired shares to Mr. Novak. The equivalent to the market price of the paired shares on the date of grant was $21.4375 and the market value of such paired shares on December 31, 1998 was $360,000. The restrictions on the shares were to lapse in 64 five equal annual installments beginning on June 24, 1998 and ending on June 24, 2002, but in connection with Mr. Novak's termination, all restrictions lapsed in May 1999. (t) Mr. Jones commenced as an officer in March 1998 and was paid by Wyndham for his services as an officer of both Patriot and Wyndham. See the "Wyndham Summary Compensation Table." (u) Mr. Stewart resigned as an officer of Patriot on March 31, 1998. (v) On July 25, 1996, Patriot's predecessor awarded the equivalent of 60,000 restricted paired shares to Mr. Stewart. Taking into account the various stock splits which occurred in 1997, the equivalent to the market value of the paired shares on the date of grant was $14.125 and the market value of such paired shares on December 31, 1998 was $360,000. The restrictions lapse in four equal annual installments beginning on July 25, 1997. (w) On April 19, 1996, Patriot's predecessor granted non-qualified options to purchase the equivalent of 42,933 paired shares to Mr. Stewart. These options were to vest in seven equal annual installments beginning April 19, 1997 but became fully vested and exercisable on October 2, 1998 in connection with Mr. Stewart's resignation. The Patriot Named Executive Officers have used the companies' facilities, including the companies' hotel properties and the companies' corporate jet services, for personal and business purposes. Option Grants in Fiscal Year 1998 for Patriot The following table sets forth the options granted with respect to the fiscal year ended December 31, 1998 to the Patriot Named Executive Officers. All amounts reported in the following table have been adjusted to reflect the stock dividend declared in the fourth quarter of 1998.
Potential Realizable Value at Assumed Annual Rates of Share Price Appreciation For Individual Grants Option Term --------------------------------------------------------------- ------------------------ Number of Percent of Total Shares Underlying Options Granted Options to Employees Exercise or Base Expiration Name Granted(#) in Fiscal Year Price($/SH) Date 5%($) 10%($) - ---- ----------------- ---------------- ---------------- ---------- ---------- ---------- Anne L. Raymond......... 88,925(a)(d) 32.2% $24.224 2/2/2008 $ 0(d) $ 0(d) 10,733(b)(d) 3.9% $24.224 2/2/2008 $ 0(d) $ 0(d) 16,303(a)(e) 25.4% $ 7.547 2/2/2008 $ 77,378 $ 196,092 1,967(b)(e) 3.1% $ 7.547 2/2/2008 $ 9,336 $ 23,659 Paul Novak.............. 25,641(c)(e) 39.9% $ 7.547 6/24/2007 $ 121,699 $ 308,409
- -------- (a) Such non-qualified options vest on the anniversary of February 2, 1998 at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. (b) Such non-qualified options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. (c) Such non-qualified options vest in seven equal annual installments on the anniversary of June 24, 1997. (d) Such non-qualified options were surrendered and canceled pursuant to the stock option repricing program and are therefore no longer outstanding. See "Patriot Stock Option Repricing Program." (e) Such non-qualified options were granted pursuant to the stock option repricing program. See "Patriot Stock Option Repricing Program." 65 Option Exercises and Year-End Holdings for Patriot The following table sets forth the number of paired shares acquired upon the exercise of options during 1998 and the value of options held at the end of 1998 by the Patriot Named Executive Officers.
Number of Securities Underlying Value of Unexercised Shares Value Unexercised In-The-Money Options at Acquired on Realized Options at December 31, 1998 (#) December 31, 1998 ($) Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ ---------- -------------------------------- ------------------------- Paul A. Nussbaum........ 449,818 $5,036,234 37,271/2,968,304 (a) William W. Evans........ -- -- 601,074/0 (a) Anne L. Raymond......... 109,760 $ 904,258 0/18,270 (a) Paul Novak.............. -- -- 3,663/21,978 (a) Rex E. Stewart.......... -- -- 225,403/0 (a)
- ------- (a) None of the unexercised options are in-the-money. Patriot Stock Option Repricing Program Patriot commenced an option repricing program for certain optionees holding stock options with an exercise price per share in excess of $7.547 on November 13, 1998. The new exercise price was based on the average stock price for the five-day period beginning November 9, 1998 and ending November 13, 1998. The following table sets forth information with respect to the executive officers of Patriot relating to the repricing of certain options previously awarded to employees during fiscal years 1997 and 1998. All optionees, other than the directors and the top two executive officers, were given the opportunity to surrender certain options in exchange for new options which have a Black-Scholes value equal to the old options, but were for fewer shares, at an exercise price of $7.547 per share. The new options retain the original vesting and expiration dates of the old options. The options set forth below were the only options repriced for the executive officers in the last ten years. Pursuant to the anti-dilution provision of the Patriot 1997 Incentive Plan, the numbers of securities, stock prices and exercise prices reported in the following table have been adjusted to reflect the stock dividend declared for the fourth quarter of 1998. 10 Year Option Repricings
Length of Number of Market Number of Original Securities Price of Securities Option Term Underlying Stock at New Underlying Remaining at Date of Options Time of Exercise Price at Exercise Options Date of Name Repricing Repriced Repricing Time of Repricing Price After Repricing Repricing ---- --------- ---------- --------- ----------------- -------- --------------- ---------------- Anne L. Raymond......... 11/13/98 88,925 $7.279 $24.224 $7.547 16,303 9 years 3 months Executive Vice 11/13/98 10,733 $7.279 $24.224 $7.547 1,967 9 years 3 months President and Chief Financial Officer Paul Novak.............. 11/13/98 107,335 $7.279 $21.079 $7.547 25,641 8 years 8 months Executive Vice President John P. Bohlmann........ 11/13/98 32,220 $7.279 $24.224 $7.547 5,903 8 years 8 months Senior Vice President 11/13/98 6,977 $7.279 $24.224 $7.547 1,279 9 years 3 months and General Counsel
66 Compensation Committee Report on Repricing of Options During fiscal 1998, the compensation committees determined that the significant drop in the price of the paired shares made it necessary for Wyndham and Patriot to implement an option repricing program. The drop in price of the paired shares was caused by a number of factors, including the enactment of federal legislation affecting the paired share REIT structure, the restricted availability of credit in the financial markets caused in part by the Russian debt crisis in late summer, and Wyndham's and Patriot's liquidity issues caused by the maturity of the forward equity contracts. Under this program, all optionees, other than the directors and the top two executive officers of Wyndham and the top two executive officers of Patriot, were given the opportunity to surrender options granted on or after January 15, 1997 in exchange for new options which have a Black-Scholes value equal to the old options, but were for fewer shares, at the average stock price for the five-day period beginning November 9, 1998 and ending November 13, 1998. The new options retain the original vesting and expiration dates of the old options. The objective of the Wyndham and Patriot stock option plans is to align the efforts of all employees toward the success of Wyndham and Patriot and to reward employees for their contributions to that success. The goals of the repricing program were to protect the interests of outside stockholders while maintaining the aggregate economic "value" of the stock options before and after the option repricing. The compensation committees determined that this option repricing program was necessary because equity incentives are an important component of the total compensation of each employee and play a substantial role in Wyndham's and Patriot's ability to retain the services of individuals essential to Wyndham's and Patriot's long-term financial success. Prior to implementation of the program, the market price of the paired shares had fallen and Wyndham and Patriot had begun to experience high staff turnover. The compensation committees felt that the effectiveness of the stock option program and Wyndham's and Patriot's ability to retain key employees would be significantly impaired unless value was restored to previously granted stock options in the form of repriced options for paired shares at prices more closely related to the current market price. Non-employee directors and the top two executive officers of Wyndham and the top two executive officers of Patriot were not eligible for participation in the option repricing program. All other executive officers, including Mr. Novak were eligible to participate in the option repricing program because the compensation committees concluded that these executives were not responsible for the decrease in the stock price. Accordingly, during 1998, the compensation committees approved offering all current employees and officers, other than the top two executive officers of Wyndham and the top two executive officers of Patriot, an opportunity to surrender stock options issued between January 15, 1997 and November 13, 1998 with exercise prices above $8.10 for new options with an exercise price of $8.10 per share, the average market price of the paired shares for the five- day period beginning November 9, 1998 and ending November 13, 1998. Each optionee holding such options had the opportunity to elect to retain the old option or to accept new options for a significantly reduced number of shares that have an equivalent Black-Scholes value. Wyndham and Patriot engaged a compensation consultant to assist in the implementation of the repricing program and the Black-Scholes valuation of the previously-granted stock options. The new repriced stock options have the same Black-Scholes value as the old options, but cover much fewer shares. For most optionees, the shares underlying the repriced options represent approximately 18% of the number of shares covered by the old options. By reducing both the option price and the number of shares, the compensation committees believe this repricing program is more fair to the stockholders than the traditional repricing method which simply reduced the option price without a corresponding reduction in the number of option shares. The compensation committees did not accelerate the vesting of any regranted options, nor did they extend the time for exercise of any regranted options. For the fourth quarter of 1998, Wyndham and Patriot declared a stock dividend. Under the anti-dilution provisions of Wyndham's and Patriot's 1997 Incentive Plans, the compensation committees are given the discretion to take such action as they determine to be equitable in the event of stock dividends, stock split-up or similar occurrence. Accordingly, all options are further adjusted (both exercise prices and the number of option shares) to reflect the stock dividend. Therefore, the exercise price of the repriced options is further reduced to $7.547. 