<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
SEPTEMBER 17, 1997
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<S> <C>
Commission File Number 1-9319 Commission File Number 1-9320
PATRIOT AMERICAN HOSPITALITY, PATRIOT AMERICAN HOSPITALITY
INC. OPERATING COMPANY
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(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
Delaware Delaware
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(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
94-0358820 94-2878485
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(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
3030 LBJ Freeway, Suite 1500 3030 LBJ Freeway, Suite 1500
Dallas, Texas 75234 Dallas, Texas 75234
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(Address of principal executive offices) (Zip Code) (Address of principal executive offices) (Zip Code)
(972) 888-8000 (972) 888-8000
- ------------------------------------------------------ --------------------------------------------------------------------
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
- ------------------------------------------------------ --------------------------------------------------------------------
_______________________________________________________ ____________________________________________________________________
</TABLE>
1
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PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
ITEM 5. OTHER EVENTS
The Merger and Stock Split
On July 1, 1997, the entities formerly known as Patriot American
Hospitality, Inc. ("Old Patriot REIT") and California Jockey Club ("Cal Jockey")
consummated a merger pursuant to which Old Patriot REIT merged with and into Cal
Jockey, with Cal Jockey being the surviving legal entity (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 arrangement. In connection with
the Cal Jockey Merger, Cal Jockey changed its name to Patriot American
Hospitality, Inc. ("Patriot REIT") and Bay Meadows changed its name to Patriot
American Hospitality Operating Company ("Patriot Operating Company"). Patriot
REIT and Patriot Operating Company are collectively referred to herein as the
"Patriot Companies." By operation of the Cal Jockey Merger, each issued and
outstanding share of Old Patriot REIT's common stock was converted into 0.51895
shares of Patriot REIT's common stock and 0.51895 shares of Patriot Operating
Company's common stock (prior to giving effect to the 1.927-for-1 stock split
discussed below).
On July 10, 1997, the respective Boards of Directors of Patriot REIT and
Patriot Operating Company declared a 1.927-for-1 stock split on its shares of
common stock effected in the form of a stock dividend distributed on July 25,
1997 to shareholders of record on July 15, 1997.
Unless otherwise indicated, all references in the pro forma financial
statements to the number of shares, per share amounts, and market prices of the
common stock and options to purchase common stock have been restated to reflect
the impact of the conversion of each share of Old Patriot REIT common stock into
0.51895 paired shares issued in the Cal Jockey Merger and the 1.927-for-1 stock
split. In addition, all references in the pro forma financial statements to the
number of shares, per share amounts, and market prices of the common stock and
options to purchase common stock related to periods prior to Old Patriot REIT's
2-for-1 stock split distributed in March 1997 have been restated to reflect the
impact of such stock split.
Acquisition of Properties
Since June 30, 1997, Patriot REIT, through Patriot American Hospitality
Partnership, L.P. (the "Patriot REIT Partnership") and its subsidiaries, has
invested approximately $255.4 million in the acquisition of 13 hotels with a
total of 3,305 rooms (the "Recent Acquisitions").
In July 1997, Patriot REIT acquired 90% of the equity interests in four
separate limited liability companies which own the 266-room Holiday Inn
Westlake, the 196-room Radisson Beachwood, and the 113-room Courtyard by
Marriott Beachwood, all in Cleveland, Ohio and the 130-room Radisson Hotel in
Akron, Ohio (the "Snavely Portfolio") for an aggregate purchase price of
approximately $51 million. Patriot REIT's contribution was financed primarily
with funds drawn on the Patriot Companies' revolving credit facility. The
Radisson Beachwood Hotel is subject to a mortgage loan with a financial
institution with a principal balance of approximately $5.8 million. In addition,
Patriot REIT, through the Patriot REIT Partnership and its subsidiaries,
acquired the 224-room Holiday Inn at the San Francisco International Airport;
the 323-room Ramada Inn at the San Francisco International Airport; the 219-room
Ambassador West, a Grand Heritage Hotel in Chicago, Illinois; and the 124-room
Union Station Hotel, a Grand Heritage Hotel in Nashville, Tennessee for an
aggregate purchase price of approximately $60.6 million. These acquisitions were
financed primarily with the proceeds from the sale of certain land described
below and with funds drawn on the Patriot Companies' revolving credit facility.
In August 1997, Patriot REIT, through the Patriot REIT Partnership and its
subsidiaries, acquired the 227-room Park Shore Hotel in Honolulu, Hawaii for a
purchase price of approximately $23.6 million. The acquisition was financed
primarily with funds drawn on the Patriot Companies' revolving credit facility.
The following unaudited Pro Forma Condensed Combined Statements of Operations do
not include the results of operations of the Park Shore Hotel.
On September 4, 1997, Patriot REIT, through a consolidated partnership in
which the Patriot REIT Partnership owns an 85% general partnership interest and
an affiliate of Doubletree Hotels Corporation owns a 15%
2
<PAGE>
limited partnership interest, acquired four Doubletree Hotels in Houston, Texas,
Anaheim, California, St. Louis, Missouri and Overland Park, Kansas, with an
aggregate of 1,483 rooms, from Metropolitan Life Insurance Company (the "Met-
Doubletree Hotels"). The Met-Doubletree Hotels were acquired for an aggregate
purchase price of approximately $147.3 million, which was financed through
mortgage debt of $98.9 million and cash contributions to the partnership of
approximately $26.3 million by the Patriot REIT Partnership and $7.1 million by
the affiliate of Doubletree Hotels Corporation. Patriot REIT Partnership's cash
contribution was financed primarily with funds drawn on the Patriot Companies'
revolving credit facility. In addition, the Patriot Companies issued 614,046
paired units of limited partnership interest in the Patriot REIT Partnership and
the Patriot Operating Partnership, valued at approximately $15 million (based on
the average market price of the Patriot Companies' common stock for the 20 days
prior to the closing of the acquisition).
In addition, in August 1997, the Patriot Companies acquired Grand Heritage
Hotels, a hotel management and marketing company, and other Grand Heritage
subsidiaries including Grand Heritage Leasing, L.L.C. which leased three hotels
from Patriot REIT (the "Grand Heritage Acquisition"). The total acquisition
price for the Grand Heritage Acquisition was approximately $22.5 million which
was financed primarily through the issuance of 931,972 Class A preferred units
of limited partnership interest in Patriot American Hospitality Operating
Partnership, L.P., a subsidiary of Patriot Operating Company (the "Patriot
Operating Partnership"). The following unaudited Pro Forma Condensed Combined
Statements of Operations assume that Patriot Operating Company acquired the
three Grand Heritage Leasing, L.L.C. hotel leases, but do not include the
results of operations of the management company operations of Grand Heritage
Hotels and its other subsidiaries.
Land Sale
On July 14, 1997, Patriot REIT sold approximately 174 acres of land in San
Mateo, California, representing substantially all of the land which was owned by
Cal Jockey prior to the Cal Jockey Merger, to an affiliate of PaineWebber
Incorporated ("PaineWebber") for a purchase price of approximately $80.9 million
(the "PaineWebber Land Sale"). These funds were placed in a restricted trust
account in order to facilitate a tax-deferred, like-kind exchange through the
acquisition of suitable hotel properties. During July 1997, three suitable
hotels (the Holiday Inn at the San Francisco International Airport, the
Ambassador West Hotel and the Union Station Hotel) were acquired using a portion
of the proceeds from this restricted account. Patriot REIT retained ownership of
the improvements located on the land, including the Bay Meadows Racecourse (the
"Racecourse") and its related facilities. Simultaneously with the consummation
of the PaineWebber Land Sale, the PaineWebber affiliate and Patriot REIT entered
into a ground lease covering a portion of the land on which the Racecourse is
situated for a term of seven years. The lease provides for quarterly rental
payments of $750,000 through March 1998, $812,500 through March 1999, $875,000
through March 2000, $1,000,000 through March 2002 and $1,250,000 through July
2004. Additionally, Patriot REIT subleased the Racecourse land and leased the
related improvements to Patriot Operating Company in order to permit Patriot
Operating Company to continue horseracing operations at the Racecourse through
the term of Patriot REIT's lease. The sublease is for a term of seven years with
annual payments based on percentages of revenue generated. In addition, Patriot
REIT has leased certain land adjacent to the Racecourse to Borders, Inc. (the
"Borders Lease") for an initial term of 20 years with a fixed net annual rent of
$278,500 for years 1 through 10, $362,050 for years 11 through 15 and $416,350
for years 16 through 20. In connection with the sale, Patriot REIT assigned all
of its rights and benefits under existing leases, contracts, permits and
entitlements relating to the land sold (excluding the Borders Lease) to the
PaineWebber affiliate, and the PaineWebber affiliate assumed all of Patriot
REIT's development obligations including, but not limited to, all obligations
for on and off-site improvements and all obligations under existing lease and
contracts. The parties have the option to renew such leases upon their
expiration under certain circumstances.
New Revolving Credit Facility and Term Loan
On July 21, 1997, Patriot REIT and Patriot Operating Company entered into a
revolving credit facility with Paine Webber Real Estate Securities, Inc. ("Paine
Webber Real Estate"), The Chase Manhattan Bank ("Chase") and certain other
lenders (collectively, the "Lenders") for a three-year $700 million unsecured
revolving line of credit (the "Revolving Credit Facility"). Borrowings have been
made under the Revolving Credit Facility to repay all outstanding amounts under
Old Patriot REIT's secured line of credit with Paine Webber Real Estate (the
"Old Line of Credit"). The Revolving Credit Facility also will be used for
acquisition of additional properties, businesses and other assets, for capital
expenditures and for general working capital purposes. The interest rate for the
Revolving Credit Facility ranges from LIBOR plus 1.0% to 2.0% (depending on the
Patriot Companies' leverage ratio or investment grade ratings received from the
rating agencies) or the customary alternate base rate announced from time to
time plus 0.0% to 0.5% (depending on the Patriot Companies' leverage ratio).
The interest rate currently in effect for the Revolving Credit Facility is
7.625% per annum.
3
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Additionally, Patriot REIT has entered into a commitment letter with Paine
Webber Real Estate and Chase for a $500 million term loan (the "Term Loan"). It
is anticipated that the Term Loan will be secured by specific assets and
properties of the Patriot Companies that will be transferred to a special
purpose "bankruptcy remote" entity. The Term Loan will be used to finance
payments to be made in connection with the acquisition of certain properties and
is expected to have an interest rate per annum equal to LIBOR plus 1.75%.
Effective August 4, and August 5, 1997, the Patriot Companies entered into
two interest rate swap arrangements to swap floating rate LIBOR-based interest
rates for fixed rate interest amounts as a hedge against $250 million of the
$700 million Revolving Credit Facility. As discussed above, the interest rate
currently in effect for borrowings under the Revolving Credit Facility is 7.625%
per annum. Each of the interest rate swaps covers $125 million of borrowings
under the Revolving Credit Facility and fixes the LIBOR portion of the Revolving
Credit Facility interest rate at 6.09% and 6.255%, respectively. The interest
rate swap arrangements expire November 2002.
Mortgage Loans and Other Investments
In June 1997, Patriot REIT loaned approximately $20.5 million to a
partnership affiliated with members of CHC Lease Partners relating to the
Doubletree Hotel in Glenview, Illinois which is owned by the partnership. During
July 1997, Patriot REIT loaned approximately $25.6 million to another
partnership affiliated with members of CHC Lease Partners, relating to the
Sheraton Gateway Hotel in Miami (also known as the Sheraton River House Hotel)
which is owned by such partnership. Both loans mature in two years, bear
interest at a rate per annum equal to 30-day LIBOR plus 2.75%, and are secured
by first priority liens on the respective hotels. Additionally, Patriot REIT
has purchased two additional loans from a financial institution on which
partnerships affiliated with the members of CHC Lease Partners are borrowers for
an aggregate purchase price of $57 million. One of the purchased loans, in the
principal amount of approximately $30.7 million, matures in December 2000 and
bears interest at a rate per annum equal to 8.0% until November 30, 1997, 8.5%
from December 1, 1997 until November 30, 1999, and 9.0% from December 1, 1999
until December 1, 2000. The second purchased loan, in the principal amount of
approximately $24.4 million, matures on December 31, 1999 and bears interest at
a rate per annum equal to 8.0% until December 31, 1997 and 9.5% from January 1,
1998 until December 31, 1999. Each of the purchased loans is secured by first
priority liens on the respective hotels. The notes contain certain penalties for
early repayment. In connection with such loans, Patriot REIT has entered into a
short-term financing arrangement with an affiliate of Paine Webber Real Estate,
whereby such affiliate loaned Patriot REIT $103 million through April 15, 1998
at a rate equal to the greater of 30-day LIBOR plus 1.75% or the borrowing
rate on the Revolving Credit Facility. This financing is secured by a collateral
assignment of the mortgage loans encumbering the four hotels. CHC Lease Partners
currently leases 25 of Patriot REIT's hotels and is Patriot REIT's largest
independent Lessee.
On August 1, 1997, Patriot Operating Company purchased a participating loan
from National Resort Ventures, L.P., a Delaware limited partnership, related to
the 1,013-room Buena Vista Palace Hotel in Orlando, Florida for $23.75 million
in cash (the "Participating Note"). The Buena Vista Palace Hotel is owned by a
joint venture between Equitable Life Insurance Company who owns a 55% interest
and Hotel Venture Partners, Ltd., a Florida limited partnership, who owns a 45%
interest. The Participating Note is subordinated to a ground lease, a $51,000
first leasehold mortgage loan and a separate $8.5 million participating loan.
Public Offering of Securities
In August 1997, the Patriot Companies completed a public offering of
10,580,000 paired shares of common stock (including 1,380,000 paired shares of
common stock issued upon exercise of the underwriters' over-allotment option),
with net proceeds (less underwriter discount and expenses) of approximately
$240.4 million. The net proceeds were primarily used to reduce the outstanding
debt under the Revolving Credit Facility.
4
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF PROPERTIES ACQUIRED
The index to the financial information for Minneapolis Hotels (which
include the Sheraton Park Place Hotel and the Luxeford Suites Hotel); the
Met Life Hotels (which include the Doubletree Allen Center in Houston,
Texas; the Doubletree Downtown Hotel in Tulsa, Oklahoma; the Doubletree
Hotel in Orange, California; the Doubletree Hotel and Conference Center in
St. Louis, Missouri; the Doubletree Post Oak in Houston, Texas; and the
Doubletree Hotel in Overland Park, Kansas) and the Snavely Hotels (which
include the Holiday Inn Westlake, the Radisson Beachwood Hotel, the
Courtyard by Marriott Beachwood Hotel and the Radisson Hotel in Akron,
Ohio) are included on page F-1 of this report.
(B) PRO FORMA FINANCIAL INFORMATION
The index to the separate and combined pro forma financial information for
Patriot American Hospitality, Inc. and Patriot American Hospitality
Operating Company and for the Combined Lessees is included on page F-1 of
this report.
(C) EXHIBITS
Exhibit
Number Description
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23.1 Consent of Coopers & Lybrand L.L.P.
5
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrants have duly caused the report to be signed on their behalf by the
undersigned thereunto duly authorized.
DATED: September 17, 1997
PATRIOT AMERICAN HOSPITALITY, INC.
