<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)
DECEMBER 10, 1997
COMMISSION FILE NUMBER 1-9319 COMMISSION FILE NUMBER 1-9320
PATRIOT AMERICAN HOSPITALITY, PATRIOT AMERICAN HOSPITALITY
INC. OPERATING COMPANY
- ---------------------------------- ---------------------------------
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
DELAWARE DELAWARE
- ---------------------------------- ---------------------------------
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
94-0358820 94-2878485
- ---------------------------------- ---------------------------------
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
3030 LBJ FREEWAY, SUITE 1500 3030 LBJ FREEWAY, SUITE 1500
DALLAS, TEXAS 75234 DALLAS, TEXAS 75234
- ---------------------------------- ---------------------------------
(Address of principal (Address of principal
executive offices) (Zip Code) executive offices) (Zip Code)
(972) 888-8000 (972) 888-8000
- ---------------------------------- ---------------------------------
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
N/A N/A
- ---------------------------------- ---------------------------------
(Former name, former address and (Former name, former address and
former fiscal year, if changed former fiscal year, if changed
since last report) since last report)
<PAGE>
ITEM 5. OTHER EVENTS
Interstate Hotels Company Merger
On December 2, 1997, Patriot American Hospitality, Inc. ("Patriot REIT")
and Patriot American Hospitality Operating Company ("Patriot Operating Company")
entered into an agreement and plan of merger (the "Patriot/IHC Merger
Agreement") with Interstate Hotels Company ("IHC"), pursuant to which IHC will
merge with and into Patriot REIT with Patriot REIT being the surviving
corporation (the "Patriot/IHC Merger"). The terms of the Patriot/IHC Merger are
more fully described in a Form 8-K dated December 2, 1997 of Patriot REIT and
Patriot Operating Company.
Sheraton City Centre Hotel Acquisition
On November 25, 1997, Patriot REIT, through Patriot American Hospitality
Partnership, L.P. (the "Patriot REIT Partnership"), acquired a 92.5% general
partner interest in a partnership formed for the purpose of acquiring the
353-room Sheraton City Centre Hotel (the "Sheraton City Centre Partnership"). A
third-party (the "Minority Partner") owns the remaining 7.5% limited partner
interest in the Sheraton City Centre Partnership (the "Minority Interest"). The
Patriot REIT Partnership contributed approximately $36.8 million for its general
partner interest, financed primarily from its $700 million unsecured revolving
line of credit (the "Revolving Credit Facility"). Patriot REIT has leased the
Sheraton City Centre Hotel to Patriot Operating Company. Beginning in November
1999, the Minority Partner may require Patriot REIT Partnership to purchase the
Minority Interest at its then estimated value (as calculated in accordance with
the Sheraton City Centre Partnership agreement). In addition, beginning in
November 2001, Patriot REIT Partnership has the option to purchase the Minority
Interest for the greater of $5.5 million or the estimated value of the Minority
Interest (as calculated in accordance with the Sheraton City Centre Partnership
agreement).
Probable Acquisition of the Buena Vista Palace Hotel
In August 1997, Patriot Operating Company purchased a participating loan
from National Resort Ventures, L.P., related to the 1,014-room Buena Vista
Palace Hotel in Orlando, Florida for approximately $23.75 million in cash. The
Buena Vista Palace Hotel is owned by a joint venture (the "Buena Vista Joint
Venture") between Equitable Life Insurance Company ("Equitable"), which owns a
55% interest, and Hotel Venture Partners, Ltd. ("HVP"), which owns a 45%
interest. Patriot REIT, through certain of its subsidiaries, has entered into a
Contribution Agreement dated October 7, 1997 to acquire approximately 90% of
HVP's 45% interest in the Buena Vista Joint Venture for approximately $14
million in cash and units of limited partnership interest in the Patriot REIT
Partnership and Patriot American Hospitality Operating Partnership, L.P. (the
"Patriot Operating Company Partnership"). Patriot REIT has acquired an option to
purchase HVP's remaining interest in the Buena Vista Joint Venture. In addition,
pursuant to a Purchase and Sale Agreement dated November 6, 1997, Patriot REIT,
through certain of its subsidiaries, agreed to acquire Equitable's 55% interest
in the Buena Vista Joint Venture for approximately $53.5 million in cash and
also agreed to repay outstanding mezzanine debt of approximately $6 million.
Patriot REIT will acquire the participating loan investment held by Patriot
Operating Company for $23.75 million in cash. Subsequent to acquisition of these
joint venture interests, Patriot REIT, through certain of its subsidiaries, will
hold an aggregate 95% ownership interest (including a 1% general partnership
interest) in the Buena Vista Palace Hotel with an option to acquire the
remaining 5% interest in three years. The hotel will remain subject to a ground
lease and a first leasehold mortgage note in the amount of approximately $50.7
million.
Negotiations to Modify the Revolving Credit Facility and Term Loan
On July 21, 1997, Patriot REIT, Patriot Operating Company and their
respective subsidiaries (collectively, the "Patriot Companies") entered into a
revolving credit facility with Paine Webber Real Estate Securities, Inc. ("Paine
Webber Real Estate"), The Chase Manhattan Bank ("Chase") and certain other
lenders for a 3-year $700 million unsecured Revolving Credit Facility. The
Patriot Companies are negotiating with Paine Webber Real Estate and Chase to
increase the amount available under the Revolving Credit Facility to $900
million.
<PAGE>
Additionally, Patriot REIT entered into a commitment letter with Paine
Webber Real Estate and Chase for a $500 million term loan (the "Term Loan"). In
connection with the Patriot Companies' negotiations to increase the amount
available under the Revolving Credit Facility, the Term Loan amount has been
reduced to $350 million. Additionally, the Term Loan will be an unsecured
facility.
The index to the financial information for Wyndham Hotel Corporation;
Crow Family Hotel Partnerships; WHG Resorts & Casinos Inc. (including financial
statements for its significant non-consolidated affiliates, Posadas De San Juan
Associates, WKA El Con Associates and El Conquistador Partnership L.P.); CHC
International, Inc. - Hospitality Division; Interstate Hotels Company and Royal
Palace Hotel Associates (Buena Vista Palace Hotel) is included on page F-1 of
this report.
The index to the separate and combined pro forma information for Patriot
American Hospitality, Inc. and Patriot American Hospitality Operating Company
and for the Combined Lessees is included on page F-1 of this report.
2
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INDEX TO FINANCIAL INFORMATION
<TABLE>
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PAGE
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PRO FORMA FINANCIAL INFORMATION
<S> <C>
PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996
(unaudited)............................................................................................... F-12
Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 1997
(unaudited)............................................................................................... F-14
Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 (unaudited)............................. F-17
PATRIOT AMERICAN HOSPITALITY INC.:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996
(unaudited)............................................................................................... F-19
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997
(unaudited)............................................................................................... F-22
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996
(unaudited)............................................................................................... F-25
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997
(unaudited)............................................................................................... F-28
COMBINED LESSEES:
Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996
(unaudited) and the nine months ended September 30, 1997 (unaudited)...................................... F-32
PRO FORMA FINANCIAL INFORMATION--AS ADJUSTED
FOR THE WYNDHAM TRANSACTIONS
PATRIOT REIT AND WYNDHAM INTERNATIONAL:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)........ F-37
Pro Forma Condensed Combined Statement of Operations for the nine months ended
September 30, 1997 (unaudited).............................................................................. F-39
Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 (unaudited).............................. F-42
PATRIOT REIT
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-45
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended
September 30, 1997 (unaudited).............................................................................. F-47
WYNDHAM INTERNATIONAL:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-49
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended
September 30, 1997 (unaudited).............................................................................. F-51
COMBINED LESSEES:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited) and the
nine months ended September 30, 1997 (unaudited)............................................................ F-54
PRO FORMA FINANCIAL INFORMATION--AS ADJUSTED
FOR THE WHG MERGER
PATRIOT REIT AND WYNDHAM INTERNATIONAL:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)........ F-57
Pro Forma Condensed Combined Statement of Operations for the nine months ended
September 30, 1997 (unaudited).............................................................................. F-58
Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 (unaudited).............................. F-60
WYNDHAM INTERNATIONAL:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-62
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended
September 30, 1997 (unaudited).............................................................................. F-63
PRO FORMA FINANCIAL INFORMATION--AS ADJUSTED
FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PATRIOT REIT AND WYNDHAM INTERNATIONAL:
Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)........ F-68
Pro Forma Condensed Combined Statement of Operations for the nine months ended
September 30, 1997 (unaudited).............................................................................. F-69
Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 (unaudited).............................. F-71
PATRIOT REIT
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-74
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended
September 30, 1997 (unaudited).............................................................................. F-76
WYNDHAM INTERNATIONAL:
Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited).... F-78
Pro Forma Condensed Consolidated Statement of Operations for the nine months ended
September 30, 1997 (unaudited).............................................................................. F-80
</TABLE>
F-1
<PAGE>
<TABLE>
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PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INDEX TO FINANCIAL INFORMATION - CONTINUED
PAGE
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HISTORICAL FINANCIAL INFORMATION
WYNDHAM HOTEL CORPORATION (UNAUDITED):
Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited)...................... F-82
Consolidated Statements of Income for the quarter ended September 30, 1997 and 1996 (unaudited) and
the nine months ended September 30, 1997 and 1996 (unaudited)............................................. F-83
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited)..... F-84
Notes to Consolidated Financial Statements (unaudited)...................................................... F-85
CROW FAMILY HOTEL PARTNERSHIPS:
Report of Independent Public Accountants -- Arthur Andersen LLP............................................. F-94
Combined Balance Sheets as of December 31, 1996 and 1995 and September 30, 1997 (unaudited)................. F-95
Combined Statements of Operations for the years ended December 31, 1996, 1995 and 1994 and
the nine months ended September 30, 1997 and 1996 (unaudited)............................................. F-96
Combined Statements of Partners' Deficit for the years ended December 31, 1996, 1995 and 1994 and the
nine months ended September 30, 1997 (unaudited).......................................................... F-97
Combined Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and the nine
months ended September 30, 1997 (unaudited)............................................................... F-98
Notes to Combined Financial Statements...................................................................... F-99
WHG RESORTS & CASINOS INC.:
Report of Independent Auditors -- Ernst & Young LLP......................................................... F-108
Consolidated Balance Sheets at June 30, 1997 and 1996 September 30, 1997 (unaudited)........................ F-109
Consolidated Statements of Operations for the years ended June 30, 1997, 1996 and 1995...................... F-110
and the three months ended September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995
and the three months ended September 30, 1997 and 1996 (unaudited)........................................ F-111
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, 1996 and 1995 and the
three months ended September 30, 1997 (unaudited)......................................................... F-112
Notes to Consolidated Financial Statements.................................................................. F-113
Financial Statement Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1997,
1996 and 1995............................................................................................. F-126
POSADAS DE SAN JUAN ASSOCIATES, A SIGNIFICANT NONCONSOLIDATED AFFILIATE OF WHG:
Report of Independent Auditors -- Ernst & Young LLP........................................................ F-127
Balance Sheets at June 30, 1997 and 1996 and September 30, 1997 (unaudited)................................ F-128
Statements of Operations and Deficit for the years ended June 30, 1997, 1996 and 1995 and the three
months ended September 30, 1997 and 1996 (unaudited)...................................................... F-129
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 and the three months ended
September 30, 1997 and 1996 (unaudited)................................................................... F-130
Notes to Financial Statements............................................................................... F-131
Financial Statement Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1997,
1996 and 1995............................................................................................. F-136
WKA EL CON ASSOCIATES, A SIGNIFICANT NONCONSOLIDATED AFFILIATE OF WHG:
Report of Independent Auditors -- Ernst & Young LLP........................................................ F-137
Balance Sheets at June 30, 1997 and 1996 and September 30, 1997 (unaudited)................................ F-138
Statements of Operations and Deficit for the years ended June 30, 1997, 1996 and 1995 and the three
months ended September 30, 1997 and 1996 (unaudited)...................................................... F-139
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 and the three months ended
September 30, 1997 and 1996 (unaudited)................................................................... F-140
Notes to Financial Statements............................................................................... F-141
EL CONQUISTADOR PARTNERSHIP L.P., A SIGNIFICANT NONCONSOLIDATED AFFILIATE OF WHG:
Report of Independent Auditors -- Ernst & Young LLP........................................................ F-144
Balance Sheets at March 31, 1997 and 1996 and June 30, 1997 (unaudited).................................... F-145
Statements of Operations and (Deficiency in) Partners' Capital for the years ended March 31, 1997, 1996
and 1995 and the three months ended June 30, 1997 and 1996 (unaudited).................................... F-146
Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995 and the three months ended
June 30, 1997 and 1996 (unaudited)........................................................................ F-147
Notes to Financial Statements............................................................................... F-148
</TABLE>
F-2
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<TABLE>
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PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
INDEX TO FINANCIAL INFORMATION - CONTINUED
PAGE
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<S> <C>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION:
Report of Independent Certified Public Accountants -- Price Waterhouse, LLP................................. F-155
Balance Sheets as of November 30, 1995 and 1996 and August 31, 1997 (unaudited)............................ F-156
Statements of Operations for the years ended November 30, 1995 and 1996 and
the nine months ended August 31, 1996 and 1997 (unaudited)................................................ F-157
Statements of Changes in Stockholders' Equity (Deficit) for the years ended
November 30, 1995 and 1996 and the nine months ended August 31, 1997 (unaudited).......................... F-158
Statements of Cash Flows for the years ended November 30, 1995 and 1996 and
the nine months ended August 31, 1996 and 1997 (unaudited)................................................ F-159
Notes to Financial Statements............................................................................... F-161
INTERSTATE HOTELS COMPANY:
Report of Independent Accountants -- Coopers & Lybrand L.L.P................................................ F-181
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)............. F-182
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997 (unaudited)...................................................... F-183
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1997 (unaudited)...................................................... F-184
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997 (unaudited)...................................................... F-185
Notes to Consolidated Financial Statements.................................................................. F-186
Unaudited Pro Forma Statement of Income for the year ended December 31, 1996................................ F-202
Unaudited Pro Forma Statement of Income for the nine months ended September 30, 1997........................ F-203
Notes to Unaudited Pro Forma Statements of Income........................................................... F-204
ROYAL PALACE HOTEL ASSOCIATES (THE BUENA VISTA PALACE HOTEL):
Report of Independent Accountants -- Coopers & Lybrand L.L.P................................................ F-205
Balance Sheets as of December 31, 1996 and 1995 and September 30, 1997 (unaudited).......................... F-206
Statements of Operations for the years ended December 31, 1996 and 1995 and the nine months ended
September 30, 1997 and 1996 (unaudited)................................................................... F-207
Statements of Partners' Equity for the years ended December 31, 1996 and 1995 and the nine months
ended September 30, 1997 (unaudited)..................................................................... F-208
Statements of Cash Flows for the years ended December 31, 1996 and 1995 and the nine months ended
September 30, 1997 and 1996 (unaudited)................................................................... F-209
Notes to Financial Statements............................................................................... F-210
</TABLE>
F-3
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
INTRODUCTION TO
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
BACKGROUND
On July 1, 1997, the Virginia corporation formerly known as Patriot American
Hospitality, Inc. ("Old Patriot REIT") merged with and into California Jockey
Club ("Cal Jockey"), with Cal Jockey being the surviving legal entity (the "Cal
Jockey Merger"). In connection with the Cal Jockey Merger, Cal Jockey changed
its name to Patriot American Hospitality, Inc. ("Patriot REIT") and Bay Meadows
Operating Company ("Bay Meadows") changed its name to Patriot American
Hospitality Operating Company ("Patriot Operating Company"). The term "Patriot
Companies" as used herein includes Patriot REIT, Patriot Operating Company and
their respective subsidiaries. Patriot REIT's shares of common stock are paired
and trade together with the shares of common stock of Patriot Operating Company
as a single unit pursuant to a stock pairing arrangement.
By operation of the Cal Jockey Merger, each issued and outstanding share of
common stock, no par value per share of Old Patriot REIT ("Old Patriot REIT
Common Stock") was converted into 0.51895 shares of common stock, par value
$0.01 per share of Patriot REIT ("Patriot REIT Common Stock") and 0.51895 shares
of common stock, par value $0.01 per share of Patriot Operating Company
("Patriot Operating Company Common Stock") (prior to giving effect to the 1.927-
for-1 stock split discussed below), which shares are paired and transferable
only as a single unit. Each paired share of Cal Jockey and Bay Meadows common
stock remained outstanding and represented the same number of paired shares of
Patriot REIT Common Stock and Patriot Operating Company Common Stock. Paired
shares of Patriot REIT common stock and Patriot Operating Company Common Stock
are referred to herein as "Paired Shares."
In connection with the Cal Jockey Merger, Bay Meadows formed Patriot American
Hospitality Operating Partnership, L.P. (the "Patriot Operating Company
Partnership") into which Bay Meadows contributed its assets in exchange for
units of limited partnership interest ("OP Units") of the Patriot Operating
Company Partnership, and Cal Jockey contributed certain of its assets to Patriot
American Hospitality Partnership, L.P. (the "Patriot REIT Partnership") in
exchange for OP Units of the Patriot REIT Partnership. Collectively, the Patriot
Operating Company Partnership and the Patriot REIT Partnership are referred to
herein as the "Patriot Partnerships." Subsequent to completion of the Cal Jockey
Merger and the related transactions contemplated by the Cal Jockey Merger
agreement, substantially all of the operations of Patriot REIT and Patriot
Operating Company have been conducted through the Patriot Partnerships and their
subsidiaries.
The unaudited Pro Forma Financial Statements have been adjusted for the
purchase method of accounting whereby the Bay Meadows Racecourse (the
"Racecourse") facilities and related leasehold improvements owned by Cal Jockey
and Bay Meadows are adjusted to estimated fair market value. The Cal Jockey
Merger has been accounted for as a reverse acquisition whereby Cal Jockey is
considered to be the acquired company for accounting purposes.
On July 10, 1997, the respective Boards of Directors of Patriot REIT and
Patriot Operating Company declared a 1.927-for-1 stock split on its shares of
common stock effected in the form of a stock dividend distributed on July 25,
1997 to shareholders of record on July 15, 1997.
Unless otherwise indicated, all references in the pro forma financial
statements to the number of shares, per share amounts, and market prices of
the common stock and options to purchase common stock have been restated to
reflect the impact of the conversion of each share of Old Patriot REIT Common
Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger and the
1.927-for-1 stock split. In addition, all references in the pro forma
financial statements to the number of shares, per share amounts, and market
prices of the common stock and options to purchase common stock related to
periods prior to the 2-for-1 stock split on Old Patriot REIT Common Stock
effected in the form of a stock dividend distributed on March 18, 1997 to
shareholders of record on March 7, 1997 have been restated to reflect the
impact of such stock split.
Patriot REIT leases each of its hotels, except the Crowne Plaza Ravinia Hotel
and the Wyndham WindWatch Hotel, which are separately owned through special
purpose entities (the "Non-Controlled Subsidiaries"), to either Patriot
Operating Company or to other lessees (the "Lessees") who are responsible for
operating the hotels. The hotels are leased for periods ranging from one to 12-
years pursuant to separate participating leases providing for the payment of the
greater of base or participating rent, plus certain additional charges, as
applicable (the "Participating Leases"). The Lessees, in turn, have entered into
separate agreements with hotel management entities (the "Operators") to manage
the hotels. The Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel were
structured without lessees and are managed directly by an Operator.
F-4
<PAGE>
As of December 4, 1997, 35 of Patriot REIT's hotels are leased to separate
Lessees (excluding the Park Shore Hotel), and 42 hotels are leased to Patriot
Operating Company (excluding the Sheraton City Centre).
BUSINESSES ACQUIRED
Since January 1, 1997, Patriot REIT, through the Patriot REIT Partnership and
its subsidiaries, has invested approximately $730,588 in the acquisition of 20
hotels and five resort properties with a total of 6,024 guest rooms (the "Recent
Acquisitions"). These acquisitions were financed primarily with funds drawn on
the Patriot Companies' $700,000 revolving credit facility (the "Revolving Credit
Facility") and prior to the Cal Jockey Merger, Old Patriot REIT's line of credit
facility, and other mortgage debt, the issuance of 3,204,243 OP Units valued at
approximately $73,662, and the assumption of mortgage debt in the amount of
approximately $34,263. In addition, in connection with certain other
transactions described below (see "Acquisition of Gencom American Hospitality
and Merger with CHC International, Inc."), Patriot REIT, through the Patriot
REIT Partnership and its subsidiaries, has invested approximately $236,984 in
the acquisition of ten additional hotels with a total of 3,119 rooms (the "CHC
Hotels").
On July 14, 1997, Patriot REIT sold approximately 174 acres of land in San
Mateo, California, representing substantially all of the land which was owned by
Cal Jockey prior to the Cal Jockey Merger, to an affiliate of PaineWebber
Incorporated ("PaineWebber") for a purchase price of approximately $80,864 (the
"PaineWebber Land Sale"). These funds were placed in a restricted trust account
in order to facilitate a tax-deferred, like-kind exchange through the
acquisition of suitable hotel properties. During July 1997, three suitable
hotels (the Holiday Inn at the San Francisco International Airport, the
Ambassador West Hotel and the Union Station Hotel) were acquired using a portion
of the proceeds from this restricted account. Patriot REIT retained ownership of
the improvements located on the land, including the Racecourse and its related
facilities. Simultaneously with the consummation of the PaineWebber Land Sale,
the PaineWebber affiliate and Patriot REIT entered into a ground lease covering
a portion of the land on which the Racecourse is situated for a term of seven
years. The lease provides for quarterly rental payments of $750 through March
1998, $813 through March 1999, $875 through March 2000, $1,000 through March
2002 and $1,250 through July 2004. Additionally, Patriot REIT subleased the
Racecourse land and leased the related improvements to Patriot Operating Company
in order to permit Patriot Operating Company to continue horseracing operations
at the Racecourse through the term of Patriot REIT's lease. The sublease is for
a term of seven years with annual payments based on percentages of revenue
generated. In addition, Patriot REIT has leased certain land adjacent to the
Racecourse to Borders, Inc. (the "Borders Lease") for an initial term of 20
years with a fixed net annual rent of $279 for years 1 through 10, $362 for
years 11 through 15 and $416 for years 16 through 20. In connection with the
sale, Patriot REIT assigned all of its rights and benefits under existing
leases, contracts, permits and entitlements relating to the land sold (excluding
the Borders Lease) to the PaineWebber affiliate, and the PaineWebber affiliate
assumed all of Patriot REIT's development obligations including, but not limited
to, all obligations for on and off-site improvements and all obligations under
existing leases and contracts. The parties have the option to renew such leases
upon their expiration under certain circumstances.
In August 1997, Patriot Operating Company acquired Grand Heritage Hotels,
Inc., a hotel management and marketing company, and other Grand Heritage
subsidiaries including Grand Heritage Leasing, L.L.C., which leased three
hotels from Patriot REIT (the "Grand Heritage Acquisition"). The acquisition
was financed primarily through the issuance of 931,972 Class A preferred OP
Units of the Patriot Operating Company Partnership.
Effective October 1, 1997, Patriot Operating Company, through certain of its
subsidiaries, acquired the members' interest of PAH RSI, L.L.C., a limited
liability company owned and controlled by certain executive officers of the
Patriot Companies ("PAH RSI Lessee") for approximately $143. PAH RSI Lessee
leased eight of Patriot REIT's hotels. As a result of the acquisition, Patriot
Operating Company holds these leasehold interests.
F-5
<PAGE>
FINANCING TRANSACTIONS
On July 21, 1997, the Patriot Companies entered into the Revolving Credit
Facility with PaineWebber Real Estate Securities, Inc. ("PaineWebber Real
Estate"), The Chase Manhattan Bank ("Chase") and certain other lenders for a
three-year $700,000 unsecured revolving line of credit. The Patriot Companies
are negotiating with PaineWebber Real Estate and Chase to increase the amount
available under the Revolving Credit Facility to $900,000.
Borrowings were made under the Revolving Credit Facility to repay all
outstanding amounts under Old Patriot REIT's secured line of credit with
PaineWebber Real Estate (the "Old Line of Credit"). The Revolving Credit
Facility generally is used for the acquisition of additional properties,
businesses and other assets, for capital expenditures and for general working
capital purposes. The interest rate for the Revolving Credit Facility ranges
from LIBOR plus 1.0% to 2.0% (depending on the Patriot Companies' leverage ratio
or the investment grade rating received from the rating agencies) or the
customary alternate base rate announced from time to time plus 0.0% to 0.5%
(depending on the Patriot Companies' leverage ratio). The weighted average
interest rate in effect for the Revolving Credit Facility for the period ended
September 30, 1997 was 7.62% per annum.
Additionally, Patriot REIT has entered into a commitment letter with
PaineWebber Real Estate and Chase for the $500,000 term loan (the "Term Loan").
In connection with the Patriot Companies' negotiations to increase the amount
available under the Revolving Credit Facility, the Term Loan amount has been
reduced to $350,000. It is anticipated that the Term Loan will be unsecured. The
Term Loan will be used primarily to finance payments to be made in connection
with the acquisition of certain assets described herein. The Term Loan is
expected to have an interest rate per annum equal to the interest rate incurred
on the Revolving Credit Facility.
In June 1997, Patriot REIT loaned approximately $20,500 to a partnership
affiliated with members of CHC Lease Partners relating to the Doubletree Hotel
in Glenview, Illinois. In July 1997, Patriot REIT loaned approximately $25,600
to another partnership affiliated with members of CHC Lease Partners, relating
to the Sheraton Gateway Hotel in Miami (also known as the Sheraton River House
Hotel). Both loans mature in two years, bear interest at a rate per annum
equal to 30-day LIBOR plus 2.75%, and are secured by first priority liens on
the respective hotels. Additionally, Patriot REIT has purchased two additional
loans on which partnerships affiliated with the members of CHC Lease Partners
are borrowers for an aggregate purchase price of $57,000. One of the purchased
loans, in the principal amount of approximately $30,700, matures in December
2000 and bears interest at a rate per annum equal to 8.0% until November 30,
1997, 8.5% from December 1, 1997 until November 30, 1999, and 9.0% from
December 1, 1999 until December 1, 2000. The second purchased loan, in the
principal amount of approximately $24,400, matures on December 31, 1999 and
bears interest at a rate per annum equal to 8.0% until December 31, 1997 and
9.5% from January 1, 1998 until December 31, 1999. Each of the purchased loans
is secured by first priority liens on the respective hotels. The notes contain
certain penalties for early repayment. In connection with such loans, Patriot
REIT has entered into a short-term financing arrangement with an affiliate of
PaineWebber Real Estate (the "PaineWebber Mortgage Financing"), whereby such
affiliate loaned Patriot REIT $103,000 through April 15, 1998 at a rate equal
to the greater of 30-day LIBOR plus 1.75% or the borrowing rate on the
Revolving Credit Facility. This financing is secured by a collateral
assignment of the mortgage loans encumbering the four hotels. In October 1997,
Patriot REIT, through certain of its subsidiaries, acquired 100% of the
ownership interests in the four partnerships that own these hotels (see
"Acquisition of Gencom American Hospitality and Merger with CHC International,
Inc." below). As a result, the note balances and the related interest income
and expense are eliminated in Patriot REIT's consolidated financial
statements.
On November 25, 1997, Patriot REIT, through the Patriot REIT Partnership,
acquired a 92.5% general partner interest in a partnership formed for the
purpose of acquiring the 353-room Sheraton City Centre hotel (the "Sheraton
City Centre Partnership"). A third party (the "Minority Partner") owns the
remaining 7.5% limited partner interest in the Sheraton City Centre
Partnership (the "Minority Interest"). The Patriot REIT
F-6
<PAGE>
Partnership contributed approximately $36,800 for its general partner
interest, financed primarily with funds drawn on the Revolving Credit
Facility. Patriot REIT has leased the Sheraton City Centre hotel to Patriot
Operating Company. Beginning in November 1999, the Minority Partner may
require Patriot REIT Partnership to purchase the Minority Interest at a price
equal to the estimated value (as calculated in accordance with the provisions
of the partnership agreement). In addition, beginning in November 2001, the
Patriot REIT Partnership has the option to purchase the Minority Interest for
the greater of $5,500 or the estimated value of the Minority Interest (as
defined in the partnership agreement). The following unaudited Pro Forma
Condensed Combined Statements of Operations do not include the results of
operations of the Sheraton City Centre.
In August 1997, Patriot Operating Company purchased a participating loan from
National Resort Ventures, L.P., a Delaware limited partnership, related to the
1,014-room Buena Vista Palace Hotel in Orlando, Florida for $23,750 in cash (the
"Participating Note"). The Buena Vista Palace Hotel is owned by a joint venture
(the "Buena Vista Joint Venture") between Equitable Life Insurance Company
("Equitable"), which owns a 55% interest, and Hotel Venture Partners, Ltd.
("HVP"), a Florida limited partnership, which owns a 45% interest. Patriot REIT,
through certain of its subsidiaries, has entered into a Contribution Agreement
dated October 7, 1997 to acquire approximately 90% of HVP's 45% interest in the
Buena Vista Joint Venture for approximately $14,000 in cash and units of limited
partnership interest in the Patriot REIT Partnership and the Patriot Operating
Company Partnership. Patriot REIT was also granted an option to acquire HVP's
remaining interest in the Buena Vista Joint Venture. In addition, pursuant to a
Purchase and Sale Agreement dated November 6, 1997, Patriot REIT, through
certain of its subsidiaries, agreed to acquire Equitable's 55% interest in the
Buena Vista Joint Venture for approximately $53,500 in cash. Patriot REIT will
also acquire the Participating Note investment held by Patriot Operating Company
for $23,750 in cash and also agreed to repay outstanding mezzanine debt of
approximately $6,004. Subsequent to acquisition of these joint venture
interests, Patriot REIT, through certain of its subsidiaries, will hold an
aggregate 95% ownership interest (including a 1% general partnership interest)
in the Buena Vista Joint Venture with an option to acquire the remaining 5%
interest in three years. The hotel will remain subject to a ground lease and a
first leasehold mortgage note in the amount of approximately $50,700.