67 The compensation committees believe that the stock option repricing program, which reflects both a reduction in the number of shares issuable upon exercise and a reduction in the per share exercise price but preserves the original vesting schedule and expiration dates of the original options, strikes an appropriate balance between the interests of Wyndham and Patriot, their stockholders and option holders. The lower exercise prices in effect under the repriced options make those options valuable once again to the option holders who are critical to Wyndham's and Patriot's future success and financial performance. Mr. Nussbaum was not initially eligible for the 1998 stock option repricing program. However, as part of his resignation, the compensation committee allowed Mr. Nussbaum to file an election, between June 30, 1999 and December 31, 1999, to exchange his outstanding options for new options of equal "Black- Scholes" value at the then current market price. It is expected that the new options will be for significantly fewer shares. Because of Mr. Nussbaum's continued involvement with the companies as both a director and a consultant, the compensation committees believe that Mr. Nussbaum's separation package should have a large equity component. In this way, Mr. Nussbaum's economic interests would be aligned with the stockholders'. Mr. Nussbaum will benefit from the repriced options only if the share price increases. Submitted by the Wyndham Compensation Committee Arch K. Jacobson James C. Leslie Submitted by the Patriot Compensation Committee John C. Deterding Gregory R. Dillon Arch K. Jacobson 68 Executive Compensation for Wyndham The following table sets forth the base compensation that Wyndham paid to its Chief Executive Officer and to five executive officers other than the Chief Executive Officer of Wyndham (collectively, the "Wyndham Named Executive Officers") whose base salary and bonus exceeded $100,000 during the fiscal year ending December 31, 1998. Summary Compensation Table
Long Term Annual Compensation(a) Compensation Awards ----------------------- ------------------------ Securities Restricted Underlying Name and Principal Stock Options All Other Position Year Salary($) Bonus($) Awards($) (#) (b) Compensation($) - ------------------ ---- --------- -------- ---------- ---------- --------------- James D. Carreker (c)... 1998 $571,036 -- -- -- $ 648(d) Chief Executive Officer and Chairman of the Board Karim Alibhai........... 1998 $353,886 $140,000 -- 300,532(e) $1,466(d) President and Chief 1997 $ 72,916 -- -- 300,532(f) -- Operating Officer Leslie V. Bentley....... 1998 $320,192 $120,000 -- 117,928(g) $2,308(d) Executive Vice President Stanley M. Koonce, Jr... 1998 $310,920 $120,000 -- 117,928(g) $ 792(d) Executive Vice President Richard A. Holtzman..... 1998 $348,070 $200,000 $ 930,000(h) 16,511(i) Executive Vice President Lawrence S. Jones....... 1998 $242,308 $150,000 $ 742,500(j) 115,919(k) $ 120(d) Executive Vice President and Treasurer
- -------- (a) No Wyndham Named Executive Officer received personal benefits or perquisites in excess of the lesser of $50,000 or 10% of their aggregate salary and bonus. (b) Share amounts reflect the stock dividend distributed on January 25, 1999 to stockholders of record on December 30, 1998. (c) Mr. Carreker became Chief Executive Officer of Wyndham in January 1998. (d) For Mr. Carreker, such amount includes $360 of term life insurance premiums paid by Wyndham for the benefit of Mr. Carreker and $288 contributed by Wyndham to Mr. Carreker's 401(k) account. For Mr. Alibhai, such amount includes $113 of term life insurance premiums paid by Wyndham for the benefit of Mr. Alibhai and $1,353 contributed by Wyndham to Mr. Alibhai's 401(k) account. For Mr. Bentley, such amount includes $139 of term life insurance premiums paid by Wyndham for the benefit of Mr. Bentley and $2,169 contributed by Wyndham to Mr. Bentley's 401(k) account. For Mr. Koonce, such amount includes $146 of term life insurance premiums paid by Wyndham for the benefit of Mr. Koonce and $646 contributed by Wyndham to Mr. Koonce's 401(k) account. For Mr. Jones, such amount represents term life insurance premiums paid by Wyndham for the benefit of Mr. Jones. (e) On June 12, 1998, Wyndham granted non-qualified options to purchase the equivalent of 300,532 paired shares to Mr. Alibhai. These options vest in 12 equal installments at the beginning of each calendar quarter starting on January 1, 1998 and ending on December 31, 2000. (f) On October 1, 1997, Wyndham granted non-qualified options to purchase the equivalent of 300,532 paired shares to Mr. Alibhai. These options vest in 12 equal installments at the beginning of each calendar quarter starting on January 1, 1997 and ending on December 31, 2000. 69 (g) On February 2, 1998, Wyndham granted the named executive: 1) non-qualified options to purchase the equivalent of 10,733 paired shares which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40% and 2) non-qualified options to purchase the equivalent of 88,925 paired shares which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. On November 13, 1998, pursuant to an option repricing program, the non-qualified options to purchase the equivalent of 10,733 paired shares were surrendered and exchanged for non- qualified options to purchase the equivalent of 1,967 paired shares and the non-qualified options to purchase the equivalent of 88,925 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 16,303 paired shares. See "Wyndham Option Repricing Program". (h) On June 19, 1998, Wyndham awarded the equivalent of 40,000 restricted paired shares to Mr. Holtzman. The equivalent to the market price of the paired shares on the date of grant was $23.25 and the market value of such paired shares on December 31, 1998 was $240,000. The restrictions on the award will lapse on the anniversary of the date of grant at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. Mr. Holtzman is entitled to receive dividends on the total award during the vesting period. (i) On February 2, 1998, Wyndham granted non-qualified options to purchase the equivalent of 13,953 paired shares to Mr. Holtzman which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. On November 13, 1998, pursuant to an option repricing program, such non-qualified options were surrendered and exchanged for non-qualified options to purchase the equivalent of 2,558 paired shares. See "Wyndham Option Repricing Program". (j) On March 9, 1998, Wyndham awarded the equivalent of 30,000 restricted paired shares to Mr. Jones. The equivalent to the market price of the paired shares on the date of grant was $24.75 and the market value of such paired shares on December 31, 1998 was $180,000. The restrictions on the award will lapse on the anniversary of the date of grant at the following rates: year 1: 25%; year 2: 50%; year 3: 75% and year 4: 100%. Mr. Jones is entitled to receive dividends on the total award during the vesting period. (k) On March 9, 1998, Wyndham granted non-qualified options to purchase the equivalent of 10,733 paired shares to Mr. Jones which options vest on the anniversary of March 9, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. On April 1, 1998, Wyndham granted non-qualified options to purchase the equivalent of 85,866 paired shares to Mr. Jones which options vest in 12 equal quarterly installments beginning on April 1, 1998. On November 13, 1998, pursuant to an option repricing program, the non-qualified options to purchase the equivalent of 10,733 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 2,147 paired shares and the non-qualified options to purchase the equivalent of 85,866 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 17,173 paired shares. See "Wyndham Option Repricing Program". 70 Option Grants in Fiscal Year 1998 for Wyndham The following table sets forth the options granted with respect to the fiscal year ended December 31, 1998 to the Wyndham Named Executive Officers. All amounts reported in the following table have been adjusted to reflect the stock dividend declared in the fourth quarter of 1998.
Potential Realizable Value at Assumed Annual Rates of Share Price Appreciation For Individual Grants Option Term ---------------------------------------------------------- ------------------------ Number of Percent of Total Shares Underlying Options Granted Exercise Options to Employees or Base Expiration Name Granted(#) in Fiscal Year Price($/SH) Date 5%($) 10%($) - ---- ----------------- ---------------- ----------- ---------- ---------- ---------- Karim Alibhai........... 300,532(a) 11.5% $19.449 6/12/2008 $3,675,919 $9,315,499 Leslie V. Bentley....... 10,733(b)(d) 0.4% $24.224 2/2/2008 $ 0(d) $ 0(d) 88,925(c)(d) 3.4% $24.224 2/2/2008 $ 0(d) $ 0(d) 1,967(e) 0.6% $ 7.547 2/2/2008 $ 9,336 $ 23,659 16,303(e) 4.9% $ 7.547 2/2/2008 $ 77,378 $ 196,092 Stanley M. Koonce, Jr. ................... 10,733(b)(d) 0.4% $24.224 2/2/2008 $ 0(d) $ 0(d) 88,925(c)(d) 3.4% $24.224 2/2/2008 $ 0(d) $ 0(d) 1,967(e) 0.6% $ 7.547 2/2/2008 $ 9,336 $ 23,659 16,303(e) 4.9% $ 7.547 2/2/2008 $ 77,378 $ 196,092 Richard A. Holtzman..... 13,953(b)(d) 0.5% $24.224 2/2/2008 $ 0(d) $ 0(d) 2,558(e) 0.8% $ 7.547 2/2/2008 $ 12,141 $ 30,768 Lawrence S. Jones....... 85,866(f)(d) 3.3% $23.059 3/9/2008 $ 0(d) $ 0(d) 10,733(g)(d) 0.4% $23.059 3/9/2008 $ 0(d) $ 0(d) 17,173(e) 5.2% $ 7.547 3/9/2008 $ 81,508 $ 206,556 2,147(e) 0.6% $ 7.547 3/9/2008 $ 10,190 $ 25,824
- -------- (a) Such non-qualified options vest in 12 equal installments at the beginning of each calendar quarter starting on January 1, 1998 and ending on December 31, 2000. (b) Such non-qualified options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. (c) Such non-qualified options vest on the anniversary of February 2, 1998 at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. (d) Such non-qualified options were surrendered and canceled pursuant to the stock option repricing program and are therefore no longer outstanding. See "Wyndham Stock Option Repricing Program." (e) Such non-qualified options were granted pursuant to the stock option repricing program. See "Wyndham Stock Option Repricing Program." (f) Such options vest in 12 quarterly installments beginning on April 1, 1998. (g) Such options vest on the anniversary of March 9, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. 71 Option Exercises and Year-End Holdings for Wyndham The following table sets forth the number of paired shares acquired upon the exercise of options during 1998 and the value of options held at the end of 1998 by the Wyndham Named Executive Officers.