By: /s/ Rex E. Stewart
-----------------------------------------------------
Rex E. Stewart
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
By: /s/ Rex E. Stewart
----------------------------------------------------
Rex E. Stewart
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
6
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PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INDEX TO FINANCIAL INFORMATION
PRO FORMA FINANCIAL INFORMATION
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Page
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PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996
(unaudited).................................................................................... F-8
Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 1997
(unaudited).................................................................................... F-10
Pro Forma Condensed Combined Balance Sheet as of June 30, 1997 (unaudited)........................ F-13
PATRIOT AMERICAN HOSPITALITY INC.:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996
(unaudited).................................................................................... F-16
Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 1997
(unaudited).................................................................................... F-18
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996
(unaudited).................................................................................... F-20
Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 1997
(unaudited).................................................................................... F-22
COMBINED LESSEES:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996
(unaudited) and the six months ended June 30, 1997 (unaudited)................................ F-25
HISTORICAL FINANCIAL INFORMATION
MINNEAPOLIS HOTELS (THE SHERATON PARK PLACE HOTEL AND THE LUXEFORD SUITES HOTEL):
Report of Independent Accountants -- Coopers & Lybrand L.L.P...................................... F-26
Combined Balance Sheet as of December 31, 1996.................................................... F-27
Combined Statements of Revenues Over Expenses for the year ended December 31, 1996
and the six months ended June 30, 1996 and 1997 (unaudited).................................... F-28
Combined Statement of Changes in Stockholders' Equity for the year ended December 31, 1996
and the six months ended June 30, 1997 (unaudited)............................................ F-29
Combined Statements of Cash Flows for the year ended December 31, 1996
and the six months ended June 30, 1996 and 1997 (unaudited).................................... F-30
Notes to Combined Financial Statements............................................................ F-31
THE MET LIFE HOTELS (THE DOUBLETREE ALLEN CENTER IN HOUSTON, TEXAS; THE DOUBLETREE DOWNTOWN HOTEL
IN TULSA, OKLAHOMA; THE DOUBLETREE HOTEL IN ORANGE, CALIFORNIA; THE DOUBLETREE HOTEL AND CONFERENCE
CENTER IN ST. LOUIS, MISSOURI; THE DOUBLETREE POST OAK IN HOUSTON, TEXAS; AND THE DOUBLETREE HOTEL
IN OVERLAND PARK, KANSAS):
Report of Independent Accountants -- Coopers & Lybrand L.L.P...................................... F-38
Combined Statements of Direct Revenues and Direct Operating Expenses for the year ended
December 31, 1996 and the six months ended June 30, 1996 and 1997 (unaudited).................. F-39
Notes to Combined Statements of Direct Revenues and Direct Operating Expenses..................... F-40
</TABLE>
F-1
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INDEX TO FINANCIAL INFORMATION - CONTINUED
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PAGE
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SNAVELY HOTELS (THE HOLIDAY INN WESTLAKE, THE RADISSON BEACHWOOD HOTEL, THE COURTYARD BY MARRIOTT
BEACHWOOD HOTEL AND THE RADISSON HOTEL IN AKRON, OHIO):
Report of Independent Accountants -- Coopers & Lybrand L.L.P................................... F-44
Combined Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996.................. F-45
Combined Statements of Operations the year ended December 31, 1996
and for the six months ended June 30, 1996 and 1997 (unaudited)............................ F-46
Combined Statement of Changes in Partners' Capital the year ended December 31, 1996
and for the six months ended June 30, 1997 (unaudited).................................... F-47
Combined Statements of Cash Flows for the year ended December 31, 1996
and six months ended June 30, 1996 and 1997 (unaudited).................................... F-48
Notes to Combined Financial Statements......................................................... F-49
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F-2
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
On July 1, 1997, pursuant to an Agreement and Plan of Merger (the "Cal
Jockey Merger Agreement") between the entities formerly known as Patriot
American Hospitality, Inc. ("Old Patriot REIT"), its subsidiary Patriot American
Hospitality Partnership, L.P., a limited partnership (the "Patriot REIT
Partnership"), California Jockey Club ("Cal Jockey") and Bay Meadows Operating
Company ("Bay Meadows"), Old Patriot REIT merged with and into Cal Jockey, with
Cal Jockey being the surviving legal entity (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 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. ("Patriot REIT") and Bay Meadows
changed its name to Patriot American Hospitality Operating Company ("Patriot
Operating Company").
By operation of the Cal Jockey Merger, each issued and outstanding share of
common stock, no par value per share of Old Patriot REIT ("Old Patriot REIT
Common Stock") was converted into 0.51895 shares of common stock, par value
$0.01 per share of Patriot REIT ("Patriot REIT Common Stock") and 0.51895 shares
of common stock, par value $0.01 per share of Patriot Operating Company
("Patriot Operating Company Common Stock"), which shares are paired and
transferable only as a single unit. Each paired share of Cal Jockey and Bay
Meadows common stock remains outstanding and represents the same number of
paired shares of Patriot REIT Common Stock and Patriot Operating Company Common
Stock.
In connection with the Cal Jockey Merger, Bay Meadows formed an operating
partnership (the "Patriot Operating Partnership") into which Bay Meadows
contributed its assets in exchange for units of limited partnership interest
("OP Units") of the Patriot Operating Partnership, and Cal Jockey contributed
certain of its assets to the Patriot REIT Partnership in exchange for OP Units
of the Patriot REIT Partnership (collectively, the Patriot Operating Partnership
and the Patriot REIT Partnership are referred to herein as the "Patriot
Partnerships"). Upon completion of the Cal Jockey Merger and the transactions
contemplated by the Cal Jockey Merger Agreement (the "Related Transactions"),
substantially all of the operations of Patriot REIT and Patriot Operating
Company will be conducted through the Patriot Partnerships and their
subsidiaries.
The following unaudited Pro Forma Financial Statements have been adjusted
for the purchase method of accounting whereby the Bay Meadows Racecourse
("Racecourse") facilities and related leasehold improvements owned by Cal Jockey
and Bay Meadows are adjusted to estimated fair market value. The Cal Jockey
Merger has been accounted for as a reverse acquisition whereby Cal Jockey is
considered to be the acquired company for accounting purposes.
On July 10, 1997, the respective Boards of Directors of Patriot REIT and
Patriot Operating Company declared a 1.927-for-1 stock split on its shares of
common stock effected in the form of a stock dividend distributed on July 25,
1997 to shareholders of record on July 15, 1997.
Unless otherwise indicated, all references in the pro forma financial
statements to the number of shares, per share amounts, and market prices of the
common stock and options to purchase common stock have been restated to reflect
the impact of the conversion of each share of Old Patriot REIT Common Stock into
0.51895 paired shares issued in the Cal Jockey Merger and the 1.927-for-1 stock
split. In addition, all references in the pro forma financial statements to the
number of shares, per share amounts, and market prices of the common stock and
options to purchase common stock related to periods prior to the 2-for-1 stock
split on Old Patriot REIT Common Stock effected in the form of a stock dividend
distributed on March 18, 1997 to shareholders of record on March 7, 1997 have
been restated to reflect the impact of such stock split.
As of June 30, 1997, Old Patriot REIT, through the Patriot REIT Partnership
and its subsidiaries, owned 56 hotel properties in 22 states with an aggregate
13,355 guest rooms. Old Patriot REIT, through its wholly owned subsidiaries PAH
GP, Inc. and PAH LP, Inc. owned an approximate 84.4% limited partnership
interest in the Patriot REIT Partnership.
F-3
<PAGE>
Patriot REIT leases each of its hotels, except the Crowne Plaza Ravinia
Hotel and the Marriott WindWatch Hotel, which are separately owned through
special purpose entities, to lessees that are responsible for operating the
hotels (the "Lessees"). The Lessees, in turn, have entered into separate
agreements with hotel management entities (the "Operators") to manage the
hotels. The Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel were
structured without lessees and are managed directly by an Operator.
Patriot REIT holds approximate 99% non-controlling ownership interests in
three special purpose entities (including the two entities that own the Crowne
Plaza Ravinia Hotel and the Marriott WindWatch Hotel) (the "Non-Controlled
Subsidiaries"). Patriot REIT's investments in these Non-Controlled Subsidiaries
are accounted for using the equity method of accounting and Patriot REIT's share
of their net income is reflected in Equity in Earnings of Unconsolidated
Subsidiaries in the accompanying Pro Forma Financial Statements.
Since June 30, 1997, Patriot REIT, through the Patriot REIT Partnership and
its subsidiaries, has invested approximately $255,419 in the acquisition of 13
hotels with a total of 3,305 rooms (the "Recent Acquisitions").
In July 1997, Patriot REIT acquired 90% of the equity interests in four
separate limited liability companies which own the 266-room Holiday Inn
Westlake, the 196-room Radisson Beachwood, and the 113-room Courtyard by
Marriott Beachwood, all in Cleveland, Ohio and the 130-room Radisson Hotel in
Akron, Ohio (the "Snavely Portfolio") for an aggregate purchase price of
approximately $51,066. Patriot REIT's contribution was financed primarily with
funds drawn on the Patriot Companies' revolving credit facility. The Radisson
Beachwood Hotel is subject to a mortgage loan with a financial institution with
a principal balance of approximately $5,774. In addition, Patriot REIT, through
the Patriot REIT Partnership and its subsidiaries, acquired the 224-room Holiday
Inn at the San Francisco International Airport; the 323-room Ramada Inn at the
San Francisco International Airport; the 219-room Ambassador West, a Grand
Heritage Hotel in Chicago, Illinois; and the 124-room Union Station Hotel, a
Grand Heritage Hotel in Nashville, Tennessee for an aggregate purchase price of
approximately $60,646. These acquisitions were financed primarily with the
proceeds from the sale of certain land described below and with funds drawn on
the Patriot Companies' revolving credit facility.
In August 1997, Patriot REIT, through the Patriot REIT Partnership and its
subsidiaries, acquired the 227-room Park Shore Hotel in Honolulu, Hawaii for a
purchase price of approximately $23,574. The acquisition was financed primarily
with funds drawn on the Patriot Companies' revolving credit facility. The
following unaudited Pro Forma Condensed Combined Statements of Operations do not
include the results of operations of the Park Shore Hotel.
On September 4, 1997, Patriot REIT, through a consolidated partnership in
which the Patriot REIT Partnership owns an 85% general partnership interest and
an affiliate of Doubletree Hotels Corporation owns a 15% limited partnership
interest, acquired four Doubletree Hotels in Houston, Texas, Anaheim,
California, St. Louis, Missouri and Overland Park, Kansas, with an aggregate of
1,483 rooms (the "Met-Doubletree Hotels"). The Met-Doubletree Hotels were
acquired for an aggregate purchase price of approximately $147,316, which was
financed through mortgage debt of $98,893 and cash contributions to the
partnership of approximately $26,300 by the Patriot REIT Partnership and $7,123
by the affiliate of Doubletree Hotels Corporation. Patriot REIT Partnership's
cash contribution was financed primarily with funds drawn on the Patriot
Companies' revolving credit facility. In addition, the Patriot Companies issued
614,046 paired units of limited partnership interest in the Patriot REIT
Partnership and the Patriot Operating Partnership, valued at approximately
$15,000 (based on the average market price of the Patriot Companies' common
stock for the 20 days prior to the closing of the acquisition).
In addition, in August 1997, the Patriot Companies acquired Grand Heritage
Hotels, a hotel management and marketing company, and other Grand Heritage
subsidiaries including Grand Heritage Leasing, L.L.C. which leased three hotels
from Patriot REIT (the "Grand Heritage Acquisition"). The total acquisition
price for the Grand Heritage Acquisition was approximately $22,500 which was
financed primarily through the issuance of 931,972 Class A preferred OP Units of
Patriot Operating Partnership. The following unaudited Pro Forma Condensed
Combined Statements of Operations assume that Patriot Operating Company acquired
the three Grand Heritage Leasing, L.L.C. hotel leases, but do not include the
results of operations of the management company operations of Grand Heritage
Hotels and its other subsidiaries.
As of September 1, 1997, 43 of Patriot REIT's hotels are leased to
independent Lessees (excluding the Park Shore Hotel acquired in August 1997),
eight hotels are leased to PAH RSI, L.L.C., a limited liability company owned
and controlled by certain executive officers of the Patriot
F-4
<PAGE>
Companies ("PAH RSI Lessee"), and 15 hotels are leased to Patriot Operating
Company (including the three hotel leases acquired in the Grand Heritage
Acquisition).
On July 14, 1997, Patriot REIT sold approximately 174 acres of land in San
Mateo, California, representing substantially all of the land which was owned by
Cal Jockey prior to the Cal Jockey Merger, to an affiliate of PaineWebber
Incorporated ("PaineWebber") for a purchase price of approximately $80,864 (the
"PaineWebber Land Sale"). These funds were placed in a restricted trust account
in order to facilitate a tax-deferred, like-kind exchange through the
acquisition of suitable hotel properties. During July 1997, three suitable
hotels (the Holiday Inn at the San Francisco International Airport, the
Ambassador West Hotel and the Union Station Hotel) were acquired using a portion
of the proceeds from this restricted account. Patriot REIT retained ownership of
the improvements located on the land, including the Racecourse and its related
facilities. Simultaneously with the consummation of the PaineWebber Land Sale,
the PaineWebber affiliate and Patriot REIT entered into a ground lease covering
a portion of the land on which the Racecourse is situated for a term of seven
years. The lease provides for quarterly rental payments of $750 through March
1998, $813 through March 1999, $875 through March 2000, $1,000 through March
2002 and $1,250 through July 2004. Patriot REIT has subleased the Racecourse
land and leased the related improvements to Patriot Operating Company in order
to permit Patriot Operating Company to continue horseracing operations at the
Racecourse through the term of Patriot REIT's lease. The sublease is for a term
of seven years with annual payments based on percentages of revenue generated.
In addition, Patriot REIT has leased certain land adjacent to the Racecourse to
Borders, Inc. (the "Borders Lease") for an initial term of 20 years with a fixed
net annual rent of $279 for years 1 through 10, $362 for years 11 through 15 and
$416 for years 16 through 20. In connection with the sale, Patriot REIT
assigned all of its rights and benefits under existing leases, contracts,
permits and entitlements relating to the land sold (excluding the Borders Lease)
to the PaineWebber affiliate, and the PaineWebber affiliate assumed all of
Patriot REIT's development obligations including, but not limited to, all
obligations for on and off-site improvements and all obligations under existing
lease and contracts. The parties have the option to renew such leases upon
their expiration under certain circumstances.
On July 21, 1997, the Patriot Companies entered into a revolving credit
facility with Paine Webber Real Estate Securities, Inc. ("Paine Webber Real
Estate"), The Chase Manhattan Bank ("Chase") and certain other lenders
(collectively, the "Lenders") for a three-year $700,000 unsecured revolving line
of credit (the "Revolving Credit Facility"). Borrowings have been made under the
Revolving Credit Facility to repay all outstanding amounts under Old Patriot
REIT's secured line of credit with Paine Webber Real Estate (the "Old Line of
Credit"). The Revolving Credit Facility also will be used for acquisition of
additional properties, businesses and other assets, for capital expenditures and
for general working capital purposes. The interest rate for the Revolving Credit
Facility ranges from LIBOR plus 1.0% to 2.0% (depending on the Patriot
Companies' leverage ratio or investment grade ratings received from the rating
agencies) or the customary alternate base rate announced from time to time plus
0.0% to 0.5% (depending on the Patriot Companies' leverage ratio). The interest
rate currently in effect for the Revolving Credit Facility is 7.625% per annum.
Additionally, Patriot REIT has entered into a commitment letter with Paine
Webber Real Estate and Chase for a $500,000 term loan (the "Term Loan"). It is
anticipated that the Term Loan will be secured by specific assets and properties
of the Patriot Companies that will be transferred to a special purpose
"bankruptcy remote" entity. The Term Loan will be used to finance payments to be
made in connection with the acquisition of certain properties and is expected to
have an interest rate per annum equal to LIBOR plus 1.75%.