In August 1997, the Patriot Companies completed a public offering (the
"Offering") of 10,580,000 Paired Shares (including 1,380,000 Paired Shares
issued upon exercise of the underwriters' over-allotment option), with net
proceeds (less underwriter discount and expenses) of approximately $240,795.
The net proceeds were primarily used to reduce the outstanding debt under the
Revolving Credit Facility.
On November 13, 1997, pursuant to a letter agreement dated September 30,
1997, the Patriot Companies sold 1,000,033 Paired Shares to PaineWebber (the
"PaineWebber Direct Placement") for a purchase price per Paired Share of
$27.6875, or aggregate consideration of $27,688. In addition, pursuant to a
letter agreement dated September 30, 1997, the Patriot Companies sold
1,000,000 Paired Shares to LaSalle Advisors Limited Partnership ("LaSalle"),
as agent for certain clients of LaSalle (the "LaSalle Direct Placement"), at a
purchase price per Paired Share of $27.65, or aggregate consideration of
$27,650.
On September 30, 1997, the Patriot Companies exercised their right to call
2,000,033 OP Units in each of the Patriot Partnerships held by The Morgan
Stanley Real Estate Fund, L.P., and certain related entities (the "Morgan
Stanley Call"). The exercise price on the Morgan Stanley Call was $25.875 per
pair of OP Units. The Morgan Stanley Call was funded with the proceeds of the
PaineWebber Direct Placement and the LaSalle Direct Placement.
ACQUISITION OF GENCOM AMERICAN HOSPITALITY AND MERGER WITH CHC INTERNATIONAL,
INC.
In September 1997, Patriot REIT, through certain of its subsidiaries, acquired
seven hotels (including an approximate 50% controlling ownership interest in the
Omni Inner Harbor Hotel) and in October 1997, Patriot REIT, through certain of
its subsidiaries, acquired three additional hotels. The ten CHC Hotels were
acquired from entities affiliated with the Gencom American Hospitality group of
companies ("Gencom") and CHC International, Inc. ("CHCI") for an aggregate
purchase price of approximately $236,984.
F-7
<PAGE>
In addition, Patriot REIT has entered into an agreement whereby Patriot REIT
may indirectly acquire the remaining ownership interest in the Omni Inner
Harbor Hotel for approximately $19,314. The CHC Hotels are leased to and
managed by Patriot Operating Company and its subsidiaries. The purchase of the
hotels was financed with approximately $45,000 of cash drawn on the Revolving
Credit Facility and by issuing 1,703,943 Paired Shares and 2,174,773 paired OP
Units in the Patriot Partnerships in a private placement. Four of the hotels
are encumbered by the mortgage loans, in the aggregate amount of approximately
$103,443 including accrued interest, that Patriot REIT made in connection with
the PaineWebber Mortgage Financing discussed above.
In addition, Patriot REIT acquired the leasehold interests related to eight
hotels which were previously leased by CHC Lease Partners and re-leased such
hotels to Patriot Operating Company. Prior to such acquisition, the management
contracts with GAH-II, L.P. ("GAH"), an affiliate of CHCI and Gencom, related to
the eight hotels were terminated. The aggregate purchase price of the leasehold
interests was approximately $52,766. Concurrently, Patriot Operating Company
purchased an approximate 50% managing, controlling ownership interest in GAH
from affiliates of Gencom for a purchase price of approximately $13,860. These
transactions were financed with approximately $644 of cash, and by issuing
2,388,932 paired OP Units of the Patriot REIT Partnership and the Patriot
Operating Company Partnership and 476,682 Class C preferred OP Units of Patriot
Operating Company Partnership. In connection with Patriot REIT's acquisition of
the eight leasehold interests from CHC Lease Partners, CHC Lease Partners was
liquidated and its remaining 17 leasehold interests became leasehold interests
of CHCI, the ultimate remaining owner of CHC Lease Partners at the time of its
liquidation. These 17 leasehold interests will be acquired by Patriot Operating
Company if the CHCI Merger is consummated, as described below.
GAH, directly and through certain of its subsidiaries, owns nine management
contracts related to hotels leased by Patriot Operating Company, 15 third-party
management contracts, and certain other hospitality management assets.
Concurrently with Patriot Operating Company's purchase of its controlling
interest in GAH, Patriot Operating Company also entered into a Hospitality
Advisory, Asset Management and Support Services Agreement with CHCI and GAH
whereby Patriot Operating Company will provide certain hospitality advisory,
asset management and support services to certain CHCI and GAH subsidiaries for
base fees aggregating approximately $750 per month plus a percentage of excess
cash flows of the hotels.
Patriot REIT, Patriot Operating Company and CHCI have also entered into an
Agreement and Plan of Merger dated as of September 30, 1997 for the merger of
the hospitality-related businesses of CHCI with and into Patriot Operating
Company with Patriot Operating Company being the surviving company (the "CHCI
Merger"). Subject to regulatory approvals, CHCI's gaming operations will be
transferred to a new legal entity prior to the CHCI Merger and such operations
will not be a part of the transaction. It is anticipated that the CHCI Merger
will be consummated in the first or second quarter of 1998, although the precise
timing is subject to certain conditions, including receipt of all necessary
regulatory approvals. As a result of the CHCI Merger, Patriot Operating Company,
through its subsidiaries, will acquire the remaining 50% investment interest in
GAH, the remaining 17 leases and 16 of the associated management contracts
related to the Patriot REIT hotels leased by CHC Lease Partners, 3 management
contracts related to Patriot REIT hotels leased by Patriot Operating Company, 12
third-party management contracts, 2 third-party lease contracts, the Grand Bay
and Registry Hotels & Resorts proprietary brand names and certain other
hospitality management assets. Patriot Operating Company has also agreed to
provide CHCI with a $7,000 line of credit until such time as the CHCI Merger is
completed. Patriot Operating Company's acquisition of GAH, both the acquisition
of an approximate 50% interest in GAH in September 1997 and the acquisition of
the remaining approximate 50% interest in connection with the CHCI Merger, is
referred to as the "GAH Acquisition" when used in connection with the
presentation of pro forma financial data.
By operation of the CHCI Merger and the transactions related thereto, each
issued and outstanding share of CHCI common stock, par value $0.005 per share
("CHCI Share") and certain stock option rights will be converted into the right
to receive shares of Series A Redeemable Convertible Preferred Stock, par value
$0.01 per share, of Patriot Operating Company ("Operating Company Series A
Preferred Stock") and shares of Series B Redeemable Convertible Preferred Stock,
par value $0.01 per share, of Patriot Operating Company ("Operating Company
Series B Preferred Stock," and collectively with the Operating Company Series A
Preferred Stock, the "Operating Company Preferred Stock"). The formula for
determining the exchange ratio of CHCI Shares for Operating Company Series A
Preferred Stock and Operating Company Series B Preferred Stock is based on
issuing an aggregate of approximately 4,396,000 shares of
F-8
<PAGE>
Operating Company Preferred Stock (based on an aggregate purchase value of
approximately $102,200 and a market price per Paired Share of $23.25), subject
to reduction if certain specified events occur and subject to increase
representing adjustments for dividends paid on Paired Shares after September
30, 1997. Generally, the aggregate number of shares of Operating Company
Preferred Stock that each shareholder shall have the right to receive pursuant
to the CHCI Merger shall consist of, to the extent possible, an equal number
of Operating Company Series A Preferred Stock and Operating Company Series B
Preferred Stock.
Generally, each share of Operating Company Series A Preferred Stock may be
redeemed for one Paired Share at any time following the one-year anniversary
of the closing of the CHCI Merger. Each share of Operating Company Series B
Preferred Stock may be redeemed for one Paired Share, however, such redemption
is generally restricted until the fifth-year anniversary of the closing of the
CHCI Merger. The value of a Paired Share at the time of redemption (the
"Redemption Value") may, at Patriot Operating Company's option, be paid in
cash. Further, if Patriot Operating Company fails to comply with certain
restrictions, the preferred shares may be redeemed for cash or, at Patriot
Operating Company's option, Paired Shares at the Redemption Value plus a
premium. The dividend rate on the shares of Operating Company Preferred Stock
is equivalent to the dividend rate on the Paired Shares. Dividends on
Operating Company Series B Preferred Stock are subject to increase during the
five years subsequent to the closing of the CHCI Merger if the shares are
transferred by the original holder. If the dividends on the shares of
Operating Company Preferred Stock are not paid when due, dividends will
instead accrue at the rate of 115% per annum on a compounded basis. The shares
of Operating Company Preferred Stock are redeemable at Patriot Operating
Company's option at the Redemption Value, plus a premium in the case of the
original holders thereof and certain permitted transferees.
In connection with the GAH Acquisition, preferred OP Units of the Patriot
Operating Company Partnership with a value of approximately $5,000 have been
held back, and the CHCI Merger equity consideration is subject to reduction in
the amount of approximately $5,000 if the hotels and leaseholds acquired fail to
achieve certain operating targets over the period prior to the closing of the
CHCI Merger.
In addition, on September 30, 2000 and September 30, 2002, Patriot Operating
Company may be obligated to pay the CHCI stockholders, and a subsidiary of
Patriot Operating Company may be obligated to pay a Gencom-related entity,
additional consideration, in each case based upon the delivery and performance
of certain specified assets.
F-9
<PAGE>
SUMMARY
As of December 2, 1997, Patriot REIT owned interests in 81 hotels and
resorts and held an approximate 86.0% ownership interest in the Patriot REIT
Partnership. Patriot Operating Company held an approximate 84.6% ownership
interest in the Patriot Operating Company Partnership. The unaudited Pro Forma
Financial Statements reflect an approximate 13.8% minority ownership interest
in the Patriot REIT Partnership and a 14.5% minority ownership interest in the
Patriot Operating Company Partnership, which represents the estimated
ownership interest subsequent to consummation of the GAH Acquisition, the CHCI
Merger, the PaineWebber Direct Placement and the LaSalle Direct Placement.
The following unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1996 and the nine months ended September 30,
1997 of Patriot REIT and Patriot Operating Company are derived from the
individual unaudited Pro Forma Condensed Consolidated Statements of Operations
of Patriot REIT and Patriot Operating Company which are included in this Joint
Current Report. Such pro forma information is based in part upon:
(i) the Separate and Combined Statements of Income of Cal Jockey and Bay
Meadows filed with the Cal Jockey and Bay Meadows Joint Annual Report on
Form 10-K for the year ended December 31, 1996;
(ii) the Consolidated Statements of Operations of Old Patriot REIT filed
with the Old Patriot REIT Annual Report on Form 10-K for the year ended
December 31, 1996;
(iii) the Separate and Combined Statements of Operations of Patriot REIT
and Patriot Operating Company filed with the Patriot Companies' Joint
Quarterly Report on Form 10-Q for the nine months ended September 30, 1997;
(iv) the historical financial statements of certain hotels acquired by
Old Patriot REIT filed in Old Patriot REIT's Current Reports on Form 8-K
dated April 2, 1996, as amended, December 5, 1996 and January 16, 1997, as
amended;
(v) the historical financial statements of the certain hotels and
businesses acquired by Patriot REIT and Patriot Operating Company filed in
the Patriot Companies' Joint Current Reports on Form 8-K dated September
17, 1997, and September 30, 1997, as amended, and located elsewhere in this
Joint Current Report; and
(vi) the Pro Forma Condensed Combined Statements of Operations of the
Lessees which are located elsewhere in this Joint Current Report.
The following unaudited Pro Forma Condensed Combined Statements of
Operations assume the following transactions (the "Recent Transactions") have
occurred as of January 1, 1996:
(i) the Cal Jockey Merger and the related transactions have been
consummated on terms set forth in the Cal Jockey Merger Agreement;
(ii) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased that portion of the land upon which the Racecourse is
situated to Patriot REIT, and Patriot REIT has subleased the land and
related improvements to Patriot Operating Company;
(iii) Patriot REIT has leased certain land to Borders, Inc.;
(iv) Patriot Operating Company has completed the Grand Heritage
Acquisition and the acquisition of PAH RSI Lessee;
(v) Patriot REIT has acquired the Recent Acquisitions (excluding the Park
Shore Hotel and the Sheraton City Centre);
(vi) the mortgage notes to affiliates of CHC Lease Partners have been
funded;
(vii) Patriot REIT has replaced the Old Line of Credit with the Revolving
Credit Facility;
(viii) Patriot Operating Company has acquired the Participating Note; and
(ix) the Offering of 10,580,000 Paired Shares has been completed.
F-10
<PAGE>
The unaudited Pro Forma Condensed Combined Statements of Operations also
assume the following additional transactions have occurred at the beginning of
the periods presented:
(i) Patriot REIT has acquired the CHC Hotels and leased such hotels to
Patriot Operating Company;
(ii) Patriot Operating Company has completed the GAH Acquisition; and
(iii) the CHCI Merger has been consummated on the terms set forth in the
CHCI Merger Agreement.
The pro forma results of operations for the year ended December 31, 1996
assume the 24 hotels acquired during 1996 and the private placement of equity
securities and the public offering of common stock completed by Old Patriot
REIT during 1996 had occurred as of January 1, 1996.
In management's opinion, all material adjustments necessary to reflect the
effects of these transactions have been made. The following unaudited Pro Forma
Condensed Combined Statements of Operations are not necessarily indicative of
what the actual results of operations of Patriot REIT and Patriot Operating
Company would have been assuming such transactions had been completed as of
January 1, 1996, nor do they purport to represent the results of operations for
future periods. Further the unaudited Pro Forma Condensed Combined Statement of
Operations for the interim period ended September 30, 1997 is not necessarily
indicative of the results of operations for the full year.
F-11
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT
PATRIOT OPERATING
REIT COMPANY PRO FORMA
PRO FORMA PRO FORMA ELIMINATIONS TOTAL
--------- ---------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease reve-
nue..................... $213,868 $ -- $(172,119)(A) $ 41,749
Hotel revenue............ -- 572,292 -- 572,292
Racecourse facility and
land lease revenue ..... 5,945 51,946 (5,611)(B) 52,280
Management fee and serv-
ice fee income.......... -- 13,522 -- 13,522
Interest and other in-
come.................... 2,297 10,012 (5,916)(C) 6,393
-------- -------- --------- --------
Total revenue............ 222,110 647,772 (183,646) 686,236
-------- -------- --------- --------
Expenses:
Departmental costs--hotel
operations.............. -- 241,792 -- 241,792
Racecourse facility oper-
ations.................. -- 46,351 (5,611)(B) 40,740
Direct operating costs of
management company and
service department...... -- 11,143 -- 11,143
General and administra-
tive.................... 6,797 71,700 (34)(C) 78,463
Ground lease expense..... 5,693 733 -- 6,426
Repair and maintenance... -- 29,897 -- 29,897
Utilities................ -- 26,843 -- 26,843
Interest expense......... 64,518 1,393 (5,882)(C) 60,029 (D)
Real estate and personal
property taxes and casu-
alty insurance.......... 22,488 398 -- 22,886
Marketing................ -- 51,238 -- 51,238
Management fees.......... -- 9,469 -- 9,469
Depreciation and amorti-
zation.................. 62,723 10,348 -- 73,071
Participating lease pay-
ments................... -- 172,119 (172,119)(A) --
-------- -------- --------- --------
Total expenses........... 162,219 673,424 (183,646) 651,997
-------- -------- --------- --------
Income (loss) before eq-
uity in earnings of un-
consolidated subsidiar-
ies, income tax provision
and minority interests... 59,891 (25,652) -- 34,239
Equity in earnings of un-
consolidated subsidiar-
ies..................... 7,559 -- -- 7,559
-------- -------- --------- --------
Income (loss) before in-
come tax provision and
minority interests....... 67,450 (25,652) -- 41,798
Income tax provision..... (170) (760) -- (930)
-------- -------- --------- --------
Income (loss) before mi-
nority interests......... 67,280 (26,412) -- 40,868
Minority interest in the
Patriot Partnerships.... (9,032) 3,830 -- (5,202)
Minority interest in con-
solidated subsidiaries.. (1,832) -- -- (1,832)
-------- -------- --------- --------
Net income (loss) applica-
ble to common
shareholders(F).......... $ 56,416 $(22,582) $ -- $ 33,834 (D)
======== ======== ========= ========
Net income (loss) per com-
mon Paired Share(E)...... $ 0.75 $ (0.30) $ 0.45 (D)
======== ======== ========
</TABLE>
- --------
(A) Represents elimination of participating lease revenue and expense related
to the 59 hotels (including the 17 leases to be acquired in connection
with the CHCI Merger) leased by Patriot REIT to Patriot Operating Company.
(B) Represents elimination of rental income and expense related to the
Racecourse facility and land leased by Patriot REIT to Patriot Operating
Company.
(C) In connection with the Cal Jockey Merger, Patriot REIT Partnership
subscribed for shares of Bay Meadows common stock (which became shares of
Patriot Operating Company Common Stock in connection with the Cal Jockey
Merger) in an amount equal to the number of shares of Patriot REIT Common
Stock that were issued to Old Patriot REIT stockholders in the Cal Jockey
Merger. In addition, Patriot REIT Partnership similarly subscribed for OP
Units in the Patriot Operating Partnership in an amount equal to the
number of Patriot REIT Partnership OP Units that were outstanding
subsequent to the Cal Jockey Merger. The subscription for the shares and
OP Units was funded through the issuance of promissory notes in the
aggregate amount of $58,901 (the "Subscription Notes") payable to Patriot
Operating Company. The Subscription Notes accrue interest at a rate of 8%
per annum and mature December 31, 1997. The pro forma adjustments
represent the elimination of $4,712 of interest income and expense related
to the Subscription Notes, the elimination of $1,170 of interest income
and expense related to a note receivable issued to Old Patriot REIT in
connection with the sale of certain assets to PAH RSI Lessee, which assets
were acquired by Patriot Operating Company, and the elimination of $34 of
other intercompany income and expense items.
F-12
<PAGE>
(D) The pro forma amounts presented assume an average interest rate of 7.183%
per annum (representing LIBOR plus 1.7%) on the amounts outstanding under
the Revolving Credit Facility. An increase of 0.25% in the interest rate
would increase pro forma interest expense to $61,604, decrease net income
applicable to common shareholders to $32,477 and decrease net income per
common share to $0.43.
In connection with the closing of the Revolving Credit Facility, deferred
loan costs totaling approximately $11,605, including fees, legal and other
expenses were incurred and amortization expense of approximately $3,868 is
reflected in pro forma interest expense. Amortization of deferred loan costs
is computed using the straight-line method over the 3-year loan term. As a
result of closing the Revolving Credit Facility, deferred loan costs
totaling approximately $2,910 related to the Old Line of Credit were written
off. This amount was reported as an extraordinary item in the Patriot
Companies' results of operations for the nine months ended September 30,
1997.
(E) Pro forma earnings per share is computed based on 75,516 weighted average
common Paired Shares and common Paired Share equivalents outstanding for the
period. The number of shares used for the calculation includes adjustments
to reflect the impact of the conversion of shares of Patriot Operating
Company Preferred Stock into Paired Shares. In addition, the net income per
common Paired Share and the weighted average number of common Paired Shares
and common Paired Share equivalents have been adjusted for (i) the March
1997 2-for-1 stock split on Old Patriot REIT Common Stock effected in the
form of a stock dividend, (ii) the conversion of each share of Old Patriot
REIT Common Stock into 0.51895 Paired Shares issued in the Cal Jockey
Merger, and (iii) the July 1997 1.927-for-1 stock split effected in the form
of a stock dividend. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 Earnings
Per Share ("Statement 128"). Statement 128 specifies the computation,
presentation and disclosure requirements for basic earnings per share and
diluted earnings per share. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options and convertible
preferred securities will be excluded. Pro forma basic earnings per share
for the year ended December 31, 1996 would be $0.45 per common Paired Share.
The impact of Statement 128 on the calculation of diluted earnings per share
is not expected to differ significantly from the earnings per share amounts
reported.
(F) In connection with the GAH Acquisition and the CHCI Merger, Patriot REIT
acquired eight Participating Leases held by CHC Lease Partners (and leased
these hotels to Patriot Operating Company) and Patriot Operating Company
acquired the remaining 17 Participating Leases held by CHC Lease Partners
for aggregate consideration of approximately $105,532. Because the intent of
the accompanying pro forma condensed combined statement of operations for
the year ended December 31, 1996 is to reflect the expected continuing
impact of the above-described transactions on the Patriot Companies, the
adjustment to write off the cost of acquiring these leases has been
excluded. This expense will be recorded as an operating expense on Patriot
REIT's and Patriot Operating Company's respective statements of operations.
F-13
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT
PATRIOT OPERATING
REIT COMPANY PRO FORMA
PRO FORMA PRO FORMA ELIMINATIONS TOTAL
--------- ---------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease reve-
nue..................... $172,682 $ -- $(138,309)(A) $ 34,373
Hotel revenue............ -- 462,484 -- 462,484
Racecourse facility and
land lease revenue...... 3,504 33,399 (3,246)(B) 33,657
Management fee and serv-
ice fee income.......... -- 14,701 -- 14,701
Interest and other in-
come.................... 4,043 6,374 (2,306)(C) 8,111
-------- -------- --------- --------
Total revenue............ 180,229 516,958 (143,861) 553,326
-------- -------- --------- --------
Expenses:
Departmental costs--hotel
operations.............. -- 187,784 -- 187,784
Racecourse facility oper-
ations.................. -- 30,114 (3,246)(B) 26,868
Direct operating costs of
management company and
service department...... -- 12,568 -- 12,568
General and administra-
tive.................... 6,937 54,225 (24)(C) 61,138
Ground lease expense..... 5,535 523 -- 6,058
Repair and maintenance... -- 24,230 -- 24,230
Utilities................ -- 20,341 -- 20,341
Interest expense......... 48,329 936 (2,282)(C) 46,983 (D)
Real estate and personal
property taxes and casu-
alty insurance.......... 17,812 290 -- 18,102
Marketing................ -- 41,734 -- 41,734
Management fees.......... -- 9,657 -- 9,657
Depreciation and amorti-
zation.................. 47,565 5,449 -- 53,014
Participating lease pay-
ments................... -- 138,309 (138,309)(A) --
-------- -------- --------- --------
Total expenses........... 126,178 526,160 (143,861) 508,477
-------- -------- --------- --------
Income (loss) before eq-
uity in earnings of un-
consolidated subsidiar-
ies, income tax provision
and minority interests... 54,051 (9,202) -- 44,849
Equity in earnings of un-
consolidated subsidiar-
ies..................... 4,488 -- -- 4,488
-------- -------- --------- --------
Income (loss) before in-
come tax provision and
minority interests....... 58,539 (9,202) -- 49,337
Income tax (provision)
benefit................. (125) -- -- (125)
-------- -------- --------- --------
Income (loss) before mi-
nority interests......... 58,414 (9,202) -- 49,212
Minority interest in the
Patriot Partnerships.... (7,803) 1,334 -- (6,469)
Minority interest in con-
solidated subsidiaries.. (1,869) -- -- (1,869)
-------- -------- --------- --------
Net income (loss) applica-
ble to common
shareholders(F).......... $ 48,742 $ (7,868) $ -- $ 40,874 (D)
======== ======== ========= ========
Net income (loss) per com-
mon Paired Share(E)...... $ 0.64 $ (0.10) $ 0.54 (D)
======== ======== ========
</TABLE>
- --------
(A) Represents elimination of participating lease revenue and expense related
to the 59 hotels (including the 17 leases to be acquired in connection
with the CHCI Merger) leased by Patriot REIT to Patriot Operating Company.
(B) Represents elimination of rental income and expense related to the
Racecourse facility and land leased by Patriot REIT to Patriot Operating
Company.
(C) The pro forma adjustments represent the elimination of $1,450 of interest
income and expense related to the Subscription Notes issued to Patriot
Operating Company in connection with the subscription for shares of
Patriot Operating Company Common Stock and Patriot Operating Partnership
OP Units issued in connection with the Cal Jockey Merger, the elimination
of $832 of interest income and expense related to a note receivable issued
to Old Patriot REIT in connection with the sale of certain assets to PAH
RSI Lessee, which assets were acquired by Patriot Operating Company, and
the elimination of $24 of other intercompany income and expense items.
(D) The pro forma amounts presented assume an average interest rate of 7.303%
per annum (representing LIBOR plus 1.7%) on the amounts outstanding under
the Revolving Credit Facility. An increase of 0.25% in the interest rate
would increase pro forma interest expense to $48,159 and decrease net
income applicable to common shareholders to $39,860. Net income per common
share would be $0.53. In connection with the closing of the Revolving
Credit Facility, deferred loan costs totaling approximately $11,605,
including fees, legal and other expenses were incurred and amortization
expense of approximately $2,901 is reflected in pro forma interest
expense.
F-14
<PAGE>
Amortization of deferred loan costs is computed using the straight-line
method over the 3-year loan term. As a result of closing the Revolving
Credit Facility, deferred loan costs totaling approximately $2,910 related
to the Old Line of Credit were written off. This amount was reported as an
extraordinary item in the Patriot Companies' historical results of
operations for the nine months ended September 30, 1997 and has been
eliminated from operating results for pro forma presentation purposes.
(E) Pro forma earnings per share is computed based on 76,090 weighted average
common Paired Shares and common Paired Share equivalents outstanding for
the period. The number of shares used for the calculation includes
adjustments to reflect the impact of the conversion of shares of Patriot
Operating Company Preferred Stock into Paired Shares. In addition, the net
income per common Paired Share and the weighted average number of common
Paired Shares and common Paired Share equivalents have been adjusted to
reflect the impact of the 1.927-for-1 stock split effected in the form of
a stock dividend.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be $0.58 per common Paired Share. The impact of
Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
(F) In connection with the GAH Acquisition and the CHCI Merger, Patriot REIT
acquired eight Participating Leases held by CHC Lease Partners (and leased
these hotels to Patriot Operating Company) and Patriot Operating Company
acquired the remaining 17 Participating Leases held by CHC Lease Partners
for aggregate consideration of approximately $105,532. Because the intent
of the accompanying pro forma condensed combined statement of operations for
the nine months ended September 30, 1997 is to reflect the expected
continuing impact of the above-described transactions on the Patriot
Companies, the adjustment to write off the cost of acquiring these leases
has been excluded. This expense will be recorded as an operating expense on
Patriot REIT's and Patriot Operating Company's respective statements of
operations.
F-15
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited Pro Forma Condensed Combined Balance Sheet assumes
the following transactions have occurred as of September 30, 1997:
(i) Patriot REIT has acquired the three CHC Hotels and The Buttes (which
were acquired subsequent to September 30, 1997) and has acquired the remaining
approximate 50% interest in the Omni Inner Harbor Hotel and leased such hotels
to Patriot Operating Company;
(ii) Patriot Operating Company has acquired the members' interests in PAH
RSI Lessee;
(iii) Patriot Operating Company has completed the GAH Acquisition; and
(iv) The CHCI Merger has been consummated on the terms set forth in the
CHCI Merger Agreement.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Condensed Combined Balance Sheet is
derived from Patriot REIT's and Patriot Operating Company's Combined Balance
Sheet as of September 30, 1997 and should be read in conjunction with the
financial statements filed with the Patriot Companies' Joint Quarterly Report
on Form 10-Q for the nine months ended September 30, 1997.
The following Pro Forma Condensed Combined Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of September 30, 1997, nor does it purport
to represent the future financial position of Patriot REIT and Patriot
Operating Company.
F-16
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT REIT
AND PATRIOT
OPERATING
COMPANY
COMBINED OTHER CHC HOTELS CHCI PRO
HISTORICAL ACQUISITIONS ACQUISITION MERGER FORMA
(A) (B) (C) (D) TOTAL
------------ ------------ ----------- -------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
ASSETS
Net investment in real
estate and related
improvements............ $ 1,477,512 $63,755 $116,016 $ -- $1,657,283
Mortgage notes and other
receivables from
unconsolidated
subsidiaries............ 74,053 -- -- -- 74,053
Other notes and
receivables............. 98,538 -- (82,625)(E) -- 15,913
Management contracts..... 22,453 -- -- 22,911 (F) 45,364
Trade names.............. 2,500 -- -- 5,000 (F) 7,500
Investment in
unconsolidated
subsidiaries............ 12,061 -- -- -- 12,061
Cash and cash
equivalents............. 21,515 -- -- -- 21,515
Restricted cash (G)...... 38,196 -- -- 38,196
Accounts receivable...... 38,540 -- -- -- 38,540
Goodwill................. 120,839 -- -- 7,269 (H) 128,108
Deferred expenses, net... 16,626 -- -- -- 16,626
Deferred acquisition
costs................... 46,036 -- (6,066) -- 39,970
Prepaid expenses and
other assets............ 10,538 (1,002) 1,393 394 11,323
Deferred income taxes.... 700 -- -- -- 700
----------- ------- -------- -------- ----------
Total assets............ $ 1,980,107 $62,753 $ 28,718 $ 35,574 $2,107,152
=========== ======= ======== ======== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowings under a line
of credit facility and
mortgage notes.......... $ 727,177 $62,753 $ -- $ -- $ 789,930
Accounts payable and
accrued expenses........ 48,561 -- 1,816 (I) -- 50,377
Dividends and
distributions payable... 21,727 -- -- -- 21,727
Sales taxes payable...... 2,968 -- -- -- 2,968
Deposits................. 2,037 -- -- -- 2,037
Deferred income tax
liability............... 4,846 -- -- -- 4,846
Due to unconsolidated
subsidiaries............ 5,904 -- -- -- 5,904
Minority interest in the
Patriot Partnerships.... 257,274 -- 7,588(J) -- 264,862
Minority interest in
consolidated
subsidiaries............ 29,284 -- -- -- 29,284
Shareholders' equity:
Preferred stock......... -- -- -- 44 (L) 44
Common stock............ 1,360 -- 17 (K) -- 1,377
Paid-in capital......... 941,674 -- 19,297 (K) 88,296 (L) 1,049,267
Unearned stock
compensation, net...... (15,075) -- -- -- (15,075)
Retained earnings....... (47,630) -- -- (52,766)(L) (100,396)
----------- ------- -------- -------- ----------
Total shareholders'
equity................. 880,329 -- 19,314 35,574 935,217
----------- ------- -------- -------- ----------
Total liabilities and
shareholders' equity... $ 1,980,107 $62,753 $ 28,718 $ 35,574 $2,107,152
=========== ======= ======== ======== ==========
</TABLE>
See notes on following page.