Number of Securities Underlying Value of Unexercised Shares Value Unexercised In-The-Money Options at Acquired on Realized Options at December 31, 1998 (#) December 31, 1998 ($) Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ ---------- -------------------------------- ------------------------- James D. Carreker....... 178,360 $2,200,606 78,048/0 (a) Leslie V. Bentley....... 82,320 $1,082,549 29,452/18,720 (a) Stanley M. Koonce, Jr... 82,320 $1,118,564 29,452/18,720 (a) Lawrence S. Jones....... -- -- 3,220/16,100 (a)
- -------- (a) None of the unexercised options are in-the-money. 72 Wyndham Stock Option Repricing Program Wyndham commenced an option repricing program for certain optionees holding stock options with an exercise price per share in excess of $7.547 on November 13, 1998. The new exercise price was based on the average stock price for the five-day period beginning November 9, 1998 and ending November 13, 1998. The following table sets forth information with respect to the executive officers of Wyndham relating to the repricing of certain options previously awarded to employees during fiscal years 1997 and 1998. All optionees, other than the directors and the top two executive officers, were given the opportunity to surrender certain options in exchange for new options which have a Black-Scholes value equal to the old options, but were for fewer shares, at an exercise price of $7.547 per share. The new options retain the original vesting and expiration dates of the old options. The options set forth below were the only options repriced for the executive officers in the last ten years. Pursuant to the anti-dilution provision of the Wyndham 1997 Incentive Plan, the numbers of securities, stock prices and exercise prices reported in the following table have been adjusted to reflect the stock dividend declared for the fourth quarter of 1998. 10 Year Option Repricings
Number of Number of Market Securities Length of Securities Price of Exercise Underlying Original Option Underlying Stock at Price at New Options Term Remaining Date of Options Time of Time of Exercise After at Date of Repricing Repriced Repricing Repricing Price Repricing Repricing Name --------- ---------- --------- --------- -------- ---------- ---------------- Leslie V. Bentley ...... 11/13/98 88,925 $7.279 $24.224 $7.547 16,303 9 years 3 months Executive Vice 11/13/98 10,733 $7.279 $24.224 $7.547 1,967 9 years 3 months President Stanley M. Koonce, Jr... 11/13/98 88,925 $7.279 $24.224 $7.547 16,303 9 years 3 months Executive Vice 11/13/98 10,733 $7.279 $24.224 $7.547 1,967 9 years 3 months President Lawrence S. Jones....... 11/13/98 85,866 $7.279 $23.059 $7.547 17,173 9 years 4 months Executive Vice 11/13/98 10,733 $7.279 $23.059 $7.547 2,147 9 years 4 months President and Treasurer Richard A. Holtzman..... 11/13/98 13,953 $7.279 $24.224 $7.547 2,558 9 years 3 months Executive Vice President Thomas W. Lattin........ 11/13/98 33,625 $7.279 $24.224 $7.547 6,617 9 years 3 months Executive Vice President Michael A. Grossman..... 11/13/98 41,806 $7.279 $24.224 $7.547 7,665 9 years 3 months Executive Vice 11/13/98 10,733 $7.279 $24.224 $7.547 1,967 9 years 3 months President Carla S. Moreland....... 11/13/98 32,200 $7.279 $24.224 $7.547 5,903 9 years 3 months Senior Vice President 11/13/98 6,977 $7.279 $24.224 $7.547 1,279 9 years 3 months and General Counsel
For Compensation Committee Report on Repricing of Options, see page 80. Report of the Compensation Committees of the Boards of Directors of Wyndham and Patriot on Executive Compensation This compensation committee report relates to compensation decisions made by Wyndham's and Patriot's compensation committees. This compensation committee report shall not be deemed incorporated by reference by any general statement incorporating by reference this joint proxy statement/prospectus into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that Wyndham or Patriot specifically incorporates this information by reference, and shall not otherwise be deemed filed under such laws. 73 Objectives of Executive Compensation. Wyndham's and Patriot's executive compensation programs are intended to attract, motivate and retain key executives who are capable of leading Wyndham and Patriot effectively and continuing their long-term growth. The compensation programs for executives are comprised of base salary, annual incentives and long-term incentive awards. Base salary is targeted to be within a reasonable range of compensation for comparable companies and for comparable levels of expertise by executives. Annual incentives are based upon the achievement of one or more performance goals. Wyndham and Patriot use stock options and other equity based compensation in their long-term incentive programs. Compensation Committee Procedures. The compensation committees of the Boards of Directors establish the general compensation policies of Wyndham and Patriot and implement and monitor the compensation and incentive plans and policies of Wyndham and Patriot. The Wyndham compensation committee is composed of two independent directors, none of whom is currently an officer or employee of Wyndham. The Patriot compensation committee is composed of three independent directors, none of whom is currently or was formerly an officer or employee of Patriot. Final compensation determinations for each fiscal year are generally made after the end of the fiscal year, after audited financial statements for such year become available. At that time, bonuses, if any, are determined for the past year's performance, base salaries for the following fiscal year are set and long-term incentives, if any, are granted. The compensation committees engage compensation consultants to advise the committees with respect to executive compensation matters, including compensation amounts and the relative allocation of compensation among base salary, annual incentive compensation and long-term incentive compensation. The compensation committees, working with these compensation consultants, established quantitative and qualitative performance targets for the year ending December 31, 1998 for both annual and long-term compensation awards. The results of this review are reflected in the annual incentive compensation decisions for the fiscal year ended December 31, 1998 and in the base salary levels for the fiscal year ending December 31, 1999. In setting base salary and determining annual incentive and long-term incentive awards, the compensation committees review compensation levels of executive officers at other hospitality companies and real estate investment trusts with revenues comparable to those of Wyndham and Patriot . Some of these companies are the same companies that comprise the NAREIT Total Return Equity Index to which Wyndham's and Patriot's stock performances are compared in this joint proxy statement/prospectus. The compensation committees believe that the compensation information for these groups is comparable since both groups contain hospitality companies of similar size and performance. The compensation committees also review data contained in published surveys on executive compensation. The compensation committees based their decisions regarding 1999 base salary and annual cash bonus amounts for the year ended December 31, 1998, in part, upon their review of such data. In general, the 1999 base salary for most executives is slightly above the median base salary for comparable companies. The cash bonus for 1998 is generally below the median for comparable companies. Members of the compensation committees consult periodically by telephone prior to their joint meetings at which compensation decisions are made. The compensation committees exercise their independent discretion in determining the compensation of the executive officers. Each element of the executive compensation, as well as the compensation of the Wyndham Chief Executive Officer and the Patriot Chief Executive Officer, is discussed separately below. Base Salary. Base salaries are determined by the compensation committees after reviewing salaries paid by hospitality companies of similar size and performance. For 1999, most executives received a base salary increase of about 5 percent. Annual Incentives. Annual incentives are provided in the form of cash bonuses. Annual incentives are designed to reward executives and management for the annual growth and achievement of Wyndham and 74 Patriot. The compensation committees award cash bonuses to those executives who meet established goals, with the amount of the award based upon each executive's base salary and the level to which such executive's performance met and exceeded the established goal. For the three top senior executives, the goal for bonus is two-fold: FFO per share growth and individual performance. The FFO per share growth for 1998 was not met, and therefore, the three top senior executives did not receive any cash bonuses. For executives in hotel operations, the goal for bonus is three-fold: revenue growth versus competition, EBITDA targets and individual performance. The revenue growth goals for hotel operations for 1998 were met, while EBITDA results were mixed. Executives in hotel operations with the title Executive Vice President and above who received commendable ratings from their immediate superiors received average bonuses equal to 40 percent of their base salaries. For executives in corporate operations, the goal for bonus is two-fold: achievement of key corporate objectives such as merger integrations and corporate procurement program and individual performance. Some of the corporate objectives were met and executives in corporate operations who received commendable ratings from their immediate superiors received average bonuses equal to 40 percent of their base salaries. In some instances, bonuses have been awarded pursuant to requirements in the employment agreements. Long-term Incentives. Long-term incentives are provided through the grant of restricted stock awards and stock options. These grants are designed to align executives' interests with the long-term goals of Wyndham and Patriot and the interests of Wyndham's and Patriot's stockholders and encourage high levels of stock ownership among executives. Wyndham and Patriot have a broad-based stock option award