Effective August 4, and August 5, 1997, the Patriot Companies entered into
two interest rate swap arrangements to swap floating rate LIBOR-based interest
rates for fixed rate interest amounts as a hedge against $250,000 of the
$700,000 Revolving Credit Facility. Each of the interest rate swaps covers
$125,000 of borrowings under the Revolving Credit Facility and fixes the LIBOR
portion of the Revolving Credit Facility interest rate at 6.09% and 6.255%,
respectively. The interest rate swap arrangements expire November 2002. The
following unaudited Pro Forma Condensed Combined Statements of Operations do not
include adjustments to pro forma interest expense to reflect these interest rate
swap arrangements.
In June 1997, Patriot REIT loaned approximately $20,500 to a partnership
affiliated with members of CHC Lease Partners relating to the Doubletree Hotel
in Glenview, Illinois which is owned by the partnership. In July 1997, Patriot
REIT loaned approximately $25,600 to another partnership affiliated with members
of CHC Lease Partners, relating to the Sheraton Gateway Hotel in Miami (also
known as the Sheraton River House Hotel) which is owned by such partnership.
Both loans mature in two years, bear interest at a rate per annum equal to 30-
day
F-5
<PAGE>
LIBOR plus 2.75%, and are secured by first priority liens on the respective
hotels. Additionally, Patriot REIT has purchased two additional loans from a
financial institution on which partnerships affiliated with the members of CHC
Lease Partners are borrowers for an aggregate purchase price of $57,000. One of
the purchased loans, in the principal amount of approximately $30,700, matures
in December 2000 and bears interest at a rate per annum equal to 8.0% until
November 30, 1997, 8.5% from December 1, 1997 until November 30, 1999, and 9.0%
from December 1, 1999 until December 1, 2000. The second purchased loan, in the
principal amount of approximately $24,400, matures on December 31, 1999 and
bears interest at a rate per annum equal to 8.0% until December 31, 1997 and
9.5% from January 1, 1998 until December 31, 1999. Each of the purchased loans
is secured by first priority liens on the respective hotels. The notes contain
certain penalties for early repayment. In connection with such loans, Patriot
REIT has entered into a short-term financing arrangement with an affiliate of
Paine Webber Real Estate (the "Paine Webber Mortgage Financing"), whereby such
affiliate loaned Patriot REIT $103,000 through April 15, 1998 at a rate equal to
the greater of 30-day LIBOR plus 1.75% or the borrowing rate on the Revolving
Credit Facility. This financing is secured by a collateral assignment of the
mortgage loans encumbering the four hotels. CHC Lease Partners currently leases
25 of Patriot REIT's hotels and is Patriot REIT's largest independent Lessee.
On August 1, 1997, Patriot Operating Company purchased a participating loan
from National Resort Ventures, L.P., a Delaware limited partnership, related to
the 1,013-room Buena Vista Palace Hotel in Orlando, Florida for $23,750 in cash
(the "Participating Note"). The Participating Note acquisition closed
simultaneously with the closing of the public offering of common stock discussed
below. The Buena Vista Palace Hotel is owned by a joint venture between
Equitable Life Insurance Company who owns a 55% interest and Hotel Venture
Partners, Ltd., a Florida limited partnership, who owns a 45% interest. The
Participating Note is subordinated to a ground lease, a $51,000 first leasehold
mortgage loan and a separate $8,500 participating loan.
In August 1997, the Patriot Companies completed a public offering (the
"Offering") of 10,580,000 paired shares of common stock (including 1,380,000
paired shares of common stock issued upon exercise of the underwriters' over-
allotment option), with net proceeds (less underwriter discount and expenses) of
approximately $240,400. The net proceeds were primarily used to reduce the
outstanding debt under the Revolving Credit Facility.
As of September 5, 1997, Patriot REIT owned interests in 69 hotels and
resorts and held an approximate 88.2% ownership interest in the Patriot REIT
Partnership. Patriot Operating Company held an approximate 87.2% ownership
interest in the Patriot Operating Partnership. The following unaudited Pro
Forma financial statements reflect ownership interests in the Patriot
Partnerships of 88.2%.
The following unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1996 and the six months ended June
30, 1997 of Patriot REIT and Patriot Operating Company are derived from the
individual unaudited Pro Forma Condensed Consolidated Statements of Operations
of Patriot REIT and Patriot Operating Company which are located elsewhere in
this Joint Current Report. Such pro forma information is based in part upon:
(i) the Separate and Combined Statements of Income of Cal Jockey and Bay
Meadows filed with the Cal Jockey and Bay Meadows Annual Report on
Form 10-K for the year ended December 31, 1996 and the Joint
Quarterly Report on Form 10-Q for the six months ended June 30,
1997;
(ii) the Consolidated Statements of Operations of Old Patriot REIT filed
with the Old Patriot REIT Annual Report on Form 10-K for the year
ended December 31, 1996 and the Joint Quarterly Report on Form 10-Q
for the six months ended June 30, 1997;
(iii) the historical financial statements of certain hotels acquired by
Old Patriot REIT filed in Old Patriot REIT's Current Reports on Form
8-K dated April 2, 1996, as amended, December 5, 1996 and January
16, 1997, as amended;
(iv) the historical financial statements of the Snavely Portfolio, the
combined Minneapolis Hotels (Sheraton Park Place Hotel and Luxeford
Suites Hotel) and the Met-Doubletree Hotels included in this Joint
Current Report; and
(v) the Pro Forma Condensed Combined Statements of Operations of the
Lessees which are located elsewhere in this Joint Current Report.
F-6
<PAGE>
The following unaudited Pro Forma Condensed Combined Statements of
Operations assume the following transactions have occurred at the beginning of
the periods presented:
(i) the Cal Jockey Merger and the Related Transactions have been
consummated on terms set forth in the Cal Jockey Merger Agreement;
(ii) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased that portion of the land upon which the
Racecourse is situated to Patriot REIT, and Patriot REIT has
subleased this land to Patriot Operating Company;
(iii) Patriot REIT has leased certain land to Borders, Inc.;
(iv) Patriot REIT has acquired the Recent Acquisitions;
(v) the mortgage notes to affiliates of CHC Lease Partners have been
funded;
(vi) Patriot REIT has replaced the Old Line of Credit with the Revolving
Credit Facility;
(vii) Patriot REIT has acquired the Participating Note; and
(viii) the Offering of 10,580,000 paired shares of common stock has been
completed.
In management's opinion, all material adjustments necessary to reflect the
effects of these transactions have been made. The following unaudited Pro Forma
Condensed Combined Statements of Operations are not necessarily indicative of
what the actual results of operations of Patriot REIT and Patriot Operating
Company would have been assuming such transactions had been completed as of the
beginning of the period presented, nor do they purport to represent the results
of operations for future periods. Further the unaudited Pro Forma Condensed
Combined Statement of Operations for the interim period ended June 30, 1997 is
not necessarily indicative of the results of operations for the full year.
F-7
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PATRIOT
PATRIOT AMERICAN
AMERICAN HOSPITALITY
HOSPITALITY, OPERATING
INC. COMPANY ELIMINATION PRO FORMA
RO FORMA PRO FORMA ENTRIES TOTAL
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease revenue........................... $170,766 $ -- $(36,985)(A) $133,781
Hotel revenue......................................... -- 115,618 -- 115,618
Racecourse facility and land lease revenue............ 5,945 51,946 (5,611)(B) 52,280
Interest and other income............................. 10,502 16,635 (4,746)(C) 22,391
-------- -------- -------- --------
Total revenue.............................. 187,213 184,199 (47,342) 324,070
-------- -------- -------- --------
Expenses:
Departmental costs -- hotel operations................ -- 51,962 -- 51,962
Racing facility operations............................ -- 46,351 (5,611)(B) 40,740
Ground lease expense.................................. 5,460 84 -- 5,544
General and administrative............................ 9,901 16,566 (34)(C) 26,433
Repair and maintenance................................ -- 6,534 -- 6,534
Utilities............................................. -- 6,689 -- 6,689
Interest expense...................................... 57,357 130 (4,712)(C) 52,775
Real estate and personal property taxes and
casualty insurance................................... 17,992 398 -- 18,390
Marketing............................................. -- 13,275 -- 13,275
Management fees....................................... -- 3,125 -- 3,125
Depreciation and amortization......................... 50,049 1,127 -- 51,176
Participating lease payments.......................... -- 36,985 (36,985)(A) --
-------- -------- -------- --------
Total expenses............................. 140,759 183,226 (47,342) 276,643
-------- -------- -------- --------
Income before equity in earnings of unconsolidated
subsidiaries, income tax provision and minority
interests............................................... 46,454 973 -- 47,427
Equity in earnings of unconsolidated
subsidiaries........................................ 7,559 -- -- 7,559
-------- -------- -------- --------
Income before income tax provision and minority
interests............................................... 54,013 973 -- 54,986
Income tax provision.................................. -- (421) -- (421)
-------- -------- -------- --------
Income (loss) before minority interests.................. 54,013 552 -- 54,565
Minority interest in the Patriot Partnerships......... (6,167) (65) -- (6,232)
Minority interest in consolidated subsidiaries........ (1,754) -- -- (1,754)
-------- -------- -------- --------
Net income applicable to common shareholders............. $ 46,092 $ 487 $ -- $ 46,579
======== ======== =========== ========
Net income per common paired share (E) (F)............... $ 0.69 $ 0.01 $ 0.70
======== ======== ========
Weighted average number of common paired
shares and common paired share equivalents
outstanding (F)......................................... 67,047 67,047 67,047
======== ======== ========
</TABLE>
____________________________________________________
(A) Represents elimination of participating lease revenue and expense related
to the 15 hotels leased by Patriot REIT to Patriot Operating Company.
(B) Represents elimination of rental income and expense related to the
Racecourse facility and land leased by Patriot REIT to Patriot Operating
Company.
(C) In connection with the Cal Jockey Merger, Patriot REIT Partnership
subscribed for shares of Bay Meadows common stock (which became shares of
Patriot Operating Company Common Stock in connection with the Cal Jockey
Merger) in an amount equal to the number of shares of Patriot REIT Common
Stock that were issued to Old Patriot REIT stockholders in the Cal Jockey
Merger (the "Subscription Shares"). In addition, Patriot REIT Partnership
similarly subscribed for units of limited partnership interest ("OP Units")
in the Patriot Operating
F-8
<PAGE>
Partnership in an amount equal to the number of OP Units of Patriot REIT
Partnership that were outstanding subsequent to the Cal Jockey Merger (the
"Subscribed Units"). The subscription for the Subscribed Shares and the
Subscribed Units was funded through the issuance of promissory notes in the
aggregate amount of $58,901 (the "Subscription Notes") payable to Patriot
Operating Company. The Subscription Notes accrue interest at a rate of 8%
per annum and mature December 31, 1997. The pro forma adjustment represents
the elimination of $4,712 of interest income and expense related to the
Subscription Notes and other intercompany income and expense items.
(D) The pro forma amounts presented assume an average interest rate of 7.183%
per annum (representing LIBOR plus 1.7%) on the amounts outstanding under
the Revolving Credit Facility. An increase of 0.25% in the interest rate
would increase pro forma interest expense to $54,088 and decrease net
income applicable to common shareholders to $45,421. Net income per common
share would be $0.68.
In connection with the closing of the Revolving Credit Facility, deferred
loan costs totaling approximately $13,192, including fees, legal and other
expenses were incurred and amortization expense of approximately $4,397 is
reflected in pro forma interest expense. Amortization of deferred loan
costs is computed using the straight-line method over the 3-year loan term.
As a result of the closing of the Revolving Credit Facility, deferred loan
costs totaling approximately $2,910 related to the Old Line of Credit are
to be written off. This amount will be reported as an extraordinary item in
the Patriot Companies' results of operations and has been reflected as an
adjustment to retained earnings for pro forma presentation purposes.
(E) 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.
Management believes that adoption of Statement 128 will not have a material
effect on earnings per share of the Patriot Companies.
(F) The net income per common paired share and the weighted average number of
common paired shares and common paired share equivalents have been adjusted
for (i) the March 1997 2-for-1 stock split on Old Patriot REIT Common Stock
effected in the form of a stock dividend, (ii) the conversion of each share
of Old Patriot REIT Common Stock into 0.51895 paired shares issued in the
Cal Jockey Merger, and (iii) the July 1997 1.927-for-1 stock split effected
in the form of a stock dividend.
F-9
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PATRIOT
PATRIOT AMERICAN
AMERICAN HOSPITALITY
HOSPITALITY, OPERATING
INC. COMPANY ELIMINATION PRO FORMA
PRO FORMA PRO FORMA ENTRIES TOTAL
----------- ------------- ------------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease revenue............................. $ 93,169 $ -- $ (20,328)(A) $ 72,841
Hotel revenue........................................... -- 60,403 -- 60,403
Racecourse facility and land lease revenue.............. 2,802 22,538 (2,635)(B) 22,705
Interest and other income............................... 6,927 8,609 (2,380)(C) 13,156
---------- ---------- ------------ -----------
Total revenue................................ 102,898 91,550 (25,343) 169,105
---------- ---------- ------------ -----------
Expenses:
Departmental costs -- hotel operations.................. -- 26,096 -- 26,096
Racing facility operations.............................. -- 20,282 (2,635)(B) 17,647
Ground lease expense.................................... 2,665 41 -- 2,706
General and administrative.............................. 6,629 7,635 (24)(C) 14,240
Repair and maintenance.................................. -- 3,206 -- 3,206
Utilities............................................... -- 3,151 -- 3,151
Interest expense........................................ 28,891 27 (2,356)(C) 26,562
Real estate and personal property taxes and
casualty insurance..................................... 9,676 220 -- 9,896
Marketing............................................... -- 6,443 -- 6,443
Management fees......................................... -- 1,670 -- 1,670
Depreciation and amortization........................... 25,850 564 -- 26,414
Participating lease payments............................ -- 20,328 (20,328)(A) --
---------- ---------- ------------ -----------
Total expenses............................... 73,711 89,663 (25,343) 138,031
---------- ---------- ------------ -----------
Income before equity in earnings of unconsolidated
subsidiaries, income tax provision and minority
interests................................................. 29,187 1,887 -- 31,074
Equity in earnings of unconsolidated
subsidiaries........................................... 3,093 -- -- 3,093
---------- ---------- ------------ -----------
Income before income tax provision and minority
interests................................................. 32,280 1,887 -- 34,167
Income tax provision.................................... -- (817) -- (817)
---------- ---------- ------------ -----------
Income before minority interests........................... 32,280 1,070 -- 33,350
Minority interest in the Patriot Partnerships........... (3,693) (126) -- (3,819)
Minority interest in consolidated subsidiaries.......... (979) -- -- (979)
---------- ---------- ------------ -----------
Net income (loss) applicable to common
shareholders............................................... $ 27,608 $ 944 $ -- $ 28,552
========== ========== ============ ===========
Net income per common paired share (E) (F)................. $ 0.41 $ 0.01 $ 0.42
========== ========== ===========
Weighted average number of common paired
shares and common paired share equivalents
outstanding (F)........................................... 67,047 67,047 67,047
========== ========== ===========
</TABLE>
_________________________________________
(A) Represents elimination of participating lease revenue and expense related
to the 15 hotels leased by Patriot REIT to Patriot Operating Company.
(B) Represents elimination of rental income and expense related to the
Racecourse facility and land leased by Patriot REIT to Patriot Operating
Company.
F-10
<PAGE>
(C) Represents the elimination of $2,356 of interest income and expense related
to the Subscription Notes issued to Patriot Operating Company in connection
with the subscription for shares of Patriot Operating Company Common Stock
and Patriot Operating Partnership OP Units issued in connection with the
Cal Jockey Merger and other intercompany income and expense items.