F-17
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997:
(A) Represents the historical combined financial position of Patriot REIT and
Patriot Operating Company as of September 30, 1997.
(B) Represents adjustments to the Patriot Companies' pro forma financial
position assuming Patriot REIT had acquired The Buttes resort as of
September 30, 1997.
(C) Represents adjustments to the Patriot Companies' pro forma financial
position assuming the three CHC Hotels purchased in October 1997 and the
remaining approximate 50% ownership interest in the Omni Inner Harbor
Hotel had been acquired as of September 30, 1997.
(D) Represents adjustments to the Patriot Companies' pro forma financial
position assuming the CHCI Merger had been consummated as of September 30,
1997.
(E) Represents the elimination of the principal balance of the mortgage notes
held by Patriot REIT encumbering three of the CHC Hotels.
(F) Represents the estimated value of the management contracts and trade names
acquired.
(G) The restricted cash balance represents the cash proceeds from the
PaineWebber Land Sale (in the initial amount of $80,864) that were placed
in a restricted trust account in order to facilitate a tax-deferred, like-
kind exchange through the acquisition of suitable hotel properties. In
order to qualify as a tax-deferred exchange, suitable properties must be
located and exchanged and the exchange must be effectuated within a
relatively short time period allowed by Internal Revenue Service
regulations. Management believes that the three hotel properties that have
been purchased thus far with PaineWebber Land Sale proceeds are suitable
hotel properties that qualify as a tax-deferred, like-kind exchange.
(H) Represents the purchase consideration in excess of the fair market value
of the net assets.
(I) Represents adjustment for accounts payable and accrued expenses assumed or
incurred in connection with the acquisition of hotel properties.
(J) Represents adjustments to reflect the issuance of 326,348 OP Units of the
Patriot Partnerships in connection with the acquisition of three of the
CHC Hotels.
(K) Represents adjustments to reflect the issuance of 830,713 Paired Shares in
connection with the acquisition of the remaining approximate 50% interest
in the Omni Inner Harbor Hotel.
(L) Represents the following adjustments to Shareholders' Equity:
<TABLE>
<CAPTION>
PREFERRED PAID-IN RETAINED
STOCK CAPITAL EARNINGS
--------- ------- --------
<S> <C> <C> <C>
Pursuant to issuance of a total of
approximately 4,395,700 shares of Series A
Preferred Stock and Series B Preferred
Stock of Patriot Operating Company in
connection with the CHCI Merger............ $ 44 $88,296 $ --
Write-off the estimated cost to acquire 17
Participating Leases related to hotels
leased by Patriot REIT to CHC Lease
Partners and related
transactions............................... -- -- (52,766)
---- ------- --------
$ 44 $88,296 $(52,766)
==== ======= ========
</TABLE>
In connection with the CHCI Merger, Patriot Operating Company will acquire
the remaining 17 Participating Leases held by CHC Lease Partners, issuing a
combination of Operating Company Series A Preferred Stock and Operating
Company Series B Preferred Stock in connection with the transaction. The
cost of acquiring these leases will be recorded as an operating expense in
Patriot Operating Company's results of operations. However, because the
intent of the pro forma financial statements is to reflect, among other
things, the expected continuing impact of the CHCI Merger on Patriot
Operating Company, this adjustment has been excluded from the pro forma
statements of operations and has been reflected as an adjustment to retained
earnings for pro forma presentation purposes.
F-18
<PAGE>
PATRIOT REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
OLD PATRIOT
REIT CAL JOCKEY RECENT CHC HOTELS
HISTORICAL HISTORICAL TRANSACTIONS ACQUISITION OTHER PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS TOTAL
----------- ---------- ------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $75,893 $ -- $98,428 (E) $39,702(E) $ (155) $213,868
Rental of Racecourse
facility and land..... -- 4,918 1,027 (F) -- -- 5,945
Interest and other in-
come.................. 600 494 1,203 (G) -- -- 2,297
------- ------- ------- ------- ------- --------
Total revenue.......... 76,493 5,412 100,658 39,702 (155) 222,110
------- ------- ------- ------- ------- --------
Expenses:
Ground lease expense... 1,075 -- 4,238 (H) 380 -- 5,693
General and administra-
tive.................. 4,500 5,696 (3,399)(I) -- -- 6,797
Interest expense....... 7,380 -- 46,372 (J) 7,753(J) 3,013 (J) 64,518 (R)
Real estate and
personal property
taxes and casualty
insurance............. 7,150 -- 10,121 (K) 5,217(K) -- 22,488
Depreciation and amor-
tization.............. 17,420 932 32,894 (L) 11,477(L) -- 62,723
------- ------- ------- ------- ------- --------
Total expenses......... 37,525 6,628 90,226 24,827 3,013 162,219
------- ------- ------- ------- ------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 38,968 (1,216) 10,432 14,875 (3,168) 59,891
Equity in earnings of
unconsolidated
subsidiaries........... 5,845 -- 1,714 (M) -- -- 7,559
------- ------- ------- ------- ------- --------
Income (loss) before
income tax provision
and minority
interests.............. 44,813 (1,216) 12,146 14,875 (3,168) 67,450
Income tax provision.... -- -- -- -- (170)(N) (170)
------- ------- ------- ------- ------- --------
Income (loss) before
minority interests..... 44,813 (1,216) 12,146 14,875 (3,338) 67,280
Minority interest in
Patriot REIT
Partnership........... (6,767) -- 405 (O) -- (2,670)(O) (9,032)
Minority interest in
consolidated
subsidiaries.......... (55) -- (1,777)(P) -- -- (1,832)
------- ------- ------- ------- ------- --------
Net income (loss)
applicable to common
shareholders........... $37,991 $(1,216) $10,774 $14,875 $(6,008) $ 56,416 (R)
======= ======= ======= ======= ======= ========
Net income (loss) per
common share (Q)....... $ 1.06 $ (0.11) $ 0.75 (R)
======= ======= ========
</TABLE>
See notes on following page.
F-19
<PAGE>
NOTES TO PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996:
(A) Represents Old Patriot REIT's historical results of operations for the
year ended December 31, 1996.
(B) Represents the historical results of operations of Cal Jockey for the
year ended December 31, 1996.
(C) Represents adjustment to Patriot REIT's results of operations assuming
(i) the Cal Jockey Merger and the related transactions have been
consummated; (ii) the PaineWebber Land Sale has been consummated, the
PaineWebber affiliate has leased the Racecourse land to Patriot REIT and
Patriot REIT has subleased this land to Patriot Operating Company; (iii)
Patriot REIT has leased certain land to Borders, Inc.; (iv) Patriot REIT
has completed the Recent Acquisitions (excluding the Park Shore Hotel and
the Sheraton City Centre); (v) the mortgage notes to affiliates of CHC
Lease Partners have been funded; (vi) Patriot REIT has replaced the Old
Line of Credit with the Revolving Credit Facility and the Term Loan;
(vii) the Offering has been completed; and (viii) the 24 hotels acquired
by Patriot REIT, the private placement of equity securities and the
public offering of common stock completed by Old Patriot REIT during 1996
had occurred as of January 1, 1996.
(D) Represents adjustment to Patriot REIT's results of operations assuming
the CHC Hotels had been acquired as of January 1, 1996.
(E) Represents adjustments to participating lease revenue assuming the 77
hotels owned by Patriot REIT and its subsidiaries (excluding the Crowne
Plaza Ravinia Hotel and the Wyndham WindWatch Hotel which are not leased
to Lessees and excluding the Park Shore Hotel and the Sheraton City
Centre) had been leased to the Lessees or Patriot Operating Company as of
January 1, 1996.
(F) Represents adjustments to Racecourse facility rental revenue as a result
of (i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the related transactions
and the PaineWebber Land Sale and (ii) rental income related to the
Borders Lease.
(G) Represents the following adjustments to interest and other income:
<TABLE>
<S> <C>
Related to interest earned on notes receivable issued to the
Patriot REIT Partnership by PAH RSI Lessee in connection with
the sale of certain assets and the right to receive certain
royalty fees.................................................. $ 1,170
Related to the $500 mortgage note receivable issued to the Pa-
triot REIT Partnership by NorthCoast Hotels, L.L.C............ 48
Related to interest earned from notes receivable from an uncon-
solidated subsidiary.......................................... 21
Related to the elimination of interest earned on the $2,900
note receivable issued to Old Patriot REIT by Cal Jockey in
connection with the Cal Jockey Merger......................... (36)
-------
$ 1,203
=======
</TABLE>
(H) Represents pro forma ground lease payments pursuant to the ground lease
agreement with an affiliate of PaineWebber of $3,964 and pro forma ground
lease payments to be made with respect to certain of the hotels of $274.
(I) Represents the following adjustments to general and administrative
expense:
<TABLE>
<S> <C>
Related to elimination of administrative salaries and other ex-
penses not expected to be incurred by Patriot REIT............. $ (568)
Related to elimination of non-recurring legal fees.............. (1,344)
Related to elimination of Cal Jockey Merger related costs....... (3,284)
Related to increased salaries, insurance, travel, audit, legal
and other expenses associated with operating as a public com-
pany and the continued growth of Patriot REIT.................. 150
Related to the annual amortization of unearned stock compensa-
tion computed on a straight-line basis over the 3 to 5-year
vesting periods................................................ 1,647
-------
$(3,399)
=======
</TABLE>
(J) Interest expense consists of the following components:
<TABLE>
<S> <C>
Historical interest expense...................................... $ 7,380
Interest expense related to 47 hotels acquired by Patriot REIT
since January 1, 1996 (excluding the Park Shore Hotel, the Sher-
aton City Centre and the CHC Hotels)............................ 37,569
Interest expense related to the Subscription Notes payable to Pa-
triot Operating Company......................................... 4,712
Interest expense related to amortization of deferred loan costs
(including $3,868 of amortization related to costs associated
with the Revolving Credit Facility)............................. 3,998
Interest expense related to amortization of capitalized inter-
est............................................................. 93
Interest expense related to four of the CHC Hotels encumbered by
mortgage loans held by Patriot REIT............................. 7,753
Interest expense related to the acquisition of the 10 CHC Ho-
tels............................................................ 3,013
-------
$64,518
=======
</TABLE>
(K) Represents real estate and personal property taxes and casualty insurance
to be paid by Patriot REIT related to the 47 hotels acquired since
January 1, 1996 (except for the Park Shore Hotel and the Sheraton City
Centre) and the 10 CHC Hotels.
F-20
<PAGE>
(L) Represents the following adjustments to depreciation and amortization:
<TABLE>
<S> <C>
Depreciation related to 47 hotels acquired by Patriot REIT since
January 1, 1996 (excluding the Park Shore Hotel, the Sheraton
City Centre and the CHC Hotels)................................ $30,603
Reduction of depreciation expense related to the Racecourse fa-
cility......................................................... (93)
Amortization of goodwill resulting from the adjustment for pur-
chase method of accounting whereby the Racecourse facility and
retained leasehold improvements owned by Cal Jockey are ad-
justed to estimated fair market value.......................... 2,384
-------
$32,894
=======
Depreciation related to the CHC Hotels.......................... $11,477
=======
</TABLE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and
improvements, 20 years for the Racecourse facility and 5 to 7 years for
furniture, fixtures and equipment ("F, F & E"). These estimated useful
lives are based on management's knowledge of the properties and the
industry in general. Amortization of goodwill is computed using the
straight-line method over a 40 year estimated useful life. Because the
paired share structure is "grandfathered" under the Code, management
believes the life of the paired share structure is perpetual. Under
generally accepted accounting principles, however, the maximum amortization
period is 40 years for intangible assets.
(M) Represents equity in income of PAH WindWatch, L.L.C. and PAH Boulders,
Inc. acquired in September 1996 and January 1997, respectively.
(N) Represents an adjustment for estimated state income tax liabilities.
(O) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions. The
estimated minority interest percentage subsequent to the Recent
Transactions is approximately 11.8%. The estimated minority interest
percentage subsequent to the acquisition of the CHC Hotels, the GAH
Acquisition, the CHCI Merger and the PaineWebber Direct Placement and the
LaSalle Direct Placement is approximately 13.8%.
(P) Represents the minority interest related to the partnerships with an
affiliate of Doubletree Hotels Corporation and the limited liability
companies which own certain other hotels assuming such entities had been
formed and the 15 hotels owned by such entities had been acquired at
January 1, 1996.
(Q) Pro forma earnings per share is computed based on 75,516 weighted average
common shares and common share equivalents outstanding for the period.
The number of shares used for the calculation includes adjustments to
reflect the impact of the conversion of shares of Patriot Operating
Company Preferred Stock into Paired Shares. In addition, the net income
per common share and the weighted average number of common shares and
common share equivalents have been adjusted for (i) the March 1997 2-for-
1 stock split on Old Patriot REIT Common Stock effected in the form of a
stock dividend, (ii) the conversion of each share of Old Patriot REIT
Common Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger,
and (iii) the July 1997 1.927-for-1 stock split effected in the form of a
stock dividend, as applicable. Historical basis earnings per share is
computed based on 35,938 and 11,106 weighted average common shares and
common share equivalents outstanding for Old Patriot REIT and Cal Jockey,
respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be $0.75 per common share. The impact of Statement 128 on
the calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
(R) If the interest rate on the Revolving Credit Facility increased by 0.25%,
interest expense would increase to approximately $66,093, net income
would decrease to $55,059 and net income per common share would decrease
to $0.73.
F-21
<PAGE>
PATRIOT REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT
REIT RECENT CHC HOTELS
HISTORICAL TRANSACTIONS ACQUISITION PRO FORMA
(A) (B) (C) TOTAL
---------- ------------ ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $117,770 $29,280 (D) $25,632 (D) $172,682
Rental of Racecourse
facility and land..... 1,323 2,181 (E) -- 3,504
Interest and other in-
come.................. 4,215 (172)(F) -- 4,043
-------- ------- ------- --------
Total revenue.......... 123,308 31,289 25,632 180,229
-------- ------- ------- --------
Expenses:
Ground lease expense... 1,993 3,340 (G) 202 5,535
General and administra-
tive.................. 7,582 (645)(H) -- 6,937
Interest expense....... 31,977 11,633 (I) 4,719 (I) 48,329 (R)
Real estate and per-
sonal property taxes
and casualty insur-
ance.................. 11,219 3,276 (J) 3,317 (J) 17,812
Cost of acquiring
leaseholds............ 43,820 (43,820)(K) -- --
Depreciation and amor-
tization.............. 30,656 10,391 (L) 6,518 (L) 47,565
-------- ------- ------- --------
Total expenses......... 127,247 (15,825) 14,756 126,178
-------- ------- ------- --------
Income (loss) before eq-
uity in earnings of un-
consolidated subsidiar-
ies, income tax provi-
sion, minority inter-
ests and extraordinary
item................... (3,939) 47,114 10,876 54,051
Equity in earnings of
unconsolidated subsid-
iaries................ 4,488 -- -- 4,488
-------- ------- ------- --------
Income (loss) before in-
come tax provision, mi-
nority interests and
extraordinary item..... 549 47,114 10,876 58,539
Income tax provision... -- (125)(M) -- (125)
-------- ------- ------- --------
Income (loss) before mi-
nority interests and
extraordinary item..... 549 46,989 10,876 58,414
Minority interest in
Patriot REIT Partner-
ship.................. (1,194) (4,195)(N) (2,414)(N) (7,803)
Minority interest in
consolidated subsidi-
aries................. (1,368) (501)(O) -- (1,869)
-------- ------- ------- --------
Income (loss) before ex-
traordinary item....... (2,013) 42,293 8,462 48,742
Extraordinary loss from
early extinguishment
of debt, net of
minority interest..... (2,534) 2,534 (P) -- --
-------- ------- ------- --------
Net income (loss) appli-
cable to common share-
holders................ $ (4,547) $44,827 $ 8,462 $ 48,742 (R)
======== ======= ======= ========
Net income (loss) per
common share:
Income (loss) before
extraordinary item.... $ (0.04) $ 0.64
Extraordinary loss..... (0.05) --
-------- --------
Net income (loss) per
common share (Q)....... $ (0.09) $ 0.64 (R)
======== ========
</TABLE>
See notes on following page.
F-22
<PAGE>
NOTES TO PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997:
(A) Represents Patriot REIT's historical results of operations for the nine
months ended September 30, 1997.
(B) Represents adjustments to Patriot REIT's results of operations assuming
(i) the Cal Jockey Merger and the related transactions have been
consummated; (ii) the PaineWebber Land Sale has been consummated, the
PaineWebber affiliate has leased the Racecourse land to Patriot REIT and
Patriot REIT has subleased this land to Patriot Operating Company; (iii)
Patriot REIT has leased certain land to Borders, Inc.; (iv) Patriot REIT
has completed the Recent Acquisitions (excluding the Park Shore Hotel and
the Sheraton City Centre); (v) the mortgage notes to affiliates of CHC
Lease Partners have been funded; (vi) Patriot REIT has replaced the Old
Line of Credit with the Revolving Credit Facility and the Term Loan; and
(vii) the Offering has been completed as of January 1, 1996.
(C) Represents adjustments to Patriot REIT's results of operations assuming
the CHC Hotels had been acquired as of January 1, 1996.
(D) Represents adjustments to participating lease revenue assuming the 77
hotels owned by Patriot REIT and its subsidiaries (excluding the Crowne
Plaza Ravinia Hotel and the Wyndham WindWatch Hotel which are not leased
to Lessees and excluding the Park Shore Hotel and the Sheraton City
Centre) had been leased to the Lessees or Patriot Operating Company as of
January 1, 1996.
(E) Represents adjustments to Racecourse facility rental revenue including
adjustments as a result of (i) the new lease agreement between Patriot
REIT and Patriot Operating Company subsequent to the Cal Jockey Merger
and the related transactions and the PaineWebber Land Sale and (ii)
rental income related to the Borders Lease.
(F) Represents the following adjustments to interest and other income:
<TABLE>
<S> <C>
Related to interest earned on notes receivable issued to the
Patriot REIT Partnership by PAH RSI Lessee in connection with
the sale of certain assets and the right to receive certain
royalty fees.................................................. $ 46
Cal Jockey historical interest income prior to the Cal Jockey
Merger........................................................ 1,715
Eliminate interest earned on the mortgage notes receivable from
affiliates of CHC Lease Partners.............................. (1,869)
Related to interest earned on other notes receivable .......... (64)
--------
$ (172)
========
</TABLE>
(G) Represents ground lease payments pursuant to the ground lease agreement
with an affiliate of PaineWebber.
(H) Represents the following adjustments to general and administrative
expense:
<TABLE>
<S> <C>
Cal Jockey historical general and administrative expense for
the six month period prior to the Cal Jockey Merger........... $ 2,657
Elimination of non-recurring legal fees and Cal Jockey Merger
related costs................................................. (2,092)
Adjustment to the amortization of unearned stock compensation
computed on the straight-line method over the 3 to 5-year
vesting periods (primarily to allocate a portion of the costs
to Patriot Operating Company)................................. (1,210)
--------
$ (645)
========
</TABLE>
(I) Interest expense consists of the following components:
<TABLE>
<S> <C>
Historical interest expense...................................... $31,977
Interest expense related to the hotels acquired by Patriot REIT
since January 1, 1997 (excluding the Park Shore Hotel, the Sher-
aton City Centre and the CHC Hotels)............................ 7,115
Interest expense related to the Subscription Notes payable to Pa-
triot Operating Company......................................... 1,450
Interest expense related to amortization of deferred loan costs
(including $2,901 of amortization related to costs associated
with the Revolving Credit Facility)............................. 2,998
Interest expense related to amortization of capitalized inter-
est............................................................. 70
Interest expense related to three CHC Hotels encumbered by mort-
gage loans held by Patriot REIT acquired subsequent to September
30, 1997........................................................ 4,719
-------
$48,329
=======
</TABLE>
(J) Represents real estate and personal property taxes and casualty insurance
to be paid by Patriot REIT related to the hotels acquired since January
1, 1997 (except for the Park Shore Hotel and the Sheraton City Centre).
(K) Represents elimination of the cost of acquiring seven leaseholds related
to Participating Lease agreements for seven hotels leased by CHC Lease
Partners recorded as an operating expense in Patriot REIT's historical
results of operations. Because the intent of the pro forma financial
statements is to reflect the expected continuing impact of certain
transactions on the Patriot Companies, this non-recurring expense has been
excluded from the pro forma statements of operations.
(L) Represents the following adjustments to depreciation and amortization:
<TABLE>
<S> <C>
Depreciation related to hotels acquired by Patriot REIT from
January 1, 1997 through September 30, 1997 (excluding the Park
Shore Hotel and the Sheraton City Centre)..................... $ 9,536
Reduction of depreciation expense related to the Racecourse
facility...................................................... (240)
Amortization of goodwill resulting from the adjustment for
purchase method of accounting whereby the Racecourse facility
and retained leasehold improvements owned by Cal Jockey are
adjusted to estimated fair market value....................... 1,095
-------
$10,391
=======
Depreciation related to the CHC Hotels......................... $ 6,518
=======
</TABLE>
F-23
<PAGE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and improvements,
20 years for the Racecourse facility and 5 to 7 years for F, F & E. These
estimated useful lives are based on management's knowledge of the properties
and the industry in general. Amortization of goodwill is computed using the
straight-line method over a 40 year estimated useful life. Because the
paired share structure is "grandfathered" under the Code, management
believes the life of the paired share structure is perpetual. Under
generally accepted accounting principles, however, the maximum amortization
period is 40 years for intangible assets.
(M) Represents an adjustment for estimated state income tax liabilities.
(N) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions. The
estimated minority interest percentage subsequent to the Recent
Transactions is approximately 11.8%. The estimated minority interest
percentage subsequent to the acquisition of the CHC Hotels, the GAH
Acquisition, the CHCI Merger and the PaineWebber Direct Placement and the
LaSalle Direct Placement is approximately 13.8%.
(O) Represents adjustments to the minority interest related to the
partnerships with an affiliate of Doubletree Hotels Corporation and the
limited liability companies which own certain other hotels assuming such
entities had been formed and the 15 hotels owned by such entities had been
acquired as of January 1, 1996.
(P) Represents elimination of extraordinary loss from the early extinguishment
of debt. Patriot REIT recognized the loss as a result of the write-off of
unamortized deferred loan costs related to the Old Line of Credit when it
was replaced with the Revolving Credit Facility. Because the intent of the
pro forma financial statements is to reflect the expected continuing
impact of certain transactions on the Patriot Companies, this non-
recurring expense has been excluded from the pro forma statements of
operations.
(Q) Pro forma earnings per share is computed based on 76,090 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of shares of Patriot Operating Company
Preferred Stock into Paired Shares. In addition, the historical net income
per common share and the weighted average number of common shares and
common share equivalents have been adjusted for the conversion of each
share of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued
in the Cal Jockey Merger, and the July 1997 1.927-for-1 stock split
effected in the form of a stock dividend, as applicable. Historical basis
earnings per share is computed based on 51,104 weighted average common
shares and common share equivalents outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be $0.69 per common share. The impact of Statement
128 on the calculation of diluted earnings per share is not expected to
differ significantly from the earnings per share amounts reported.
(R) If the interest rate on the Revolving Credit Facility increased by 0.25%,
interest expense would increase to approximately $49,505, net income would
decrease to $47,728 and net income per common share would decrease to
$0.63.
F-24
<PAGE>
PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
BAY CHC HOTELS CHCI
MEADOWS RECENT AND LEASE GAH HOSPITALITY
HISTORICAL TRANSACTIONS ACQUISITION HISTORICAL DIVISION PRO FORMA
(A) (B) (C) (D) (E) OTHER TOTAL
---------- ------------ ----------- ---------- ----------- ------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $ -- $145,801 $187,365 $ -- $ 5,282 $ -- $338,448
Other hotel revenues... -- 132,243 97,250 -- 4,351 -- 233,844
Racecourse facility
revenue............... 51,946 -- -- -- -- -- 51,946
Management fee and
service fee income.... -- 3,165 -- 7,270 9,032 (5,945)(F) 13,522
Interest and other in-
come.................. 1,526 7,757 (G) -- 14 715 -- 10,012
------- -------- -------- ------ ------- ------- --------
Total revenue.......... 53,472 288,966 284,615 7,284 19,380 (5,945) 647,772
------- -------- -------- ------ ------- ------- --------
Expenses:
Departmental costs--ho-
tel operations........ -- 124,924 112,873 -- 3,995 -- 241,792
Racecourse facility op-
erations.............. 45,658 693 (H) -- -- -- -- 46,351
Management company and
service department
operations............ -- 1,595 -- 4,882 4,666 -- 11,143
General and administra-
tive.................. 4,381 28,264 (I) 28,568 (J) 1,056(J) 9,431 (J) -- 71,700
Ground lease expense... -- 733 -- -- -- -- 733
Repair and mainte-
nance................. -- 16,777 13,120 -- -- -- 29,897
Utilities.............. -- 12,676 14,167 -- -- -- 26,843
Marketing.............. 1,436 22,717 27,085 -- -- -- 51,238
Management fees........ -- 8,743 6,671 -- -- (5,945)(F) 9,469
Depreciation and amor-
tization.............. 754 1,591 (K) -- 112 853 7,038 (K) 10,348
Participating lease
payments.............. -- 78,240 (L) 93,879 (L) -- -- -- 172,119
Interest expense....... 130 1,240 -- 23 3,304 (3,304)(M) 1,393
Real estate and per-
sonal property taxes
and casualty insur-
ance.................. 398 -- -- -- -- -- 398
------- -------- -------- ------ ------- ------- --------
Total expenses......... 52,757 298,193 296,363 6,073 22,249 (2,211) 673,424
------- -------- -------- ------ ------- ------- --------
Income (loss) before
income tax provision
and minority
interests.............. 715 (9,227) (11,748) 1,211 (2,869) (3,734) (25,652)
Income tax provision... (260) -- -- -- (92)(N) (408)(N) (760)
------- -------- -------- ------ ------- ------- --------
Income (loss) before
minority interest...... 455 (9,227) (11,748) 1,211 (2,961) (4,142) (26,412)
Minority interest in
Patriot Operating Com-
pany Partnership...... -- 1,123 (O) -- -- -- 2,707 (O) 3,830
------- -------- -------- ------ ------- ------- --------
Net income (loss)
applicable to common
shareholders........... $ 455 $ (8,104) $(11,748) $1,211 $(2,961) $(1,435) $(22,582)
======= ======== ======== ====== ======= ======= ========
Net income (loss) per
common
share (P).............. $ 0.04 $ (0.30)
======= ========
</TABLE>
See notes on following page.
F-25
<PAGE>
NOTES TO PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996:
(A) Represents the historical results of operations of Patriot Operating
Company (formerly known as Bay Meadows) for the year ended December 31,
1996.
(B) Represents adjustments to Patriot Operating Company's results of
operations assuming 24 of Patriot REIT's hotel properties had been leased
to Patriot Operating Company as of January 1, 1996. These hotel properties
include 11 of the Recent Acquisitions (excluding the Sheraton City
Centre), the eight hotels previously leased to PAH RSI Lessee, the three
hotels previously leased to Grand Heritage Leasing, L.L.C., the Doubletree
Hotel at Allen Center, the Doubletree Hotel in Tulsa, Oklahoma and The
Buttes.
(C) Represents the combined results of operations for the year ended December
31, 1996 of the 10 CHC Hotels and 25 hotels leased by CHC Lease Partners
assuming that such hotels were leased to Patriot Operating Company as of
January 1, 1996.
(D) Represents the results of operations of GAH for the year ended December
31, 1996, assuming it had been acquired by Patriot Operating Company as of
January 1, 1996.
(E) Represents the results of operations for the contracts acquired as a
result of the CHCI Merger for the twelve months ended November 30, 1996,
assuming such contracts had been acquired by Patriot Operating Company as
of January 1, 1996.
(F) Represents the elimination of management fees for Patriot REIT hotels
previously managed by Gencom and CHCI, which subsequent to the GAH
Acquisition and the CHCI Merger, such hotels are assumed to be managed by
Patriot Operating Company.
(G) Adjustments to interest and other income consist of the following
components:
<TABLE>
<S> <C>
Interest and other income related to PAH RSI Lessee............. $ 2,030
Interest income related to the Subscription Notes receivable
from Patriot REIT.............................................. 4,712
Interest income related to the Participating Note............... 1,015
-------
$ 7,757
=======
</TABLE>
All other interest and other income balances presented represent historical
amounts recorded by hotels and businesses acquired.
(H) Represents adjustment to Racecourse facility rental expense as a result of
(i) the new lease agreement between Patriot REIT and Patriot Operating
Company subsequent to the Cal Jockey Merger and the related transactions
and (ii) the PaineWebber Land Sale.
(I) Represents the following adjustments to general and administrative
expense:
<TABLE>
<S> <C>
Represents expense related to the hotels recently acquired...... $24,497
Represents general liability insurance expense.................. 1,441
Related to elimination of costs related to the Cal Jockey
Merger......................................................... (861)
Related to increased salaries, insurance, travel, audit, legal
and other expenses associated with operating as a public
company and the continued growth of Patriot Operating Company.. 300
Represents expense related to the annual amortization of
unearned stock compensation computed on a straight-line basis
over the 3 to 5-year vesting periods........................... 2,887
-------
$28,264
=======
</TABLE>
(J) Represent general and administrative expense related to the 10 CHC Hotels
and general and administrative expense related to the contracts acquired
in connection with the GAH Acquisition and the CHCI Merger.