program that is granted annually to generally all employees with the title "General Manager" and up. These annual option grants vest over three years. New executives are eligible to receive a one-time initial option grant that vests over four years. In addition, executives who are marked as high potential and key to the long-term growth of Wyndham and Patriot may receive a Chairman's award which entitles them to receive a special option award that vests over five years. Both the one-time initial option grants and the Chairman's awards are more generous in size than the annual option grants. Executives who are parties to employment agreements and other selected executives may receive restricted stock grants that vest over four years. It is intended that only a select group of executives will receive restricted stock grants. Termination Agreement with Mr. Stewart. On March 31, 1998, Mr. Stewart's employment with Patriot terminated. In consideration of Mr. Stewart's agreement to provide consulting services, the compensation committee approved certain severance arrangements which are described in more detail in the section captioned "Wyndham and Patriot Employment Agreement and Termination Agreements." Compensation of Chief Executive Officers. The compensation committees set Mr. Carreker's and Mr. Nussbaum's base salaries for the year ended December 31, 1998 at or around the median base salary for chief executive officers of comparable companies. Mr. Carreker's 1998 base salary was $571,036. Mr. Nussbaum's 1998 base salary was $555,425, an amount that represents an increase of 11% over his 1997 base salary of $500,000. In light of Wyndham's and Patriot's financial difficulties in 1998, the compensation committees did not award Mr. Carreker or Mr. Nussbaum a bonus for 1998. Except for the award made pursuant to the special retention plan described below, neither Mr. Carreker nor Mr. Nussbaum received any equity award in 1998. The compensation committees considered that it was very important to keep the top executives focused on facilitating a strategic transaction or investment that would be in the best interests of the stockholders. Towards this end, the compensation committees engaged a compensation consultant to assist them in designing a special retention and incentive plan for the top executives that would motivate the executives to support the best possible transactions for Wyndham and Patriot and that would be fair and reasonable to stockholders. The consultant advised the compensation committees that market practice would support the adoption of a special retention plan for those selected executives whose continued employment and active role in supporting a strategic transaction was critical. After careful review of the compensation consultant's report and consultation with counsel, the compensation committees approved a special retention plan. Payments would be made under the special retention plan upon the execution of, and in some instances, the closing of a strategic transaction. The compensation 75 committees considered the purchase agreement to be a strategic transaction that would entitle executives to receive payments under the special retention plan. Pursuant to the special retention plan, in February, 1999, Mr. Carreker received a paired share award in the amount of 216,666 paired shares. The first installment of 72,222 paired shares will become payable upon the closing of the investment and the related transactions, and 72,222 paired shares will become payable on each of the first and second anniversaries thereof. Pursuant to the special retention plan, in February, 1999, Mr. Nussbaum received a paired share award in the amount of 250,000 paired shares, payable in three installments. The first installment of 83,334 paired shares became payable upon the execution of the purchase agreement, and 83,333 paired shares will become payable on each of the first and second anniversaries thereof. Pursuant to the special retention plan, Mr. Evans received a paired share award in the amount of 166,666 paired shares. The first installment of 55,556 paired shares will become payable upon the closing of the investment and the related transactions, and 55,555 will become payable on each of the first and second anniversaries thereof. No other executive is eligible to receive an award under the special retention plan. Mr. Nussbaum was not initially eligible for the 1998 stock option repricing program described above. However, as part of his resignation, the Patriot compensation committee allowed Mr. Nussbaum to file an election, between June 30, 1999 and December 31, 1999, to exchange his outstanding options for new options of equal "Black-Scholes" value for fewer shares at the then current market price. Tax Considerations. The compensation committees' executive compensation strategies are designed to be cost- and tax-effective. Therefore, the compensation committees' policies are, where possible and considered appropriate, to preserve corporate tax deductions, including the deductibility of compensation paid to the Wyndham Named Officers and the Patriot Named Officers pursuant to Section 162(m) of the Internal Revenue Code, while maintaining the flexibility to approve compensation arrangements which they deem to be in the best interests of Wyndham and Patriot and their stockholders, but which may not always qualify for full tax deductibility. Submitted by the Wyndham Compensation Committee Arch K. Jacobson James C. Leslie Submitted by the Patriot Compensation Committee John C. Deterding Gregory R. Dillon Arch K. Jacobson Compensation Committee Interlocks and Insider Participation for Wyndham and Patriot With respect to Wyndham, during 1998 Mr. Carreker served on the compensation committee of Crow Family Holdings and Ms. Groenteman is a director of Wyndham and the chief operating officer of Crow Family Holdings. Wyndham and Patriot Employment Agreements and Termination Agreements Patriot entered into an employment agreement as of April 14, 1997 with Mr. Carreker, pursuant to which Mr. Carreker serves as Chief Executive Officer and as Chairman of the Board of Wyndham for a term of five years beginning on January 5, 1998. Mr. Carreker's base salary is $571,036. This agreement is automatically extended for an additional two-year term unless either party elects to terminate it by notice in writing at least 90 days prior to the second anniversary of the agreement or even-numbered anniversary date thereafter. Mr. Carreker is eligible to receive incentive compensation to be determined by the compensation committee of an amount up to 100% of his base compensation. 76 Patriot entered into an employment agreement as of April 14, 1997 with Mr. Nussbaum, pursuant to which Mr. Nussbaum serves as Chief Executive Officer and Chairman of the Board of Patriot from July 1, 1997 until January 5, 2003, the fifth anniversary of the effective date of the Wyndham merger. Mr. Nussbaum's employment with Patriot terminated as of February 26, 1999, for reasons other than for cause. Pursuant to the terms of his separation agreement, which was based in part on the provisions of Mr. Nussbaum's employment agreement, Patriot has agreed to pay Mr. Nussbaum severance in the amount of $3.2 million, to provide for certain benefits for two years and an office and secretarial support for three years. In addition, all of Mr. Nussbaum's outstanding stock options vested and became exercisable and all of Mr. Nussbaum's restricted stock became fully vested and nonforfeitable. In accordance with the separation agreement, the stock options will remain outstanding for their remaining terms and at Mr. Nussbaum's election, which must be made between June 1, 1999 and December 31, 1999, Mr. Nussbaum's existing stock options will be exchanged on a Black-Scholes neutral basis for new options with an exercise price equal to the fair market value of the common stock at the time of the exchange. Pursuant to the separation agreement, Patriot also agrees to guarantee the repayment of Mr. Nussbaum's outstanding indebtedness to NationsBank, and upon the earlier of the closing of the investment and related transactions or December 31, 1999, Patriot will assume the NationsBank loan in exchange for a personal recourse note of Mr. Nussbaum which will become payable at the end of six years and will carry an interest rate of 5.5% per annum. Further, Mr. Nussbaum received a new grant of 250,000 shares of restricted stock, payable in three installments over two years. Finally, Mr. Nussbaum agreed to provide consulting services to Patriot for two years, for which he will receive a fee of $75,000 per month for the first 12 months and $50,000 per month for the next 12 months. Wyndham entered into an employment agreement as of October 1, 1997 with Mr. Alibhai, pursuant to which Mr. Alibhai serves as President and Chief Operating Officer of Wyndham for a term of three years beginning on September 30, 1997, with a base salary of $350,000. This agreement is automatically extended for an additional two-year term unless either party elects to terminate it by notice in writing at least 45 days prior the second anniversary of the agreement or even-numbered anniversary date thereof, to expiration of the agreement. Additionally, Mr. Alibhai is eligible to receive incentive compensation to be determined by the compensation committee of an amount up to 80% of his annual base compensation, but in no event less than $75,000. Upon termination of employment due to the death or disability of Messrs. Carreker, Nussbaum or Alibhai, all unexercisable stock options and non-vested stock-based grants will immediately vest and will be exercisable for one year. Additionally, Wyndham or Patriot as applicable, will pay health insurance premiums for one year. If employment is terminated by Messrs. Carreker, Nussbaum or Alibhai for "good reason," or if Wyndham or Patriot, as applicable, terminates his employment without "cause," Wyndham or Patriot, as applicable, will pay such executive a severance payment in accordance with Wyndham's or Patriot's, as applicable, then current severance policies. At a minimum, Messrs. Carreker and Nussbaum would be entitled to a severance payment equal to three times the sum of his average base compensation, (determined in accordance with