(D) The pro forma amounts presented assume an average interest rate of 7.264%
per annum (representing LIBOR plus 1.7%) on the amounts outstanding under
the Revolving Credit Facility. An increase of 0.25% in the interest rate
would increase pro forma interest expense to $27,220 and decrease net
income applicable to common shareholders to $27,971. Net income per common
share would be unchanged. In connection with the closing of the Revolving
Credit Facility, deferred loan costs totaling approximately $13,192,
including fees, legal and other expenses were incurred and amortization
expense of approximately $2,199 is reflected in pro forma interest expense.
Amortization of deferred loan costs is computed using the straight-line
method over the 3-year loan term. As a result of the closing of the
Revolving Credit Facility, deferred loan costs totaling approximately
$2,910 related to the Old Line of Credit are to be written off. This amount
will be reported as an extraordinary item in the Patriot Companies' results
of operations and has been reflected as an adjustment to retained earnings
for pro forma presentation purposes.
(E) 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.
Management believes that adoption of Statement 128 will not have a material
effect on earnings per share of the Patriot Companies.
(F) After restatement to reflect the impact of the 1.927-for-1 stock split
effected in the form of a stock dividend distributed on July 25, 1997 to
shareholders of record on July 15, 1997.
F-11
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited Pro Forma Condensed Combined Balance Sheet assumes
the following transactions have occurred as of June 30, 1997:
(ix) the Cal Jockey Merger and the Related Transactions have been
consummated on terms set forth in the Cal Jockey Merger Agreement;
(x) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased that portion of the land upon which the
Racecourse is situated to Patriot REIT, and Patriot REIT has
subleased this land to Patriot Operating Company;
(xi) Patriot REIT has leased certain land to Borders, Inc.;
(xii) Patriot REIT has acquired the Recent Acquisitions;
(xiii) the mortgage notes to affiliates of CHC Lease Partners have been
funded;
(xiv) Patriot REIT has replaced the Old Line of Credit with the Revolving
Credit Facility;
(xv) Patriot REIT has acquired the Participating Note; and
(xvi) the Offering of 10,580,000 paired shares of common stock has been
completed.
The following unaudited Pro Forma Condensed Combined Balance Sheet is
derived from Old Patriot REIT's Consolidated Balance Sheet as of June 30, 1997
and Patriot REIT's and Patriot Operating Company's Combined Balance Sheet as of
June 30, 1997 and should be read in conjunction with the financial statements
filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the
six months ended June 30, 1997 (which included the financial statements of Old
Patriot REIT as of and for the six months ended June 30, 1997). The following
unaudited Pro Forma Condensed Combined Balance Sheet does not include
adjustments to reflect the Grand Heritage Acquisition which the Patriot
Companies acquired in August 1997.
In management's opinion, all material adjustments necessary to reflect
the effect of these transactions have been made.
The Cal Jockey Merger has been accounted for as a reverse acquisition
whereby Cal Jockey is considered to be the acquired company for accounting
purposes. The unaudited Pro Forma Condensed Combined Balance Sheet reflects
adjustments for the purchase method of accounting whereby the Bay Meadows
Racecourse ("Racecourse") facilities and related leasehold improvements owned by
Cal Jockey and Bay Meadows are adjusted to estimated fair market value and Cal
Jockey's and Bay Meadows' historical shareholders' equity is eliminated. The
following Pro Forma Condensed Combined Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of June 30, 1997, nor does it purport to
represent the future financial position of Patriot REIT and Patriot Operating
Company.
F-12
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OLD PATRIOT
PATRIOT COMPANIES PRO FORMA ADJUSTMENTS
--------------------------
REIT COMBINED CAL JOCKEY PRO FORMA
HISTORICAL HISTORICAL MERGER (A) OTHER (B) TOTAL
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Net investment in hotel and resort
properties and land held for sale................. $1,011,940 $ -- $ -- $259,927 (C) $1,271,867
Net investment in Racecourse facility
and related improvements......................... -- 21,080 485 (D) -- 21,565
Mortgage notes and other receivables
from unconsolidated subsidiaries.................. 77,324 -- -- -- 77,324
Other mortgage notes and other
receivables....................................... 30,896 -- (2,900)(E) 104,475 (F) 132,471
Investment in unconsolidated
subsidiaries...................................... 12,448 -- -- 12,448
Cash and cash equivalents.......................... 8,975 4,256 -- 7,338 (G) 20,569
Restricted cash.................................... -- -- 80,864 (H) (39,320)(I) 41,544
Accounts receivable................................ 13,075 163 -- -- 13,238
Goodwill........................................... -- -- 103,121 (J) -- 103,121
Deferred expenses, net............................. 9,656 -- -- 6,094 (K) 15,750
Prepaid expenses and other assets.................. 13,087 771 -- 3,270 (L) 17,128
Deferred income taxes.............................. -- 227 -- -- 227
---------- ------- -------- -------- ----------
Total assets........................... $1,177,401 $26,497 $181,570 $341,784 $1,727,252
========== ======= ======== ======== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowings under a line of credit
facility and mortgage notes...................... $ 584,294 $ -- $ -- $ 74,303 (M) $ 658,597
Accounts payable and accrued
expenses......................................... 12,013 5,541 12,339 (N) 2,373 (O) 32,266
Note payable...................................... -- 2,900 (2,900)(E) -- --
Due to unconsolidated subsidiaries................. 6,314 -- -- -- 6,314
Minority interest in the Patriot
Partnerships...................................... 118,151 -- -- 15,000 (P) 133,151
Minority interest in consolidated
subsidiaries...................................... 15,767 -- -- 12,223 (Q) 27,990
Shareholders' equity:
Preferred stock.............................. -- -- -- -- --
Common stock................................. -- 116 459 (R) 212 (T) 787
Paid-in capital.............................. 460,029 18,384 171,228 (S) 240,583 (T) 890,224
Unearned stock compensation, net............. (16,397) -- -- -- (16,397)
Retained earnings............................ (2,770) (444) 444 (S) (2,910)(U) (5,680)
---------- ------- -------- -------- ----------
Total shareholders' equity............. 440,862 18,056 172,131 237,885 868,934
---------- ------- -------- -------- ----------
Total liabilities and shareholders'
equity................................ $1,177,401 $26,497 $181,570 $341,784 $1,727,252
========== ======= ======== ======== ==========
</TABLE>
____________________________
(A) Represents adjustments to the historical combined financial position of Old
Patriot REIT, Cal Jockey and Bay Meadows assuming the Cal Jockey Merger and
the Related Transactions and the PaineWebber Land Sale had been consummated
as of June 30, 1997.
(B) Represents adjustments to the Patriot Companies' pro forma financial
position assuming (i) Patriot REIT had acquired the Recent Acquisitions
(excluding the Park Shore Hotel acquired in August 1997); (ii) the mortgage
notes to affiliates of CHC Lease Partners had been funded; (iii) the Patriot
Companies' Old Line of Credit was
F-13
<PAGE>
replaced with the Revolving Credit Facility; (iv) Patriot REIT acquired the
Participating Note; and (v) the Offering of 10,580,000 paired shares of
common stock was completed as of June 30, 1997.
(C) Represents adjustment for the purchase of the Recent Acquisitions (excluding
the Park Shore Hotel acquired by Patriot REIT in August 1997).
(D) Represents adjustment for the purchase method of accounting whereby the
Racecourse facility and related leasehold improvements owned by Cal Jockey
and Bay Meadows are adjusted to estimated fair market value after the sale
of substantially all of the Cal Jockey land to an affiliate of PaineWebber
for $80,864.
(E) Represents the elimination of the $2,900 note payable between Cal Jockey and
Old Patriot REIT issued in connection with the Cal Jockey Merger.
(F) Represents adjustments of $80,725 to reflect the funding of the mortgage
notes to affiliates of CHC Lease Partners and $23,750 to reflect the
acquisition of the Participating Note.
(G) Represents the remaining net proceeds from the Offering.
(H) Represents the cash proceeds from the PaineWebber Land Sale. These funds
were placed in a restricted trust account in order to facilitate a tax-
deferred, like-kind exchange through the acquisition of suitable hotel
properties. In order to qualify as a tax-deferred exchange, suitable
properties must be located and exchanged and the exchange must be
effectuated within a relatively short time period allowed by Internal
Revenue Service regulations.
(I) Represents the cash proceeds from the PaineWebber Land Sale which have been
used to purchase suitable hotel properties which qualify as a tax-deferred,
like-kind exchange.
(J) Represents the purchase consideration in excess of the fair market value of
the net assets of Cal Jockey and Bay Meadows. Management primarily
attributes this amount to the paired share structure that, subsequent to the
Cal Jockey Merger, will enable Patriot REIT and Patriot Operating Company to
be a fully integrated owner and operator of hotels. The paired share tax
treatment is no longer available under the Internal Revenue Code of 1986, as
amended (the "Code"); however, Cal Jockey and Bay Meadows are one of only
four publicly-held companies in existence for which this structure has been
"grandfathered."
(K) Represents adjustments to reflect deferred loan costs associated with the
closing of the Revolving Credit Facility, net of the write-off of $2,910 of
unamortized deferred loan costs associated with the Old Line of Credit.
(L) Represents adjustment for prepaid expenses and other assets acquired in
connection with the acquisition of the Recent Acquisitions.
(M) Represents adjustments to reflect (i) replacement of the Old Line of Credit
with the Revolving Credit Facility; (ii) funds drawn on the Revolving Line
of Credit related to the acquisition of the Recent Acquisitions and the
Participating Note; (iii) the Paine Webber Mortgage Financing of
approximately $103,000 obtained to fund the mortgage notes with affiliates
of CHC Lease Partners; (iv) mortgage debt of approximately $5,774 assumed in
the acquisition of the Recent Acquisitions; and (v) application of
approximately $227,375 of net proceeds from the Offering of common stock to
reduce amounts outstanding under the Revolving Credit Facility.
(N) Represents adjustment for accrued Cal Jockey Merger costs including legal
and accounting fees, printing and various other professional fees
anticipated in connection with the Cal Jockey Merger and the Related
Transactions.
(O) Represents adjustment for accounts payable and accrued expenses assumed in
connection with the acquisition of the Recent Acquisitions.
(P) Represents adjustment to reflect 614,046 OP Units of the Patriot
Partnerships issued in connection with the acquisition of the four Met-
Doubletree Hotels.
(Q) Represents cash and property contributions of the minority interest partners
in the consolidated subsidiaries which were formed to acquire eight of the
Recent Acquisition hotel properties.
(R) Represents the exchange of shares of Old Patriot REIT Common Stock for
paired shares of Patriot REIT Common Stock and Patriot Operating Company
Common Stock. Pursuant to the Cal Jockey Merger Agreement, Old Patriot REIT
stockholders were entitled to receive, for each share of Old Patriot REIT
Common Stock held by them at the effective time of the Cal Jockey Merger,
0.51895 shares of Patriot REIT Common Stock and 0.51895 shares of Patriot
Operating Company Common Stock, which shares are paired and transferable
only as a single unit. At June 30, 1997, Old Patriot REIT had 44,311,225
shares of Old Patriot REIT Common Stock outstanding which were assumed to be
exchanged for approximately 22,995,310 paired shares of Patriot REIT Common
Stock and Patriot Operating Company Common Stock, resulting in an increase
in common stock of approximately $459, which has been offset by a
corresponding adjustment to paid-in capital.
(S) Pursuant to the Cal Jockey Merger Agreement, Old Patriot REIT stockholders
received 0.51895 shares of Patriot REIT Common Stock and 0.51895 shares of
Patriot Operating Company Common Stock for each Old Patriot REIT share. The
estimated value of the Cal Jockey and Bay Meadows paired shares, based on
the
F-14
<PAGE>
closing price of Old Patriot REIT's Common Stock on October 30, 1996, of
$17.125 (adjusted for the stock splits and Cal Jockey Merger conversion of
shares), is $33.00 per paired share. Based on 5,763,257 paired shares of Cal
Jockey common stock and Bay Meadows common stock outstanding, the total
purchase consideration is approximately $190,187. The adjustments to
shareholders' equity eliminate the historical equity accounts of Cal Jockey
and Bay Meadows which total $23,708 and record equity based on the number of
paired shares of Cal Jockey common stock and Bay Meadows common stock that
remained outstanding after the Cal Jockey Merger at $33.00 per paired share.
(T) Represents adjustments to reflect the closing of the Offering of 10,580,000
shares of common stock, par value $0.02 per paired share.
(U) Represents adjustment to record the write-off of unamortized deferred loan
costs related to the Old Line of Credit which was replaced with the
Revolving Credit Facility. This amount will be reported as an extraordinary
item in Patriot REIT's results of operations and has been reflected as an
adjustment to retained earnings for purposes of pro forma balance sheet
presentation.
F-15
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
OLD PATRIOT PATRIOT REIT
REIT (CAL JOCKEY)
HISTORICAL HISTORICAL ADJUST- PRO FORMA
(A) (B) MENTS TOTAL
------------- ------------ ------ ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease revenue.................... $75,893 $ -- $ 94,873 (C) $170,766
Rental of Racecourse facility and land......... -- 4,918 1,027 (D) 5,945
Interest and other income...................... 600 494 9,408 (E) 10,502
------- ------- -------- --------
Total revenue....................... 76,493 5,412 105,308 187,213
------- ------- -------- --------
Expenses:
Ground lease expense........................... 1,075 -- 4,385 (F) 5,460
General and administrative..................... 4,500 5,696 (295)(G) 9,901
Interest expense............................... 7,380 -- 49,977 (H) 57,357
Real estate and personal property taxes
and casualty insurance........................ 7,150 -- 10,842 (I) 17,992
Depreciation and amortization.................. 17,420 932 31,697 (J) 50,049
------- ------- -------- --------
Total expenses...................... 37,525 6,628 96,606 140,759
------- ------- -------- --------
Income (loss) before equity in earnings of
unconsolidated subsidiaries and minority
interests...................................... 38,968 (1,216) 8,702 46,454
Equity in earnings of unconsolidated subsidiaries. 5,845 -- 1,714 (K) 7,559
------- ------- -------- --------
Income (loss) before minority interests........... 44,813 (1,216) 10,416 54,013
Minority interest in Patriot REIT Partnership.. (6,767) -- 600 (L) (6,167)
Minority interest in consolidated subsidiaries. (55) -- (1,699)(M) (1,754)
------- ------- -------- --------
Net income (loss) applicable to common
shareholders................................... $37,991 $(1,216) $ 9,317 $ 46,092
======= ======= ======== ========
Net income (loss) per common share (N) (O)........ $ 1.06 $ (0.11) $ 0.69
======= ======= ========
Weighted average number of common shares
and common share equivalents (N)............... 35,938 11,106 67,047
======= ======= ========
</TABLE>
___________________________________________________
(A) Represents Old Patriot REIT's historical results of operations for the year
ended December 31, 1996.
(B) Represents the historical results of operations of Patriot REIT (formerly
known as Cal Jockey) for the year ended December 31, 1996.
(C) Represents adjustments to participating lease revenue assuming the 69 hotels
currently owned by Patriot REIT and its subsidiaries (except for the Park
Shore Hotel acquired in August 1997) had been leased to the Lessees or the
Patriot Operating Company as of January 1, 1996.
(D) Represents adjustments to Racecourse facility rental revenue as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the Related Transactions and
the PaineWebber Land Sale and (ii) rental income related to the Borders
Lease.
(E) Represents adjustments to interest and other income of (i) $1,170 related to
interest earned on notes receivable issued to the Patriot REIT Partnership
by PAH RSI Lessee in connection with the sale of certain assets and the
right to receive certain royalty fees, (ii) $8,205 related to interest
earned on the mortgage notes receivable from affiliates of CHC Lease
Partners, (ii) $48 related to the $500 mortgage note receivable issued to
the Patriot REIT Partnership by NorthCoast Hotels, L.L.C. (the "NorthCoast
Lessee"), (iii) $21 of interest earned from an unconsolidated subsidiary and
(iv) $36 related to the elimination of interest earned on the $2,900 note
F-16
<PAGE>
receivable issued to Old Patriot REIT by Cal Jockey and Bay Meadows in
connection with the Cal Jockey Merger.