(K) Represents the following adjustments to depreciation and amortization:
<TABLE>
<S> <C>
Adjustment to increase depreciation related to F, F & E......... $ 245
Adjustment to reflect amortization of goodwill.................. 438
Adjustment to reflect amortization of trade names............... 125
Adjustment to reflect amortization of management contract
costs.......................................................... 783
-------
$ 1,591
=======
Adjustment to increase depreciation related to F, F & E......... $ 86
Adjustment to reflect amortization of goodwill.................. 600
Adjustment to reflect amortization of trade names............... 250
Adjustment to amortization of management contract costs......... 6,102
-------
$ 7,038
=======
</TABLE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 5 to 7 years for F, F & E. Amortization of
goodwill related to the Cal Jockey Merger is computed using the straight-
line method over a 40 year estimated useful life. Because the paired share
structure is "grandfathered" under the Code, management believes the life of
the paired share structure is perpetual. Under generally accepted accounting
principles, however, the maximum amortization period is 40 years for
intangible assets. Amortization of goodwill related to the acquisition of
the management operations of Grand Heritage Hotels, Inc., GAH and CHCI is
computed using the straight-line method over a 20 year estimated useful
life. Amortization of trade names is computed using the straight-line method
over a 20 year estimated useful life. Amortization of management contract
costs is computed using the straight-line method over the estimated
remaining term of the contracts.
(L) Represents lease payments from Patriot Operating Company to Patriot REIT
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the
period presented.
F-26
<PAGE>
(M) Represents the elimination of interest expense related to debt that
Patriot Operating Company will not assume in connection with the CHCI
Merger.
(N) Represents an adjustment to the estimated federal and state tax liability
as a result of the pro forma adjustments to the operating results of
Patriot Operating Company for the year ended December 31, 1996.
(O) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions. The
estimated minority interest percentage subsequent to the Recent
Transactions is approximately 11.8%. The estimated minority interest
percentage subsequent to the acquisition of the CHC Hotels, the GAH
Acquisition, the CHCI Merger and the PaineWebber Direct Placement and the
LaSalle Direct Placement is approximately 14.5%.
(P) Pro forma earnings per share is computed based on 75,516 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of shares of Patriot Operating Company
Preferred Stock into Paired Shares. In addition, the historical net income
per common share and the weighted average number of common shares and
common share equivalents have been adjusted for (i) the March 1997 2-for-1
stock split on Old Patriot REIT Common Stock effected in the form of a
stock dividend, (ii) the conversion of each share of Old Patriot REIT
Common Stock into 0.51895 Paired Shares issued in the Cal Jockey Merger,
and (iii) the July 1997 1.927-for-1 stock split effected in the form of a
stock dividend, as applicable. Historical basis earnings per share is
computed based on 11,106 weighted average common shares and common share
equivalents outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be a net loss of $0.30 per common share. The impact of
Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
F-27
<PAGE>
PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT
OPERATING CHC HOTELS CHCI
COMPANY RECENT AND LEASE GAH HOSPITALITY
HISTORICAL TRANSACTIONS ACQUISITION HISTORICAL DIVISION PRO FORMA
(A) (B) (C) (D) (E) OTHER TOTAL
---------- ------------ ----------- ---------- ----------- ------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $20,437 $108,831 $146,163 $ -- $ 4,164 $ -- $279,595
Other hotel revenues... 9,834 98,144 71,352 -- 3,559 -- 182,889
Racecourse facility
revenue............... 10,861 22,538 -- -- -- -- 33,399
Management fee and
service fee income.... 1,577 2,836 -- 6,805 6,747 (3,264)(F) 14,701
Interest and other in-
come.................. 1,475 1,876 983 142 590 1,308 (G) 6,374
------- -------- -------- ------ ------- ------- --------
Total revenue.......... 44,184 234,225 218,498 6,947 15,060 (1,956) 516,958
------- -------- -------- ------ ------- ------- --------
Expenses:
Departmental costs--ho-
tel operations........ 10,032 90,512 84,047 -- 3,193 -- 187,784
Racecourse facility op-
erations.............. 10,536 19,664 (H) -- -- -- (86)(H) 30,114
Management company and
service department
operations............ 260 1,458 -- 2,147 8,703 -- 12,568
General and administra-
tive.................. 4,081 22,598 (I) 21,186 (I) 3,413(I) 5,573 (I) (2,626)(J) 54,225
Ground lease expense... -- 523 -- -- -- -- 523
Repair and mainte-
nance................. 1,186 13,077 9,967 -- -- -- 24,230
Utilities.............. 1,450 8,589 10,302 -- -- -- 20,341
Marketing.............. 3,122 16,402 21,678 532 -- -- 41,734
Management fees........ 699 7,395 4,827 -- -- (3,264)(F) 9,657
Depreciation and amor-
tization.............. 1,142 370 -- 103 792 3,042 (K) 5,449
Participating lease
payments.............. 10,686 57,947 (L) 69,676 (L) -- -- -- 138,309
Interest expense....... 11 912 -- 13 1,934 (1,934)(M) 936
Real estate and
personal property
taxes and casualty
insurance............. 48 220 -- 22 -- -- 290
------- -------- -------- ------ ------- ------- --------
Total expenses......... 43,253 239,667 221,683 6,230 20,195 (4,868) 526,160
------- -------- -------- ------ ------- ------- --------
Income (loss) before in-
come tax provision and
minority interests..... 931 (5,442) (3,185) 717 (5,135) 2,912 (9,202)
Income tax (provision)
benefit............... (94) 471 (N) -- -- (74)(N) (303)(N) --
------- -------- -------- ------ ------- ------- --------
Income (loss) before
minority interest...... 837 (4,971) (3,185) 717 (5,209) 2,609 (9,202)
Minority interest in
Patriot Operating
Company Partnership... (115) 604 (O) -- -- -- 845 (O) 1,334
Minority interest in
consolidated
subsidiaries.......... (13) -- -- -- -- 13 --
------- -------- -------- ------ ------- ------- --------
Net income (loss) appli-
cable to common share-
holders................ $ 709 $ (4,367) $ (3,185) $ 717 $(5,209) $ 3,467 $ (7,868)
======= ======== ======== ====== ======= ======= ========
Net income (loss) per
common share (P)....... $ 0.01 $ (0.10)
======= ========
</TABLE>
See notes on following page.
F-28
<PAGE>
NOTES TO PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997:
(A) Represents the historical results of operations of Patriot Operating
Company for the three months ended September 30, 1997. As a result of the
Cal Jockey Merger on July 1, 1997, Patriot Operating Company is considered
for financial reporting purposes to have commenced operations as of such
date.
(B) Represents adjustments to Patriot Operating Company's results of
operations assuming 24 of Patriot REIT's hotel properties had been leased
to Patriot Operating Company as of January 1, 1996. These hotel properties
include 11 of the Recent Acquisitions (excluding the Sheraton City
Centre), the eight hotels previously leased to PAH RSI Lessee, the three
hotels previously leased to Grand Heritage Leasing, L.L.C., the Doubletree
Hotel at Allen Center, the Doubletree Hotel in Tulsa, Oklahoma and The
Buttes.
(C) Represents the combined results of operations for the nine months ended
September 30, 1997 of the 10 CHC Hotels and 25 leases of CHC Lease
Partners leased by CHC Lease Partners assuming that such hotels were
leased to Patriot Operating Company as of January 1, 1996.
(D) Represents the results of operations of GAH for the nine months ended
September 30, 1997, assuming it had been acquired by Patriot Operating
Company as of January 1, 1996.
(E) Represents the results of operations for the contracts acquired as a
result of the CHCI Merger for the nine months ended August 31, 1997, as if
they were acquired by Patriot Operating Company as of January 1, 1996.
(F) Represents the elimination of management fees for Patriot REIT hotels
previously managed by Gencom and CHCI, which subsequent to the GAH
Acquisition and the CHCI Merger such hotels are assumed to be managed by
Patriot Operating Company.
(G) Adjustments to interest and other income consists of the following
components:
<TABLE>
<S> <C>
Interest income related to the Subscription Notes receivable
from Patriot REIT............................................. $ 723
Interest income related to the Participating Note.............. 585
-------
$ 1,308
=======
</TABLE>
All other interest and other income balances presented represent historical
amounts recorded by hotels and businesses acquired.
(H) Represents historical expense amount of $19,664 recorded by Bay Meadows
for the six months prior to the Cal Jockey Merger and an adjustment in the
amount of $86 to Racecourse facility rental expense as a result of (i) the
new lease agreement between Patriot REIT and Patriot Operating Company
subsequent to the Cal Jockey Merger and the related transactions and (ii)
the PaineWebber Land Sale.
(I) Represent general and administrative expense related to the hotels
acquired and general and administrative expense related to the contracts
acquired in connection with the GAH Acquisition and the CHCI Merger.
(J) Represents the following adjustments to general and administrative
expense:
<TABLE>
<S> <C>
Eliminate costs related to the Cal Jockey Merger................ $(4,792)
Expense related to annual amortization of unearned stock
compensation computed on a straight-line basis over the 3 to 5-
year vesting periods........................................... 2,166
-------
$(2,626)
=======
</TABLE>
(K) Depreciation and amortization expense consists of the following
components:
<TABLE>
<S> <C>
Depreciation related to F, F & E and other assets................. $2,306
Amortization of goodwill.......................................... 546
Amortization of trade names....................................... 94
Amortization of management contract costs......................... 2,503
------
$5,449
======
</TABLE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 5 to 7 years for F, F & E. Amortization of
goodwill related to the Cal Jockey Merger is computed using the straight-
line method over a 40 year estimated useful life. Because the paired share
structure is "grandfathered" under the Code, management believes the life of
the paired share structure is perpetual. Under generally accepted accounting
principles, however, the maximum amortization period is 40 years for
intangible assets. Amortization of goodwill related to the acquisition of
the management operations of Grand Heritage Hotels, Inc., GAH and CHCI is
computed using the straight-line method over a 20 year estimated useful
life. Amortization of trade names is computed using the straight-line method
over a 20 year estimated useful life. Amortization of management contract
costs is computed using the straight-line method over the estimated
remaining term of the contracts.
(L) Represents lease payments from Patriot Operating Company to Patriot REIT
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the
period presented.
(M) Represents the elimination of interest expense related to debt which
Patriot Operating Company will not assume in connection with the CHCI
Merger.
(N) Represents an adjustment to the estimated federal and state tax liability
as a result of the pro forma adjustment to Patriot Operating Company for
the nine months ended September 30, 1997.
(O) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions. The
estimated minority interest percentage subsequent to the Recent
Transactions is approximately 11.8%. The estimated minority interest
percentage subsequent to the acquisition of the CHC Hotels, the GAH
Acquisition, the CHCI Merger and the Paine Webber Direct Placement and the
La Salle Direct Placement is approximately 14.5%.
F-29
<PAGE>
(P) Pro forma earnings per share is computed based on 76,090 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of shares of Patriot Operating Company
Preferred Stock into Paired Shares. In addition, the historical net income
per common share and the weighted average number of common shares and
common share equivalents have been adjusted for the conversion of each
share of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued
in the Cal Jockey Merger, and the July 1997 1.927-for-1 stock split
effected in the form of a stock dividend, as applicable. Historical basis
earnings per share is computed based on 51,104 weighted average common
shares and common share equivalents outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be a net loss of $0.11 per common share. The impact
of Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
F-30
<PAGE>
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Patriot REIT leases each of its hotels to Lessees, except those hotels leased
to Patriot Operating Company and except the Crowne Plaza Ravinia Hotel and the
Wyndham WindWatch Hotel, which are separately owned through the Non-Controlled
Subsidiaries and are managed directly by Operators. The Combined Lessees
subsequent to (i) the Cal Jockey Merger and the related transactions; (ii) the
Grand Heritage Acquisition (which included the acquisition of Grand Heritage
Leasing, L.L.C. which leased three hotels from Patriot REIT); (iii) the
acquisition of PAH RSI Lessee (which included the acquisition of eight Patriot
REIT hotel leases); and (iv) the GAH Acquisition and the CHCI Merger (which
included the acquisition of 25 Patriot REIT hotel leases from CHC Lease
Partners) consist of NorthCoast Hotels, L.L.C. ("NorthCoast Lessee") which
leases 11 hotels (excluding the Park Shore Hotel), DTR North Canton, Inc.
("Doubletree Lessee") which leases four hotels, Crow Hotel Lessee, Inc. which
leases two hotels, and Metro Hotel Leasing Corporation ("Metro Lease Partners")
which leases one hotel. The Participating Leases provide for staggered terms of
one to twelve years and the payment of the greater of base or participating
rent, plus certain additional charges, as applicable.
The Combined Lessees' unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997 are presented as if the 18 hotels that Patriot REIT leases
to the Combined Lessees pursuant to Participating Leases (excluding the Park
Shore Hotel) had been leased as of January 1, 1996. The eight hotels which
were leased to PAH RSI Lessee, the 25 hotels which were leased to CHC Lease
Partners, and the three hotels leased to Grand Heritage Leasing, L.L.C. are
assumed to have been leased to Patriot Operating Company and, therefore, have
been eliminated from the Pro Forma Condensed Combined Statements of Operations
for the Combined Lessees. The pro forma information is based in part upon the
Statements of Operations of NorthCoast Lessee filed with Old Patriot REIT's
Annual Report on Form 10-K for the year ended December 31, 1996 and the
Statements of Operations of NorthCoast Lessee filed with Patriot REIT's and
Patriot Operating Company's Joint Quarterly Report on Form 10-Q for the nine
months ended September 30, 1997 which are incorporated by reference herein. In
management's opinion, all adjustments necessary to reflect the effects of
these transactions have been made.
The unaudited Pro Forma Condensed Combined Statements of Operations are not
necessarily indicative of what the actual results of operations of the
Combined Lessees would have been assuming such transactions had been completed
as of January 1, 1996, nor do they purport to represent the results of
operations for future periods. Further, the unaudited Pro Forma Condensed
Combined Statement of Operations for the interim period ended September 30, 1997
is not necessarily indicative of the results of operations for the full year.
F-31
<PAGE>
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Room............................................ $ 88,410 $72,100
Food and beverage............................... 36,878 28,663
Telephone and other............................. 7,837 6,193
--------- -------
Total revenue................................ 133,125 106,956
--------- -------
Expenses:
Departmental costs and expenses................. 54,564 42,397
General and administrative...................... 12,595 9,520
Ground lease expense............................ 2,496 985
Repair and maintenance.......................... 6,670 5,072
Utilities....................................... 5,435 4,038
Marketing....................................... 9,169 7,495
Participating lease payments(A)................. 41,749 34,373
--------- -------
Total expenses............................... 132,678 103,880
--------- -------
Income before lessee income (expense)............ 447 3,076
--------- -------
Dividend and interest income(B).................. 142 1,087
Management fees(C)............................... (3,479) (3,102)
Lessee general and administrative(D)............. (577) (478)
--------- -------
(3,914) (2,493)
--------- -------
Net income (loss)................................ $ (3,467) $ 583
========= =======
</TABLE>
- --------
(A) Represents lease payments calculated on a pro forma basis by applying the
provisions of the Participating Leases to the historical revenue of the
hotels.
(B) Includes dividend income on OP Units in the Patriot Partnerships which
form a portion of the required capitalization of NorthCoast Lessee. Pro
forma amounts exclude additional dividend income earned on OP Units held
by certain Lessees, and pro forma interest income earned on invested cash
balances.
(C) Represents pro forma management fees paid to the Operators under the terms
of their respective management agreements with the Lessees.
(D) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
F-32
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
INTRODUCTION TO
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Pursuant to the Agreement and Plan of Merger dated as of April 14, 1997, as
thereafter amended, (the "Merger Agreement") between Patriot REIT, Patriot
Operating Company and Wyndham Hotel Corporation ("Wyndham"), and the
transactions contemplated thereby, Wyndham will merge with and into Patriot
REIT, with Patriot REIT being the surviving corporation (the "Merger"). In
addition, pursuant to a Stock Purchase Agreement dated as of April 14, 1997 (the
"Stock Purchase Agreement"), Patriot REIT will purchase up to 9,447,745 shares
of common stock par value $0.01 per share, of Wyndham ("Wyndham Common Stock")
owned by CF Securities, L.P. ("CF Securities"), the principal stockholder of
Wyndham. Following the Merger, Patriot REIT will continue to be referred to as
"Patriot American Hospitality, Inc." and Patriot Operating Company will change
its name to "Wyndham International, Inc." ("Wyndham International")
Pursuant to the Merger Agreement, subject to certain adjustments and the right
of Wyndham stockholders to elect to receive cash (such election being referred
to herein as a "Cash Election" and such cash to be received being referred to
herein as "Cash Consideration") as described below, Wyndham stockholders will be
entitled to receive, for each share of Wyndham Common Stock held by them at the
time the Merger becomes effective (the "Effective Time") of the Merger, 1.372
shares of Patriot REIT Common Stock and 1.372 shares of Patriot Operating
Company Common Stock (subject to certain REIT qualification requirements and
certain charter provisions limiting the number of Paired Shares which may be
beneficially owned by any person or entity), which shares will be paired and
transferable only as a single unit (the applicable conversion ratio being
referred to herein as the "Exchange Ratio"). If the Effective Time of the Merger
is on or prior to December 31, 1997 and the average closing price of a Paired
Share as reported on the New York Stock Exchange ("NYSE") over the 20 trading
days immediately preceding the fifth business day prior to the special meeting
of the stockholders of Wyndham (the "Patriot Average Closing Price") is less
than $21.86 but greater than or equal to $20.87, Wyndham stockholders will be
entitled to receive, for each share of Wyndham Common Stock held by them at the
Effective Time of the Merger, the number of Paired Shares equal to $30.00
divided by the Patriot Average Closing Price. If the Effective Time of the
Merger is on or prior to December 31, 1997 and the Patriot Average Closing Price
is less than $20.87, Wyndham stockholders will be entitled to receive, for each
share of Wyndham Common Stock held by them at the effective time of the Merger,
1.438 Paired Shares, provided, however, that in the event that the Patriot
Average Closing Price is less than $20.87, Wyndham has the right, waivable by
it, to terminate the Merger Agreement. Each Paired Share of Patriot REIT Common
Stock and Patriot Operating Company Common Stock outstanding immediately prior
to the Merger will remain outstanding after the Merger and will represent the
same number of Paired Shares of Patriot REIT Common Stock and Patriot Operating
Company Common Stock (or subsequent to the Merger, "Wyndham International Common
Stock").
Pursuant to Amendment No. 2 to the Merger Agreement (the "Second Amendment"),
if the Effective Time of the Merger does not occur on or prior to December 31,
1997, other than as a result of the failure, caused by Wyndham, of certain
closing conditions to be satisfied (a "Wyndham Delay"), and the Patriot Average
Closing Price is less than $27.50 but greater than or equal to $25.50, the
Exchange Ratio will be adjusted so that each share of Wyndham Common Stock,
other than shares as to which Cash Consideration is to be received, will be
converted into the right to receive the number of Paired Shares equal to $37.73
divided by the Patriot Average Closing Price. If the Effective Time of the
Merger does not occur on or prior to December 31, 1997 other than as a result of
such a Wyndham Delay, and the Patriot Average Closing Price is less than $25.50,
the Exchange Ratio will be adjusted so that each share of Wyndham Common Stock,
other than shares as to which Cash Consideration is to be received, will be
converted into the right to receive 1.480 Paired Shares, provided, however, that
in such circumstances Wyndham has the right, waivable by it, to terminate the
Merger Agreement.
As of December 9, 1997, the average closing price of a Paired Share over the
previous 20 trading days was $30.71. Management of the Patriot Companies does
not anticipate that the Patriot Average Closing Price, as calculated at the
Effective Time of the Merger (assuming a closing date of January 5, 1998), will
result in an adjustment to the Exchange Ratio.
F-33
<PAGE>
In lieu of receiving Paired Shares, Wyndham stockholders have the right under
the Merger Agreement to make a Cash Election to receive Cash Consideration,
and CF Securities has an equivalent right under the Stock Purchase Agreement;
provided, however, that the maximum aggregate amount of cash to be paid to
Wyndham stockholders and CF Securities pursuant to such Cash Election rights
will be a total of $100,000. Pursuant to the Second Amendment, Patriot REIT,
Patriot Operating Company and Wyndham also agreed to change the amount per share
payable upon a Cash Election to a fixed amount so that stockholders of Wyndham
who make a Cash Election will be entitled to receive Cash Consideration in an
amount per share equal to equal to $42.80. Prior to the execution of the Second
Amendment, the Merger Agreement provided that stockholders of Wyndham who made a
Cash Election would have been entitled to receive Cash Consideration in an
amount per share equal to the Exchange Ratio multiplied by the average closing
price of a Paired Share over the five trading days immediately preceding the
closing of the Merger (the "Cash Consideration Fair Market Value"), as provided
in the April Merger Agreement. In the event that holders of Wyndham Common Stock
and CF Securities elect to receive more than $100,000 in cash, such cash will be
allocated on a pro rata basis among such stockholders and CF Securities based
upon the respective number of shares of Wyndham Common Stock as to which they
have made a Cash Election, and the Wyndham stockholders (other than CF
Securities) will receive Paired Shares at the Exchange Ratio for their shares of
Wyndham Common Stock which are not converted into Cash Consideration. CF
Securities has delivered to Patriot REIT a Cash Election pursuant to which CF
Securities has elected to receive Cash Consideration with respect to all
9,447,745 shares of Wyndham Common Stock beneficially owned by CF Securities.
Because CF Securities has made a Cash Election with respect to all of the shares
of Wyndham Common Stock beneficially owned by it, the maximum amount of cash
available to be paid to other holders of Wyndham Common Stock in the Merger is
expected to be approximately $56,300. If no other stockholders of Wyndham make a
Cash Election, CF Securities will receive the entire $100,000 of cash available
for Cash Elections. Under such circumstances, CF Securities may receive a
combination of Paired Shares and Series A Convertible Preferred Stock, par value
$0.01 per share, of Patriot REIT ("Series A Preferred Stock") pursuant to the
terms of the Stock Purchase Agreement for its shares of Wyndham Common Stock
which are not converted into Cash Consideration, subject to certain REIT
qualification limitations that could, under certain limited circumstances,
result in the payment of cash in lieu of shares of Series A Preferred Stock.
The Second Amendment also provides that in addition to receiving Paired Shares
at the Exchange Ratio, and/or Cash Consideration in the case of shares of
Wyndham Common Stock as to which a Cash Election has been made, holders of
Wyndham Common Stock, will be entitled to receive an additional cash payment
(the "Additional Cash Consideration") equal to the sum of (i) the Pro Forma
Dividend Amount (as defined below), if any, and (ii) if the Effective Time of
the Merger does not occur on or prior to January 5, 1998 other than as a result
of a Wyndham Delay, a per share amount equal to the product of the Full Dilution
Percentage (as hereinafter defined) and the Per Share Deferral Amount (as
defined below), if any. Under the terms of the Second Amendment, the term "Pro
Forma Dividend Amount" is defined as the amount equal to the aggregate per share
amount of all dividends declared on the Patriot REIT Common Stock and the
Patriot Operating Company Common Stock the record date for which is on or after
November 26, 1997 but prior to the Effective Time, multiplied by the Exchange
Ratio. Under the terms of the Second Amendment, the term "Per Share Deferral
Amount" is defined as follows: (X) so long as there is not in effect an order,
ruling or injunction in any action brought by or on behalf of one or more
stockholders of Wyndham or in the right of Wyndham (a "Wyndham Stockholder
Injunction") that causes the condition under the Merger Agreement that there
exist no order, ruling or injunction of a court which prohibits consummation of
the Merger (the "Injunction Condition") to not be satisfied, (a) if the
Effective Time is on or before January 31, 1998, the Per Share Deferral Amount
shall be an amount equal to $10,000, divided by the total number of shares of
Wyndham Common Stock outstanding immediately prior to the Effective Time (the
"Wyndham Outstanding Shares"), (b) if the Effective Time is after January 31,
1998 but on or before February 28, 1998, the Per Share Deferral Amount shall be
an amount equal to $21,000, divided by the Wyndham Outstanding Shares, and (c)
if the Effective Time is after February 28, 1998, the Per Share Deferral Amount
shall be an amount equal to $32,000, divided by the Wyndham Outstanding Shares;
and (Y) in the event that there is in effect a Wyndham Stockholder Injunction
that causes the Injunction Condition to not be satisfied, (A) if the Effective
Time is on or before January 31, 1998, the Per Share Deferral Amount shall be
equal to zero, (B) if the Effective Time is after January 31, 1998 but on or
before February 28, 1998, the Per Share Deferral Amount shall be an amount equal
to $15,000, divided by the Wyndham Outstanding Shares, and (C) if the Effective
Time is after February 28, 1998, the Per Share Deferral Amount shall be an
amount equal to $30,000, divided by the Wyndham Outstanding Shares. Under the
terms of the Second Amendment the term "Full Dilution Percentage" is defined
as (A) the total number of shares of Wyndham Common Stock outstanding
immediately prior to the Effective Time, divided by (B) the sum of the total
number of shares of Wyndham Common Stock in clause (A) above and the total
number of shares of Wyndham Common Stock as to which Assumed Options are or may
become exercisable (whether or not currently exercisable). The Full Dilution
Percentage will cause the portion of the Additional Cash Consideration
attributable to the Per Share Deferral Amount to be calculated on a fully-
diluted basis assuming exercise of all of Wyndham's stock options.
The parties to the Stock Purchase Agreement have confirmed that the change in
the Merger consideration resulting from the Second Amendment will have a
corresponding effect under the Stock Purchase Agreement.
At November 3, 1997, Wyndham's portfolio of owned, leased or managed hotels
consisted of 93 hotels operated by Wyndham, as well as 8 franchised hotels,
which in the aggregate contained 24,083 rooms. Wyndham's portfolio includes 84
upscale hotel properties and 17 midscale properties operating under the
F-34
<PAGE>
ClubHouse brand. Wyndham acquired through merger in July 1997 Kansas City-based
ClubHouse, a privately-held hospitality company with a portfolio of 17 hotels.
Of the hotels comprising ClubHouse's portfolio, Wyndham acquired through the
merger or in related acquisition transactions ownership of 13 ClubHouse hotels
and partial ownership of three ClubHouse hotels. Wyndham also acquired through
the merger ownership of the "ClubHouse" brand name, as well as license rights
with respect to one franchised ClubHouse hotel.
Following the Merger, Patriot REIT, through certain of its subsidiaries, will
own the 10 Wyndham hotels and 13 ClubHouse hotels and will lease such hotels to
Wyndham International. The 13 hotel leases to be assumed by Patriot REIT will be
sub-leased to Wyndham International. Wyndham's remaining 52 management and
franchise contracts (excluding the Wyndham WindWatch Hotel which is owned by
Patriot REIT), the Wyndham and the ClubHouse proprietary brand names and the
Wyndham hotel management company will be transferred to corporate subsidiaries
of Patriot REIT (collectively, the "New Non-Controlled Subsidiaries"). Patriot
REIT will own a 99% non-voting interest and Wyndham International will own the
1% controlling voting interest in each of the New Non-Controlled Subsidiaries.
Therefore, the operating results of the New Non-Controlled Subsidiaries will be
combined with those of Wyndham International for financial reporting purposes.
Patriot REIT will account for its investment in the New Non-Controlled
Subsidiaries using the equity method of accounting.
Patriot REIT will also assume Wyndham's existing indebtedness, substantially
all of which is expected to be refinanced with funds drawn on the Term Loan
and/or the Revolving Credit Facility.
The Pro Forma Financial Statements have been adjusted for the purchase method
of accounting whereby the hotels and related improvements and other assets and
liabilities owned by Wyndham are adjusted to estimated fair market value. The
fair market value of the assets and liabilities of Wyndham has been determined
based upon preliminary estimates and is subject to change as additional
information is obtained. Management does not anticipate that the preliminary
allocation of purchase costs based upon the estimated fair market value of the
assets and liabilities of Wyndham will materially change; however, the
allocation of purchase costs is subject to final determination based upon
estimates and other evaluations of fair market value as of the close of the
transaction. Therefore, the allocation reflected in the following unaudited Pro
Forma Financial Statements may differ from the amounts ultimately determined.
In connection with the execution of the Merger Agreement, the Patriot REIT
Partnership also entered into agreements with certain partnerships that are
owned by certain members of the Trammell S. Crow family and their affiliates,
certain current and former executive officers of Wyndham and others (the "Crow
Family Entities") providing for the acquisition by Patriot REIT of up to 11
full-service Wyndham-brand hotels with 3,072 rooms for approximately $331,664 in
cash, plus approximately $14,000 in additional consideration if two hotels meet
certain operational targets (the "Crow Assets Acquisition"). However, Patriot
REIT currently expects that the purchase of the Milwaukee Hotel will be delayed
up to 24 months pending the receipt of certain third party consents.
Accordingly, the Pro Forma Financial Statements include only the results of
operations of the other 10 hotels with 2,851 rooms which represent approximately
$308,633 of the total purchase price. Subsequent to the Crow Assets Acquisition,
Patriot REIT will lease the purchased hotels to Wyndham International. In
addition, in connection with the Crow Assets Acquisition, the leases with the
Wyndham Lessee related to the Wyndham Garden Hotel-Midtown and the Wyndham
Greenspoint Hotel will be terminated and Patriot REIT will lease these hotel
properties to Wyndham International.