Mr. Nussbaum's or Mr. Carreker's employment agreement, respectively, and average incentive compensation, determined in accordance with Mr. Nussbaum's or Mr. Carreker's employment agreement, respectively. Mr. Alibhai would be entitled to a minimum severance payment equal to the sum of his average base compensation and average incentive compensation for the remaining term of his agreement or 24 months, whichever is higher, subject to certain offsets. Additionally, for a period of three years, Wyndham or Patriot, as applicable, will provide Messrs. Carreker and Nussbaum with an office and related facilities and an assistant at a location of their respective choosing. For a period of one year, Wyndham or Patriot, as applicable, would pay for Messrs. Carreker and Nussbaum the cost of executive placement services. Certain stock options and stock-based grants held by the Messrs. Carreker, Nussbaum or Alibhai will also become exercisable or nonforfeitable. If a "change in control", as defined in the employment agreements, occurs and the executive's employment is terminated for any reason other than death, disability or voluntary resignation within 18 months of such change in control, Wyndham or Patriot, as applicable, must pay the executive a lump sum amount equal to the severance payment (as defined in the employement agreements) and all stock options and other stock-based awards will become immediately exercisable or non-forfeitable. In addition, Patriot will provide the executive with a tax gross-up payment to cover any excise tax due. 77 In June 1997, Patriot entered into an employment agreement with Mr. Novak, pursuant to which Mr. Novak serves as Executive Vice President--Acquisitions and Development for a three-year term beginning June 1997, with a base salary of $275,000. Mr. Novak's employment with Patriot terminated May, 1999, for reasons other than for cause. Pursuant to the terms of Mr. Novak's employment agreement, he is entitled to receive severance in the amount of $705,500 plus health insurance for two years. In addition, all of Mr. Novak's outstanding stock options vested and became exercisable and all of Mr. Novak's restricted stock became fully vested and nonforfeitable. Mr. Novak will also be reimbursed for executive outplacement and legal fees. In February 1997, Patriot entered into an employment agreement with William W. Evans III for a three- year term beginning March 1, 1997, with an initial base salary of $300,000. Pursuant to the agreement, Mr. Evans initially served in the Office of the Chairman of Patriot. In the event Mr. Evans' employment is terminated due to death or disability: (1) Mr. Evans' beneficiaries will receive the proceeds under applicable insurance policies, (2) all stock options and other stock-based awards will become immediately exercisable or nonforfeitable and (3) for a period of one year, Mr. Evans' spouse and dependents will receive medical and related health benefits under Patriot's existing plans. In the event Mr. Evans' employment is terminated for cause or Mr. Evans voluntarily terminates his employment, he will be entitled to receive any accrued but unpaid cash compensation and benefits through the date of termination and all vested options will continue to be exercisable for their exercise term, as if his employment had not been terminated. If Patriot terminates Mr. Evans without cause or if Mr. Evans terminates his employment due to a constructive termination (as defined in his employment agreement): (i.) all stock option and other stock-based awards will become immediately exercisable or nonforfeitable, (2) for the longer of one year or the remaining length of the term of the agreement, Mr. Evans and his spouse and dependents will receive medical and related health benefits under Patriot's existing plans and (3) Patriot will pay Mr. Evans within 30 days after the date of termination, a lump sum equal to his average base salary and average incentive compensation for the remaining length of the term of the agreement, or 12 months, whichever is greater. Mr. Evans is entitled to the same benefits as Messrs. Carreker and Nussbaum in the event of a change in control as defined in the employment agreement. Mr. Evans' employment agreement was amended in late 1998 to increase his base salary to $450,000, effective November, 1998, and provide for an incentive performance bonus payable upon successful completion of certain goals established by the compensation committee. Further, the employment agreement was amended to provide for a grant of 166,666 restricted paired shares, payable in three installments over two years, contingent upon the closing of the investment and the related transactions. In addition, Mr. Evans' outstanding stock options all became vested and exercisable and all his restricted stock grants became fully vested and non-forfeitable. Finally, Patriot provided Mr. Evans with a loan pursuant to his amended employment agreement to assist him with the payment of income taxes on paired shares that vested in February 1998. As of April 14, 1997, Patriot entered into an employment agreement with Ms. Raymond and Wyndham entered into employment agreements with Messrs. Bentley and Koonce, with base salaries of $315,000, $350,000 and $315,000, respectively. These employment agreements became effective on January 5, 1998. These employment agreements have a term of three years and have substantially similar provisions as Mr. Novak's employment agreement except that the severance payment is equal to the sum of the average base and incentive compensation payable for the remaining length of the three-year term, or 18 months, whichever is greater. Ms. Raymond's position is that of Executive Vice President and Chief Financial Officer of Patriot. Mr. Bentley's position is that of Executive Vice President of Wyndham, and Mr. Koonce's position is that of Executive Vice President, Marketing and Strategic Planning of Wyndham. On March 9, 1998, Mr. Jones entered into employment agreements with both Wyndham and Patriot for a three-year term with a base salary of $300,000. Mr. Jones's position is that of Executive Vice President and Treasurer of both Wyndham and Patriot. Mr. Jones's employment agreements have provisions that are 78 substantially similar to the employment agreements for Messrs. Bentley and Koonce, except that Mr. Jones's employment agreements provide for a minimum guarantee of incentive compensation equal to 50% of his base salary. Mr. Jones is also entitled to borrow up to $750,000 from Wyndham and Patriot. Upon Mr. Jones's termination of employment, if his total compensation earned while employed at Wyndham and Patriot, including stock-based compensation, is less than $3,000,000, a portion of the loan will be forgiven. On June 19, 1998, Wyndham entered into an employment agreement with Mr. Holtzman for a three-year term with a base salary of $315,500. Mr. Holtzman's position is that of Executive Vice President of Wyndham and President of Grand Bay Hotels and Resorts. Under Mr. Holtzman's employment agreement, he is entitled to receive a guaranteed bonus of $200,000 in his initial year of employment. If Mr. Holtzman's employment is terminated by Wyndham without "cause" or Mr. Holtzman resigns for a "good reason," he will be entitled to a severance payment equal to the sum of 50% of his average base pay and bonus and the amount payable under the Wyndham's then current severance policy. Certain stock options and stock-based grants held by Mr. Holtzman will become exercisable or nonforfeitable. For a period of six months, Wyndham would pay Mr. Holtzman the cost of executive placement services. Upon a "change in control," all of Mr. Holtzman's stock options and stock-based grants will become exercisable and nonforfeitable. On March 31, 1998, Mr. Stewart's employment with Patriot terminated. Pursuant to the terms of Mr. Stewart's separation agreement, Mr. Stewart continued to receive his base salary through October 2, 1998. In addition, all of Mr. Stewart's outstanding stock options vested and became exercisable on October 2, 1998 and will remain outstanding until October 2, 2000. Mr. Stewart's restricted stock will continue to vest in accordance to its original vesting schedule and will not be forfeited as a result of Mr. Stewart's termination. In consideration for the foregoing severance arrangements, Mr. Stewart provided consulting services to Patriot for 60 days. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Except as otherwise noted, the following table sets forth certain information as of May 21, 1999 as to the security ownership of those persons owning of record or known to Wyndham and Patriot to be the beneficial owner of more than five percent of the paired shares and the security ownership of Wyndham preferred stock, Patriot preferred stock and paired shares by each of the directors of Wyndham and Patriot, director nominees and each of the executive officers of Wyndham and Patriot, and all directors and executive officers of Wyndham and Patriot as a group. All information with respect to beneficial ownership has been furnished by the respective director, director nominee, executive officer or five percent beneficial owner, as the case may be. Unless otherwise indicated, the persons named below have sole voting and investment power with respect to the number of shares set forth opposite their names. Beneficial ownership of the Wyndham preferred stock, Patriot preferred stock and paired shares has been determined for this purpose in accordance with applicable rules and regulations promulgated under the Exchange Act. The number of shares of Wyndham preferred stock, Patriot preferred stock or paired shares also includes the number of shares that the person could receive if he redeemed his partnership units under certain circumstances. As of May 21, 1999, there were 239,901,410 paired shares; 4,860,876 shares of Patriot series A preferred stock; 558,656 shares of Patriot series B preferred stock; 1,781,173 shares of Wyndham series A preferred stock; 1,781,181 shares of Wyndham series B preferred stock; 8,651,569 options to purchase a like number of paired 79 shares; 1,324,804 preferred B paired partnership units, 655,892 preferred A Wyndham partnership units, and 586,814 preferred C Wyndham partnership units outstanding.