(F) Represents ground lease payments pursuant to the ground lease agreement with
an affiliate of PaineWebber of $3,964 and pro forma ground lease payments to
be made with respect to certain of the hotels of $421.
(G) Represents adjustment for (i) certain administrative salaries and other
expenses not expected to be incurred by Patriot REIT of $568 and elimination
of approximately $1,344 of non-recurring legal fees and $3,284 of Cal Jockey
Merger related costs, (ii) increased salaries, insurance, travel, audit,
legal and other expenses associated with operating as a public company and
the continued growth of Patriot REIT of $150, and (iii) annual amortization
of unearned stock compensation computed on a straight-line basis over the
three to five year vesting periods of $4,751.
(H) Pro forma interest expense consists of interest expense of approximately
$40,796 related to the 69 hotels currently owned (excluding the Park Shore
Hotel which was acquired in August 1997), $7,399 related to the Paine Webber
Mortgage Financing obtained to acquire the mortgage loans with affiliates of
CHC Lease Partners, and $4,712 related to the Subscription Notes payable to
Patriot Operating Company. In addition, pro forma interest expense includes
amortization of deferred loan costs of $4,397 and amortization of
capitalized interest of $53.
If the interest rate on the Revolving Credit Facility increased by 0.25%,
interest expense would increase to approximately $58,670, net income would
decrease to $44,934 and net income per common share would decrease to $0.67
per share.
(I) Represents real estate and personal property taxes and casualty insurance to
be paid by Patriot REIT related to the 47 hotels acquired since January 1,
1996 (except for the Park Shore Hotel acquired in August 1997).
(J) Represents adjustments to depreciation related to the 47 hotels acquired by
Patriot REIT since January 1, 1996 (except for the Park Shore Hotel acquired
in August 1997) of $29,356. In addition, the amount includes adjustments to
reduce depreciation related to the Racecourse facility by $93, offset by
amortization of goodwill of $2,434 which results from the adjustment for
purchase method of accounting whereby the Racecourse facility and retained
leasehold improvements owned by Cal Jockey are adjusted to estimated fair
market value.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and improvements,
20 years for the Racecourse facility and 5 to 7 years for furniture,
fixtures and equipment ("F, F, & E"). These estimated useful lives are based
on management's knowledge of the properties and the industry in general.
Amortization of goodwill is computed using the straight-line method over a
40 year estimated useful life. Because the paired share structure is
"grandfathered" under the Code, management believes the life of the paired
share structure is perpetual. Under generally accepted accounting
principles, however, the maximum amortization period is 40 years for
intangible assets.
(K) Represents equity in income of PAH Windwatch, L.L.C. and PAH Boulders, Inc.
(L) Represents the adjustment to minority interest to reflect the minority
interest percentage subsequent to the assumed transactions of approximately
11.8%.
(M) Represents the minority interest related to the partnerships with DTR PAH
Holding, Inc. and the limited liability companies which own the Snavely
Portfolio hotels assuming such entities had been formed and the 15 hotels
owned by such entities had been acquired at January 1, 1996.
(N) The net income per common share and the weighted average number of common
shares and common share equivalents have been adjusted for (i) the March
1997 2-for-1 stock split on Old Patriot REIT Common Stock effected in the
form of a stock dividend, (ii) the conversion of each share of Old Patriot
REIT Common Stock into 0.51895 paired shares issued in the Cal Jockey
Merger, and (iii) the July 1997 1.927-for-1 stock split effected in the form
of a stock dividend, as applicable.
(O) In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a material
effect on the earnings per share of Patriot REIT.
F-17
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
________________________________________________________________________________
<TABLE>
<CAPTION>
OLD PATRIOT PATRIOT REIT
REIT (CAL JOCKEY)
HISTORICAL HISTORICAL ADJUST- PRO FORMA
(A) (B) MENTS TOTAL
------------- ------------ -------- ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease revenue......................... $71,986 $ -- $21,183 (C) $ 93,169
Rental of Racecourse facility and land.............. -- 2,017 785 (D) 2,802
Interest and other income........................... 1,132 1,715 4,080 (E) 6,927
------- ------- ------- --------
Total revenue............................ 73,118 3,732 26,048 102,898
------- ------- ------- --------
Expenses:
Ground lease expense................................ 683 -- 1,982 (F) 2,665
General and administrative.......................... 5,081 2,657 (1,109)(G) 6,629
Interest expense.................................... 17,328 -- 11,563 (H) 28,891
Real estate and personal property taxes
and casualty insurance............................. 6,966 -- 2,710 (I) 9,676
Depreciation and amortization....................... 18,006 478 7,366 (J) 25,850
------- ------- ------- --------
Total expenses........................... 48,064 3,135 22,512 73,711
------- ------- ------- --------
Income before equity in earnings of unconsolidated
subsidiaries and minority interests................... 25,054 597 3,536 29,187
Equity in earnings of unconsolidated subsidiaries...... 3,093 -- -- 3,093
------- ------- ------- --------
Income before minority interests....................... 28,147 597 3,536 32,280
Minority interest in Patriot REIT Partnership....... (4,534) -- 841 (K) (3,693)
Minority interest in consolidated subsidiaries...... (447) -- (532)(L) (979)
------- ------- ------- --------
Net income applicable to common
shareholders (M) (N)................................ $23,166 $ 597 $ 3,845 $ 27,608
======= ======= ======= ========
Net income (loss) per common share (M)................. $ 0.52 $ 0.05 $ 0.41
======= ======= ========
Weighted average number of common shares
and common share equivalents........................... 44,783 11,106 67,047
======= ======= ========
</TABLE>
____________________________________________________
(A) Represents Old Patriot REIT's historical results of operations for the six
months ended June 30, 1997.
(B) Represents the historical results of operations of Patriot REIT (formerly
known as Cal Jockey) for the six months ended June 30, 1997.
(C) Represents adjustments to participating lease revenue assuming the 69 hotels
currently owned by Patriot REIT and its subsidiaries (except for the Park
Shore Hotel acquired in August 1997) had been leased to the Lessees or the
Patriot Operating Company as of January 1, 1996.
(D) Represents adjustments to Racecourse facility rental revenue as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the Related Transactions and
the PaineWebber Land Sale and (ii) rental income related to the Borders
Lease.
(E) Represents adjustments to interest and other income of (i) $52 related to
interest earned on notes receivable issued to the Patriot REIT Partnership
by PAH RSI Lessee in connection with the sale of certain assets and the
right to receive certain royalty fees, (ii) $4,107 related to interest
earned on the mortgage notes receivable from affiliates of CHC Lease
Partners, and (iii) $79 related to the elimination of interest earned on the
$2,900 note receivable issued to Old Patriot REIT by Cal Jockey and Bay
Meadows in connection with the Cal Jockey Merger and other miscellaneous
interest income.
F-18
<PAGE>
(F) Represents ground lease payments pursuant to the ground lease agreement with
an affiliate of PaineWebber.
(G) Represents elimination of approximately $2,092 of non-recurring legal fees
and Cal Jockey Merger related costs and adjustment to the amortization of
unearned stock compensation computed on a straight-line basis over the three
to five year vesting periods of $983.
(H) Pro forma interest expense consists of interest expense of approximately
$20,569 related to the 69 hotels currently owned (excluding the Park Shore
Hotel which was acquired in August 1997), $3,741 related to the Paine Webber
Mortgage Financing obtained to acquire the mortgage loans with affiliates of
CHC Lease Partners, and $2,356 related to the Subscription Notes payable to
Patriot Operating Company. In addition, pro forma interest expense includes
amortization of deferred loan costs of $2,199 and amortization of
capitalized interest of $26.
If the interest rate on the Revolving Credit Facility increased by 0.25%,
interest expense would increase to approximately $29,549, net income would
decrease to $27,027 and net income per common share would decrease to $0.40
per share.
(I) Represents real estate and personal property taxes and casualty
insurance to be paid by Patriot REIT related to the 23 hotels acquired since
January 1, 1997 (except for the Park Shore Hotel acquired in August 1997).
(J) Represents adjustments to depreciation related to the 23 hotels acquired by
Patriot REIT since January 1, 1997 (except for the Park Shore Hotel acquired
in August 1997) of $6,208. In addition, the amount includes adjustments to
reduce depreciation related to the Racecourse facility by $59, offset by
amortization of goodwill of $1,217 which results from the adjustment for
purchase method of accounting whereby the Racecourse facility and retained
leasehold improvements owned by Cal Jockey are adjusted to estimated fair
market value.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and improvements,
20 years for the Racecourse facility and 5 to 7 years for F, F, & E. These
estimated useful lives are based on management's knowledge of the properties
and the industry in general. Amortization of goodwill is computed using the
straight-line method over a 40 year estimated useful life. Because the
paired share structure is "grandfathered" under the Code, management
believes the life of the paired share structure is perpetual. Under
generally accepted accounting principles, however, the maximum amortization
period is 40 years for intangible assets.
(K) Represents the adjustment to minority interest to reflect the minority
interest percentage subsequent to the assumed transactions of approximately
11.8%.
(L) Represents adjustments to the minority interest related to the partnerships
with DTR PAH Holding, Inc. and the limited liability companies which own the
hotels in the Snavely Portfolio assuming such entities had been formed and
the 15 hotels owned by such entities had been acquired as of January 1,
1996.
(M) The net income per common share and the weighted average number of common
shares and common share equivalents have been adjusted for the conversion of
each share of Old Patriot REIT Common Stock into 0.51895 paired shares
issued in the Cal Jockey Merger, and the July 1997 1.927-for-1 stock split
effected in the form of a stock dividend, as applicable.
(N) In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a material
effect on the earnings per share of Patriot REIT.
F-19
<PAGE>
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PATRIOT OPERATING
COMPANY
(BAY MEADOWS) PRO FORMA
HISTORICAL (A) ADJUSTMENTS (B) TOTAL
-----------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Room revenue............................................ $ -- $ 78,550 $ 78,550
Food and beverage....................................... -- 37,068 37,068
Racecourse facility revenue............................. 51,946 -- 51,946
Telephone and other hotel revenue....................... -- 10,397 10,397
Interest and other income............................... 1,526 4,712 6,238
------------ -------- --------
Total revenue................................ 53,472 130,727 184,199
------------ -------- --------
Expenses:
Departmental costs -- hotel operations.................. -- 51,962 51,962
Racecourse facility operations.......................... 45,658 693(C) 46,351
General and administrative.............................. 4,381 12,185(D) 16,566
Ground lease expense.................................... -- 84 84
Repair and maintenance.................................. -- 6,534 6,534
Utilities............................................... -- 6,689 6,689
Marketing............................................... 1,436 11,839 13,275
Management fees......................................... -- 3,125 3,125
Depreciation and amortization........................... 754 373(E) 1,127
Participating lease payments............................ -- 36,985(F) 36,985
Interest expense........................................ 130 -- 130
Real estate and personal property taxes and casualty
insurance.............................................. 398 -- 398
------------ -------- --------
Total expenses............................... 52,757 130,469 183,226
------------ -------- --------
Income before income tax provision and minority interests.. 715 258 973
Income tax provision.................................... (260) (161)(G) (421)
------------ -------- --------
Income before minority interest............................ 455 97 552
Minority interest in Patriot Operating Partnership...... -- (65)(H) (65)
------------ -------- --------
Net income applicable to common shareholders............... $ 455 $ 32 $ 487
============ ======== ========
Net income per common share (I) (J)........................ $ 0.04 $0.01
============ ========
Weighted average number of common shares and
common share equivalents outstanding (I).................. 11,106 67,047
============ ========
</TABLE>
___________________________________________________________
(A) Represents the historical results of operations of Patriot Operating
Company (formerly known as Bay Meadows) for the year ended December 31,
1996.
(B) Represents adjustments to Patriot Operating Company's results of operations
assuming 15 of Patriot REIT's hotel properties had been leased to Patriot
Operating Company as of January 1, 1996. These hotel properties include 10
of the Recent Acquisitions (the four hotels in the Snavely Portfolio, the
four Met-Doubletree Hotels and the Ambassador West Hotel and the Union
Station Hotel), the Mayfair Suites Hotel, the Tutwiler Hotel, the Holiday
Inn Redmont Hotel, the Doubletree Hotel at Allen Center and the Doubletree
Hotel in Tulsa, Oklahoma.
(C) Represents adjustment to Racecourse facility rental expense as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the Related Transactions
and (ii) the PaineWebber Land Sale.
(D) Represents (i) an adjustment of $12,746 to reflect general and
administrative expenses of the 15 Patriot REIT hotel properties assumed to
be leased to Patriot Operating Company as of January 1, 1996, (ii)
adjustments for estimated incremental general and administrative expenses
of approximately $300 and (iii) adjustments to eliminate certain expenses
not expected to be incurred by Patriot Operating Company of $861, including
approximately $472 of non-recurring legal fees and approximately $389 of
Cal Jockey Merger related costs.
F-20
<PAGE>
(E) Represents an increase in depreciation of furniture and equipment of $245,
and amortization of goodwill of $128 which results from the adjustment for
purchase method of accounting whereby the furniture and equipment owned by
Bay Meadows is adjusted to estimated fair market value. Depreciation is
computed using the straight-line method and is based upon the estimated
useful lives of 5 to 7 years for F, F & E. Amortization of goodwill is
computed using the straight-line method over a 40 year estimated useful
life. Because the paired share structure is "grandfathered" under the Code.
Management believes the life of the paired share structure is perpetual.
Under generally accepted accounting principles, however, the maximum
amortization period is 40 years for intangible assets.
(F) Represents lease payments from Patriot Operating Company to Patriot REIT
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the period
presented.
(G) Represents an adjustment to the estimated federal and state tax liability
as a result of the pro forma adjustment to Patriot Operating Company for
the year ended December 31, 1996.
(H) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the pro forma adjustments of
approximately 11.8%.
(I) The net income per common share and the weighted average number of common
shares and common share equivalents have been adjusted for (i) the March
1997 2-for-1 stock split on Old Patriot REIT Common Stock effected in the
form of a stock dividend, (ii) the conversion of each share of Old Patriot
REIT Common Stock into 0.51895 paired shares issued in the Cal Jockey
Merger, and (iii) the July 1997 1.927-for-1 stock split effected in the
form of a stock dividend, as applicable.
(J) In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a material
effect on the earnings per share of Patriot Operating Company.