The Patriot REIT Partnership and the Crow Family Entities have reached an
agreement in principle (the "Agreement in Principle") that the closing of the
Crow Assets Acquisition would be scheduled for December 16, 1997 as to a number
of hotels sufficient to satisfy certain closing conditions and that they would
waive any conditions to the closing that the Merger shall be consummated
concurrently with consummation of the Crow Assets Acquisition. The parties also
agreed that in the event that the Merger does not close on or before March 31,
1998, other than as a result of a delay caused by (i) the failure of Wyndham to
have obtained all required consents, authorizations and approvals of
governmental bodies or third parties (other than the consents to be obtained
from Hospitality Property Trust or an affiliate thereof, collectively, the "HPT
Consents") or (ii) the failure of Wyndham to have (A) performed its obligations
under the Merger Agreement, (B) completed the restructuring of certain assets
and/or Wyndham subsidiaries, and obtained all required consents (or waivers
thereof) in connection therewith (other than the HPT Consents), (C) acknowledged
the execution and delivery by Patriot REIT and Patriot Operating Company of the
Cooperation Agreement, or (D) obtained all required amendments, consents,
authorizations, modifications and approvals relating to the Wyndham Anatole
Hotel management agreement, the Patriot REIT Partnership will be required to pay
additional consideration (the "Additional Consideration") for the purchased
hotels to the Crow Family Entities such that the total purchase price equals the
budgeted net operating income ("NOI") for the 11 hotels to be acquired in the
Crow Assets Acquisition (with appropriate deductions for management fees, trade
name fees and F, F & E reserves) for 1998 capitalized at an 8% rate. The
Additional Consideration, if payable, will be payable 60% in Paired Shares (with
the value thereof equal to the average closing price of a Paired Share over the
ten trading days prior to March 31, 1998) (the "Non-Cash Additional
Consideration") and 40% in cash, provided that the Crow Family Entities
generally have the option of receiving the Non-Cash Additional Consideration in
the form of OP Units of the Patriot Partnerships. The Patriot REIT Partnership
and the Crow Family Entities agreed pursuant to the Agreement in Principle, that
the Crow Family Entities would receive registration rights with respect to the
Paired Shares (or the Paired Shares into which OP Units may be redeemable)
received as Non-Cash Additional Consideration based on the terms and conditions
of the Registration Rights Agreement relating to the Paired Shares and shares of
Series A Preferred Stock to be received by the Registration Rights Holders
pursuant to the Merger and the Stock Purchase.
The Merger and the Related Transactions and the Crow Assets Acquisition are
collectively referred to herein as the "Wyndham Transactions." The Merger and
the Related Transactions are expected to be consummated January 5, 1998 and
are subject to various conditions, including approval of the Merger by the
stockholders of Patriot REIT, Patriot Operating Company and Wyndham. Except as
noted above, the Crow Assets Acquisition is expected to be consummated on or
about December 16, 1997 and is subject to various conditions.
The following unaudited Pro Forma Condensed Combined Statements of Operations
as adjusted for the Wyndham Transactions for the year ended December 31, 1996
and the nine months ended September 30, 1997 assume the Merger and the Crow
Assets Acquisition had occurred on January 1, 1996 and are based on the
applicable terms of the Merger Agreement assuming the Effective Time of the
Merger is January 5, 1998, and that the purchase of ten hotels in the Crow
Assets Acquisition is completed under the terms in effect if the closing of the
Crow Assets Acquisition occurs on or before December 16, 1997. The pro forma
information is also presented as if the following Recent Transactions had
occurred on January 1, 1996:
F-35
<PAGE>
(i) the Cal Jockey Merger and the related transactions have been
consummated on terms set forth in the Cal Jockey Merger Agreement;
(ii) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased that portion of the land upon which the Racecourse is
situated to Patriot REIT, and Patriot REIT has subleased this land and the
related improvements to Patriot Operating Company;
(iii) Patriot REIT has leased certain land to Borders, Inc.;
(iv) Patriot Operating Company has completed the Grand Heritage
Acquisition and the acquisition of PAH RSI Lessee;
(v) Patriot REIT has acquired the Recent Acquisitions (excluding the Park
Shore Hotel and the Sheraton City Centre);
(vi) the mortgage notes to affiliates of CHC Lease Partners have been
funded;
(vii) Patriot REIT has replaced the Old Line of Credit with the Revolving
Credit Facility and the Term Loan;
(viii) Patriot Operating Company has acquired the Participating Note; and
(ix) the Offering of 10,580,000 Paired Shares has been completed.
The unaudited Pro Forma Condensed Combined Statements of Operations also
assume the following additional transactions have occurred at the beginning of
the periods presented:
(i) Patriot REIT has acquired the CHC Hotels and leased such hotels to
Patriot Operating Company;
(ii) Patriot Operating Company has completed the GAH Acquisition; and
(iii) the CHCI Merger has been consummated on terms set forth in the CHCI
Merger Agreement.
In addition, the pro forma results of operations for the year ended December
31, 1996 assume the 24 hotels acquired during 1996 and the private placement
of equity securities and the public offering of common stock completed by Old
Patriot REIT during 1996 had occurred as of January 1, 1996.
In management's opinion, all material adjustments necessary to reflect the
effects of these transactions have been made.
The Pro Forma Condensed Combined Statements of Operations are derived from (i)
the Patriot REIT and Patriot Operating Company Pro Forma Condensed Combined
Statements of Operations for the year ended December 31, 1996 and the nine
months ended September 30, 1997 included elsewhere in this Joint Current Report;
(ii) the Consolidated Statements of Income of Wyndham filed with Wyndham's
Annual Report on Form 10-K for the year ended December 31, 1996 incorporated by
reference herein and the nine months ended September 30, 1997 included elsewhere
in this Joint Current Report; and (iii) the Combined Crow Family Hotel
Partnerships financial statements for the year ended December 31, 1996 and the
nine months ended September 30, 1997 included in this Joint Current Report.
During 1996, one of the hotels to be acquired in the Crow Assets Acquisition
(the La Guardia Airport Hotel) was closed for renovation. As a result the hotel
reported no historical results of operations for 1996 and therefore is not
included in the following unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997. The following pro forma financial information is also based
in part upon the following additional financial information incorporated by
reference herein:
(i) the Separate and Combined Statements of Income of Cal Jockey and Bay
Meadows filed with the Cal Jockey and Bay Meadows Joint Annual Report on
Form 10-K for the year ended December 31, 1996;
(ii) the Consolidated Statements of Operations of Old Patriot REIT filed
with the Old Patriot REIT Annual Report on Form 10-K for the year ended
December 31, 1996;
(iii) the Separate and Combined Statements of Income of Patriot REIT and
Patriot Operating Company filed with the Patriot Companies' Joint Quarterly
Report on Form 10-Q for the nine months ended September 30, 1997;
(iv) the historical financial statements of certain hotels acquired by
Old Patriot REIT filed in Old Patriot REIT's Current Reports on Form 8-K
dated April 2, 1996, as amended, December 5, 1996 and January 16, 1997, as
amended;
(v) the historical financial statements of certain hotels and businesses
acquired or to be acquired by the Patriot Companies filed in the Patriot
Companies' Joint Current Reports on Form 8-K dated September 17, 1997, and
September 30, 1997, as amended; and located elsewhere in this Joint Current
Report; and
(vi) the Pro Forma Condensed Combined Statements of Operations of the
Combined Lessees which are located elsewhere in this Joint Current Report.
The following unaudited Pro Forma Condensed Combined Statements of Operations
are not necessarily indicative of what the actual results of operations of
Patriot REIT and Wyndham International as adjusted for the Wyndham Transactions
would have been assuming such transactions had been completed as of January 1,
1996, nor do they purport to represent the results of operations for future
periods. Further, the unaudited Pro Forma Condensed Combined Statement of
Operations for the interim period ended September 30, 1997 is not necessarily
indicative of the results of operations for the full year.
F-36
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT
PATRIOT OPERATING
REIT COMPANY
AND WYNDHAM AND WYNDHAM PRO FORMA
PRO FORMA PRO FORMA ELIMINATIONS TOTAL
----------- ----------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Participating lease
revenue................ $279,948 $ -- $(247,218)(A) $ 32,730
Hotel revenue........... -- 876,663 -- 876,663
Racecourse facility
revenue, hotel and land
lease revenue.......... 17,714 51,946 (17,380)(B) 52,280
Management fee, service
fee and reimbursement
income................. -- 49,225 -- 49,225
Interest and other
income................. 2,797 12,262 (5,916)(C) 9,143
-------- --------- --------- ----------
Total revenue........... 300,459 990,096 (270,514) 1,020,041
-------- --------- --------- ----------
Expenses:
Departmental costs--
hotel operations....... -- 368,568 -- 368,568
Racecourse facility
operations............. -- 46,351 (5,611)(B) 40,740
Direct operating costs
of management company,
service department, and
reimbursement
expenses............... -- 43,809 -- 43,809
General and
administrative......... 7,097 103,877 (34)(C) 110,940
Ground lease and hotel
lease expense.......... 16,824 12,502 (11,769)(B) 17,557
Repair and maintenance.. -- 41,991 -- 41,991
Utilities............... -- 36,834 -- 36,834
Interest expense........ 124,637 1,393 (5,882)(C) 120,148
Real estate and personal
property taxes and
casualty insurance..... 34,542 847 -- 35,389
Marketing............... -- 70,577 -- 70,577
Management fees......... -- 9,469 -- 9,469
Depreciation and
amortization........... 93,775 29,425 -- 123,200
Participating lease
payments............... -- 247,218 (247,218)(A) --
-------- --------- --------- ----------
Total expenses.......... 276,875 1,012,861 (270,514) 1,019,222
-------- --------- --------- ----------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income tax
provision and minority
interests............... 23,584 (22,765) -- 819
Equity in earnings of
unconsolidated
subsidiaries........... 2,877 -- 5,045 (D) 7,922
-------- --------- --------- ----------
Income (loss) before
income tax provision and
minority interests...... 26,461 (22,765) 5,045 8,741
Income tax (provision)
benefit................ (345) 7,532 -- 7,187
-------- --------- --------- ----------
Income (loss) before
minority interests...... 26,116 (15,233) 5,045 15,928
Minority interests in
the Patriot
Partnerships........... (2,549) 1,141 -- (1,408)
Minority interest in
consolidated
subsidiaries .......... (1,832) 5,045 (5,045)(D) (1,832)
-------- --------- --------- ----------
Net income (loss)
applicable to common
shareholders............ $ 21,735 $ (9,047) $ -- $ 12,688 (E)
======== ========= ========= ==========
Net income (loss) per
common Paired Share(F).. $ 0.21 $ (0.09) $ 0.12 (E)
======== ========= ==========
</TABLE>
- --------
(A) Represents elimination of participating lease revenue and expense related
to the 61 hotel properties leased by Patriot REIT to Wyndham
International.
(B) Represents elimination of rental income and expense related to the
Racecourse facility, land leased and the hotels sub-leased by Patriot REIT
to Wyndham International.
(C) The pro forma adjustments represent the elimination of $1,170 of interest
income and expense related to a note receivable issued to Old Patriot REIT
in connection with the sale of certain assets to PAH RSI Lessee, which
assets are assumed to be acquired by Patriot Operating Company, the
elimination of $4,712 of interest income and expense related to the
Subscription Notes issued to Patriot Operating Company in connection with
the subscription for shares of Patriot Operating Company Common Stock and
Patriot Operating Company Partnership OP Units issued in connection with
the Cal Jockey Merger and the elimination of $34 of other intercompany
income and expense items.
(D) Represents the elimination of equity in losses of the New Non-Controlled
Subsidiaries.
(E) The pro forma balances assume Wyndham stockholders elect to receive cash for
their shares of Wyndham Common Stock up to the maximum funds available of
$100,000 and the remaining outstanding shares of Wyndham Common Stock are
exchanged for Paired Shares. Set forth below is a summary comparison of the
net impact to pro forma net income applicable to common shareholders and net
income per Paired Share (i) assuming approximately 2,336 shares of Wyndham
Common Stock are purchased for cash ("Cash Option"), based on total funds
available of $100,000 and Cash Consideration of $42.80 per share of Wyndham
Common Stock); (ii) assuming no Wyndham stockholders elect to receive cash
("All Stock"); and (iii) assuming an average interest rate of 7.333% per
annum on the incremental borrowings related to the Revolving Credit Facility
and the Term Loan (representing LIBOR plus 1.85%, respectively) on
outstanding debt obligations of approximately $1,472,911 for Cash Option and
$1,372,911 for All Stock.
F-37
<PAGE>
<TABLE>
<CAPTION>
CASH ALL
OPTION STOCK
------- -------
<S> <C> <C>
Decrease in interest expense as a result of reduced
borrowings................................................ $ -- $(7,333)
======= =======
Income before minority interests in the Patriot
Partnerships and income tax provision (after minority
interest in consolidated subsidiaries and other
partnerships)............................................. $ 6,909 $14,242
Income tax provision....................................... 7,187 7,187
Minority interests in the Patriot Partnerships............. (1,408) (2,114)
------- -------
Net income applicable to common shareholders............... $12,688 $19,315
======= =======
Net income per common Paired Share......................... $ 0.12 $ 0.18
======= =======
Estimated minority interest percentage in the Patriot
Partnerships subsequent to the Wyndham Transactions:
Patriot REIT Partnership................................. 10.5% 10.2%
======= =======
Patriot Operating Company Partnership.................... 11.2% 10.9%
======= =======
Weighted average number of common Paired Shares and common
Paired Share equivalents outstanding...................... 102,543 105,758
======= =======
</TABLE>
Pursuant to the April Merger Agreement, if the Patriot Average Closing Price
of the Paired Shares is less than $21.86, the Exchange Ratio would be subject
to adjustment. Pursuant to the Second Amendment, if the Effective Time of the
Merger occurs after December 31, 1997, other than as a result of a Wyndham
Delay, and the Patriot Average Closing Price is less than $27.50, the Exchange
Ratio would be subject to adjustment. As of December 9, 1997, the average
closing price of a Paired Share as reported on the NYSE over the previous 20
trading days was $30.71. Management of the Patriot Companies do not anticipate
that the Patriot Average Closing Price, as calculated at the Effective Time of
the Merger (assuming a closing of January 5, 1998), will result in an
adjustment to the Exchange Ratio.
Additionally, the following table presents the net impact to pro forma net
income applicable to common shareholders and net income per common Paired
Share assuming the interest rate increases by 0.25%.
<TABLE>
<CAPTION>
CASH ALL
OPTION STOCK
------- -------
<S> <C> <C>
Decrease in interest expense as a result of reduced
borrowings ............................................... $ -- $(7,583)
======= =======
Income before income tax provision and minority interests
in the Patriot Partnerships (after minority interest in
consolidated subsidiaries and other partnerships)......... $ 2,635 $10,218
Income tax provision....................................... 7,187 7,187
Minority interests in the Patriot Partnerships............. (960) (1,703)
------- -------
Net income applicable to common shareholders............... $ 8,862 $15,702
======= =======
Net income per common Paired Share......................... $ 0.09 $ 0.15
======= =======
Estimated minority interest percentage in the Patriot
Partnerships subsequent to the Wyndham Transactions:
Patriot REIT Partnership................................. 10.5% 10.2%
======= =======
Patriot Operating Company Partnership.................... 11.2% 10.9%
======= =======
Weighted average number of common Paired Shares and common
Paired Share equivalents outstanding...................... 102,543 105,758
======= =======
</TABLE>
The Patriot Companies are negotiating with PaineWebber Real Estate and Chase
to increase the amount available under the Revolving Credit Facility to
$900,000 and to arrange for a new Term Loan commitment for an unsecured Term
Loan of $350,000. The Revolving Credit Facility and the Term Loan will be
used in part to finance the Wyndham Transactions. Deferred loan costs of
approximately $6,737 related to the financing associated with the Wyndham
Transactions have been reflected in the pro forma financial information.
(F) Pro forma earnings per share is computed based on 102,543 weighted average
common Paired Shares and common Paired Share equivalents outstanding for
the period. The number of shares used for the calculation includes
adjustments to reflect the impact of the conversion of shares of Patriot
Operating Company Preferred Stock into Paired Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be $0.13 per Paired Share. The impact of Statement 128 on the
calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
F-38
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT
PATRIOT OPERATING
REIT COMPANY
AND WYNDHAM AND WYNDHAM PRO FORMA
PRO FORMA PRO FORMA ELIMINATIONS TOTAL
----------- ----------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease
revenue................. $229,977 $ -- $(202,610)(A) $ 27,367
Hotel revenue............ -- 720,754 -- 720,754
Racecourse facility
revenue, hotel and land
lease revenue........... 19,759 33,399 (19,501)(B) 33,657
Management fee, service
fee and reimbursement
income.................. -- 45,549 -- 45,549
Interest and other
income.................. 4,043 8,507 (2,306)(C) 10,244
-------- -------- --------- --------
Total revenue............ 253,779 808,209 (224,417) 837,571
-------- -------- --------- --------
Expenses:
Departmental costs--hotel
operations.............. -- 282,402 -- 282,402
Racecourse facility
operations.............. -- 30,114 (3,246)(B) 26,868
Direct operating costs of
management company,
service department, and
reimbursement expenses.. -- 40,331 -- 40,331
General and
administrative.......... 7,137 81,670 (24)(C) 88,783
Ground lease and hotel
lease expense........... 20,017 16,778 (16,255)(B) 20,540
Repair and maintenance... -- 34,512 -- 34,512
Utilities................ -- 29,841 -- 29,841
Interest expense......... 94,414 936 (2,282)(C) 93,068
Real estate and personal
property taxes and
casualty insurance...... 27,066 290 -- 27,356
Marketing................ -- 59,095 -- 59,095
Management fees.......... -- 9,657 -- 9,657
Depreciation and
amortization............ 70,854 20,705 -- 91,559
Participating lease
payments................ -- 202,610 (202,610)(A) --
-------- -------- --------- --------
Total expenses........... 219,488 808,941 (224,417) 804,012
-------- -------- --------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income tax
provision and minority
interests................ 34,291 (732) -- 33,559
Equity in earnings of
unconsolidated
subsidiaries............ 6,027 -- (1,419)(D) 4,608
-------- -------- --------- --------
Income (loss) before
income tax provision and
minority interests....... 40,318 (732) (1,419) 38,167
Income tax (provision)
benefit................. (256) (3,477) -- (3,733)
-------- -------- --------- --------
Income (loss) before
minority interests....... 40,062 (4,209) (1,419) 34,434
Minority interests in the
Patriot Partnerships.... (4,010) 630 -- (3,380)
Minority interest in
consolidated
subsidiaries............ (1,869) (1,419) 1,419 (D) (1,869)
-------- -------- --------- --------
Net income (loss)
applicable to common
shareholders............. $ 34,183 $ (4,998) $ -- $ 29,185 (E)
======== ======== ========= ========
Net income (loss) per
common Paired Share(F)... $ 0.33 $ (0.05) $ 0.28 (E)
======== ======== ========
</TABLE>
- --------
(A) Represents elimination of participating lease revenue and expense related
to the 61 hotel properties leased by Patriot REIT to Wyndham
International.
(B) Represents elimination of rental income and expense related to the
Racecourse facility, land leased and the hotels sub-leased by Patriot REIT
to Wyndham International.
(C) Represents primarily the elimination of $832 of interest income and
expense related to a note receivable issued to Old Patriot REIT in
connection with the sale of certain assets to PAH RSI Lessee, which assets
are assumed to be acquired by Patriot Operating Company, the elimination
of $1,450 of interest income and expense related to the Subscription Notes
issued to Patriot Operating Company in connection with the subscription
for shares of Patriot Operating Company Common Stock and Patriot Operating
Company Partnership OP Units issued in connection with the Cal Jockey
Merger, and the elimination of $24 of other intercompany income and
expense items.
(D) Represents the elimination of equity in income of the New Non-Controlled
Subsidiaries.
(E) The pro forma balances assume Wyndham stockholders elect to receive cash for
their shares of Wyndham Common Stock up to the maximum funds available of
$100,000 and the remaining outstanding shares of Wyndham Common Stock are
exchanged for Paired Shares. Set forth below is a summary comparison of the
net impact to pro forma net income applicable to common shareholders and net
income per Paired Share (i) assuming approximately 2,336 shares of Wyndham
Common Stock are purchased pursuant to the Cash Option (based on total funds
available of $100,000 and Cash Consideration of $42.80 per share of Wyndham
Common Stock);
F-39
<PAGE>
(ii) assuming Wyndham stockholders elect to receive All Stock; and (iii)
assuming an average interest rate of 7.453% per annum on the incremental
borrowings related to the Revolving Credit Facility and the Term Loan
(representing LIBOR plus 1.85%) on outstanding debt obligations of
approximately $1,472,911 for Cash Option and $1,372,911 for All Stock.
<TABLE>
<CAPTION>
CASH ALL
OPTION STOCK
------- -------
<S> <C> <C>
Decrease in interest expense as a result of reduced
borrowings to fund the purchase of Wyndham Common
Stock.................................................. $ -- $(5,590)
======= =======
Income before minority interests in the Patriot
Partnerships and income tax benefit (after minority
interest in consolidated subsidiaries and other
partnerships).......................................... $36,298 $41,888
Income tax provision.................................... (3,733) (3,733)
Minority interests in the Patriot Partnerships.......... (3,380) (3,853)
------- -------
Net income applicable to common shareholders............ $29,185 $34,302
======= =======
Net income per common Paired Share...................... $ 0.28 $ 0.32
======= =======
Estimated minority interest percentage in the Patriot
Partnerships subsequent to the Wyndham Transactions:
Patriot REIT Partnership.............................. 10.5% 10.2%
======= =======
Patriot Operating Company Partnership................. 11.2% 10.9%
======= =======
Weighted average number of common Paired Shares and
common Paired Share equivalents outstanding............ 103,117 106,332
======= =======
</TABLE>
Pursuant to the April Merger Agreement, if the Patriot Average Closing Price
of the Paired Shares is less than $21.86, the Exchange Ratio would be subject
to adjustment. Pursuant to the Second Amendment, if the Effective Time of the
Merger occurs after December 31, 1997, other than as a result of a Wyndham
Delay, and the Patriot Average Closing Price is less than $27.50, the Exchange
Ratio would be subject to adjustment. As of December 9, 1997, the average
closing price of a Paired Share as reported on the NYSE over the previous 20
trading days was $30.71. Management of the Patriot Companies do not anticipate
that the Patriot Average Closing Price, as calculated at the Effective Time of
the Merger (assuming a closing of January 5, 1998), will result in an
adjustment to the Exchange Ratio.
Additionally, the following table presents the net impact to pro forma net
income applicable to common stockholders and net income per common Paired
Share assuming the interest rate increases by 0.25%.
<TABLE>
<CAPTION>
CASH ALL
OPTION STOCK
------- -------
<S> <C> <C>
Decrease in interest expense as a result of reduced
borrowings ............................................ $ -- $(5,777)
======= =======
Income before income tax provision and minority
interests in the Patriot Partnerships (after minority
interest in consolidated subsidiaries and other
partnerships).......................................... $33,391 $39,168
Income tax provision.................................... (3,733) (3,733)
Minority interests in the Patriot Partnerships.......... (3,075) (3,576)
------- -------
Net income applicable to common shareholders............ $26,583 $31,859
======= =======
Net income per common Paired Share...................... $ 0.26 $ 0.30
======= =======
Estimated minority interest percentage in the Patriot
Partnerships subsequent to the Wyndham Transactions:
Patriot REIT Partnership.............................. 10.5% 10.2%
======= =======
Patriot Operating Company Partnership................. 11.2% 10.9%
======= =======
Weighted average number of common Paired Shares and
common Paired Share equivalents outstanding............ 103,117 106,332
======= =======
</TABLE>
The Patriot Companies are negotiating with PaineWebber Real Estate and Chase
to increase the amount available under the Revolving Credit Facility to
$900,000 and to arrange for a new Term Loan commitment for an unsecured Term
Loan of $350,000. The Revolving Credit Facility and the Term Loan will be
used to finance the Wyndham Transactions. Deferred loan costs of
approximately $6,737 related to the financing associated with the Wyndham
Transactions have been reflected in the pro forma financial information.
(F) Pro forma earnings per share is computed based on 103,117 weighted average
common Paired Shares and common Paired Share equivalents outstanding for
the period. The number of shares used for the calculation includes
adjustments to reflect the impact of the conversion of shares of Patriot
Operating Company Preferred Stock into Paired Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be $0.30 per Paired Share. The impact of Statement
128 on the calculation of diluted earnings per share is not expected to
differ significantly from the earnings per share amounts reported.
F-40
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited Pro Forma Condensed Combined Balance Sheet is
presented as if the Wyndham Transactions had occurred as of September 30, 1997
and is based on the applicable terms of the Merger Agreement in effect assuming
the Effective Time of the Merger is January 5, 1998, and assuming that ten
hotels are purchased in the Crow Asset Acquisition under the terms in effect if
the closing of the Crow Assets Acquisition occurs on or before December 16,
1997. The Pro Forma Condensed Combined Balance Sheet is derived from the Patriot
REIT and Patriot Operating Company Pro Forma Condensed Combined Balance Sheet as
of September 30, 1997 included elsewhere in this Joint Current Report, which is
presented as if the following transactions have occurred as of September 30,
1997:
(i) Patriot REIT acquired the three CHC Hotels and The Buttes (which were
acquired subsequent to September 30, 1997) and has acquired the remaining
approximate 50% interest in the Omni Inner Harbor Hotel and leased such
hotels to Patriot Operating Company;
(ii) Patriot Operating Company acquired the members' interests in PAH RSI
Lessee;
(iii) Patriot Operating Company completed the GAH Acquisition; and
(iv) the CHCI Merger was consummated on terms set forth in the CHCI
Merger Agreement.
Such pro forma information is based in part upon Wyndham's Consolidated
Balance Sheet as of September 30, 1997 and Patriot REIT's and Patriot Operating
Company's Combined Balance Sheet as of September 30, 1997 and should be read in
conjunction with the financial statements filed with Wyndham's and the Patriot
Companies' respective Quarterly Reports on Form 10-Q for the nine months ended
September 30, 1997. In management's opinion, all material adjustments necessary
to reflect the effect of these transactions have been made.
The accompanying Pro Forma Condensed Combined Balance Sheet reflects
adjustments to record the net assets of the Wyndham Transactions at their
estimated fair market values and the elimination of Wyndham's historical
shareholders' equity. The fair market values of the assets and liabilities of
Wyndham have been determined based upon preliminary estimates and are subject
to change as additional information is obtained. Management does not
anticipate that the preliminary allocation of purchase costs based upon the
estimated fair market values of the assets and liabilities of Wyndham will
materially change; however, the allocations of purchase costs are subject to
final determination based upon estimates and other evaluations of fair market
value as of the close of the transaction. Therefore, the allocations reflected
in the following unaudited Pro Forma Condensed Combined Balance Sheet may
differ from the amounts ultimately determined. The following unaudited Pro
Forma Condensed Combined Balance Sheet is not necessarily indicative of what
the actual financial position would have been assuming such transactions had
been completed as of September 30, 1997, nor does it purport to represent the
future financial position of Patriot REIT and Wyndham International as
adjusted for the Wyndham Transactions.
F-41
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PATRIOT
REIT AND
PATRIOT
OPERATING CROW
COMPANY ASSETS
PRO FORMA ACQUISITION WYNDHAM PRO FORMA
TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS TOTAL
---------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Net investment in real
estate and related
improvements........... $1,657,283 $320,357 $290,391 $165,494 (D) $2,433,525
Mortgage notes and other
receivables from
unconsolidated
subsidiaries........... 74,053 -- -- -- 74,053
Notes and other
receivables from
affiliates............. -- -- 24,800 -- 24,800
Notes receivable........ 15,913 -- 1,931 -- 17,844
Investment in
unconsolidated
subsidiaries........... 12,061 -- 4,092 -- 16,153
Cash and cash
equivalents............ 21,515 -- 14,819 -- 36,334
Restricted cash......... 38,196 -- 936 -- 39,132
Accounts receivable,
net.................... 38,540 -- 15,682 -- 54,222
Goodwill................ 128,108 -- 20,857 311,584 (E) 460,549
Deferred expenses, net.. 16,626 -- 8,019 18 (F) 24,663
Deferred acquisition
costs.................. 39,970 -- -- -- 39,970
Management contract
costs.................. 45,364 -- 11,419 53,463 (G) 110,246
Trade name and franchise
costs.................. 7,500 -- -- 85,550 (H) 93,050
Prepaid expenses and
other assets........... 11,323 -- 41,006 -- 52,329
Deferred income taxes... 700 -- 16,347 (15,551)(I) 1,496
---------- -------- -------- -------- ----------
Total assets........... $2,107,152 $320,357 $450,299 $600,558 $3,478,366
========== ======== ======== ======== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Borrowings under a line
of credit and mortgage
notes.................. $ 789,930 $320,357 $228,986 $133,638 (J) $1,472,911
Accounts payable and
accrued expenses....... 50,377 -- 45,756 -- 96,133
Dividends and
distributions payable.. 21,727 -- -- -- 21,727
Sales taxes payable..... 2,968 -- -- -- 2,968
Deferred income tax
liability.............. 4,846 -- 20,970 50,609 (I) 76,425
Deposits................ 2,037 -- 1,996 -- 4,033
Deferred gain........... -- -- 11,511 (11,511)(I) --
Due to unconsolidated
subsidiaries........... 5,904 -- -- -- 5,904
Minority interests in
the Patriot
Partnerships........... 264,862 -- -- -- 264,862
Minority interest in
consolidated
subsidiaries........... 29,284 -- 2,828 -- 32,112
Shareholders' equity:
Preferred stock........ 44 -- -- -- 44
Common stock........... 1,377 -- 216 313 (K) 1,906
Paid-in capital........ 1,049,267 -- 133,137 466,650 (L) 1,649,054
Unearned stock compen-
sation, net........... (15,075) -- -- (15,075)
Notes receivable from
stockholders.......... -- -- (17,138)(M) -- (17,138)
Receivable from affili-
ates.................. -- -- (1,229)(N) -- (1,229)
Unrealized gain on se-
curities available for
sale.................. -- -- 790 (790)(L) --
Unrealized foreign ex-
change loss........... -- -- (192) 192 (L) --
Retained earnings...... (100,396) -- 22,668 (38,543)(L) (116,271)
---------- -------- -------- -------- ----------
Total shareholders' eq-
uity.................. 935,217 -- 138,252 427,822 1,501,291
---------- -------- -------- -------- ----------
Total liabilities and
shareholders' equity.. $2,107,152 $320,357 $450,299 $600,558 $3,478,366
========== ======== ======== ======== ==========
</TABLE>
See notes on following page.