Number of Shares and Amount and Nature of Percent of Name of Beneficial Owner Beneficial Ownership Class(a) - ------------------------ ------------------------ ---------- Karim Alibhai............................ 5,347,240(b) 2.18% Karim Alibhai............................ 171,200(w)*** 4.81%*** Leslie V. Bentley........................ 624,432(c) * John P. Bohlmann......................... 42,428(d) * Leonard Boxer............................ 59,117(e) * James D. Carreker........................ 2,028,661(f) * Harlan R. Crow........................... 12,126,729(g)(v) 4.95% Harlan R. Crow........................... 4,860,876(h)** 100%** John H. Daniels.......................... 204,987(e) * John C. Deterding........................ 54,697(e) * Gregory R. Dillon........................ 54,697(e) * Burton C. Einspruch, M.D................. 24,472(i) * William W. Evans III..................... 773,637(j) * Milton Fine.............................. 5,066,390 2.11% Susan T. Groenteman...................... 30,768(v) * Michael Grossman......................... 13,986(k) * Richard A. Holtzman...................... 98,353(x) * Arch K. Jacobson......................... 77,237(l) * Lawrence S. Jones........................ 25,711(m) * Stanley M. Koonce, Jr. .................. 613,438(n) * Thomas W. Lattin......................... 368,663(o) * James C. Leslie.......................... 15,033(v) * Carla S. Moreland........................ 70,879(p) * Paul Novak............................... 96,837(q) * Paul A. Nussbaum......................... 4,275,499(r) 1.76% Anne L. Raymond.......................... 609,167(y) * Rolf E. Ruhfus........................... 1,896,505(z) * Philip J. Ward........................... 11,790(v) * Sherwood M. Weiser....................... 1,137,736(i)(s) * Sherwood M. Weiser....................... 788,795(w)*** 22.14%*** Executive officers and directors as a group (27 persons)...................... 35,749,089 14.72% Leon D. Black............................ Norman Brownstein........................ Stephen T. Clark......................... Paul Fribourg............................ Thomas H. Lee............................ Alan M. Leventhal........................ William Mack............................. Lee Niebart.............................. Marc Rowan............................... Scott Schoen............................. Scott Sperling........................... CFHS, L.L.C./Crow Family, Inc............ 11,074,443(t) 4.73% 4,768,874(u)** 98.1%**
- -------- * Less than 1%. ** Patriot preferred stock *** Wyndham series A preferred stock and Wyndham series B preferred stock 80 (a) Assumes that all partnership units and shares of Patriot preferred stock held by each person are redeemed for a paired share. The total number of shares outstanding in calculating the percentage assumes that none of the partnership units or shares of Patriot preferred stock held by other persons are redeemed for paired shares. Also assumes that all vested options to purchase paired shares are exercised. The total number of shares outstanding used in calculating the percentage assumes that no other vested or unvested options held by other persons are exercised. (b) Includes options to purchase 300,531 paired shares issued to Mr. Alibhai which are currently exercisable. The number of shares beneficially held by Mr. Alibhai includes an aggregate of 441,059 partnership units beneficially owned by Gencom Interest, Inc., a family corporation for which he serves as Vice President and of which he owns 30% of the outstanding capital stock. Mr. Alibhai disclaims beneficial ownership of these partnership units, except to the extent of his 30% ownership interest in such corporation. (c) Includes options to purchase 33,303 paired shares issued to Mr. Bentley which are currently exercisable. (d) Includes options to purchase 10,765 paired shares issued to Mr. Bohlmann which are currently exercisable. (e) Includes options to purchase 42,933 paired shares, all of which are currently exercisable. (f) Includes options to purchase 78,088 paired shares issued to Mr. Carreker which are currently exercisable. (g) The number of shares beneficially held by Mr. Crow include an aggregate of 7,265,853 paired shares held by various family limited partnerships, in which Mr. Crow controls the general partner and various family corporations and trusts in which Mr. Crow exercises control over investment decisions. Mr. Crow disclaims beneficial ownership of such paired shares. The number of shares also includes 4,860,876 shares of Patriot preferred stock held by the same family limited partnerships, corporations and trusts. Mr. Crow disclaims beneficial ownership of such Patriot preferred stock. Certain of such paired shares and Patriot preferred stock are also reported being held by CFHS LLC and Crow Family, Inc. (h) Shares of Patriot preferred stock. Mr. Crow disclaims beneficial ownership of such Patriot preferred stock to the extent such stock exceeds his pecuniary interest in the limited partnerships that directly hold the stock. Certain of such shares are also reported as held by CFHS LLC and Crow and Family, Inc. (i) Includes options to purchase 21,467 paired shares, all of which are currently exercisable. (j) Includes options to purchase 601,074 paired shares issued to Mr. Evans, all of which are currently exercisable. (k) Includes options to purchase 2,023 paired shares issued to Mr. Grossman, which are currently exercisable. (l) Includes options to purchase 64,400 paired shares issued to Mr. Jacobson, all of which are currently exercisable. (m) Includes options to purchase 6,011 paired shares issued to Mr. Jones which are currently exercisable. (n) Includes options to purchase 33,303 paired shares issued to Mr. Koonce which are currently exercisable. (o) Includes options to purchase 185,392 paired shares issued to Mr. Lattin which are currently exercisable. (p) Includes options to purchase 56,788 paired shares issued to Ms. Moreland which are currently exercisable. (q) Includes options to purchase 25,641 paired shares issued to Mr. Novak which are currently exercisable. (r) Includes options to purchase 3,005,575 paired shares issued to Mr. Nussbaum which are currently exercisable. (s) Includes an aggregate of 10,984 paired partnership units held by W L Tampa, Ltd., and 129,900 paired shares held by CHC International, Inc. Mr. Weiser disclaims beneficial ownership of such securities to the extent that they exceed his pecuniary interest in such entities. (t) Includes 6,305,569 paired shares and 4,768,874 shares of Patriot preferred stock held by various limited partnerships in which CFHS LLC serves as the general partner. All of such shares are also reported in Mr. Crow's beneficial holdings. Beneficial ownership information is based on the Schedule 13D filed by G-3 Securities, L.P., CFHS, LLC and Crow Family, Inc. on January 8, 1998. (u) Shares of Patriot preferred stock. All of such shares are also reported in Mr. Crow's beneficial holdings above. (v) Includes options to purchase 10,733 paired shares, all of which are currently exercisable. (w) Shares of Wyndham series A preferred stock and shares of Wyndham series B preferred stock. (x) Includes options to purchase 95,420 paired shares which are currently exercisable. (y) Includes options to purchase 3,851 paired shares which are currently exercisable. (z) Includes an aggregate of 1,766,936 of paired partnership units held by Summerfield Suites Management Corp., Summerfield Development Corp., Summerfield Suites Lease Corp., SFHC Lease Corp., Summerfield Investment Corp., and Witchita Consulting Co. 81 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Title Insurance Unity Title Company, a corporation wholly-owned by Mr. Nussbaum and members of his family, receives a portion of the title insurance premiums paid in connection with substantially all of the hotel acquisitions by the Companies. In many cases, these premiums are paid by the seller of the hotel, and in other cases are paid by the Companies. In 1998, Unity Title Company received in excess of $60,000 in title premiums related to hotel acquisitions by the companies. Wyndham Merger In connection with the merger of Wyndham Hotels Corporation with and into Patriot in January 1998 (the "Wyndham Merger"), Patriot entered into an Omnibus Purchase and Sale Agreement, as well as 11 individual purchase and sale agreements with various descendants of Mr. and Mrs. Trammell Crow, and various corporations, partnerships, trusts and other entities beneficially owned or controlled by such persons (collectively, the "Crow Family Members"), Mr. Carreker, Mr. Bentley and Mr. Koonce, for the acquisition of 11 hotels. Messrs. Carreker, Bentley and Koonce are referred to herein collectively as the "Wyndham Senior Executives." In connection with the Wyndham merger, the Crow Family Members received $52,227,598, 6,427,217 shares of paired common stock and 4,860,876 shares of Patriot preferred stock. Mr. Carreker received $7,661,087 and 1,638,988 shares of Paired Common Stock, Mr. Bentley received $2,189,652 and 468,423 shares of paired common stock and Mr. Koonce received $2,166,908 and 463,580 shares of paired common stock, and Ms. Groenteman received $174,530 and 37,337 shares of paired common stock. Additionally, after payment of outstanding indebtedness and other transactional expenses, the entities had available for distribution approximately $64,731,000 for the Crow Family Members, approximately $1,527,000 for Mr. Carreker, and approximately $462,000 for each of Mr. Bentley and Mr. Koonce. Also, in connection with the Wyndham Merger, stock option granted to Messrs. Carreker, Bentley and Koonce and Ms. Moreland became immediately exercisable in accordance with their terms. In connection with the Wyndham merger, Crow Family Members and certain Wyndham senior executives retained the right to receive additional consideration on April 30, 2000 based on a formula pertaining to the performance of Wyndham Riverfront New Orleans and Wyndham Garden Laguardia as set forth in the Omnibus Purchase and Sale Agreement dated April 14, 1997. Based on the performance of such properties as of December 31, 1998, the additional consideration would be $9,152,000 and $9,971,000, respectively. Mortgage Notes and Other Receivables from Unconsolidated Subsidiaries Patriot loaned $40,500,000 in the form of mortgage notes to PAH Ravinia, a corporation owned directly and indirectly by Paul Nussbaum Tom Lattin and Rex Stewart, as part of the financing for PAH Ravinia's acquisitions of the Crowne Plaza Ravinia Hotel. Patriot recognized $43,000 of interest income in 1998 related to such mortgage notes (excluding $4,268,000 of such interest eliminated for financial reporting purposes in 1998). Patriot has aggregate receivable (including mortgage notes) of $42,264,000 due from PAH Ravinia as of December 31, 1998. Patriot also loaned $31,400,000 in the form of a mortgage note to PAH Windwatch, a limited liability company owned directly and indirectly by Paul Nussbaum, Tom Lattin and Rex Stewart, as part of the financing for PAH Windwatch's acquisition of the Wyndham WindWatch Hotel. Patriot recognized $79,000 of interest income in 1998 related to such mortgage notes (excluding $2,759,000 of such interest eliminated for financial reporting purposes). Patriot had aggregate receivables (including the mortgage notes) of $32,830,000 due from PAH Windwatch as of December 31, 1998. 