F-21
<PAGE>
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PATRIOT OPERATING
COMPANY
(BAY MEADOWS) PRO FORMA
HISTORICAL (A) ADJUSTMENTS (B) TOTAL
-----------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Room revenue.......................................... $ -- $ 41,480 $ 41,480
Food and beverage..................................... -- 18,923 18,923
Racecourse facility revenue........................... 22,538 -- 22,538
Telephone and other hotel revenue..................... -- 5,728 5,728
Interest and other income............................. 525 2,356 2,881
----------- ---------- ----------
Total revenue.............................. 23,063 68,487 91,550
----------- ---------- ----------
Expenses:
Departmental costs -- hotel operations................ -- 26,096 26,096
Racecourse facility operations........................ 19,664 618(C) 20,282
General and administrative............................ 3,486 4,149(D) 7,635
Ground lease expense.................................. -- 41 41
Repair and maintenance................................ -- 3,206 3,206
Utilities............................................. -- 3,151 3,151
Marketing............................................. 497 5,946 6,443
Management fees....................................... -- 1,670 1,670
Depreciation and amortization......................... 358 206(E) 564
Participating lease payments.......................... -- 20,328(F) 20,328
Interest expense...................................... 27 -- 27
Real estate and personal property taxes and casualty
insurance............................................ 220 -- 220
----------- ---------- ----------
Total expenses............................. 24,252 65,411 89,663
----------- ---------- ----------
Income (loss) before income tax provision and minority
interests............................................... (1,189) 3,076 1,887
Income tax (provision) benefit........................ 472 (1,289)(G) (817)
----------- ---------- ----------
Income (loss) before minority interest................... (717) 1,787 1,070
Minority interest in Patriot Operating Partnership.... -- (126)(H) (126)
----------- ---------- ----------
Net income (loss) applicable to common
shareholders............................................ $ (717) $ 1,661 $ 944
=========== ========== ==========
Net income (loss) per common share (I) (J)............... $ (0.06) $ 0.01
=========== ==========
Weighted average number of common shares and
common share equivalents outstanding (I)................ 11,106 67,047
=========== ==========
</TABLE>
_________________________________________________________
(A) Represents the historical results of operations of Patriot Operating
Company (formerly known as Bay Meadows) for the six months ended June 30,
1997.
(B) Represents adjustments to Patriot Operating Company's results of operations
assuming 15 of Patriot REIT's hotel properties had been leased to Patriot
Operating Company as of January 1, 1996. These hotel properties include 10
of the Recent Acquisitions (the four hotels in the Snavely Portfolio, the
four Met-Doubletree Hotels and the Ambassador West Hotel and the Union
Station Hotel), the Mayfair Suites Hotel, the Tutwiler Hotel, the Holiday
Inn Redmont Hotel, the Doubletree Hotel at Allen Center and the Doubletree
Hotel in Tulsa, Oklahoma.
(C) Represents adjustment to Racecourse facility rental expense as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the Related Transactions
and (ii) the PaineWebber Land Sale.
(D) Represents (i) an adjustment of $5,941 to reflect general and
administrative expenses of the 15 Patriot REIT hotel properties assumed to
be leased to Patriot Operating Company as of January 1, 1996, (ii)
adjustment for certain expenses not expected to be incurred by Patriot
Operating Company of $1,792, including approximately $407 of non-recurring
legal fees and approximately $1,385 of Cal Jockey Merger related costs.
F-22
<PAGE>
(E) Represents an increase in depreciation of furniture and equipment of $142,
and amortization of goodwill of $64 which results from the adjustment for
purchase method of accounting whereby the furniture and equipment owned by
Bay Meadows is adjusted to estimated fair market value. Depreciation is
computed using the straight-line method and is based upon the estimated
useful lives of 5 to 7 years for F, F & E. Amortization of goodwill is
computed using the straight-line method over a 40 year estimated useful
life. Because the paired share structure is "grandfathered" under the Code.
Management believes the life of the paired share structure is perpetual.
Under generally accepted accounting principles, however, the maximum
amortization period is 40 years for intangible assets.
(F) Represents lease payments from Patriot Operating Company to Patriot REIT
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the period
presented.
(G) Represents an adjustment to the estimated federal and state tax liability as
a result of the pro forma adjustment to Patriot Operating Company for the
six months ended June 30, 1997.
(H) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the pro forma adjustments of
approximately 11.8%.
(I) The net income per common share and the weighted average number of common
shares and common share equivalents have been adjusted for (i) the March
1997 2-for-1 stock split on Old Patriot REIT Common Stock effected in the
form of a stock dividend, (ii) the conversion of each share of Old Patriot
REIT Common Stock into 0.51895 paired shares issued in the Cal Jockey
Merger, and (iii) the July 1997 1.927-for-1 stock split effected in the form
of a stock dividend, as applicable.
(J) In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a material
effect on the earnings per share of Patriot Operating Company.
F-23
<PAGE>
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Patriot REIT leases each of its hotels, except the Crowne Plaza Ravinia
Hotel and the Marriott WindWatch Hotel, which are separately owned through the
Non-Controlled Subsidiaries, to Lessees. The Combined Lessees subsequent to the
Cal Jockey Merger and the Related Transactions and after the Grand Heritage
Acquisition (which included the acquisition of Grand Heritage Leasing, L.L.C.
which leased three hotels from Patriot REIT) consist of CHC Lease Partners which
leases 25 hotels, NorthCoast Lessee which leases 11 hotels (excluding the Park
Shore Hotel acquired in August 1997), PAH RSI Lessee which leases eight hotels,
DTR North Canton, Inc. which leases four hotels, Crow Hotel Lessee, Inc. which
leases two hotels, and Metro Hotels Leasing Corporation which leases one hotel.
The Participating Leases provide for staggered terms of one to twelve years and
the payment of the greater of base or participating rent, plus certain
additional charges, as applicable.
The Combined Lessees' unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1996 and the six months ended June
30, 1997 are presented as if the 51 hotels that Patriot REIT currently leases to
the Combined Lessees pursuant to Participating Leases (excluding the Park Shore
Hotel acquired in August 1997) had been leased as of January 1, 1996. The three
hotels which were leased to Grand Heritage Leasing, L.L.C. are assumed to have
been leased to Patriot Operating Company and, therefore, have been eliminated
from the Pro Forma Condensed Combined Statements of Operations for the Combined
Lessees. The pro forma information is based in part upon the Statements of
Operations of CHC Lease Partners and the Statement of Operations of NorthCoast
Lessee filed with Old Patriot REIT's Annual Report on Form 10-K for the year
ended December 31, 1996 and the Statements of Operations of CHC Lease Partners,
the Statements of Operations of NorthCoast Lessee and the Statement of
Operations of PAH RSI Lessee filed with the Patriot Companies' Joint Quarterly
Report on Form 10-Q for the six months ended June 30, 1997. In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made.
The unaudited Pro Forma Condensed Combined Statements of Operations are not
necessarily indicative of what actual results of operations of the Combined
Lessees would have been assuming such transactions had been completed as of the
beginning of the periods presented, nor do they purport to represent the results
of operations for future periods. Further, the unaudited Pro Forma Condensed
Combined Statement of Operations for the interim period ended June 30, 1997 is
not necessarily indicative of the results of operations for the full year.
F-24
<PAGE>
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Room..................................... $142,022 $263,642
Food and beverage........................ 57,497 107,876
Conference center........................ 1,363 2,354
Club, club membership and spa revenue.... 17,407 31,241
Shopping center revenue.................. 976 1,730
Telephone and other...................... 17,985 31,935
-------- --------
Total revenue..................... 237,250 438,778
-------- --------
Expenses:
Departmental costs and expenses.......... 96,490 182,838
General and administrative............... 19,786 37,071
Ground lease expense..................... 903 2,496
Repair and maintenance................... 13,026 24,386
Utilities................................ 8,944 19,026
Marketing................................ 18,464 34,989
Interest expense (A)..................... 585 1,173
Insurance................................ 895 2,867
Participating lease payments (B)......... 72,841 133,780
-------- --------
Total expenses.................... 231,934 438,626
-------- --------
Income before lessee income (expense)....... 5,316 152
-------- --------
Dividend and interest income (C)............ 1,771 1,543
Management fees (D)......................... (6,032) (10,231)
Lessee general and administrative (E)....... (1,202) (2,143)
-------- --------
(5,463) (10,831)
-------- --------
Net loss.................................... $ (147) $(10,679)
======== ========
</TABLE>
________________________
(A) Represents pro forma interest expense on promissory notes issued in
connection with the acquisition of certain assets by PAH RSI Lessee,
assuming the notes were outstanding at the beginning of the period
presented.
(B) Represents lease payments calculated on a pro forma basis by applying the
provisions of the Participating Leases to the historical revenue of the
hotels.
(C) Includes dividend income on OP Units in the Patriot Partnerships which form
a portion of the required capitalization of CHC Lease Partners and
NorthCoast Lessee, respectively. Pro forma amounts exclude additional
dividend income earned on OP Units held by certain Lessees, and pro forma
interest income earned on invested cash balances.
(D) Represents pro forma management fees paid to the Operators under the terms
of their respective management agreements with the Lessees.
(E) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Patriot American Hospitality, Inc.:
We have audited the accompanying combined balance sheet of the Minneapolis
Hotels (the "Hotels") as defined in Note 1 as of December 31, 1996 and the
related combined statements of revenues over expenses, changes in stockholders'
equity and cash flows for the year then ended. These combined financial
statements are the responsibility of the Hotels' management. Our responsibility
is to express an opinion on these combined financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined financial statements were prepared for the purposes of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the report on Form 8-K of Patriot American
Hospitality, Inc. as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the Minneapolis Hotels.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects the combined financial position of the
Minneapolis Hotels as of December 31, 1996 and its combined revenues over
expenses and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
May 12, 1997
F-26
<PAGE>
MINNEAPOLIS HOTELS
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
ASSETS 1996
------------
<S> <C>
Investments in hotel properties, at cost:
Land $ 3,038,697
Buildings and improvements 19,863,022
Furniture and equipment 5,073,179
Less accumulated depreciation (12,350,602)
--------------
Net investment in hotel properties 15,624,296
Cash and cash equivalents 807,039
Cash held in escrow 379,731
Accounts receivable, net 418,161
Inventories 173,290
Deferred expenses, net 194,395
Prepaid expenses and other assets 174,730
--------------
Total assets $ 17,771,642
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt $ 22,200,171
Accounts payable and accrued expenses 1,063,411
Amounts due to affiliates 1,509,322
--------------
Total liabilities 24,772,904
--------------
Commitments and contingencies (Note 5)
Common stock (Note 4) 1,000
Additional paid-in capital 3,862,858
Accumulated deficit (10,865,120)
--------------
Total stockholders' equity (deficit) (7,001,262)
--------------
Total liabilities and stockholders' equity $ 17,771,642
==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE>
MINNEAPOLIS HOTELS
COMBINED STATEMENTS OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
Year Ended Six Months Ended
--------------------------------
December 31, June 30, June 30,
1996 1996 1997
------------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenues:
Rooms $ 10,292,643 $ 4,815,283 $ 1,488,037
Food and beverage 5,857,624 2,878,722 1,145,700
Telephone and other 970,373 467,475 149,468
Gain of sale of hotel properties - - 20,123,936
------------- ------------ ------------
Total revenues 17,120,640 8,161,480 22,907,141
------------- ------------ ------------
Expenses:
Departmental costs and expenses 3,387,133 1,674,726 601,737
Food and beverage 4,811,240 2,338,925 977,772
General and administrative 1,217,264 578,527 246,009
Management fees 451,793 241,760 72,883
Franchise costs 349,238 121,256 56,002
Advertising and promotion 943,187 497,945 260,874
Repairs and maintenance 615,049 288,983 110,390
Utilities 523,076 257,928 120,887
Real estate and personal property taxes and
taxes and insurance 1,309,650 652,623 236,991
Interest 1,973,795 985,047 384,156
Depreciation and amortization 1,283,163 495,822 287,829
------------- ------------ ------------
Total expenses 16,864,588 8,133,542 3,355,530
------------- ------------ ------------
Revenues over expenses $ 256,052 $ 27,938 $ 19,551,611
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-28
<PAGE>
MINNEAPOLIS HOTELS
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Additional Accumulated Stockholders'
-------------------------
Shares Amount Paid-In-Capital Deficit Equity (Deficit)
---------- ----------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,000 $ 1,000 $ 3,862,858 $ (11,121,172) $ (7,257,314)
Revenues over expenses 256,052 256,052
--------- ---------- --------------- -------------- --------------
Balance at December 31, 1996 2,000 1,000 3,862,858 (10,865,120) (7,001,262)
Revenues over expenses (unaudited) 19,551,611 19,551,611
Non-cash distribution (unaudited) (Note 7) (2,000) (1,000) (3,862,858) 26,627,315 22,763,457
Cash distribution (unaudited) (Note 7) (35,313,806) (35,313,806)
--------- ---------- --------------- -------------- --------------
Balance at June 30, 1997 (unaudited) - $ - $ - $ - $ -
========= ========== =============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-29
<PAGE>
MINNEAPOLIS HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
-------------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ---------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Revenues over expenses $ 256,052 $ 27,938 $ 19,551,611
Adjustments to reconcile revenues over expenses to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,283,163 495,822 287,829
Gain on sale of property and equipment (40,489) (16,493)
Gain on sale of hotel properties (20,123,936)
Changes to operating assets and liabilities:
Cash held in escrow 234,252 (56,156) (683,992)
Accounts receivable 47,564 (176,700) 266,078
Inventories (18,965) (14,844) 29,763
Prepaid expenses and other assets 74,220 (52,266) 157,807
Accounts payable and accrued expenses 23,816 377,724 (543,193)
Amounts due to affiliates (531,318) (153,164) 95,059
-------------- ---------------- --------------
Net cash provided by (used in) operating activities 1,328,295 431,861 (962,974)
-------------- ---------------- --------------
Cash flows from investing activities:
Acquisition and improvements in hotel properties (966,465) (854,359)
Proceeds from sale of property and equipment 41,950 17,950
Proceeds from sale of hotel properties 35,500,000
-------------- ---------------- --------------
Net cash provided by (used in) investing activities (924,515) (836,409) 35,500,000
-------------- ---------------- --------------
Cash flows from financing activities:
Repayments of debt (617,981) (166,670) (30,259)
Proceeds from debt borrowings 9,580 9,580
Distributions paid (35,313,806)
-------------- ---------------- --------------
Net cash used in financing activities (608,401) (157,090) (35,344,065)
-------------- ---------------- --------------
Net decrease in cash and cash equivalents (204,621) (561,638) (807,039)
Cash and cash equivalents at beginning of periods 1,011,660 1,011,660 807,039
-------------- ---------------- --------------
Cash and cash equivalents at end of periods $ 807,039 $ 450,022 $ 0
============== ================ ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,975,217 $ 985,743 $ 378,610
============== ================ ==============
Noncash distribution (Note 7) $ - $ - $ 22,763,457
============== ================ ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE>
MINNEAPOLIS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
--------------------------------------
The accompanying combined financial statements include the financial
statements of the 297-room Sheraton Park Place Hotel (the "Sheraton") and
the 230-room Luxeford Suites (the "Luxeford"), both located in Minneapolis,
Minnesota. The Sheraton and the Luxeford (collectively the "Minneapolis
Hotels" or the "Hotels") were owned by the Klodt Companies ("Klodt") and
have been presented on a combined basis as they were subject to common
ownership and control and as they were the subject of a business
combination with Patriot American Hospitality Partnership, L.P. ("Patriot")
for an aggregate purchase price of $35.5 million. The combination which
occurred in February 1997 and March 1997 for the Luxeford and Sheraton,
respectively, included only the investment in hotel properties and did not
extend to any other assets or liabilities.
The Minneapolis Hotels were owned by a taxable entity. These financial
statements have been prepared to show the operations and financial position
of the Minneapolis Hotels, substantially all of whose assets and operations
were acquired by Patriot. Patriot is a limited partnership and does not pay
any federal income taxes. Therefore, financial statements related to
Minneapolis Hotels have been presented on a pretax basis and are not
representative of the actual operations of the Hotels for the periods
presented.
All significant intercompany balances and transactions have been eliminated
in combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
UNAUDITED INTERIM FINANCIAL INFORMATION
---------------------------------------
The accompanying combined statements of revenues over expenses, changes in
stockholders' equity, and cash flows for the six months ended June 30, 1997
and 1996 are unaudited. In the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the combined revenues over expenses, changes in
stockholders' equity and cash flows for these interim periods have been
included. The combined results for the interim periods are not necessarily
indicative of the results for a full year.