F-42
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL, ADJUSTED FOR THE WYNDHAM TRANSACTIONS
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997
(A) Represents the Pro Forma Condensed Combined Balance Sheet of Patriot REIT
and Patriot Operating Company as of September 30, 1997, which reflects the
Cal Jockey Merger and the transactions related thereto.
(B) Represents adjustments to Patriot REIT's and Wyndham International's pro
forma financial position assuming consummation of the Crow Assets
Acquisition had occurred at September 30, 1997.
(C) Represents Wyndham's pro forma financial position as of September 30,
1997.
(D) Represents adjustment for the purchase method of accounting whereby the
investments in hotel properties owned by Wyndham are adjusted to record
the assets at their estimated fair market values.
(E) Represents the purchase consideration in excess of fair market value of
the net assets of Wyndham.
(F) Represents the additional loan fees to be incurred in conjunction with the
financing for the Wyndham Transactions, net of Wyndham's historical
deferred loan fees.
(G) Represents adjustment for the purchase method of accounting whereby the
management contracts held by Wyndham (including the management contracts
acquired in the ClubHouse acquisition) are adjusted to their estimated
fair market values. Wyndham holds management contracts with certain of its
affiliates and with unrelated third parties for 44 hotels. The contracts
have an average remaining life of approximately 14 years and provide for
payment of management fees including a base fee plus certain incentive
fees based on specified criteria as defined in the respective management
agreements.
(H) Represents the estimated fair market value of the Wyndham and ClubHouse
tradenames and other franchise related assets.
(I) Pursuant to the Merger, deferred income taxes, the deferred income tax
liability and the deferred gain which resulted from the sale and lease-
back of the hotel properties leased by GHALP, Inc., an affiliate of
Wyndham, have been adjusted to reflect the effects of the Merger.
(J) Represents financing of $6,737 of additional loan fees related to the
financing of the Wyndham Transactions, estimated mortgage prepayment
penalties of $15,875, acquisition-related costs of $11,026 incurred in
connection with the Wyndham Transactions, and $100,000 of cash paid for
shares of Wyndham Common Stock.
(K) Represents an adjustment to record the exchange of Wyndham Common Stock for
Paired Shares. Pursuant to the Merger Agreement, Wyndham stockholders may
elect to receive for each share of Wyndham Common Stock held by them either
(i) cash for shares, up to a maximum of $100,000 of total funds available or
(ii) 1.372 shares of Patriot REIT Common Stock and 1.372 shares of Wyndham
International Common Stock. As of September 30, 1997, 21,618 shares of
Wyndham Common Stock were outstanding. The pro forma balances assume
approximately 2,336 shares of Wyndham Common Stock are purchased for cash
pursuant to the Cash Option (based on total funds available of $100,000 and
Cash Consideration of $42.80 per share of Wyndham Common Stock). The
remaining 19,282 shares of Wyndham Common Stock were assumed to be exchanged
for approximately 26,455 Paired Shares, resulting in an adjustment to
increase common stock.
(L) Represents adjustments to shareholders' equity to eliminate Wyndham's pro
forma equity accounts totaling $156,619 and record equity based on the
number of Paired Shares issued in the Merger. The pro forma balances assume
Wyndham stockholders elect to receive cash for their shares of Wyndham
Common Stock up to the maximum funds available of $100,000. As a result,
approximately 2,336 shares of Wyndham Common Stock were assumed to be
purchased for cash (based on total funds available of $100,000 and Cash
Consideration of $42.80 per share of Wyndham Common Stock). The total
purchase consideration for the Merger is approximately $688,413 (based upon
19,282 shares of Wyndham Common Stock assumed to be exchanged for
approximately 26,455 Paired Shares and an estimated market price per Paired
Share of $22.25 (which is based upon the closing price on April 11, 1997,
the business day prior to the date of the execution of the Merger Agreement,
of Old Patriot REIT's Common Stock) and $100,000 of cash consideration).
Set forth below is a summary comparison of the net impact to pro forma
borrowings and shareholders' equity (i) assuming approximately 2,336 shares
of Wyndham Common Stock are purchased pursuant to the Cash Option (the basis
used for pro forma balance sheet presentation purposes), and (ii) assuming
Wyndham stockholders elect to receive All Stock.
<TABLE>
<CAPTION>
CASH OPTION ALL STOCK
----------- ---------
<S> <C> <C>
Number of shares of Wyndham Common Stock purchased
for cash............................................ 2,336 --
======== ========
Cash paid for shares of Wyndham Common Stock (assumed
to be financed through the Revolving Credit Facility
or the Term Loan.................................... $100,000 $ --
Number of Paired Shares issued pursuant to the
Merger.............................................. 26,455 29,660
======== ========
Purchase consideration for shares.................... $588,413 $659,942
Adjustment to common stock for Paired Shares issued.. (529) (593)
Outstanding options to purchase common stock assumed
in the Merger....................................... 11,903 11,903
Book value of Wyndham paid-in capital................ (133,137) (133,137)
-------- --------
Adjustment to paid-in capital........................ 466,650 538,115
-------- --------
Mortgage prepayment penalties incurred from
refinancing of Wyndham debt......................... (15,875) (15,875)
Elimination of historical retained earnings.......... (22,668) (22,668)
-------- --------
Adjustment to retained earnings...................... (38,543) (38,543)
Adjustment to common stock........................... 313 377
Unrealized gain on securities available for sale..... (790) (790)
Unrealized foreign exchange loss..................... 192 192
-------- --------
Adjustment to shareholders' equity.................. $427,822 $499,351
======== ========
</TABLE>
F-43
<PAGE>
Pursuant to the April Merger Agreement, if the Patriot Average Closing Price
of the Paired Shares is less than $21.86, the Exchange Ratio would be subject
to adjustment. Pursuant to the Second Amendment, if the Effective Time of the
Merger occurs after December 31, 1997, other than as a result of a Wyndham
Delay, and the Patriot Average Closing Price is less than $27.50, the Exchange
Ratio would be subject to adjustment. As of December 9, 1997, the average
closing price of a Paired Share as reported on the NYSE over the previous 20
trading days was $30.71. Management of the Patriot Companies do not anticipate
that the Patriot Average Closing Price, as calculated at the Effective Time of
the Merger (assuming a closing January 5, 1998), will result in an adjustment
to the Exchange Ratio.
In connection with the Merger, options to purchase approximately 1,017
shares of Wyndham Common Stock which were issued by Wyndham to certain
officers and employees of Wyndham will be converted to options to purchase
1,395 Paired Shares. Such options to purchase Paired Shares will vest
immediately upon consummation of the Merger and become exercisable in full.
The stated exercise prices will be adjusted to reflect the Exchange Ratio.
The excess of the estimated value of a Paired Share on the date the Merger
is consummated (based upon the closing price on April 11, 1997, the business
day prior to the date of execution of the Original Merger Agreement, of Old
Patriot REIT's Common Stock on the NYSE of $22.25 and the Exchange Ratio)
over the stated exercise price of the options (as adjusted for the Exchange
Ratio) is reflected as additional purchase consideration for the Merger.
(M) Represents shareholder notes purchased by Wyndham in conjunction with its
initial public offering. In connection with the Merger, Patriot REIT will
acquire these notes at their historical cost, which approximates their
estimated fair value.
(N) Represents deferred management fees owed by an affiliate of Wyndham that
are deferred until certain operating criteria, as defined per the
management and loan agreement, are met. Such deferred management fees will
be acquired by Patriot REIT at their stated historical cost, which
approximates their estimated fair value, as a result of the Merger.
F-44
<PAGE>
PATRIOT REIT
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT CROW
REIT ASSETS
PRO FORMA ACQUISITION MERGER PRO FORMA
TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS TOTAL
--------- ------------ ------------ ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $213,868 $34,235 $ 31,845 $ -- $279,948
Racecourse facility,
hotel and land lease
revenue............... 5,945 -- 9,404 2,365 (D) 17,714
Interest and other
income................ 2,297 -- 500 -- 2,797
-------- ------- --------- --------- --------
Total revenue.......... 222,110 34,235 41,749 2,365 300,459
-------- ------- --------- --------- --------
Expenses:
Ground lease and hotel
lease expense......... 5,693 1,325 9,806 -- 16,824
General and
administrative........ 6,797 100 (E) 200 (E) -- 7,097
Interest expense....... 64,518 23,492 (F) 18,342 (F) 18,285 (F) 124,637
Real estate and
personal property
taxes and casualty
insurance............. 22,488 3,783 8,271 -- 34,542
Depreciation and
amortization.......... 62,723 12,033 (G) 19,019 (G) -- 93,775
-------- ------- --------- --------- --------
Total expenses......... 162,219 40,733 55,638 18,285 276,875
-------- ------- --------- --------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 59,891 (6,498) (13,889) (15,920) 23,584
Equity in earnings
(losses) of
unconsolidated
subsidiaries.......... 7,559 -- 363 (5,045)(H) 2,877
-------- ------- --------- --------- --------
Income (loss) before
income tax provision
and minority
interests.............. 67,450 (6,498) (13,526) (20,965) 26,461
Income tax provision... (170) -- -- (175)(I) (345)
-------- ------- --------- --------- --------
Income (loss) before mi-
nority interests....... 67,280 (6,498) (13,526) (21,140) 26,116
Minority interest in
the Patriot REIT Part-
nership............... (9,032) 682 1,420 4,381 (J) (2,549)
Minority interest in
consolidated subsidi-
aries................. (1,832) -- -- -- (1,832)
-------- ------- --------- --------- --------
Net income (loss)
applicable to common
shareholders .......... $ 56,416 $(5,816) $ (12,106) $ (16,759) $ 21,735 (K)
======== ======= ========= ========= ========
Net income per common
share(L)............... $ 0.75 $ 0.21 (K)
======== ========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Patriot REIT for the
year ended December 31, 1996 assuming the following transactions had
occurred at the beginning of the period presented: (i) the Cal Jockey
Merger and the transactions related thereto; (ii) the PaineWebber Land
Sale was consummated, the PaineWebber affiliate leased that portion of the
land upon which the Racecourse is situated to Patriot REIT and Patriot
REIT subleased this land and the related improvements to Patriot Operating
Company; (iii) Patriot REIT leased certain land to Borders, Inc.; (iv)
Patriot REIT acquired the Recent Acquisitions (excluding the Park Shore
Hotel and Sheraton City Centre); and the CHC Hotels; (v) the mortgage
notes to affiliates of CHC Lease Partners have been funded; (vi) Patriot
REIT replaced the Old Line of Credit with the Revolving Credit Facility
and the Term Loan; (vii) Patriot REIT acquired the Participating Note;
(viii) the Offering of 10,580,000 Paired Shares was completed; and (ix)
Patriot Operating Company acquired eight leases from CHC Lease Partners
and re-leased such hotels to Patriot Operating Company. In addition, the
pro forma results of operations assume the 24 hotels acquired during 1996
and the private placement and public offering of equity securities
completed by Old Patriot REIT during 1996 had occurred as of January 1,
1996. See page F-19.
(B) Represents adjustments to Patriot REIT's results of operations assuming
the Crow Assets Acquisition (10 hotels) had occurred at the beginning of
the period presented. One of the hotels was closed during 1996 due to
renovation. As a result, the pro forma results of operations for the Crow
Assets Acquisition reflects the results of operations for nine hotels for
the year ended December 31, 1996 (excluding the La Guardia Airport Hotel
which was closed for renovation during 1996).
(C) Represents adjustments to Patriot REIT's results of operations assuming
the Merger had been consummated at the beginning of the period presented.
(D) Represents the increase in hotel lease revenue for those hotels which are
leased by Patriot REIT from third parties and then sub-leased to Wyndham
International.
F-45
<PAGE>
(E) Represents adjustment for estimated incremental administrative salaries
and other expenses expected to be incurred by Patriot REIT.
(F) For the Crow Assets Acquisition, the adjustment represents interest
expense incurred on net borrowings under the Revolving Credit Facility and
Term Loan, which will be used to purchase the hotel properties. For the
Merger, the adjustment represents interest expense on current debt
obligations and interest expense related to certain capital lease
obligations which are expected to be assumed in connection with the
Merger. Patriot REIT expects to refinance substantially all of Wyndham's
long-term debt with borrowings under the Revolving Credit Facility and
Term Loan. Patriot REIT will pay an estimated $15,875 in mortgage
prepayment penalties. This amount will be reported as an extraordinary
item in Patriot REIT's results of operations following the completion of
the Wyndham Transactions and has been reflected as an adjustment to
retained earnings for pro forma presentation purposes. In addition, the
Revolving Credit Facility and Term Loan generally have more favorable
interest rates than the debt expected to be repaid. The deferred loan
costs are being amortized using the straight-line method over the terms of
the loans. Interest expense incurred on the Revolving Credit Facility and
Term Loan borrowings assumes an average interest rate of 7.333%
(representing LIBOR plus 1.85%). An increase of 0.25% in the interest rate
would increase pro forma interest expense to $128,911, decrease net income
applicable to common shareholders to $17,909 and decrease net income per
common share to $0.17, based on 102,543 weighted average number of common
shares and common share equivalents outstanding.
(G) Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and
improvements and 5 to 7 years for F, F & E . These estimated useful lives
are based on management's knowledge of the properties and the hotel
industry in general.
(H) Represents equity in losses of the New Non-Controlled Subsidiaries which
own the Wyndham tradenames and franchise related assets, the management
and franchising contracts and the hotel management company, which will be
controlled by Wyndham International.
(I) Represents provision for Patriot REIT's estimated state tax liability.
(J) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Wyndham Transactions of
approximately 10.5%. The estimated minority interest percentage prior to
the Wyndham Transactions is approximately 13.8%.
(K) The pro forma balances assume Wyndham stockholders elect to receive cash
for their shares of Wyndham Common Stock up to the maximum funds available
of $100,000 and the remaining outstanding shares of Wyndham Common Stock
are exchanged for Paired Shares. If no Wyndham stockholders elect to
receive cash (and, therefore, all outstanding shares of Wyndham Common
Stock are exchanged for Paired Shares, pro forma interest expense would
decrease by $7,333, net income would be $28,392 and net income per common
share would be $0.27, based on 105,758 weighted average number of common
shares and common share equivalents outstanding.
(L) Pro forma earnings per share is computed based on 102,543 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of shares of Patriot Operating Company
Preferred Stock into Paired Shares of common stock.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be $0.22 per common share. The impact of Statement 128 on the
calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
F-46
<PAGE>
PATRIOT REIT
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT
REIT CROW ASSETS
PRO FORMA ACQUISITION MERGER PRO FORMA
TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS TOTAL
--------- ------------ ------------ ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $172,682 $30,857 $ 26,438 $ -- $229,977
Racecourse facility,
hotel and land lease
revenue .............. 3,504 -- 14,482 1,773 (D) 19,759
Interest and other
income................ 4,043 -- -- -- 4,043
-------- ------- -------- -------- --------
Total revenue.......... 180,229 30,857 40,920 1,773 253,779
-------- ------- -------- -------- --------
Expenses:
Ground lease and hotel
lease expense......... 5,535 -- 14,482 -- 20,017
General and
administrative........ 6,937 50 (E) 150 (E) -- 7,137
Interest expense....... 48,329 17,907 (F) 11,788 (F) 16,390 (F) 94,414
Real estate and
personal property
taxes and casualty
insurance............. 17,812 3,018 6,236 -- 27,066
Depreciation and
amortization.......... 47,565 9,025 (G) 14,264 (G) -- 70,854
-------- ------- -------- -------- --------
Total expenses......... 126,178 30,000 46,920 16,390 219,488
-------- ------- -------- -------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 54,051 857 (6,000) (14,617) 34,291
Equity in earnings of
unconsolidated
subsidiaries.......... 4,488 -- 120 1,419 (H) 6,027
-------- ------- -------- -------- --------
Income (loss) before
income tax provision
and minority
interests.............. 58,539 857 (5,880) (13,198) 40,318
Income tax provision... (125) -- -- (131) (I) (256)
-------- ------- -------- -------- --------
Income (loss) before mi-
nority interests....... 58,414 857 (5,880) (13,329) 40,062
Minority interest in
the Patriot REIT
Partnership........... (7,803) (90) 617 3,266 (J) (4,010)
Minority interest in
consolidated subsidi-
aries................. (1,869) -- -- -- (1,869)
-------- ------- -------- -------- --------
Net income (loss)
applicable to common
shareholders........... $ 48,742 $ 767 $ (5,263) $(10,063) $ 34,183 (K)
======== ======= ======== ======== ========
Net income per common
share(L)............... $ 0.64 $ 0.33 (K)
======== ========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Patriot REIT for the
nine months ended September 30, 1997 assuming the following transactions
had occurred at the beginning of the period presented: (i) the Cal Jockey
Merger and the transactions related thereto; (ii) the PaineWebber Land
Sale was consummated, the PaineWebber affiliate leases that portion of the
land upon which the Racecourse is situated to Patriot REIT and Patriot
REIT subleased this land and the related improvements to Patriot Operating
Company; (iii) Patriot REIT leased certain land to Borders, Inc.; (iv)
Patriot REIT acquired the Recent Acquisitions (excluding the Park Shore
Hotel and Sheraton City Centre) and the CHC Hotels; (v) the mortgage notes
to affiliates of CHC Lease Partners have been funded; (vi) Patriot REIT
replaced the Old Line of Credit with the Revolving Credit Facility and the
Term Loan; (vii) Patriot Operating Company acquired the Participating
Note; (viii) the Offering of 10,580,000 Paired Shares was completed; and
(ix) Patriot REIT acquired eight leases from CHC Lease Partners and re-
leased such hotels to Patriot Operating Company. See page F-22.
(B) Represents adjustments to Patriot REIT's results of operations assuming
the Crow Assets Acquisition (10 hotels) had occurred at the beginning of
the period presented. The pro forma results of operations for the Crow
Assets Acquisition reflects the results of operations for ten hotels for
the nine months ended September 30, 1997.
(C) Represents adjustments to Patriot REIT's results of operations assuming
the Merger had been consummated at the beginning of the period presented.
(D) Represents the increase in hotel lease revenue for those hotels which are
leased by Patriot REIT from third parties and then sub-leased to Wyndham
International.
(E) Represents adjustment for estimated incremental administrative salaries
and other expenses expected to be incurred by Patriot REIT.
(F) For the Crow Assets Acquisition, the adjustment represents interest
expense incurred on net borrowings under the Revolving Credit Facility and
Term Loan, which will be used to purchase the hotel properties. For the
Merger, the adjustment represents interest expense
F-47
<PAGE>
on current debt obligations and interest expense related to certain capital
lease obligations which are expected to be assumed in connection with the
Merger. Patriot REIT expects to refinance Wyndham's long-term debt with
borrowings under the Revolving Credit Facility and Term Loan. Patriot REIT
will pay approximately $15,875 in mortgage prepayment penalties. This amount
will be reported as an extraordinary item in Patriot REIT's results of
operations following the completion of the Wyndham Transactions and has been
reflected as an adjustment to retained earnings for pro forma presentation
purposes. In addition, the Revolving Credit Facility and Term Loan generally
have more favorable interest rates than the debt expected to be repaid. The
deferred loan costs are being amortized using the straight-line method over
the terms of the loans. Interest expense incurred on the Revolving Credit
Facility and Term Loan borrowings assumes an average interest rate of 7.453%
(representing LIBOR plus 1.85%). An increase of 0.25% in the interest rate
would increase pro forma interest expense to 97,321, decrease net income
applicable to common shareholders to $31,581 and decrease net income per
common share to $0.31, based on 103,117 weighted average number of common
shares and common share equivalents outstanding.
(G) Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and
improvements and 5 to 7 years for F, F & E. These estimated useful lives
are based on management's knowledge of the properties and the hotel
industry in general.
(H) Represents equity in income of the New Non-Controlled Subsidiaries which
own the Wyndham tradenames and franchise related assets, the management
and franchising contracts and the hotel management company, which will be
controlled by Wyndham International.
(I) Represents provision for Patriot REIT's estimated state tax liability.
(J) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Wyndham Transactions of
approximately 10.5%. The estimated minority interest percentage prior to
the Wyndham Transactions is approximately 13.8%.
(K) The pro forma balances assume Wyndham stockholders elect to receive cash
for their shares of Wyndham Common Stock up to the maximum funds available
of $100,000 and the remaining outstanding shares of Wyndham Common Stock
are exchanged for Paired Shares. If no Wyndham stockholders elect to
receive cash (and, therefore, all outstanding shares of Wyndham Common
Stock are exchanged for Paired Shares) pro forma interest expense would
decrease by $5,590, net income would be $39,317 and net income per common
share would be $0.37, based on 106,332 weighted average number of common
shares and common share equivalents outstanding.
(L) Pro forma earnings per share is computed based on 103,117 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of shares of Patriot Operating Company
Preferred Stock into Paired Shares.
In February 1997, the Financial Accounting Standards Board issue Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be $0.35 per common share. The impact of Statement
128 on the calculation of diluted earnings per share is not expected to
differ significantly from the earnings per share amounts reported.
F-48
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT ADJUSTMENTS
OPERATING ------------------------------------------
COMPANY CROW ASSETS
PRO FORMA ACQUISITION MERGER WYNDHAM PRO FORMA
TOTAL(A) PRO FORMA(B) PRO FORMA(C) PRO FORMA(D) ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $338,448 $ 64,362 $128,248 $16,228 $ -- $ 547,286
Other hotel revenue.... 233,844 44,303 40,920 10,310 -- 329,377
Racecourse facility
revenue............... 51,946 -- -- -- -- 51,946
Management fee, service
fee and reimbursement
income................ 13,522 -- 41,978 -- (6,275)(E) 49,225
Interest and other
income................ 10,012 -- 2,250 -- -- 12,262
-------- -------- -------- ------- -------- ---------
Total revenue.......... 647,772 108,665 213,396 26,538 (6,275) 990,096
-------- -------- -------- ------- -------- ---------
Expenses:
Departmental costs--
hotel, club and spa
operations............ 241,792 44,914 71,913 9,949 -- 368,568
Racecourse facility
operations............ 46,351 -- -- -- -- 46,351
Direct operating costs
of management company,
service department and
reimbursement
expenses.............. 11,143 -- 32,666 -- -- 43,809
General and
administrative........ 71,700 10,495 18,276 3,305 101 (F) 103,877
Ground lease and hotel
lease expense ........ 733 -- -- -- 11,769 (G) 12,502
Repair and
maintenance........... 29,897 4,884 6,066 1,144 -- 41,991
Utilities.............. 26,843 4,351 4,585 1,055 -- 36,834
Marketing.............. 51,238 8,375 9,226 1,738 -- 70,577
Management fees........ 9,469 5,349 -- 926 (6,275)(E) 9,469
Depreciation and
amortization.......... 10,348 -- 13,016(H) -- 6,061 (H) 29,425
Participating lease
payments (I).......... 172,119 34,235 31,845 9,019 -- 247,218
Interest expense....... 1,393 -- -- -- -- 1,393
Real estate and
personal property
taxes and insurance... 398 -- 449 -- -- 847
-------- -------- -------- ------- -------- ---------
Total expenses......... 673,424 112,603 188,042 27,136 11,656 1,012,861
-------- -------- -------- ------- -------- ---------
Income (loss) before
income tax provision
and minority
interests.............. (25,652) (3,938) 25,354 (598) (17,931) (22,765)
Income tax (provision)
benefit............... (760) -- (4,177)(J) -- 12,469 (J) 7,532
-------- -------- -------- ------- -------- ---------
Income (loss) before mi-
nority interests....... (26,412) (3,938) 21,177 (598) (5,462) (15,233)
Minority interest in
the Patriot Operating
Company Partnership... 3,830 441 (K) (2,372)(K) 67 (K) (825) (K) 1,141
Minority interest in
consolidated
subsidiaries.......... -- -- -- -- 5,045 (L) 5,045
-------- -------- -------- ------- -------- ---------
Net income (loss)
applicable to common
shareholders........... $(22,582) $ (3,497) $ 18,805 $ (531) $ (1,242) $ (9,047)
======== ======== ======== ======= ======== =========
Net loss per common
share(M)............... $ (0.30) $ (0.09)
======== =========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Patriot Operating
Company for the year ended December 31, 1996 assuming the following
transactions had occurred at the beginning of the period presented:
(i) the Cal Jockey Merger and the transactions related thereto; (ii) the
Paine Webber Land Sale was consummated, the PaineWebber affiliate leased
that portion of the land upon which the Racecourse is situated to Patriot
REIT and Patriot REIT subleased this land and the related improvements to
Patriot Operating Company; (iii) Patriot REIT leased certain land to
Borders, Inc.; (iv) Patriot Operating Company completed the Grand Heritage
Acquisition and
F-49
<PAGE>
acquired PAH RSI Lessee; (v) Patriot REIT acquired the Recent Acquisitions
(except for the Park Shore Hotel and the Sheraton City Centre) and the CHC
Hotels and leased 21 of such hotels to Patriot Operating Company; (vi) the
mortgage notes to affiliates of CHC Lease Partners have been funded; (vii)
Patriot REIT replaced the Old Line of Credit with the Revolving Credit
Facility and the Term Loan; (viii) Patriot Operating Company acquired the
Participating Note; (ix) the Offering of 10,580,000 Paired Shares was
completed; (x) the GAH Acquisition was completed; and (xi) the CHCI Merger
was completed. See page F-25.
(B) Represents adjustments to Wyndham International's results of operations
assuming the Crow Assets Acquisition (10 hotels) had occurred at the
beginning of the period presented. One of the hotels was closed during 1996
due to renovation. As a result, the pro forma results of operations for the
Crow Assets Acquisition reflects the results of operations for nine hotels
for the year ended December 31, 1996.
(C) Represents adjustments to Wyndham International's results of operations
assuming the Merger and the Related Transactions had been consummated as of
January 1, 1996. The pro forma adjustments are based on the historical
results of operations of Wyndham as of December 31, 1996 adjusted for
certain transactions, including the acquisition of ClubHouse, all hotels
and management contracts acquired during 1996 and Wyndham's initial public
offering and related transactions, as if such transactions had occurred as
of January 1, 1996.
(D) Represents adjustments to Wyndham International's results of operations
assuming the two hotels currently leased by Crow Hotel Lessee, Inc. had
been leased by Wyndham International as of January 1, 1996.
(E) Represents the elimination of management fees for the hotels previously
leased to the Crow Hotel Lessee, Inc. which are assumed to be leased by
Wyndham International and managed by a New Non-Controlled Subsidiary.
(F) Represents incremental general and administrative expenses expected to be
incurred by Wyndham International of $200 and the elimination of certain
other expenses of $99.
(G) Represents pro forma lease expense related to the sub-lease agreement with
Patriot REIT for those hotel properties leased by Patriot REIT from third
party owners.
(H) Represents adjustments to depreciation of furniture and equipment and
amortization of goodwill, tradenames and franchise-related intangible
assets. Depreciation is computed using the straight-line method and is
based upon the estimated useful lives of 5 to 7 years for F, F & E.
Amortization of goodwill, tradenames and franchise costs is computed using
the straight-line method over estimated useful lives ranging from 20 to 35
years. Amortization of management contracts is computed using the straight-
line method over the 14-year average remaining term of the related
management agreements.
(I) Represents lease payments from Wyndham International to Patriot REIT
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the period
presented.
(J) Represents adjustments to Wyndham International's estimated federal and
state tax provision for the Wyndham Transactions.
(K) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Wyndham Transactions of
approximately 11.2%. The estimated minority interest percentage prior to
the Wyndham Transactions is approximately 14.5%.
(L) Represents adjustment for minority interest in the New Non-Controlled
Subsidiaries held by Patriot REIT.
(M) Pro forma earnings per share is computed based on 102,543 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of shares of Patriot Operating Company
Preferred Stock into Paired Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure requirements
for basic earnings per share and diluted earnings per share. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options and convertible preferred securities will be excluded. Pro
forma basic earnings per share for the year ended December 31, 1996 would be
a net loss of $0.09 per common share. The impact of Statement 128 on the
calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
F-50
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT ADJUSTMENTS
OPERATING ------------------------------------------
COMPANY CROW ASSETS
PRO FORMA ACQUISITION MERGER WYNDHAM PRO FORMA
TOTAL(A) PRO FORMA(B) PRO FORMA(C) PRO FORMA(D) ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $279,595 $58,044 $108,868 $12,659 $ -- $459,166
Other hotel revenue.... 182,889 35,548 35,502 7,649 -- 261,588
Racecourse facility
revenue............... 33,399 -- -- -- -- 33,399
Management fee, service
fee and reimbursement
income................ 14,701 -- 35,785 -- (4,937)(E) 45,549
Interest and other
income................ 6,374 -- 2,133 -- -- 8,507
-------- ------- -------- ------- -------- --------
Total revenue.......... 516,958 93,592 182,288 20,308 (4,937) 808,209
-------- ------- -------- ------- -------- --------
Expenses:
Departmental costs--
hotel, club and spa
operations............ 187,784 37,199 49,712 7,707 -- 282,402
Racecourse facility
operations............ 30,114 -- -- -- -- 30,114
Direct operating costs
of management company,
service department and
reimbursement
expenses.............. 12,568 -- 27,763 -- -- 40,331
General and
administrative........ 54,225 9,324 15,539 2,382 200 (F) 81,670
Ground lease and hotel
lease expense......... 523 -- -- -- 16,255 (G) 16,778
Repair and
maintenance........... 24,230 4,005 5,366 911 -- 34,512
Utilities.............. 20,341 3,745 4,918 837 -- 29,841
Marketing.............. 41,734 6,743 9,294 1,324 -- 59,095
Management fees........ 9,657 4,279 -- 658 (4,937)(E) 9,657
Depreciation and
amortization.......... 5,449 -- 10,739 (H) -- 4,517 (H) 20,705
Participating lease
payments(I)........... 138,309 30,857 26,438 7,006 -- 202,610
Interest expense....... 936 -- -- -- -- 936
Real estate and
personal property
taxes and casuality
insurance ............ 290 -- -- -- -- 290
-------- ------- -------- ------- -------- --------
Total expenses......... 526,160 96,152 149,769 20,825 16,035 808,941
-------- ------- -------- ------- -------- --------
Income (loss) before
income tax provision
and minority
interests.............. (9,202) (2,560) 32,519 (517) (20,972) (732)
Income tax (provision)
benefit............... -- -- (9,240)(J) -- 5,763 (J) (3,477)
-------- ------- -------- ------- -------- --------
Income (loss) before mi-
nority interests....... (9,202) (2,560) 23,279 (517) (15,209) (4,209)
Minority interest in
the Patriot Operating
Company Partnership... 1,334 287 (K) (2,607)(K) 58 (K) 1,558 (K) 630
Minority interest in
consolidated
subsidiaries.......... -- -- -- -- (1,419)(L) (1,419)
-------- ------- -------- ------- -------- --------
Net income (loss)
applicable to common
shareholders........... $ (7,868) $(2,273) $ 20,672 $ (459) $(15,070) $ (4,998)
======== ======= ======== ======= ======== ========
Net loss per common
share(M)............... $ (0.10) $ (0.05)
======== ========
</TABLE>
See notes on following page.