82 Interstate Merger In connection with the Companies acquisition of Interstate Hotels Company in June 1998, Milton Fine and various entities beneficially owned or controlled by Mr. Fine received cash and 9,706,019 shares of paired common stock. Summerfield Acquisition In connection with Wyndham's acquisition (the "Summerfield Acquisition") of SF Hotels Company, L.P. in June 1998, Rolf Ruhfus and entities beneficially owned or controlled by Mr. Ruhfus (the "Summerfield Entities") received $40,885,214 in cash and 1,368,009 units (the "Units") of limited partnership interest in each of the Patriot Partnership and the Wyndham Partnership. Additionally, pursuant to the terms of Contribution Agreement relating to the Summerfield Acquisition, the Summerfield Entities received an additional 327,993 Units in January 1999 and have earned the right to receive an additional estimated $55 million of consideration in January 2000 and January 2001 (payable, at the election of the Summerfield Entities, in either cash or additional OP Units). In connection with the Summerfield Acquisition, Rolf Ruhfus retained the right to a 15% participation with the Company in the appreciation in value of the Miami Airport Summerfield based on terms set forth in the carried interest payment agreement included as an exhibit to the Contribution Agreement. GAH Acquisition--Phase II In June 1998, in connection with certain transactions with affiliates of Gencom American Hospitality, Inc. and CHCI to acquire certain real estate and other assets, Mr. Alibhai received 156,863 partnership units and 85,600 shares of Wyndham Series A and B preferred stock. In connection with the company's acquisition of CHCI on June 30, 1998 the Company may be obligated on September 30, 2000 and September 30, 2002 to pay Mr. Alibhai and Mr. Weiser additional consideration, in each case based upon the performance of certain specific assets, based on formulas as set forth in certain merger and contribution agreements. Sale of Hotels to Milton Fine In November 1998, the companies sold the Courtyard by Marriott in Westborough, Massachusetts and the Residence Inn by Marriott in Pittsburgh, Pennsylvania, as well as 50% equity interest in each of the Courtyard by Marriott in Orange, Connecticut and the Courtyard by Marriott in St. Louis, Missouri to Milton Fine for an aggregate purchase price of $41.5 million. Loan from Beacon Capital Partners, L.P. In May 1999, Beacon Capital Partners, L.P. loaned $25 million to the companies. The loan, which bears interest at LIBOR plus 2.5% is due June 30, 1999. The loan is secured by a first mortgage on the Wyndham Batterymarch hotel, a property under construction in Boston, Massachusetts. The companies paid Beacon Capital Partners, L.P. a financing fee of 2.50% of the loan principal in May and will pay Beacon an additional fee of 0.75% of the loan principal upon maturity of the loan. Other Related Party Transactions The company licenses from Paul Nussbaum the name and trademark of Patriot American Hospitality, Inc. under a perpetual no-cost license agreement. 83 During 1998, Wyndham received hotel management fees in the aggregate amount of $8,301,956 from the partnership owning Wyndham hotels ("Hotel Partnerships") listed below, in which Crow Family Members have an interest. Some or all of the Wyndham Senior Executive Officers have an ownership interest in such Hotel Partnerships. During 1998, Wyndham received payments in the aggregate amount of $14,285,904 from the Hotel Partnerships listed below, in which Crow Family Members have an interest. Some or all of the Wyndham Senior Executive Officers have an ownership interest in such Hotel Partnerships. The payments were received as reimbursements for certain administrative, tax legal, accounting, finance, risk management, sales and marketing services provided by Wyndham to such entities.
Hotel Partnership Hotel ----------------- ----- Anatole Hotel Investors, L.P................... Wyndham Anatole Bristol Hotel Associates, Ltd.................. Wyndham Bristol Playhouse Square Hotel Limited Partnership..... Wyndham Playhouse Square MTD Associates................................. Wyndham Milwaukee Center Hotel and Convention Center Partners I-XI. Ltd........................................... Wyndham Palm Springs Amgreen-Heritage Hotel Partnership, Ltd........ Wyndham Garden Hotel-Orange Waterfront-Hotel Associates, S.E............... Wyndham Old San Juan
During 1998, Wyndham received hotel management fees in the aggregate of $14,285,904 from the ownership entity of the hotel listed below in which Milton Fine, Paul Nussbaum, Karim Alibhai, Rolf Ruhfus, or Sherwood Weiser has an interest.
1998 Aggregate Management Milt Fine and Service Fees --------- ------------------------- Marriott-Harrisburg, PA $ 265,734 Marriott Reach Resort; Key West, Fla. 201,187 Marriott-Pittsburgh Airport 294,884 Marriott-Albany, NY 340,144 Marriott Mission Valley, San Diego 323,684 Marriott Minnetonka, Minneapolis 273,466 Marriott Courtyard; St. Louis 378,029 Marriott Courtyard-Westborough; Boston 208,065 Marriott Courtyard Orange 210,486 Marriott-Ft. Lauderdale 173,532 Marriott Greentree, Pittsburgh 658,613 Marriott Providence 1,383,983 Marriott Trumbull 1,554,174 Embassy Suites Chicago 377,213 Residence Inn Pittsburgh 46,866 Hilton Garden Inn-Chicago 99 Opening Paul Nussbaum ------------- Marriott Residence Inn, Houston $ 210,737 Holiday Inn Astrodome 215,020 Days Inn Astrodome 49,350 Sheraton Astrodome 524,190 Radisson Astrodome 94,849 Ramada Astrodome -- Sheraton Edmonton 216,335 Inn at Maingate dba Doubletree Maingate 204,220
84
1998 Aggregate Management Karim Alibhai and Service Fees ------------- ------------------------- Days Inn Astrodome, Houston $ 49,350 Days Inn Greenspoint, Houston 45,530 Hampton Inn Corpus Christi 46,824 Hawthorne Suites, Houston 86,974 Holiday Inn Stevens Point, Portage County, 273,629 Wisconsin Holiday Inn Astrodome, Houston 161,733 Inn at Maingate dba Doubletree Maingate, 204,220 Kissimmee, FL Marriott Residence Inn, Houston Medical Center 210,737 Sheraton Astrodome, Houston 524,190 Sheraton Edmonton, Alberta Canada 216,335 Omni Baltimore 916,675 Wyndham Miami-Biscayne Bay 449,110 Radisson Astrodome, Houston 94,849 Holiday Inn-Lenox 221,928 Wyndham Garden Market Center, Dallas 137,813 Days Inn Austin 40,314 Radisson Acapulco 21,639 Wyndham Montreal 256,793 Rolf Ruhfus ----------- Summerfield Suites-Bridgewater $141,990 Summerfield Suites-Burlington 136,446 Summerfield Suites Chicago Downtown 158,621 Summerfield Suites Charlotte 36,006 Summerfield Suites Gaithersburg 98,982 Summerfield Suites Pleasanton 51,339 Summerfield Suites Scottsdale 4,889 Summerfield Suites Harrison -- Summerfield Suites Plymouth Meeting -- Sierra Suites-Atlanta Perimeter -- Sierra Suites-Bothell 45,901 Sierra Suites-Chantilly 332 Sierra Suites-Orlando 40,272 Sierra Suites-Lake Buena Vista 36,740 Sierra Suites-Phoenix Metro Center 25,621 Sierra Suites-Piscataway 29,637 Sierra Suites-Pleasanton 23,613 Sierra Suites-Scottsdale 54,871 Sierra Suites-Waltham 32,470 Sierra Suites-Woburn 53,678 Sierra Suites-Atlanta Brookhaven -- Sierra Suites-San Jose -- Sherwood Weiser --------------- Holiday Inn Dayton Mall, Ohio 37,161 Sheraton University City, Philadelphia 161,089 Wyndham Miami-Biscayne Bay 449,110 Westin Hotel Providence, RI 143,982 Washington Duke 359,750
85 During 1998, the Company made lease payments of $455,414 to an affiliate of Summerfield Associates L.P., a partnership in which Rolf Ruhfus has an ownership interest, related to the hotels listed below: Sierra Suites Atlanta Cumberland 82,894 Sierra Suites Phoenix Camelback 181,989 Sierra Suites Westborough 190,531
During 1996, the Wyndham Senior Executive Officers incurred indebtedness to Wyndham Finance Limited Partnership ("WFLP"), a partnership owned by the Crow Family Members. Notes representing such loans were purchased by Wyndham Hotel Corporation in May of 1996 in connection with its formation for a cash payment to WFLP in the amount of $18,576,000, which is equivalent to the aggregate outstanding principal and accrued interest severally owing by the Wyndham Senior Executive Officers to WFLP. Such promissory notes, which are made payable to Wyndham, accrue interest at 6% per annum and are secured by the pledge of certain paired shares held by the note obligors. The outstanding principal and accrued interest (compounded quarterly) is payable in a single lump sum in May 2001. The aggregate principal amount of such loans, including interest are as follows:
December 31, 1998 ----------------- James D. Carreker.......................................... $5,770,000 Leslie V. Bentley.......................................... $2,124,000 Stanley M. Koonce, Jr. .................................... $2,163,000 Anne L. Raymond............................................ $5,197,000