F-31
<PAGE>
MINNEAPOLIS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
INVESTMENT IN HOTEL PROPERTIES
------------------------------
The hotel properties are stated at cost. Depreciation is computed using
the straight-line method based upon the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings 31
Building improvements 15-20
Furniture and equipment 3-10
</TABLE>
Maintenance and repairs are charged to operators as incurred; major
renewals or betterments are capitalized. Upon sale or disposition of a
fixed asset, the asset and related accumulated depreciation are removed
from the accounts, and the gain or loss is included in operations.
The respective owners of the Hotels review the carrying value of each
property to determine if circumstances exist indicating an impairment in
the carrying value of the investment in hotel property or that depreciation
periods should be modified. If facts or circumstances support the
possibility of impairment, the respective owners of the Hotels will prepare
a projection of the undiscounted future cash flows, without interest
charges, of the specific hotel property and determine if the investment in
hotel property is recoverable based on the undiscounted future cash flows.
The respective owners of the Hotels do not believe that there are any
factors or circumstances indicating impairment of any of its investment in
hotel properties.
CASH AND CASH EQUIVALENTS
-------------------------
All highly liquid instruments with maturities of three months or less when
purchased are considered to be cash equivalents.
The Hotels regularly maintain cash and cash equivalents in accounts with
various financial institutions in excess of amounts insured by the Federal
Deposit Insurance Corporation ("FDIC"). As of December 31, 1996, the Hotels
maintained approximately $1,090,000 of such deposits in excess of FDIC
coverage.
F-32
<PAGE>
MINNEAPOLIS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
CASH HELD IN ESCROW
-------------------
Cash held in escrow consists primarily of amounts escrowed for the payment
of real and personal property taxes and capital replacement pursuant to
certain mortgage note agreements.
INVENTORIES
-----------
Inventories consist of food, beverages and supplies and are stated at cost,
which approximates market, with cost determined using the first-in, first-
out method.
DEFERRED EXPENSES
-----------------
Deferred expenses primarily consist of deferred loan costs. Amortization
is computed using the effective yield method over the lives of the related
loans which range from five to twenty-eight years.
Accumulated amortization is $131,615 at December 31, 1996.
REVENUE RECOGNITION
-------------------
Revenue is recognized when earned. Ongoing credit evaluations are
performed and an allowance for potential credit losses is provided against
the portion of accounts receivable which is estimated to be uncollectible.
Such losses have been within management's expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of these investments. The carrying amounts of
variable and fixed rate debt approximate their fair values which is
estimated based on discounted cash flows at rates currently available to
the Hotels for debt with similar terms and remaining maturities.
SEASONALITY
-----------
The hotel industry is seasonal in nature. Generally, revenue at the Hotels
is greater in the second and third quarters of a calendar year.
F-33
<PAGE>
MINNEAPOLIS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
3. DEBT:
----
At December 31, 1996, debt consists of the following:
<TABLE>
<S> <C>
Mortgage notes payable $ 22,147,730
Equipment loans 52,441
-----------
$ 22,200,171
===========
</TABLE>
The mortgage notes payable are collateralized by the related real estate
and bear interest at fixed and variable rates. The Sheraton's mortgage note
had $9,857,600 outstanding at December 31, 1996. This note bears interest
at 4.5 points above the ninety-day London Interbank Offered Rates ("LIBOR")
which was 5.5% at December 31, 1996. The note requires monthly principal
and interest payments through 2000 with a balloon payment at maturity. In
addition, the note includes a provision that allows a two-year extension at
the borrowers option.
The Luxeford is encumbered by two mortgage notes. The primary mortgage had
$11,170,988 outstanding at December 31, 1996 and bears interest at 8.51%.
In early 1997, the interest rate was adjusted to 9.12%. The note requires
regular monthly principal and interest payments through 2002 with a balloon
payment at maturity. The secondary mortgage had $1,119,142 outstanding at
December 31, 1996 and requires monthly principal and interest payments
equal to 50% of the previous month's operating cash flow, as defined in the
mortgage note. Interest is computed at a rate of 9.5% per annum and any
unpaid principal is due in full 2002.
The equipment loans are comprised of four fixed rate notes which are
collateralized by certain hotel equipment. The interest rates vary from 9%
to 12% and all of these notes mature in 1997.
F-34
<PAGE>
MINNEAPOLIS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
The required annual principal requirements, excluding the Luxeford
secondary mortgage which does not contain fixed repayment terms, for the
five years subsequent to December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 500,269
1998 492,741
1999 544,163
2000 9,368,646
2001 306,353
Thereafter 9,868,857
-----------
$ 21,081,029
===========
</TABLE>
4. COMMON STOCK:
------------
The following is a summary of the common stock of the Hotels for December
31, 1996 and 1995:
<TABLE>
<CAPTION>
Luxeford Sheraton
-------- --------
<S> <C> <C>
Par value $ 1 $ none
Number of shares authorized 25,000 25,000
Number of shares issued and outstanding 1,000 1,000
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Minneapolis Hotels utilize certain operating equipment which is leased
under noncancelable agreements which extend beyond one year. Rent expense
associated with these leases was approximately $58,000 for the year ending
December 31, 1996. The following is a schedule of future minimum rental
payments required under these operating leases having initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1996:
<TABLE>
<S> <C>
1997 $ 60,469
1998 46,086
1999 37,213
2000 25,803
2001 5,530
---------
$ 175,101
=========
</TABLE>
F-35
<PAGE>
MINNEAPOLIS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Franchise costs represent the annual expense for franchise royalties,
reservation and advertising services under the terms of the Sheraton's
franchise agreement with ITT Sheraton ("ITT") expiring in April 2002. Fees
are computed based upon 6% of gross room revenue. The Sheraton will
continue to be operated under the existing franchise agreement with ITT.
The Hotels are subject to environmental regulations related to the
ownership of real estate (hotels). The cost of complying with the
environmental regulations was not material to the Hotels' combined
statements of revenues over expenses for the year ended December 31, 1996.
The Hotels are not aware of any environmental condition on any of its
properties which is likely to have a material adverse effect on the Hotels'
financial statements.
6. RELATED PARTY TRANSACTIONS:
--------------------------
The Hotels are managed by Klodt, under management agreements. These
agreements provide for management fees of three percent and two percent of
total revenues for the Sheraton and the Luxeford, respectively. Due to
affiliates as of December 31, 1996 includes liabilities to Klodt for
management fees and other direct expenses incurred by Klodt on behalf of
the Hotels.
7. GAIN ON SALE OF HOTEL PROPERTIES (UNAUDITED):
--------------------------------------------
As discussed in Note 1, the Hotels were sold in February and March of 1997
for approximately $35.5 million. Accordingly, no June 30, 1997 combined
balance sheet is presented and a gain of approximately $20.1 million has
been recognized in the statement of operations for the six months ended
June 30, 1997. Immediately subsequent to the sale, the Minneapolis Hotels
ceased to exist as entities and the remaining net noncash liabilities of
$22,763,457 and the remaining cash of $35,313,806 were distributed to the
owners.
F-36
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Patriot American Hospitality, Inc.:
We have audited the accompanying combined statement of direct revenues and
direct operating expenses of the Met Life Hotels (the "Hotels") as defined in
Note 1 for the year ended December 31, 1996. This statement is the
responsibility of the Hotels' management. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined statement of direct revenues and direct
operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statement of direct revenues and direct operating expenses. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the combined statement of direct revenues and direct operating expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of direct revenues and direct operating
expenses has been prepared for the purpose of substantially complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the report on Form 8-K of Patriot American Hospitality, Inc. as described in
Note 1 and is not intended to be a complete presentation of the Hotels' revenues
and expenses.
In our opinion, the combined statement of direct revenues and direct operating
expenses referred to above presents fairly, in all material respects, the
combined direct revenues and direct operating expenses as described in Note 1 of
the Met Life Hotels for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
June 27, 1997
F-38
<PAGE>
THE MET LIFE HOTELS
COMBINED STATEMENTS OF DIRECT REVENUES
AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------------------
1996 1996 1997
------------- ------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Direct revenues from hotel operations:
Rooms $ 47,116,733 $ 23,869,421 $ 18,562,594
Food and beverage 27,774,710 13,708,866 10,767,675
Telephone and other 8,072,556 3,980,753 3,807,641
------------- ------------- --------------
Total direct revenues 82,963,999 41,559,040 33,137,910
------------- ------------- --------------
Direct operating expenses:
Departmental costs and expenses 15,456,461 7,626,935 5,970,496
Food and beverage 19,407,845 9,668,987 6,997,960
General and administrative 7,530,039 4,110,670 2,741,637
Management fees 3,022,843 1,393,482 1,321,017
Advertising and promotion 7,466,802 3,813,197 2,608,785
Repairs and maintenance 4,281,582 2,186,930 1,622,525
Utilities 4,043,231 2,019,007 1,227,488
Rent, real estate and personal property taxes,
and insurance 3,350,394 1,652,250 1,437,333
------------- ------------- --------------
Total direct operating expenses 64,559,197 32,471,458 23,927,241
------------- ------------- --------------
Direct revenues in excess of direct
operating expenses $ 18,404,802 $ 9,087,582 $ 9,210,669
============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these combined statements
of direct revenues and direct operating expenses.
F-39
<PAGE>
THE MET LIFE HOTELS
NOTES TO COMBINED STATEMENTS OF DIRECT REVENUES
AND DIRECT OPERATING EXPENSES
1. ORGANIZATION AND BASIS OF PRESENTATION:
--------------------------------------
ORGANIZATION
------------
The accompanying combined statements of direct revenues and direct
operating expenses include the direct revenues and direct operating
expenses of the following hotel properties:
<TABLE>
<CAPTION>
Number
Hotel Property of Rooms Location
---------------------------------------------- ----------------- -----------------
<S> <C> <C>
Doubletree at Allen Center ("Allen Center") 341 Houston, TX
Doubletree Downtown Hotel ("Tulsa") 418 Tulsa, OK
Doubletree Hotel ("Orange") 454 Orange, CA
Doubletree Hotel and Conference Center ("St. Louis") 223 St. Louis, MO
Doubletree Post Oak ("Post Oak") 449 Houston, TX
Doubletree Hotel ("Overland Park") 357 Overland Park, KS
</TABLE>
These hotels (collectively the "Met Life Hotels" or the "Hotels") are owned
by Metropolitan Life Insurance Company ("Met Life"). The Met Life Hotels
have been presented on a combined basis as they were subject to common
ownership and control and as they were the subject of a business
combination with Patriot American Hospitality Partnership, L.P. ("Patriot")
(through a limited partnership of which Patriot owns an 85% general
partnership interest) for an aggregate purchase price of $196,800,000. The
acquisition will include only the investment in Hotel properties and will
not extend to any other assets or liabilities.
The acquisition of the Allen Center Hotel by Patriot was closed in November
1996. The acquisition of the Tulsa Hotel by Patriot was closed in December
1996. Effective on the dates of these acquisitions, these hotels ceased to
exist as entities. Accordingly, only the direct revenues and direct
operating expenses of the Allen Center and Tulsa Hotels up to the dates of
their acquisition by Patriot are included in the accompanying statements.
F-40
<PAGE>
THE MET LIFE HOTELS
NOTES TO COMBINED STATEMENTS OF DIRECT REVENUES
AND DIRECT OPERATING EXPENSES, CONTINUED
BASIS OF PRESENTATION
---------------------
The accompanying combined statements of direct revenues and direct
operating expenses (the "Statements") have been prepared to substantially
comply with the rules and regulations of the Securities and Exchange
Commission for business combinations accounted for as a purchase. The
accompanying combined statements include revenue and expenses directly
related to the operations of the Hotels as reflected in the records of the
Hotels' management company. The accompanying combined statements, rather
than full audited financial statements, are presented for the Hotels
because the Hotels were acquired from an unaffiliated third party in a
negotiated transaction and records that supported historical costs of the
investment in Hotel properties, indebtedness and equity of the Hotels were
unavailable. Because it was not practicable to obtain full audited
financial statements for the Hotels, the presentation does not include all
revenue and expenses of Met Life, as they relate to the Hotels, such as (1)
interest or other income earned on investments of Met Life, (2)
depreciation expense and gains and losses on sales related to long-lived
and short-lived assets (including the Hotels and related improvements), (3)
amortization expense related to organizational costs or other deferred
expenses of Met Life, (4) interest expense incurred on indebtedness of the
Hotels and amortization of deferred loan costs, and (5) certain Met Life
related general and administrative expenses. Therefore, the combined
statements are not representative of the actual operations of the Hotels
for the periods presented. Included in Note 5 is certain unaudited
financial information related to the depreciation expense discussed above.
All significant intercompany balances and transactions have been eliminated
in combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
UNAUDITED INTERIM FINANCIAL INFORMATION
---------------------------------------
The accompanying combined statements of direct revenues and direct
operating expenses for the six months ended June 30, 1997 and 1996 are
unaudited. In the opinion of management, all adjustments (consisting solely
of normal recurring adjustments) necessary for a fair presentation of the
combined statements of direct revenue and direct operating expenses for
these interim periods have been included. The combined results for the
interim periods are not necessarily indicative of the results for a full
year.
F-41
<PAGE>
THE MET LIFE HOTELS
NOTES TO COMBINED STATEMENTS OF DIRECT REVENUES
AND DIRECT OPERATING EXPENSES, CONTINUED
CAPITALIZATION POLICY
---------------------
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized.
REVENUE RECOGNITION
-------------------
Revenue is recognized when earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the
portion of accounts receivable which is estimated to be uncollectible. Such
losses have been within management's expectations.
SEASONALITY
-----------
The hotel industry is seasonal in nature. Generally, revenue at the Hotels
is greater in the second and third quarters of a calendar year.
USE OF ESTIMATES
----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS:
--------------------------
MANAGEMENT AGREEMENTS
---------------------
The Hotels are managed by Doubletree Hotel Corporation ("Doubletree") under
management agreements which expire in 2010. These agreements provide for
management fees of three percent of total revenues. These agreements also
provide for incentive management fees based on net operating income after a
deferred owner participation. Incentive fees cannot exceed three percent
of total revenues. Incentive fees of $603,543 are included in management
fees for the year ended December 31, 1996.
F-42
<PAGE>
THE MET LIFE HOTELS
NOTES TO COMBINED STATEMENTS OF DIRECT REVENUES
AND DIRECT OPERATING EXPENSES, CONTINUED
MARKETING ASSESSMENTS
---------------------
In exchange for use of its central marketing and reservation system,
Doubletree assesses the Hotels four percent of gross room revenue.
Marketing and reservation assessments of approximately $1.9 million are
included in advertising and promotion expense for the year ended December
31, 1996.
4. EMPLOYEE BENEFIT PLAN:
---------------------
The Hotels maintains a defined benefit savings plan for all eligible
employees. Hotel contributions are based on the participating employees'
contributions reduced by any forfeitures in the plan. Vesting begins after
three years with 100% vesting after six years. The Hotels' contributions
were $328,573 for the year ended December 31, 1996.
5. UNAUDITED FINANCIAL INFORMATION:
-------------------------------
The following supplemental financial information has been provided by the
Hotels' management company on an unaudited basis for certain of those
expenses which have been omitted from the accompanying Statements.
Supporting information was not provided by the owner.
Additions to furniture, fixtures and equipment ("FF&E") for the Hotels
totaled $2,991,665 for the year ended December 31, 1996. Depreciation
expense related to FF&E is computed using the straight-line method based on
estimated useful lives ranging from three to ten years. Estimated
depreciation expense related to FF&E was approximately $2,000,000 for the
year ended December 31, 1996.
Patriot's estimated allocation of the purchase price will be $16 million to
land, $166 million to building and improvements, and $16 million to FF&E.
Expected lives for building and improvements, and FF&E are thirty-five
years and five to seven years, respectively.