F-51
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (CONTINUED)
(UNAUDITED)
- --------
(A) Represents the pro forma results of operations of Patriot Operating
Company for the nine months ended September 30, 1997 assuming the
following transactions had occurred at the beginning of the period
presented: (i) the Cal Jockey Merger and the transactions related thereto
(ii) the PaineWebber Land Sale was consummated, the PaineWebber affiliate
leased that portion of the land upon which the Racecourse is situated to
Patriot REIT and Patriot REIT subleased this land and the related
improvements to Patriot Operating Company; (iii) Patriot REIT leased
certain land to Borders, Inc.; (iv) Patriot Operating Company completed
the Grand Heritage Acquisition and acquired PAH RSI Lessee; (v) Patriot
REIT acquired the Recent Acquisitions (except for the Park Shore Hotel and
the Sheraton City Centre) and the CHC Hotels and leased 21 of such hotels
to Patriot Operating Company; (vi) the mortgage notes to affiliates of CHC
Lease Partners have been funded; (vii) Patriot REIT replaced the Old Line
of Credit with the Revolving Credit Facility and the Term Loan; (viii)
Patriot Operating Company acquired the Participating Note; (ix) the
Offering of 10,580,000 Paired Shares was completed; (x) the GAH
Acquisition was completed; and (xi) the CHCI Merger was completed. See
page F-28.
(B) Represents adjustments to Wyndham International's results of operations
assuming the Crow Assets Acquisition (10 hotels) had occurred as of
January 1, 1996. The pro forma results of operations for the Crow Assets
Acquisition reflects the results of operations for ten hotels for the nine
months ended September 30, 1997.
(C) Represents adjustments to Wyndham International's results of operations
assuming the Merger had been consummated at the beginning of the period
presented. The pro forma adjustments are based on the historical results
of operations of Wyndham as of September 30, 1997 adjusted for certain
transactions, including the acquisition of ClubHouse and all hotels and
management contracts acquired during the first nine months of 1997, as if
such transactions had occurred as of January 1, 1996.
(D) Represents adjustments to Wyndham International's results of operations
assuming the two hotels currently leased by Crow Hotel Lessee, Inc. had
been leased by Wyndham International as of January 1, 1996.
(E) Represents the elimination of management fees for the hotels previously
leased to the Crow Hotel Lessee, Inc. which are assumed to be leased by
Wyndham International and managed by a New Non-Controlled Subsidiary.
(F) Represents incremental general and administrative expenses expected to be
incurred by Wyndham International of $200.
(G) Represents pro forma lease expense related to the sub-lease agreement with
Patriot REIT for those hotel properties leased by Patriot REIT from third
party owners.
(H) Represents adjustments to depreciation of furniture and equipment and
amortization of goodwill, tradenames and franchise-related intangible
assets. Depreciation is computed using the straight-line method and is
based upon the estimated useful lives of 5 to 7 years for F, F & E.
Amortization of goodwill, tradenames and franchise costs is computed using
the straight-line method over estimated useful lives ranging from 20 to 35
years. Amortization of management contracts is computed using the
straight-line method over the 14-year average remaining term of the
related management agreements.
(I) Represents lease payments from Wyndham International to Patriot REIT
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the
period presented.
(J) Represents adjustments to Wyndham International's estimated federal and
state tax provision for the Wyndham Transactions.
(K) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Wyndham Transactions of
approximately 11.2%. The estimated minority interest percentage prior to
the Wyndham Transactions is approximately 14.5%.
(L) Represents adjustment for minority interest in the New Non-Controlled
Subsidiaries held by Patriot REIT.
(M) Pro forma earnings per share is computed based on 103,117 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of shares of Patriot Operating Company
Preferred Stock into Paired Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be a net loss of $0.05 per common share. The impact
of Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
F-52
<PAGE>
COMBINED LESSEES
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Patriot REIT leases each of its hotels, except the Crowne Plaza Ravinia
Hotel and the Wyndham WindWatch Hotel, which are separately owned through Non-
Controlled Subsidiaries, to Lessees or to Patriot Operating Company. The
Combined Lessees subsequent to (i) the Wyndham Transactions, (ii) the Cal
Jockey Merger and the transactions related thereto, (iii) the Grand Heritage
Acquisition (which included the acquisition of Grand Heritage Leasing, L.L.C.
which leased three hotels from Patriot REIT), (iv) the acquisition of PAH RSI
Lessee (which included the acquisition of eight Patriot REIT hotel leases);
and (v) the GAH Acquisition and the CHCI Merger (which included the
acquisition of 25 Patriot REIT hotel leases from CHC Lease Partners) consist
of NorthCoast Lessee which leases 11 hotels (excluding the Park Shore Hotel),
Doubletree Lessee which leases four hotels, and Metro Lease Partners which
leases one hotel. Patriot REIT also leases two hotels to Crow Hotel Lessee,
Inc. (the Wyndham Garden Hotel-Midtown and the Wyndham Greenspoint Hotel).
Subsequent to the completion of the Wyndham Transactions, Patriot REIT expects
to terminate its leases with Crow Hotel Lessee, Inc. and re-lease such hotels
to Wyndham International. The Participating Leases provide for staggered terms
of one to twelve years and the payment of the greater of base or participating
rent, plus certain additional charges, as applicable.
The following Combined Lessees' unaudited Pro Forma Condensed Combined
Statements of Operations for the year ended December 31, 1996 and the nine
months ended September 30, 1997 are presented as if the 16 hotels that Patriot
REIT leases to the Combined Lessees pursuant to Participating Leases
(excluding the Park Shore Hotel) had been leased as of January 1, 1996. The 25
hotels leased to CHC Lease Partners, the eight hotels leased to PAH RSI
Lessee, the three hotels leased to Grand Heritage Leasing, L.L.C. and the two
hotels leased to Crow Hotel Lessee, Inc. are assumed to have been leased to
Wyndham International and, therefore, have been eliminated from the Pro Forma
Condensed Combined Statements of Operations for the Combined Lessees. The pro
forma information is based in part upon the Statements of Operations of
NorthCoast Lessee filed with Old Patriot REIT's Annual Report on Form 10-K for
the year ended December 31, 1996 and the Statements of Operations of
NorthCoast Lessee filed with Patriot REIT's and Patriot Operating Company's
Joint Quarterly Report on Form 10-Q for the nine months ended September 30,
1997 all of which are incorporated by reference herein and the Pro Forma
Condensed Combined Statement of Operations of the Combined Lessees located
elsewhere in this Joint Current Report. In management's opinion, all material
adjustments necessary to reflect the effects of these transactions have been
made.
The unaudited Pro Forma Condensed Combined Statements of Operations are not
necessarily indicative of what the actual results of operations of the Combined
Lessees would have been assuming such transactions had been completed as of
January 1, 1996, nor do they purport to represent the results of operations for
future periods. Further, the unaudited Pro Forma Condensed Combined Statement of
Operations for the interim period ended September 30, 1997 is not necessarily
indicative of the results of operations for the full year.
F-53
<PAGE>
COMBINED LESSEES
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Room................................................ $72,182 $59,441
Food and beverage................................... 28,499 22,355
Telephone and other................................. 5,906 4,852
------- -------
Total revenue.................................... 106,587 86,648
------- -------
Expenses:
Departmental costs and expenses..................... 44,615 34,690
General and administrative.......................... 9,389 7,138
Ground lease expense................................ 2,496 985
Repair and maintenance.............................. 5,526 4,161
Utilities........................................... 4,380 3,201
Marketing........................................... 7,431 6,171
Participating lease payments(A)..................... 32,730 27,367
------- -------
Total expenses................................... 106,567 83,713
------- -------
Income before lessee income (expense)................ 20 2,935
------- -------
Dividend and interest income(B)...................... 142 1,087
Management fees(C)................................... (2,553) (2,444)
Lessee general and administrative(D)................. (478) (478)
------- -------
(2,889) (1,835)
------- -------
Net income (loss).................................... $(2,869) $ 1,100
======= =======
</TABLE>
- --------
(A) Represents lease payments calculated on a pro forma basis by applying the
provisions of the Participating Leases to the historical revenue of the
hotels.
(B) Includes dividend income on OP Units in the Patriot Partnerships which
form a portion of the required capitalization of NorthCoast Lessee. Pro
forma amounts exclude additional dividend income earned on OP Units held
by certain Lessees, and pro forma interest income earned on invested cash
balances.
(C) Represents pro forma management fees paid to the Operators under the terms
of their respective management agreements with the Lessees.
(D) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
F-54
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL ADJUSTED FOR THE WHG MERGER
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
On September 30, 1997, Patriot REIT, Patriot Operating Company and WHG Resorts
& Casinos Inc. ("WHG") entered into an Agreement and Plan of Merger (the "WHG
Merger Agreement") providing for the merger of a newly-formed subsidiary of
Patriot Operating Company (and subsequent to the Merger, Wyndham International)
with and into WHG, with WHG being the surviving corporation (the "WHG Merger").
As a result of the WHG Merger, Wyndham International will acquire the Condado
Plaza Hotel & Casino, a 50% interest in the El San Juan Hotel & Casino and a
23.3% interest in the El Conquistador Resort & Country Club (the "El
Conquistador"), all of which are located in Puerto Rico, as well as a 62%
interest in Williams Hospitality Group, Inc., the management company for the
three hotels and the Las Casitas Village at El Conquistador.
Under the terms of the WHG Merger Agreement, each share of WHG common stock,
par value $0.01 per share ("WHG Common Stock") generally will be converted into
the right to receive 0.784 Paired Shares (the "WHG Exchange Ratio"); provided,
however, that in the event that (i) the average closing price of a Paired Share
over the ten trading days immediately preceding the third business day prior to
the date on which the WHG stockholders' meeting to approve the WHG Merger is
convened (the "Patriot/WHG Average Closing Price") is greater than $31.25 and
the effective time of the WHG Merger is before February 1998, the WHG Exchange
Ratio will be adjusted such that the product (the "WHG Exchange Ratio Product")
equals $24.50, (ii) the Patriot/WHG Average Closing Price is greater than $31.75
and the effective time of the WHG Merger is in February 1998, the WHG Exchange
Ratio will be adjusted such that the WHG Exchange Ratio Product equals $24.89,
(iii) the Patriot/WHG Average Closing Price is greater than $32.25 and the
effective time of the WHG Merger is after February 1998, the WHG Exchange Ratio
will be adjusted such that the WHG Exchange Ratio Product equals $25.28, (iv)
the Patriot/WHG Average Closing Price is less than or equal to $25.50, but
greater than or equal to $19.50, the WHG Exchange Ratio will be adjusted such
that the WHG Exchange Ratio Product equals $20.00, or (v) the Patriot/WHG
Average Closing Price is less than $19.50, the WHG Exchange Ratio will equal
1.026, provided, however, that in such circumstances WHG has the right, waivable
by it, to terminate the WHG Merger Agreement.
In addition, each issued and outstanding share of WHG Series B Convertible
Preferred Stock will be converted into the right to receive that number of
Paired Shares that the holder of such shares of WHG Series B Convertible
Preferred Stock would have the right to receive assuming conversion of such
shares, together with any accrued and unpaid dividends thereon, into shares of
WHG Common Stock immediately prior to the effective time of the WHG Merger.
The Pro Forma Financial Statements have been adjusted for the purchase
method of accounting whereby the hotel and related improvements and other
assets and liabilities owned by WHG are adjusted to estimated fair market
value. The fair market value of the assets and liabilities of WHG has been
determined based upon preliminary estimates and is subject to change as
additional information is obtained. Management does not anticipate that the
preliminary allocation of purchase costs based upon the estimated fair market
value of the assets and liabilities of WHG will materially change; however,
the allocation of purchase costs are subject to final determination based upon
estimates and other evaluations of fair market value as of the close of the
transaction. Therefore, the allocation reflected in the following unaudited
Pro Forma Financial Statements may differ from the amounts ultimately
determined.
In connection with the WHG Merger, Patriot Operating Company is currently in
negotiations to acquire additional interests in the El San Juan Hotel & Casino,
the El Conquisitor, Williams Hospitality Group, Inc., and WKA Development S.E.,
and to acquire an option to buy certain property attached to the Condado Plaza
Hotel & Casino. No assurance can be given that any of these transactions will be
consummated and the following unaudited Pro Forma Financial Statements do not
reflect adjustments for these transactions.
The following unaudited Pro Forma Condensed Combined Statement of Operations
as adjusted for the WHG Merger for the year ended December 31, 1996 and the nine
months ended September 30, 1997 are derived from (i) the Patriot REIT and
Patriot Operating Company Pro Forma Condensed Combined Statements of Operations
as adjusted for the Wyndham Transactions for the year ended December 31, 1996
and the nine months ended September 30, 1997 and (ii) the Consolidated
Statements of Operations of WHG for the year ended June 30, 1997 and the three
months ended September 30, 1997 included elsewhere in this Joint Current Report.
As a result of the WHG
F-55
<PAGE>
Merger, WHG will become a wholly owned subsidiary of Wyndham International.
Consequently the WHG Merger has minimal impact on the pro forma operating
results of Patriot REIT. As a result, separate unaudited Pro Forma Condensed
Statements of Operations for Patriot REIT, adjusted for the WHG Merger have
not been presented.
The following unaudited Pro Forma Condensed Combined Statements of Operations
are not necessarily indicative of what the actual results of operations of
Patriot REIT and Wyndham International as adjusted for the WHG Merger would have
been assuming such transactions had been completed as of January 1, 1996, nor do
they purport to represent the results of operations for future periods. Further,
the unaudited Pro Forma Condensed Combined Statement of Operations for the
interim period ended September 30, 1997 is not necessarily indicative of the
results of operations for the full year.
F-56
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT WYNDHAM
REIT INTERNATIONAL PRO FORMA
PRO FORMA(A) PRO FORMA(B) ELIMINATIONS TOTAL
------------ ------------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Participating lease
revenue................ $279,948 $ -- $(247,218)(C) $ 32,730
Hotel revenue........... -- 931,559 -- 931,559
Racecourse facility
revenue, hotel and land
lease revenue.......... 17,714 51,946 (17,380)(D) 52,280
Management fee, service
fee and reimbursement
income................. -- 62,221 -- 62,221
Interest and other
income................. 2,797 14,346 (5,916)(E) 11,227
-------- ---------- --------- ----------
Total revenue........... 300,459 1,060,072 (270,514) 1,090,017
-------- ---------- --------- ----------
Expenses:
Departmental costs--
hotel operations....... -- 403,122 -- 403,122
Racecourse facility
operations............. -- 46,351 (5,611)(D) 40,740
Direct operating costs
of management company,
service department, and
reimbursement
expenses............... -- 47,564 -- 47,564
General and
administrative......... 7,097 110,110 (34)(E) 117,173
Ground lease and hotel
lease expense.......... 16,824 12,502 (11,769)(D) 17,557
Repair and maintenance.. -- 41,991 -- 41,991
Utilities............... -- 36,834 -- 36,834
Interest expense........ 124,637 4,866 (5,882)(E) 123,621
Real estate and personal
property taxes and
casualty insurance..... 34,542 847 -- 35,389
Marketing............... -- 73,533 -- 73,533
Management fees......... -- 9,469 -- 9,469
Depreciation and
amortization........... 93,775 40,943 -- 134,718
Participating lease
payments............... -- 247,218 (247,218)(C) --
-------- ---------- --------- ----------
Total expenses.......... 276,875 1,075,350 (270,514) 1,081,711
-------- ---------- --------- ----------
Income (loss) before
equity in earnings
(losses) of
unconsolidated
subsidiaries, income tax
provision and minority
interests............... 23,584 (15,278) -- 8,306
Equity in earnings of
unconsolidated
subsidiaries........... 2,877 (3,407) 5,045 (F) 4,515
-------- ---------- --------- ----------
Income (loss) before
income tax provision and
minority interests...... 26,461 (18,685) 5,045 12,821
Income tax (provision)
benefit................ (345) 4,647 -- 4,302
-------- ---------- --------- ----------
Income (loss) before
minority interests...... 26,116 (14,038) 5,045 17,123
Minority interests in
the Patriot
Partnerships........... (2,428) 1,359 -- (1,069)
Minority interest in
consolidated
subsidiaries .......... (1,832) 1,341 (5,045)(F) (5,536)
-------- ---------- --------- ----------
Net income (loss)
applicable to common
shareholders............ $ 21,856 $ (11,338) $ -- $ 10,518
======== ========== ========= ==========
Net income (loss) per
common Paired Share(G).. $ 0.20 $ (0.11) $ 0.09
======== ========== ==========
</TABLE>
- --------
(A) Patriot REIT Pro Forma balances are derived from the pro forma results of
operations of Patriot REIT for the year ended December 31, 1996 as
adjusted for the Wyndham Transactions. See page F-45. Minority interest in
the Patriot REIT Partnership has been decreased by $121 to reflect the
decrease in the estimated minority interest percentage subsequent to the
WHG Merger to approximately 10.0%. The estimated minority interest
percentage prior to the WHG Merger is approximately 10.5%.
(B) Wyndham International Pro Forma balances are derived from the pro forma
results of operations of Patriot Operating Company for the year ended
December 31, 1996 appearing on page F-62.
(C) Represents elimination of participating lease revenue and expense related
to the 61 hotel properties leased by Patriot REIT to Wyndham International
(excluding the Sheraton City Centre).
(D) Represents elimination of rental income and expense related to the
Racecourse facility, land leased and the hotels sub-leased by Patriot REIT
to Wyndham International.
(E) The pro forma adjustments represent the elimination of $1,170 of interest
income and expense related to a note receivable issued to Old Patriot REIT
in connection with the sale of certain assets to PAH RSI Lessee, which
assets are assumed to be acquired by Patriot Operating Company, the
elimination of $4,712 of interest income and expense related to the
Subscription Notes issued to Patriot Operating Company in connection with
the subscription for shares of Patriot Operating Company Common Stock and
Patriot Operating Company Partnership OP Units issued in connection with
the Cal Jockey Merger and the elimination of $34 of other intercompany
income and expense items.
(F) Represents the elimination of equity in losses of the New Non-Controlled
Subsidiaries.
(G) Pro forma earnings per share is computed based on 107,547 weighted average
common Paired Shares and common Paired Share equivalents outstanding for
the period. The number of shares used for the calculation includes
adjustments to reflect the impact of the conversion of shares of Patriot
Operating Company Preferred Stock into Paired Shares and the conversion of
WHG Series B Convertible Preferred Stock into Paired Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be $0.10 per common Paired Share. The impact of Statement 128
on the calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
F-57
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
WYNDHAM
PATRIOT REIT INTERNATIONAL PRO FORMA
PRO FORMA(A) PRO FORMA(B) ELIMINATIONS TOTAL
------------ ------------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease
revenue................. $229,977 $ -- $(202,610)(C) $ 27,367
Hotel revenue............ -- 763,616 -- 763,616
Racecourse facility
revenue, hotel and land
lease revenue........... 19,759 33,399 (19,501)(D) 33,657
Management fee, service
fee and reimbursement
income.................. -- 56,838 -- 56,838
Interest and other
income.................. 4,043 10,524 (2,306)(E) 12,261
-------- -------- --------- --------
Total revenue............ 253,779 864,377 (224,417) 893,739
-------- -------- --------- --------
Expenses:
Departmental costs--hotel
operations.............. -- 307,597 -- 307,597
Racecourse facility
operations.............. -- 30,114 (3,246)(D) 26,868
Direct operating costs of
management company,
service department, and
reimbursement expenses.. -- 43,427 -- 43,427
General and
administrative.......... 7,137 87,322 (24)(E) 94,435
Ground lease and hotel
lease expense........... 20,017 16,778 (16,255)(D) 20,540
Repair and maintenance... -- 34,512 -- 34,512
Utilities................ -- 29,841 -- 29,841
Interest expense......... 94,414 3,291 (2,282)(E) 95,423
Real estate and personal
property taxes and
casualty insurance...... 27,066 290 -- 27,356
Marketing................ -- 61,334 -- 61,334
Management fees.......... -- 9,657 -- 9,657
Depreciation and
amortization............ 70,854 29,489 -- 100,343
Participating lease
payments................ -- 202,610 (202,610)(C) --
-------- -------- --------- --------
Total expenses........... 219,488 856,262 (224,417) 851,333
-------- -------- --------- --------
Income before equity in
earnings of
unconsolidated
subsidiaries, income tax
provision and minority
interests................ 34,291 8,115 -- 42,406
Equity in earnings of
unconsolidated
subsidiaries............ 6,027 417 (1,419)(F) 5,025
-------- -------- --------- --------
Income before income tax
provision and minority
interests................ 40,318 8,532 (1,419) 47,431
Income tax (provision)
benefit................. (256) (3,477) -- (3,733)
-------- -------- --------- --------
Income before minority
interests................ 40,062 5,055 (1,419) 43,698
Minority interests in the
Patriot Partnerships.... (3,819) (39) -- (3,858)
Minority interest in
consolidated
subsidiaries............ (1,869) (4,692) 1,419 (F) (5,142)
-------- -------- --------- --------
Net income applicable to
common shareholders...... $ 34,374 $ 324 $ -- $ 34,698
======== ======== ========= ========
Net income per common
Paired Share(G).......... $ 0.31 $ 0.01 $ 0.32
======== ======== ========
</TABLE>
- --------
(A) Patriot REIT Pro Forma balances are derived from the pro forma results of
operations of Patriot REIT for the nine months ended September 30, 1997 as
adjusted for the Wyndham Transactions. See page F-47. Minority interest in
the Patriot REIT Partnership has been decreased by $191 to reflect the
decrease in the estimated minority interest percentage subsequent to the
WHG Merger to approximately 10.0%. The estimated minority interest
percentage prior to the WHG Merger is approximately 10.5%.
(B) Wyndham International Pro Forma balances are derived from the pro forma
results of operations of Patriot Operating Company for the nine months
ended September 30, 1997 appearing on page F-63.
(C) Represents elimination of participating lease revenue and expense related
to the 61 hotel properties leased by Patriot REIT to Wyndham International
(excluding the Sheraton City Centre).
(D) Represents elimination of rental income and expense related to the
Racecourse facility, land leased and the hotels sub-leased by Patriot REIT
to Wyndham International.
(E) Represents primarily the elimination of $832 of interest income and
expense related to a note receivable issued to Old Patriot REIT in
connection with the sale of certain assets to PAH RSI Lessee, which assets
are assumed to be acquired by Patriot Operating Company, the elimination
of $1,450 of interest income and expense related to the Subscription Notes
issued to Patriot Operating Company in connection with the subscription
for shares of Patriot Operating Company Common Stock and Patriot Operating
Company Partnership OP Units issued in connection with the Cal Jockey
Merger, and the elimination of $24 of other intercompany income and
expense items.
(F) Represents the elimination of equity in income of the New Non-Controlled
Subsidiaries.
(G) Pro forma earnings per share is computed based on 108,178 weighted average
common Paired Shares and common Paired Share equivalents outstanding for
the period. The number of shares used for the calculation includes
adjustments to reflect the impact of the conversion of shares of Patriot
Operating Company Preferred Stock into Paired Shares and the conversion of
WHG Series B Convertible Preferred Stock into Paired Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be $0.34 per common Paired Share. The impact of
Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
F-58
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited Pro Forma Condensed Combined Balance Sheet is
presented as if the WHG Merger had occurred as of September 30, 1997. The Pro
Forma Condensed Combined Balance Sheet is also derived from the Patriot REIT
and Patriot Operating Company Pro Forma Condensed Combined Balance Sheet as
adjusted for the Wyndham Transactions as of September 30, 1997 included
elsewhere in this Joint Current Report.
Such pro forma information is based in part upon WHG's Consolidated Balance
Sheet as of September 30, 1997 and Wyndham's Consolidated Balance Sheet as of
September 30, 1997 and should be read in conjunction with the financial
statements presented elsewhere in this Joint Current Report and filed with WHG's
and Wyndham's respective Quarterly Reports on Form 10-Q for the quarter ended
September 30, 1997 and Patriot REIT's and Patriot Operating Company's Combined
Balance Sheet as of September 30, 1997, filed with the Patriot Companies' Joint
Quarterly Report on Form 10-Q for the nine months ended September 30, 1997. In
management's opinion, all material adjustments necessary to reflect the effect
of these transactions have been made.
The accompanying Pro Forma Condensed Combined Balance Sheet reflects
adjustments to record the net assets of WHG at their estimated fair market
values and the elimination of WHG's historical shareholders' equity. The fair
market values of the assets and liabilities of WHG have been determined based
upon preliminary estimates and are subject to change as additional information
is obtained. Management does not anticipate that the preliminary allocation of
purchase costs based upon the estimated fair market values of the assets and
liabilities of WHG will materially change; however, the allocations of
purchase costs are subject to final determination based upon estimates and
other evaluations of fair market value as of the close of the transaction.
Therefore, the allocations reflected in the following unaudited Pro Forma
Condensed Combined Balance Sheet may differ from the amounts ultimately
determined. The following unaudited Pro Forma Condensed Combined Balance Sheet
is not necessarily indicative of what the actual financial position would have
been assuming such transactions had been completed as of September 30, 1997,
nor does it purport to represent the future financial position of Patriot REIT
and Wyndham International as adjusted for the WHG Merger.
F-59
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PATRIOT
REIT AND
WYNDHAM
INTERNATIONAL
PRO FORMA WHG PRO FORMA
TOTAL(A) HISTORICAL(B) ADJUSTMENTS TOTAL
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Net investment in real
estate and related
improvements............ $2,433,525 $ 49,050 $ 31,641 (C) $2,514,216
Mortgage notes and other
receivables from
unconsolidated
subsidiaries............ 74,053 1,731 40,308 (D) 116,092
Notes and other
receivables from
affiliates.............. 24,800 -- -- 24,800
Notes receivable......... 17,844 -- -- 17,844
Investment in
unconsolidated
subsidiaries............ 16,153 29,791 (21,399)(E) 24,545
Cash and cash
equivalents............. 36,334 18,941 -- 55,275
Restricted cash.......... 39,132 -- -- 39,132
Accounts receivable,
net..................... 54,222 3,454 -- 57,676
Goodwill................. 460,549 8,613 7,628 (F) 476,790
Deferred expenses, net... 24,663 -- -- 24,663
Deferred acquisition
costs................... 39,970 -- -- 39,970
Management contract
costs................... 110,246 -- 43,567 (G) 153,813
Trade name and franchise
costs................... 93,050 -- -- 93,050
Prepaid expenses and
other assets............ 52,329 6,772 -- 59,101
Deferred income taxes.... 1,496 -- -- 1,496
---------- -------- -------- ----------
Total assets............ $3,478,366 $118,352 $101,745 $3,698,463
========== ======== ======== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Borrowings under a line
of credit and mortgage
notes................... $1,472,911 $ 22,363 $ -- $1,495,274
Notes and other
liabilities............. -- 5,032 -- 5,032
Accounts payable and
accrued expenses........ 96,133 11,204 -- 107,337
Dividends and
distributions payable... 21,727 -- -- 21,727
Sales tax payable........ 2,968 -- -- 2,968
Deferred income tax
liability............... 76,425 2,192 -- 78,617
Deposits................. 4,033 -- -- 4,033
Due to unconsolidated
subsidiaries............ 5,904 -- -- 5,904
Minority interests in the
Patriot Partnerships.... 264,862 -- -- 264,862
Minority interest in
consolidated
subsidiaries............ 32,112 20,410 -- 52,522
Shareholders' equity:
Preferred stock......... 44 3 (3)(H) 44
Common stock............ 1,906 61 39 (H) 2,006
Paid-in capital......... 1,649,054 17,293 141,503 (I) 1,807,850
Unearned stock compensa-
tion, net.............. (15,075) -- (15,075)
Notes receivable from
stockholders........... (17,138) -- -- (17,138)
Receivable from affili-
ates................... (1,229) -- -- (1,229)
Retained earnings....... (116,271) 39,794 (39,794)(I) (116,271)
---------- -------- -------- ----------
Total shareholders' eq-
uity................... 1,501,291 57,151 101,745 1,660,187
---------- -------- -------- ----------
Total liabilities and
shareholders' equity... $3,478,366 $118,352 $101,745 $3,698,463
========== ======== ======== ==========
</TABLE>
See notes on following page.
F-60
<PAGE>
- --------
(A) Reflects the Pro Forma Condensed Combined Balance Sheet of Patriot REIT
and Patriot Operating Company as of September 30, 1997, which reflects (i)
the Recent Transactions, including the Cal Jockey Merger; (ii) the
acquisition of the CHC Hotels, the GAH Acquisition and the CHCI Merger;
and (iii) the Wyndham Transactions. See page F-42.
(B) Represents the Consolidated Balance Sheet of WHG as of September 30, 1997.