During 1998, the Companies made payments in the aggregate amount of $1.2 million as lease payments for its corporate office space to an entity in which Crow Family Members have an ownership interest. In 1998 the Company made payments in the aggregate amounts of $66,000 as lease payments for the Summerfield divisional offices in Wichita, Kansas to Summerfield Associates L.P., a partnership in which Rolf Ruhfus has an ownership interest. The leases terminate in June 2001. During 1998, Wyndham made payments in the aggregate amount of $3,423,000 to Wyndham Travel Management Ltd. an entity owned by Lucy Billingsley (the daughter of Mr. Trammell Crow), for travel services provided to Wyndham. During 1998, Wyndham received payments in the aggregate amount of $117,900 from Crow-Los Patriots Limited, a senior assisted living facility in which certain Crow Family Members have an ownership interest. The payments were received as management fees. During 1998, Patriot provided William W. Evans, III with a non-recourse loan of $424,375 to assist Mr. Evans with the payment of income taxes in the vesting of his shares of Paired Common Stock. This loan is secured by 53,667 shares of Paired Common Stock and bears interest at 7.5% per annum. The loan is due on November 27, 2003, or 60 days after Mr. Evans' termination of employment, if earlier. During 1998, Wyndham provided Lawrence S. Jones with a non-recourse loan of $300,000. This loan bears interest at 7% per annum and is due on October 5, 2001. As provided in Mr. Jones's employment agreements, a portion of the loan may be forgiven upon Mr. Jones's termination of employment with the Companies. Wyndham is a guarantor of the obligations of Playhouse Square Hotel Limited Partnership (the owners of which include Crow Family Members and the Wyndham Senior Executive Officers) to fund operating deficits relating to such Hotel Partnership. The guarantee requires the guarantors (including Wyndham) to advance up to $600,000 per year to the extent the Hotel Partnership experiences operating deficits, with maximum required advances of $2.3 million over the term of the guarantee extending from 1995 to 2000. Playhouse Square Hotel Limited Partnership has caused to be deposited the sum of $1,000,000 as reserve to secure the payment of the 86 guaranteed obligations and to fund operating deficits. Wyndham has not to date been required to make any advance under the guarantee. Pursuant to the terms of its management agreement relating to the Wyndham Hotel at Los Angeles Airport (the "LAX"), Wyndham agreed to loan $4,560,000 to be applied to costs of refurbishment of the LAX. The refurbishment loan is evidenced by a promissory note (the "Note Receivable"), which has been partially funded in the amount of $4,237,000 as of December 31, 1998. Wyndham's obligation to make the remaining advances under the refurbishment loan is secured by a letter of credit, which, in turn, is collateralized by $440,241 (in cash) as of December 31, 1998. Prior to the formation of Wyndham, WHC LAX Associates, L.P. ("WHC LAX"), a limited partnership owned by Crow Family Members and the Wyndham Senior Executive Officers, paid Wyndham $4,560,000 in return for Wyndham's agreement to pay to WHC LAX all payments that Wyndham receives under the Note Receivable. Wyndham also agreed that, insofar as the WHC LAX's $4,560,000 payment to Wyndham exceeds advances that Wyndham is obligated to make, but has not yet made, under the Note Receivable, it would pay to WHC LAX interest at a variable rate that has ranged from 5.25% to 5.81% per annum on the unfunded amounts. As of December 31, 1998, Wyndham has accrued such interest in the amount of $71,226. In 1996, Wyndham entered into a five year service agreement with ISIS 2000, an entity owned by Crow Family Members and the Wyndham Senior Executive Officers, whereby ISIS 2000 will provide centralized reservations and property management services to all Wyndham brand hotels. The services will be provided for a fee comprised of an initial link-up charge plus a per reservation fee and a per hotel charge for the property management system. The service fee incurred by Wyndham totaled $4,368,000 in 1998. Wyndham has entered into an asset management agreement with ISIS 2000 providing for human resource, finance, accounting, payroll, legal and tax services. In addition, Wyndham had guaranteed operating leases on behalf of ISIS 2000 in the approximate amount of $1.8 million as of December 31, 1998. In connection with the Wyndham Merger, each of the owners of ISIS 2000 granted an option (collectively, the "ISIS Options") to Patriot to purchase their ownership interests in ISIS 2000. The exercise price of the ISIS Options is equal to an amount that would yield an internal rate of return equal to 12.5% on total capital contribution by the owners of ISIS 2000 as of the date of exercise. On May 7, 1999, Patriot exercised the ISIS options for an aggregate exercise price of $3,073,000. In 1998 the Company made payments in the aggregate amount of $5,467,000 to Kinetic Group Limited Partnership, an entity 50% owned by Trammell Crow Company and 50% owned by an entity owned by Crow Family Members and certain Senior Executive Officers. The payments were made under the terms of a service agreement whereby Kinetic Group Limited Partnership provides management information services to the Companies. In connection with the Wyndham merger, the 50% entity owned by Crow Family Members and certain Senior Executive Officers granted options to Patriot to purchase their ownership interests in the 50% owner of Kinetic Group Limited Partnership. The exercise price of such options is $100.00. In 1997, Wyndham entered into a construction loan agreement with the Wyndham Anatole Hotel (the "Anatole Hotel"), in which Crow Family Members have an ownership interest. Under the agreement, Wyndham made a loan in the amount of $10,000,000 for the construction costs of the hotel. Crow Family Members retained the right to receive additional consideration in an aggregate amount of up to $3,000,000 related to Wyndham Greenspoint- Houston and Wyndham-Midtown Atlanta based on contingencies related to target returns on invested capital as set forth in certain purchase and sale agreements prior to the Wyndham merger and which survive the applicable termination agreement. In 1998 the Company managed Wyndham branded hotels for certain affiliates of Hampstead Group L.L.C. An entity owned by Crow Family Members and certain Senior Executive Officers (Hamcontinpay) may be entitled to a contingent payment at such time as all such hotels achieve an investment return target of 15% on all equity capital invested through such program plus certain overhead costs. The amount of such contingent payment is 10% of all cash proceeds realized in excess of the investment return target. 87 Wyndham has made insurance premium payments to Wynright Insurance ("Wynright"), an entity owned by Crow Family Members and the Wyndham Senior Executive Officers, with respect to certain insurance policies maintained for the benefit of Wyndham and hotels owned or leased by Wyndham. Such payments totaled $730,000 in 1998. In 1996, a subsidiary of Wyndham entered into a master management agreement with Homegate, an entity in which Crow Family Members have an interest. On October 31, 1997, the management agreement with Homegate was terminated and Wyndham received $8,000,000 in cash and a promissory note in the amount of $3,000,000 in exchange for the termination. The promissory note was collected on January 9, 1998. Leonard Boxer, a director of Wyndham, is a partner is Stroock & Stroock & Lavan, a law firm that has advised Patriot on certain matters relating to the acquisition of certain real property. In 1998 the Company paid Rolf Ruhfus in excess of $598,393 in consulting fees under terms set forth in a consulting agreement entered into in connection with the Summerfield Acquisition. The Consulting Agreement expires in June 1999. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act, requires the companies' officers, directors and persons who beneficially own more than ten percent of the paired shares to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent beneficial owners also are required by rules promulgated by the SEC to furnish the companies with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such forms furnished to the companies, or written representations that no Form 5 filings were required, Wyndham and Patriot believe that during 1998 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with except that: (1) Mr. Lyon inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to the redemption and distribution of certain paired partnership units; (2) Mr. Lyon inadvertently failed to file a Form 4 with the SEC on a timely basis to report several sales of paired shares; (3) Mr. Weiser inadvertently failed to file a Form 5 with the SEC on a timely basis with respect to the redemption and distribution of certain paired partnership units and the sale of certain paired shares; (4) Mr. Holtzman inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to certain employee stock options and he and Ms. Priest both inadvertently failed to file a Form 3 with the SEC on a timely basis when they became reporting persons; (5) Mr. Alibhai inadvertently failed to file a Form 4 with the SEC on a timely basis to report the disposition of certain preferred C Wyndham partnership units; (6) Mr. Grossman inadvertently failed to file a Form 4 with the SEC on a timely basis to report the grant of certain paired shares as a bonus; (7) Mr. Novak inadvertently failed to file a Form 4 with the SEC on a timely basis to report the acquisition of certain paired shares acquired in the Wyndham merger;(8) Mr. Weiser inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to the redemption of certain paired partnership units and a Form 4 with respect to the redemption of certain paired partnership units and the sale of certain paired shares; (9) Mr. Bohlmann inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to the repricing of certain employee stock options and with respect to the purchase of certain paired shares; and (10) Mr. Lattin inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to the repricing of certain employee stock options. 88 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each of the Registrants has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, May 24, 1999. PATRIOT AMERICAN HOSPITALITY, INC. /s/ James D. Carreker By: _________________________________ James D. Carreker Chief Executive Officer 89 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each of the Registrants has duly caused the Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, May 24, 1999. WYNDHAM INTERNATIONAL, INC. /s/ James D. Carreker By: _________________________________ James D. Carreker Chairman of the Board and Chief Executive Officer 90 -----END PRIVACY-ENHANCED MESSAGE-----