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Patriot American Hospitality, Inc.:
We have audited the accompanying combined balance sheet of the Snavely Hotels
(the "Hotels") as defined in Note 1 as of December 31, 1996, and the related
combined statements of operations, partners' capital, and cash flows for the
year then ended. These combined financial statements are the responsibility of
the Hotels' management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Snavely
Hotels as of December 31, 1996, and the combined results of their operations and
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 8, 1997
F-44
<PAGE>
SNAVELY HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1996 1997
--------------- --------------
(unaudited)
<S> <C> <C>
Investments in hotel properties, at cost:
Land $ 4,429,980 $ 4,429,980
Building and improvements 24,690,693 25,040,023
Furniture and equipment 9,048,137 9,048,137
Less accumulated depreciation (13,774,383) (14,379,225)
--------------- -------------
Net investment in hotel properties 24,394,427 24,138,915
Cash and cash equivalents 942,102 1,240,968
Cash held in escrow 889,007 594,566
Accounts receivable, net 713,117 718,046
Inventories 80,018 80,197
Deferred expenses, net 598,868 533,591
Prepaid expenses and other assets 90,786 430,770
-------------- -------------
Total assets $ 27,708,325 $ 27,737,053
============== =============
LIABILITIES AND PARTNERS' CAPITAL
Debt and capital lease obligations $ 31,970,003 $ 31,446,887
Accounts payable and accrued expenses 2,508,450 2,227,157
Amounts due to affiliates 354,203 218,279
-------------- -------------
Total liabilities 34,832,656 33,892,323
Commitments and contingencies (Note 4)
Partners' capital (deficit) (7,124,331) (6,155,270)
-------------- -------------
Total liabilities and partners' capital $ 27,708,325 $ 27,737,053
============== =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-45
<PAGE>
SNAVELY HOTELS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, Six Months Ended June 30,
1996 1996 1997
-------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenues:
Rooms $ 14,465,631 $ 6,731,126 $ 7,236,869
Food and beverage 4,534,881 2,168,064 2,353,868
Telephone and other 830,094 401,323 404,680
-------------- -------------- --------------
Total revenues 19,830,606 9,300,513 9,995,417
-------------- -------------- --------------
Expenses:
Departmental costs and expenses 3,609,920 1,692,148 1,787,372
Food and beverage 3,724,285 1,790,448 1,851,702
General and administrative 1,530,436 708,859 783,952
Management fees 868,307 410,528 439,773
Franchise costs 966,727 454,497 503,212
Advertising and promotion 784,034 418,609 401,225
Utilities 1,058,993 517,398 503,566
Repairs and maintenance 741,078 342,791 348,548
Real estate and personal property taxes and
insurance 791,029 387,120 394,696
Interest 2,901,732 1,369,046 1,242,191
Depreciation and amortization 1,609,494 803,190 670,119
-------------- -------------- --------------
Total expenses 18,586,035 8,894,634 8,926,356
-------------- -------------- --------------
Net income $ 1,244,571 $ 405,879 $ 1,069,061
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-46
<PAGE>
SNAVELY HOTELS
COMBINED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<S> <C>
Balance at December 31, 1995 $ (7,744,011)
Distributions (624,891)
Net income 1,244,571
-------------
Balance at December 31, 1996 (7,124,331)
Distributions (unaudited) (100,000)
Net income (unaudited) 1,069,061
-------------
Balance at June 30, 1997 (unaudited) $ (6,155,270)
=============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-47
<PAGE>
SNAVELY HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31, Six Months Ended June 30,
1996 1996 1997
-------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,244,571 $ 405,879 $ 1,069,061
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,609,494 803,190 670,119
Changes in assets and liabilities:
Cash held in escrow (235,462) 151,257 294,441
Accounts receivable (266,681) (177,546) (4,929)
Inventories (2,150) 4,950 (179)
Deferred expenses - (16,964) -
Prepaid expenses and other assets (41,903) (39,150) (339,984)
Accounts payable and accrued expenses 299,063 (28,154) (281,293)
Amount due to affiliates (44,991) (703) (135,924)
------------ ----------- ------------
Net cash provided by operating activities 2,561,941 1,102,759 1,271,312
------------ ----------- ------------
Cash flows from investing activities:
Acquisition and improvements in hotel properties (498,602) (273,774) (349,330)
------------ ----------- ------------
Net cash used in investing activities (498,602) (273,774) (349,330)
------------ ----------- ------------
Cash flows from financing activities:
Repayments of debt and capital lease obligations (1,395,312) (378,399) (523,116)
Distributions paid (624,891) (124,012) (100,000)
------------ ----------- ------------
Net cash used in financing activities (2,020,203) (502,411) (623,116)
------------ ----------- ------------
Net increase in cash and cash equivalents 43,136 326,574 298,866
Cash and cash equivalents at beginning of periods 898,966 898,966 942,102
------------ ----------- ------------
Cash and cash equivalents at end of periods $ 942,102 $ 1,225,540 $ 1,240,968
============ =========== ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,845,937 $ 1,364,973 $ 1,272,870
============ =========== ============
Capital lease obligation assumed for acquisition
of equipment $ 64,000 $ - $ -
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-48
<PAGE>
SNAVELY HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
--------------------------------------
The accompanying combined financial statements include the financial
statements of the 130-room Radisson Inn in Akron, Ohio (the "Akron
Hotel"), the 266-room Holiday Inn in Westlake, Ohio (the "Westlake
Hotel"), the 196-room Radisson Inn in Beachwood, (the "Beachwood
Radisson Hotel") Ohio and the 113-room Courtyard by Marriott in
Beachwood, Ohio (the "Beachwood Courtyard Hotel") (collectively the
"Snavely Hotels" or the "Hotels"). The Snavely Hotels were owned by the
Snavely Group ("Snavely") and have been presented on a combined basis as
they were subject to common ownership and control and as they were the
subject of a business combination with Patriot American Hospitality
Partnership, L.P ("Patriot") on July 1, 1997.
The hotels were owned by limited partnerships which formed limited
liability companies prior to the business combination. Patriot
contributed approximately $6,750,000 in return for 90% of the equity
interest in the Akron Hotel; approximately $16,875,000 in return for 90%
of the equity interest in the Westlake Hotel; approximately $13,275,000
in return for 90% of the equity interest in the Beachwood Radisson Hotel
and approximately $9,000,000 in return for 90% of the equity interest in
the Beachwood Courtyard Hotel.
All significant intercompany balances and transactions have been
eliminated as combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
UNAUDITED INTERIM FINANCIAL INFORMATION
---------------------------------------
The accompanying combined statements of operations, changes in partners'
capital, and cash flows for the six months ended June 30, 1997 and 1996
are unaudited. In the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the combined operations, changes in partners' equity,
and cash flows for these interim periods have been included. The
combined results for the interim periods are not necessarily indicative
of the results for a full year.
F-49
<PAGE>
SNAVELY HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
INVESTMENTS IN HOTEL PROPERTIES
-------------------------------
The hotel properties are stated at cost. Depreciation is computed using
the straight-line method based upon the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings 31-40
Building improvements 20
Furniture and equipment 5-7
</TABLE>
Maintenance and repairs are charges to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition
of a fixed asset, the asset and related accumulated depreciation are
removed from the accounts, and the gain or loss is included in
operations.
The respective owners of the Snavely Hotels review the carrying value of
each property to determine if circumstances exist indicating an
impairment in the carrying value of the investment of the hotel property
or that depreciation periods should be modified. If facts or
circumstances support the possibility of impairment, the respective
owners of the Snavely Hotels will prepare a projection of the
undiscounted future cash flows, without interest charges, of the
specific hotel property and determine if the investment in hotel
property is recoverable based on the undiscounted future cash flows. The
respective owners of the Snavely Hotels do not believe that there are
any factors or circumstances indicating impairment of any of its
investment in hotel properties.
CASH AND CASH EQUIVALENTS
-------------------------
All highly liquid investments with maturity of three months or less when
purchased are considered to be cash equivalents.
The Hotels regularly maintain cash and cash equivalents in accounts with
various financial institutions in excess of amounts ensured by the
Federal Deposit Insurance Corporation ("FDIC"). As of December 31,
1996, the Hotels maintained approximately $1.1 million of such deposits
F-50
<PAGE>
SNAVELY HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
CASH HELD IN ESCROW
-------------------
Cash held in escrow consists primarily of amounts escrowed for the
payment of real and personal property taxes and capital replacement
pursuant to certain mortgage note agreements.
INVENTORIES
-----------
Inventories, consist predominantly of food, beverages and supplies are
stated at cost, which approximates market, with cost determined using
the first-in, first-out method.
DEFERRED EXPENSES
-----------------
Deferred expenses primarily consist of franchise costs and deferred loan
costs. Amortization is computed using the effective yield method for
deferred loan costs and the straight-line method for franchise costs
based upon the terms of the franchise and loan agreements which range
from 5 years to 20 years.
Accumulated amortization is $799,215 at December 31, 1996.
REVENUE RECOGNITION
-------------------
Revenue is recognized when earned. Ongoing credit evaluations are
performed and an allowance for potential credit losses is provided
against the portion of accounts receivable which is estimated to be
uncollectible. Such losses have been within management's expectations.
INCOME TAXES
------------
No provisions have been included for income taxes as the hotels are
owned by limited partnerships. Any income or loss was taxed to the
partners in their individual income tax returns.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of these investments. The carrying
amounts of variable and fixed rate debt approximate their fair values
which is estimated based on discounted cash flows at rates currently
available to the Hotels for debt with similar terms and remaining
maturities.
F-51
<PAGE>
SNAVELY HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
SEASONALITY
-----------
The hotel industry is seasonal in nature. Generally, revenue at the
Hotels is greater in the second or third quarters of a calendar year.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. DEBT AND CAPITAL LEASE OBLIGATIONS:
----------------------------------
At December 31, 1996, debt and capital lease obligations consist of the
following:
<TABLE>
<S> <C>
Mortgage notes payable $ 18,487,645
Bonds payable 10,221,655
Note payable 3,150,000
-----------
Total debt 31,859,300
Capital lease obligations 110,703
-----------
Total debt and capital lease obligations $ 31,970,003
=============
</TABLE>
Mortgage notes payable consist of four fixed interest rate loans.
The Akron Hotel mortgage note bears interest at 8.75% and is due in
payments of interest only (8.0% at December 31, 1996) until December 31,
1998 at which time the note and unpaid interest is due in full. The
balance of the loan was $6,625,219 at December 31, 1996. The Beachwood
Radisson mortgage note bears interest at 9.75% and is due in monthly
payments of principal and interest of $56,911 with a balloon payment due
on May 31, 2005. The balance of the loan was $5,823,545
F-52
<PAGE>
SNAVELY HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
at December 31, 1996. The Westlake Hotel mortgage note bears interest at
9.32% and is due in monthly payments of principal and interest of
$30,373 with a balloon payment due on April 1, 2000. The balance of the
loan was $3,197,793 at December 31, 1996. The Westlake Hotel second
mortgage note is due in full on April 1, 2000 and interest is computed
at a rate of 9.5% per annum. In conjunction with this loan, principal
and interest payments are made based on a formula determined by cash
flow, as defined in the loan agreement. The balance of the loan was
$2,841,088 at December 31, 1996.
Bonds payable consist of two variable rate demand industrial development
refunding revenue bonds issued through the County of Cuyahoga, Ohio and
the City of Westlake, Ohio, respectively. Both issuances bear interest
at the lowest interest rate necessary (the average of which was 3.9%
during the year ended December 31, 1996) to enable the remarketing agent
to sell refunding bonds of an equal outstanding principal amount plus
accrued interest. The Snavely Hotels are required to make semi-annual
sinking fund payments ranging from $105,000 - $560,000 through June 1,
2005. The balances of the Beachwood Courtyard Hotel bonds was $3,836,655
and the Westlake Hotel bonds was $6,385,000 at December 31, 1996.
The Beachwood note payable (Radisson) bears interest at 12% and is due
in payments of interest only until March 31, 2000 at which time the
principal balance of $3,150,000 is due in full. In conjunction with this
note, additional interest payments are made based on a formula
determined by cash flow and capital proceeds, as defined in the note
agreement.
The required annual principal payments, excluding the Westlake second
mortgage note which does not contain fixed repayment terms, for the five
years subsequent to December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 843,813
1998 7,587,961
1999 1,073,571
2000 4,301,488
2001 1,221,704
Thereafter 13,989,675
-------------
$ 29,018,212
=============
</TABLE>
F-53
<PAGE>
SNAVELY HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
The Hotels have acquired certain equipment pursuant to capital lease
agreements. This equipment has cost of $144,365 and accumulated
depreciation of $20,340. Future lease payments required pursuant to
these obligations are as follows:
<TABLE>
<S> <C>
1997 $ 56,108
1998 52,911
1999 12,342
---------
121,361
Less interest 10,668
---------
$ 110,693
=========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Snavely Hotels utilize certain operating equipment which is leased
under non cancelable agreements which extend beyond one year. Rent
expense associated with these leases was approximately $238,285 for the
year ending December 31, 1996. The following is a schedule of future
minimum rental payments required under these operating leases having
initial or remaining noncancelable lease terms in excess of one year as
of December 31, 1996:
<TABLE>
<S> <C>
1997 $ 210,020
1998 176,120
1999 99,043
2000 59,545
2001 45,606
----------
$ 590,334
==========
</TABLE>
Franchise costs represent the annual expense for franchise royalties,
reservation and advertising services under the terms of hotel franchise
agreements expiring at various dates through November 2012. Fees are
computed based upon a percentage of gross room revenue ranging in
aggregate from 5.5% to 8.25%. The hotels will continue to be operated
under the existing franchise agreements with the same franchisors.
F-54
<PAGE>
SNAVELY HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
The Hotels are subject to environmental regulations related to the
ownership of real estate (hotels). The cost of complying with the
environmental regulations was not material to the Hotels' combined
statements of operations for the year ended December 31, 1996. The
Hotels are not aware of any environmental condition on any of its
properties which is likely to have a material adverse effect on the
Hotels' financial statements.
5. RELATED PARTY TRANSACTIONS:
--------------------------
The Hotels are managed by an affiliate of Snavely under management
agreements which expire at various dates through April 2005. These
agreements provide for management fees of five and one half percent to
eight and one half percent of gross revenues for the Akron Hotel, the
Westlake Hotel, and the Beachwood Courtyard and for an annual fee of
$100,000 for the Beachwood Radisson. The terms of these agreements
expire at various dates through April 2005. The hotels will continue to
be operated under the existing agreements with the same management
company. Due to affiliates as of December 31, 1996 includes liabilities
to Snavely and its affiliates for management fees of $40,390 and working
capital advances of $313,813.
6. CONVEYANCE OF HOTEL PROPERTIES' INTEREST:
----------------------------------------
As discussed in Note 1, 90% of the equity interest in the hotels was
acquired by Patriot on July 1, 1996.
F-55
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Joint Registration Statement
on Form S-3 (File No. 333-29671 and 333-29671-01) of Patriot American
Hospitality, Inc. and Patriot American Hospitality Operating Company of our
reports (i) dated May 12, 1997 on our audit of the Combined Financial Statements
of the Minneapolis Hotels as of and for the year ended December 31, 1996, (ii)
dated June 27, 1997 on our audit of the Combined Statement of Direct Revenue and
Direct Operating Expenses of the Met Life Hotels for the year ended December 31,
1996, and (iii) dated September 8, 1997 on our audit of the Combined Financial
Statements of the Snavely Hotels as of and for the year ended December 31, 1996,
all of which are included in the Joint Current Report on Form 8-K dated
September 17, 1997 of Patriot American Hospitality, Inc. and Patriot American
Hospitality Operating Company.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 15, 1997