(C) Represents adjustment for the purchase method of accounting whereby the
investment in the hotel property owned by WHG is adjusted to record the
assets at their estimated fair market values.
(D) Represents the reclassification of receivables from/advances to WHG
unconsolidated subsidiaries, stated at their historical cost which
approximates their fair value.
(E) Represents the following adjustments:
<TABLE>
<S> <C>
Adjustment to state investments in WHG unconsolidated subsid-
iaries at estimated fair market value....................... $ 18,909
Reclassify receivables from/advances to WHG unconsolidated
subsidiaries................................................ (40,308)
--------
$(21,399)
========
</TABLE>
(F) Represents purchase consideration in excess of fair market value of the
net assets of WHG.
(G) Represents adjustment for the purchase method of accounting whereby the
management contracts held by WHG are adjusted to their estimated fair
market values. WHG, through certain of its subsidiaries, holds management
contracts for the three resort hotels that it holds ownership interests
in. The contracts have remaining lives of 6 to 14 years and provide for
payment of management fees including a base fee plus certain incentive
fees based on specified criteria as defined in the respective management
agreements.
(H) Represents adjustments to record the exchange of WHG Common Stock for
Paired Shares and the conversion of the WHG Series B Convertible Preferred
Stock outstanding into its Paired Share equivalent. Pursuant to the WHG
Merger Agreement, WHG stockholders will receive 0.784 Paired Shares for
each share of WHG Common Stock held by them at the time of the WHG Merger,
subject to certain adjustments. At September 30, 1997, 6,050 shares of WHG
Common Stock were outstanding and were assumed to be exchanged for
approximately 4,743 Paired Shares (with a par value equal to $0.02 per
Paired Share) resulting in an adjustment to increase Common Stock.
At September 30, 1997, 300 shares of WHG Series B Convertible Preferred
Stock were outstanding. The preferred stock has a stated value of $10.00 per
share (plus adjustment for accrued, unpaid dividends) and is convertible
into WHG Common Stock based on a value of $9.00 per share for the WHG Common
Stock. The outstanding shares of WHG Series B Convertible Preferred Stock
were assumed to be converted into approximately 261 Paired Shares (which
represents the number of Paired Shares the holder of such preferred stock
would have the right to receive assuming conversion of such shares into WHG
Common Stock).
(I) Represents the following adjustments to shareholders' equity:
<TABLE>
<S> <C>
Purchase consideration for shares.............................. $158,899
Adjustment to preferred stock assumed to be exchanged for
Paired Shares................................................. (3)
Adjustment to Common Stock for Paired Shares issued............ (39)
Book value of WHG common stock................................. (61)
Book value of WHG paid-in capital.............................. (17,293)
--------
Adjustment to paid-in capital................................. 141,503
Elimination of WHG historical retained earnings................ (39,794)
Adjustment to preferred stock.................................. (3)
Adjustment to common stock..................................... 39
--------
Adjustment to shareholders' equity............................ $101,745
========
</TABLE>
F-61
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
WYNDHAM
INTERNATIONAL
PRO FORMA WHG PRO FORMA
TOTAL(A) HISTORICAL(B) ADJUSTMENTS TOTAL
------------- ------------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $ 547,286 $25,131 $ -- $ 572,417
Other hotel revenue.... 329,377 29,765 -- 359,142
Racecourse facility
revenue............... 51,946 -- -- 51,946
Management fee, service
fee and reimbursement
income................ 49,225 12,996 -- 62,221
Interest and other
income................ 12,262 2,084 -- 14,346
---------- ------- ------- ----------
Total revenue.......... 990,096 69,976 -- 1,060,072
---------- ------- ------- ----------
Expenses:
Departmental costs--
hotel, club and spa
operations............ 368,568 34,554 -- 403,122
Racecourse facility
operations............ 46,351 -- -- 46,351
Direct operating costs
of management company,
service department,
and reimbursement
expenses.............. 43,809 3,755 -- 47,564
General and
administrative........ 103,877 6,233 -- 110,110
Ground lease and hotel
lease expense ........ 12,502 -- -- 12,502
Repair and
maintenance........... 41,991 -- -- 41,991
Utilities.............. 36,834 -- -- 36,834
Marketing.............. 70,577 2,956 -- 73,533
Management fees........ 9,469 -- -- 9,469
Depreciation and
amortization.......... 29,425 5,549 5,969 (C) 40,943
Participating lease
payments.............. 247,218 -- -- 247,218
Interest expense....... 1,393 3,473 -- 4,866
Real estate and
personal property
taxes and insurance... 847 -- -- 847
---------- ------- ------- ----------
Total expenses......... 1,012,861 56,520 5,969 1,075,350
---------- ------- ------- ----------
Income (loss) before
equity earnings of
unconsolidated
subsidiaries........... (22,765) 13,456 (5,969) (15,278)
Equity in earnings of
unconsolidated
subsidiaries........... -- (2,896) (511)(D) (3,407)
---------- ------- ------- ----------
Income (loss) before
income tax provision
and minority
interests.............. (22,765) 10,560 (6,480) (18,685)
Income tax (provision)
benefit............... 7,532 (2,152) (733)(E) 4,647
---------- ------- ------- ----------
Income (loss) before mi-
nority interests....... (15,233) 8,408 (7,213) (14,038)
Minority interest in
the Patriot Operating
Company Partnership... 1,141 -- 218 (F) 1,359
Minority interest in
consolidated
subsidiaries.......... 5,045 (3,704) -- 1,341
---------- ------- ------- ----------
Net income (loss)
applicable to common
shareholders........... $ (9,047) $ 4,704 $(6,995) $ (11,338)
========== ======= ======= ==========
Net loss per common
share(G)............... $ (0.09) $ (0.11)
========== ==========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Wyndham International
for the year ended December 31, 1996 which reflects adjustments for (i)
the Recent Transactions, including the Cal Jockey Merger and the related
transactions; (ii) the acquisition of the CHC Hotels, the GAH Acquisition
and the CHCI Merger; and (iii) the Wyndham Transactions. See page F-49.
(B) Represents the historical consolidated results of operations of WHG for
the twelve months ended December 31, 1996 (excluding the adjustment to
reflect dividends on preferred stock of Condado Plaza Hotel & Casino).
(C) Represents an increase in depreciation and amortization which results from
the adjustment for the purchase method of accounting whereby the asset
values are adjusted to their estimated fair market value. The adjustment
represents increases in depreciation expense of $907, amortization of
goodwill of $519 and amortization of management contracts of $4,543.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for buildings and improvements and
5 to 7 years for F, F & E. Amortization of goodwill is computed using the
straight-line method over a 20-year estimated useful life. Amortization of
management contract costs is computed using the straight-line method over
the remaining terms of the related contracts.
(D) Represents adjustment to equity in earnings of unconsolidated subsidiaries
which results from the adjustment for the purchase method of accounting
whereby the investment values are adjusted to their estimated fair market
value. The adjustment to the investment balance is being amortized using
the straight-line method based upon an estimated useful life of 35 years.
(E) Represents adjustments to Wyndham International's estimated federal and
state tax provision for the WHG Merger.
(F) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the WHG Merger of approximately
10.7%. The estimated minority interest percentage prior to the WHG Merger
is approximately 11.2%.
(G) Pro forma earnings per share subsequent to the WHG Merger is computed
based on 107,547 weighted average common shares and common share
equivalents outstanding for the period. The number of shares used for the
calculation includes adjustments to reflect the impact of the conversion
of shares of Patriot Operating Company Preferred Stock into Paired Shares
and the conversion of WHG Series B Convertible Preferred Stock into Paired
Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be unchanged. The impact of Statement 128 on the calculation
of diluted earnings per share is not expected to differ significantly from
the earnings per share amounts reported.
F-62
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
WYNDHAM
INTERNATIONAL
PRO FORMA WHG PRO FORMA
TOTAL(A) HISTORICAL(B) ADJUSTMENTS TOTAL
------------- ------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Room revenue............. $459,166 $19,627 $ -- $478,793
Other hotel revenue...... 261,588 23,235 -- 284,823
Racecourse facility
revenue................. 33,399 -- -- 33,399
Management fee, service
fee and reimbursement
income.................. 45,549 11,289 -- 56,838
Interest and other
income.................. 8,507 2,017 -- 10,524
-------- ------- ------- --------
Total revenue............ 808,209 56,168 -- 864,377
-------- ------- ------- --------
Expenses:
Departmental costs--
hotel, club and spa
operations.............. 282,402 25,195 -- 307,597
Racecourse facility
operations.............. 30,114 -- -- 30,114
Direct operating costs of
management company,
service department, and
reimbursement expenses.. 40,331 3,096 -- 43,427
General and
administrative.......... 81,670 6,652 (1,000)(C) 87,322
Ground lease and hotel
lease expense........... 16,778 -- -- 16,778
Repair and maintenance... 34,512 -- -- 34,512
Utilities................ 29,841 -- -- 29,841
Marketing................ 59,095 2,239 -- 61,334
Management fees.......... 9,657 -- -- 9,657
Depreciation and
amortization............ 20,705 4,412 4,372 (D) 29,489
Participating lease
payments................ 202,610 -- -- 202,610
Interest expense......... 936 2,355 -- 3,291
Real estate and personal
property taxes and
casualty insurance ..... 290 -- -- 290
-------- ------- ------- --------
Total expenses........... 808,941 43,949 3,372 856,262
-------- ------- ------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries............ (732) 12,219 (3,372) 8,115
Equity in earnings of
unconsolidated
subsidiaries............ -- 822 (405)(E) 417
-------- ------- ------- --------
Income (loss) before
income tax provision and
minority interests....... (732) 13,041 (3,777) 8,532
Income tax (provision)
benefit................. (3,477) (3,336) 3,336 (F) (3,477)
-------- ------- ------- --------
Income (loss) before mi-
nority interests......... (4,209) 9,705 (441) 5,055
Minority interest in the
Patriot Operating
Company Partnership..... 630 -- (669)(G) (39)
Minority interest in
consolidated
subsidiaries............ (1,419) (3,273) -- (4,692)
-------- ------- ------- --------
Net income (loss)
applicable to common
shareholders............. $ (4,998) $ 6,432 $(1,110) $ 324
======== ======= ======= ========
Net income (loss) per
common share(H).......... $ (0.05) $ 0.01
======== ========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Wyndham International
for the nine months ended September 30, 1997 which reflects adjustments
for (i) the Recent Transactions, including the Cal Jockey Merger and the
related transactions; (ii) the acquisition of the CHC Hotels, the GAH
Acquisition and the CHCI Merger; and (iii) the Wyndham Transactions. See
page F-51.
(B) Represents the historical consolidated results of operations of WHG for
the nine months ended September 30, 1997 (excluding the adjustment to
reflect dividends on preferred stock of Condado Plaza Hotel & Casino).
(C) Represents adjustment to eliminate non-recurring WHG Merger related costs.
(D) Represents an increase in depreciation and amortization which results from
the adjustment for the purchase method of accounting whereby by the asset
values are adjusted to their estimated fair market value. The adjustment
represents increases in depreciation expense of $678, amortization of
goodwill of $286 and amortization of management contracts of $3,408.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for buildings and improvements and
5 to 7 years for F, F & E. Amortization of goodwill is computed using the
straight-line method over a 20-year estimated useful life. Amortization of
management contract costs is computed using the straight-line method over
the remaining terms of the related contracts.
F-63
<PAGE>
(E) Represents adjustment to equity in earnings of unconsolidated subsidiaries
which results from the adjustment for the purchase method of accounting
whereby the investment values are adjusted to their estimated fair market
value. The adjustment to the investment balance is being amortized using
the straight-line method based upon an estimated useful life of 35 years.
(F) Represents adjustments to Wyndham International's estimated federal and
state tax provision for the WHG Merger.
(G) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the WHG Merger of approximately
10.7%. The estimated minority interest percentage prior to the WHG Merger
is approximately 11.2%.
(H) Pro forma earnings per share subsequent to the WHG Merger is computed
based on 108,178 weighted average common shares and common share
equivalents outstanding for the period. The number of shares used for the
calculation includes adjustments to reflect the impact of the conversion
of shares of Patriot Operating Company Preferred Stock into Paired Shares
and the conversion of WHG Series B Convertible Preferred Stock into Paired
Shares.
In February 1997, the Financing Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be unchanged. The impact of Statement 128 on the
calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
F-64
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
INTRODUCTION TO
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
On December 2, 1997, Patriot REIT and Patriot Operating Company entered into
an Agreement and Plan of Merger (the "Patriot/IHC Merger Agreement") with
Interstate Hotels Company ("IHC"), pursuant to which IHC will merge with and
into Patriot REIT with Patriot REIT being the surviving corporation (the
"Patriot/IHC Merger"). As a result of the Patriot/IHC Merger, Patriot REIT will
acquire all of the assets and liabilities of IHC, including IHC's portfolio of
222 owned, leased or managed hotels located in the United States, Canada, the
Caribbean and Russia. Of IHC's portfolio, 40 hotels aggregating approximately
11,580 rooms are owned or controlled by IHC, 90 hotels aggregating approximately
10,354 rooms are leased and 92 hotels aggregating approximately 23,183 rooms
are managed or subject to service agreements. IHC operates its hotels under a
variety of brand names, including Marriott(R), Embassy Suites(R), Hilton(TM),
Holiday Inn(R), Radisson(TM), Westin(R), Sheraton(TM), Doubletree(TM), Residence
Inn(TM), Hampton Inn(R), Comfort Inn(TM), Homewood Suites(TM) and Colony(R). As
a result of the Patriot/IHC Merger, Patriot REIT will assume or refinance all of
IHC's existing indebtedness, which totaled approximately $776,000 million as of
September 30, 1997, will pay approximately $24,300 to buy out options to
purchase shares of common stock, par value $0.01 per share, of IHC ("IHC Common
Stock") and assume certain severance obligations of approximately $30,000.
Upon consummation of the Patriot/IHC Merger, and subject to proration as
described below, IHC stockholders may elect to convert their shares of IHC
Common Stock into the right to receive either (i) cash equal to $37.50 per share
of IHC Common Stock, (the "Patriot/IHC Cash Consideration") or (ii) Paired
Shares having a value of $37.50 pursuant to an exchange ratio (the "Patriot/IHC
Exchange Ratio") based on the average closing price of the Paired Shares
preceding the meeting of stockholders of IHC relating to the Patriot/IHC Merger
(the "Patriot/IHC Average Closing Price"). The Patriot/IHC Merger Agreement
provides that, except under certain circumstances involving the payment of cash
to IHC stockholders who exercise dissenters' appraisal rights in connection with
the Patriot/IHC Merger, approximately 40% of the total issued and outstanding
shares of IHC Common Stock (the "IHC Outstanding Shares") will be converted into
the right to receive the Patriot/IHC Cash Consideration and the remaining
approximately 60% of the IHC Outstanding Shares will be converted into the right
to receive Paired Shares at the Patriot/IHC Exchange Ratio. Accordingly, the
aggregate Patriot/IHC Cash Consideration (the "Aggregate Patriot/IHC Cash
Consideration") to be received by holders of IHC Common Stock who elect to
receive Patriot/IHC Cash Consideration generally will be an amount equal to 40%
of the IHC Outstanding Shares multiplied by $37.50, or an aggregate of
approximately $530,000 based on the number of shares of IHC Common Stock
outstanding as of December 1, 1997. The aggregate number of Paired Shares to be
received by holders of IHC Common Stock who elect to receive Paired Shares in
the Patriot/IHC Merger (the "Aggregate Paired Share Consideration") generally
will equal 60% of the IHC Outstanding Shares multiplied by the Patriot/IHC
Exchange Ratio. Upon consummation of the Patriot/IHC Merger, holders of
outstanding options to acquire IHC Common Stock will receive cash in an amount
equal to the spread between the exercise price of such options and $37.50,
except that certain senior executives of IHC may elect to have their options
assumed by Patriot REIT.
The Patriot/IHC Merger Agreement provides that, in the event that the
holders of IHC Outstanding Shares elect to receive Patriot/IHC Cash
Consideration with respect to more than 14,168,500 shares of IHC Common Stock
(approximately 40% of the IHC Outstanding Shares), such holders will receive
the Aggregate Patriot/IHC Cash Consideration on a pro rata basis based on the
respective numbers of shares of IHC Common Stock with respect to which each
such holder has elected to receive Patriot/IHC Cash Consideration. Under such
circumstances, such holders' remaining shares of IHC Common Stock that are not
converted into the right to receive Patriot/IHC Cash Consideration will be
converted into the right to receive Paired Shares at the Patriot/IHC Exchange
Ratio. In the event that the aggregate number of shares of IHC Common Stock
with respect to which the holders thereof have elected to receive Paired
Shares at the Patriot/IHC Exchange Ratio is greater than 60% of the IHC
Outstanding Shares, such holders will receive the Aggregate Paired Share
Consideration on a pro rata basis based on the respective numbers of shares of
IHC Common Stock with respect to which each such holder has elected to receive
Paired Shares. Under such circumstances, such holders' remaining shares of IHC
Common Stock that are not converted into the right to receive Paired Shares
will be converted into the right to receive Patriot/IHC Cash Consideration.
F-65
<PAGE>
Under the terms of the Patriot/IHC Merger Agreement and subject to proration
as described above, each issued and outstanding share of IHC Common Stock with
respect to which the holder thereof has made an election to receive Paired
Shares in the Patriot/IHC Merger generally will be converted into the right to
receive a number of Paired Shares equal to $37.50 divided by the Patriot/IHC
Average Closing Price. However, the Patriot/IHC Exchange Ratio is subject to
adjustment if the Patriot/IHC Average Closing Price is less than $27.97 or
greater than $34.186. If the Patriot/IHC Average Closing Price is less than
$27.97 but greater than or equal to $26.416, the Patriot/IHC Exchange Ratio will
be equal to 1.341. If the Patriot/IHC Average Closing Price is greater than
$34.186 but less than or equal to $37.294 ($38.848, if the Patriot/IHC Merger is
consummated after March 30, 1998), the Patriot/IHC Exchange Ratio will be equal
to 1.097. If the Patriot/IHC Average Closing Price is greater than $37.294
($38.848, if the Patriot/IHC Merger is consummated after March 30, 1998), the
Patriot/IHC Exchange Ratio will be equal to $40.912 ($42.616, if the Patriot/IHC
Merger is consummated after March 30, 1998) divided by the Patriot/IHC Average
Closing Price. If the Patriot/IHC Average Closing Price is less than $26.416,
the Patriot/IHC Exchange Ratio will be equal to 1.341, but IHC will have the
right to terminate the Patriot/IHC Merger Agreement unless Patriot REIT decides
to increase the Patriot/IHC Exchange Ratio to an amount equal to $35.424 divided
by the Patriot/IHC Average Closing Price and in the event Patriot REIT exercises
such right, IHC will no longer have the right to terminate the Patriot/IHC
Merger Agreement.
Following the Patriot/IHC Merger, Patriot REIT, directly or through its
subsidiaries, will own the 40 IHC hotels and will lease such hotels to Wyndham
International. The 90 hotel leases acquired by Patriot REIT subsidiaries (of
which 88 were leased by IHC as of September 30, 1997) will be sub-leased to
Wyndham International. IHC's remaining 92 management and franchise contracts,
the IHC hotel management company and other hotel management-related assets will
be transferred to corporate subsidiaries of Patriot REIT (collectively, the
"Patriot/IHC Non-Controlled Subsidiaries"). Patriot REIT will own a 99% non-
voting interest and Wyndham International will own the 1% controlling voting
interest in each of the Patriot/IHC Non-Controlled Subsidiaries. Therefore, the
operating results of the Patriot/IHC Non-Controlled Subsidiaries will be
combined with those of Wyndham International for financial reporting purposes.
Patriot REIT will account for its investment in the Patriot/IHC Non-Controlled
Subsidiaries using the equity method of accounting.
The Patriot Companies intend to enter into forward commitment arrangements to
place $200,000 of Paired Shares concurrent with the closing of the Patriot/IHC
Merger, the proceeds from which will be used to satisfy certain cash
requirements resulting from the Patriot/IHC Merger. Consummation of these
forward commitment arrangements is subject to various conditions and no
assurances can be given that the Patriot Companies will be successful in their
efforts to place $200,000 of Paired Shares concurrently with the closing of the
Patriot/IHC Merger.
The Pro Forma Financial Statements have been adjusted for the purchase
method of accounting whereby the hotels and related improvements and other
assets and liabilities owned by IHC are adjusted to estimated fair market
value. The fair market value of the assets and liabilities of IHC has been
determined based upon preliminary estimates and is subject to change as
additional information is obtained. Management does not anticipate that the
preliminary allocation of purchase costs based upon the estimated fair market
value of the assets and liabilities of IHC will materially change; however,
the allocation of purchase costs are subject to final determination based upon
estimates and other evaluations of fair market value as of the close of the
transaction. Therefore, the allocation reflected in the following unaudited
Pro Forma Financial Statements may differ from the amounts ultimately
determined.
In addition, the Patriot Companies have entered into agreements to acquire
an aggregate 95% interest in the Buena Vista Joint Venture (the "Buena Vista
Acquisition"). Patriot REIT, through certain of its subsidiaries, has entered
into a Contribution Agreement dated October 7, 1997 to acquire approximately 90%
of HVP's 45% interest in the Buena Vista Joint Venture for approximately $14,000
in cash and OP Units of the Patriot Partnerships. Patriot REIT was also granted
an option to acquire HVP's remaining interest in the Buena Vista Joint Venture.
In addition, pursuant to a Purchase and Sale Agreement dated November 6, 1997,
Patriot REIT, through certain of its subsidiaries, agreed to acquire Equitable's
55% interest in the Buena Vista Joint Venture for approximately $53,500 in cash
and also agreed to repay outstanding mezzanine debt of approximately $6,004.
Patriot REIT will acquire the participating loan investment held by Patriot
Operating Company for approximately $23,750 in
F-66
<PAGE>
cash. Subsequent to the acquisition of these joint venture interests, Patriot
REIT, through certain of its subsidiaries, will hold an aggregate 95%
ownership interest (including a 1% general partnership interest) in the Buena
Vista Joint Venture with an option to acquire the remaining 5% interest in
three years. The hotel will remain subject to a ground lease and a first
leasehold mortgage note in the amount of approximately $50,700.
The Patriot/IHC Merger is subject to various conditions, including approval
of the Patriot/IHC Merger by the stockholders of Patriot REIT, Patriot
Operating Company and IHC. In the event that the Patriot/IHC Merger Agreement
is terminated under certain circumstances, including in order to allow IHC to
pursue a superior proposal (as defined in the Patriot/IHC Merger Agreement),
IHC will be required to pay Patriot REIT a break-up fee of $50,000. Likewise,
if the Patriot/IHC Merger Agreement is terminated by IHC as a result of
Patriot REIT's failure to recommend approval of the Patriot/IHC Merger to its
stockholders, Patriot REIT will be required to pay a $50,000 break-up fee to
IHC. The Buena Vista Acquisition is subject to various conditions, including
completion of the Patriot Companies' due diligence procedures.
The following unaudited Pro Forma Condensed Combined Statements of Operations,
as adjusted for the Patriot/IHC Merger and Buena Vista Acquisition for the year
ended December 31, 1996 and the nine months ended September 30, 1997, are
derived from (i) the Patriot REIT and Wyndham International Pro Forma Condensed
Combined Statements of Operations as adjusted for the WHG Merger for the year
ended December 31, 1996 and the nine months ended September 30, 1997; (ii) the
Pro Forma Statements of Income of IHC for the year ended December 31, 1996 and
the nine months ended September 30, 1997 included elsewhere in this Joint
Current Report, (iii) the Consolidated Statements of Operations of IHC included
elsewhere in this Joint Current Report (see page ), and (iv) the statements of
operations of Royal Palace Hotel Associates for the year ended December 31, 1996
and the nine months ended September 30, 1997 included elsewhere in this Joint
Current Report. The following unaudited Pro Forma Condensed Combined Statements
of Operations assume the Patriot/IHC Merger and the Buena Vista Acquisition had
occurred on January 1, 1996.
The following unaudited Pro Forma Condensed Combined Statements of Operations
are not necessarily indicative of what the actual results of operations of
Patriot REIT and Wyndham International as adjusted for the Patriot/IHC Merger
and the Buena Vista Acquisition would have been assuming such transactions had
been completed as of January 1, 1996, nor do they purport to represent the
results of operations for future periods. Further, the unaudited Pro Forma
Condensed Combined Statement of Operations for the interim period ended
September 30, 1997 is not necessarily indicative of the results of operations
for the full year.
F-67
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
WYNDHAM
PATRIOT REIT INTERNATIONAL PRO FORMA
PRO FORMA PRO FORMA ELIMINATIONS TOTAL
------------ ------------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Participating lease
revenue................ $453,764 $ -- $(421,034)(A) $ 32,730
Hotel revenue........... -- 1,686,214 -- 1,686,214
Racecourse facility
revenue, hotel and land
lease revenue.......... 100,868 51,946 (100,534)(B) 52,280
Management fee, service
fee and reimbursement
income................. -- 102,979 -- 102,979
Interest and other
income................. 2,797 16,002 (5,916)(C) 12,883
-------- ---------- --------- ----------
Total revenue........... 557,429 1,857,141 (527,484) 1,887,086
-------- ---------- --------- ----------
Expenses:
Departmental costs--
hotel operations....... -- 682,451 -- 682,451
Racecourse facility
operations............. -- 46,351 (5,611)(B) 40,740
Direct operating costs
of management company,
service department, and
reimbursement
expenses............... -- 66,458 -- 66,458
General and
administrative......... 7,097 184,492 (34)(C) 191,555
Ground lease and hotel
lease expense.......... 99,570 100,263 (94,923)(B) 104,910
Repair and maintenance.. -- 75,549 -- 75,549
Utilities............... -- 68,535 -- 68,535
Interest expense........ 234,882 4,866 (5,882)(C) 233,866
Real estate and personal
property taxes and
casualty insurance..... 56,849 3,104 -- 59,953
Marketing............... -- 136,080 -- 136,080
Management fees......... -- 15,800 -- 15,800
Depreciation and
amortization........... 183,877 62,952 -- 246,829
Participating lease
payments............... -- 421,034 (421,034)(A) --
-------- ---------- --------- ----------
Total expenses.......... 582,275 1,867,935 (527,484) 1,922,726
-------- ---------- --------- ----------
Loss before equity in
earnings of
unconsolidated
subsidiaries, income tax
provision and minority
interests............... (24,846) (10,794) -- (35,640)
Equity in earnings of
unconsolidated
subsidiaries........... 2,096 (3,407) 5,826 (D) 4,515
-------- ---------- --------- ----------
Loss before income tax
provision and minority
interests............... (22,750) (14,201) 5,826 (31,125)
Income tax provision.... (1,045) (1,048) -- (2,093)
-------- ---------- --------- ----------
Income (loss) before
minority interests...... (23,795) (15,249) 5,826 (33,218)
Minority interests in
the Patriot
Partnerships........... (232) 1,113 -- 881
Minority interest in
consolidated
subsidiaries .......... (4,768) 2,122 (5,826)(D) (8,472)
-------- ---------- --------- ----------
Net loss applicable to
common shareholders..... $(28,795) $ (12,014) $ -- $ (40,809)
======== ========== ========= ==========
Net loss per common
Paired Share(E)......... $ (0.21) $ (0.09) $ (0.30)
======== ========== ==========
</TABLE>
- --------
(A) Represents the elimination of participating lease revenue and expense
related to those hotel properties leased by Patriot REIT to Wyndham
International.
(B) Represents the elimination of rental income and expense related to the
Racecourse facility, land leased and the hotels sub-leased by Patriot REIT
to Wyndham International.
(C) The pro forma adjustments represent the elimination of $1,170 of interest
income and expense related to a note receivable issued to Old Patriot REIT
in connection with the sale of certain assets to PAH RSI Lessee, which
assets are assumed to be acquired by Patriot Operating Company, the
elimination of $4,712 of interest income and expense related to the
Subscription Notes issued to Patriot Operating Company in connection with
the subscription for shares of Patriot Operating Company Common Stock and
Patriot Operating Company Partnership OP Units issued in connection with
the Cal Jockey Merger and the elimination of $34 of other intercompany
income and expense items.
(D) Represents the elimination of equity in losses of the New Non-Controlled
Subsidiaries and the Patriot/IHC Non-Controlled Subsidiaries.
(E) Pro forma earnings per share is computed based on 139,598 weighted average
common Paired Shares and common Paired Share equivalents outstanding for
the period. The number of shares used for the calculation includes
adjustments to reflect the impact of the conversion of preferred stock
into Paired Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be a net loss of $0.30 per Paired Share. The impact of
Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
F-68
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
WYNDHAM
PATRIOT REIT INTERNATIONAL PRO FORMA
PRO FORMA PRO FORMA ELIMINATIONS TOTAL
------------- ------------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $376,299 $ -- $ (348,932)(A) $ 27,367
Hotel revenue.......... -- 1,368,550 -- 1,368,550
Racecourse facility
revenue, hotel and
land lease revenue.... 92,336 33,399 (92,078)(B) 33,657
Management fee, service
fee and reimbursement
income................ -- 87,715 -- 87,715
Interest and other
income................ 4,043 11,738 (2,306)(C) 13,475
-------- ---------- ---------- ---------
Total revenue.......... 472,678 1,501,402 (443,316) 1,530,764
-------- ---------- ---------- ---------
Expenses:
Departmental costs--
hotel operations...... -- 525,457 -- 525,457
Racecourse facility
operations............ -- 30,114 (3,246)(B) 26,868
Direct operating costs
of management company,
service department,
and reimbursement
expenses.............. -- 59,138 -- 59,138
General and
administrative........ 7,137 145,137 (24)(C) 152,250
Ground lease and hotel
lease expense......... 90,828 93,181 (88,832)(B) 95,177
Repair and
maintenance........... -- 60,241 -- 60,241
Utilities.............. -- 53,539 -- 53,539
Interest expense....... 174,063 3,291 (2,282)(C) 175,072
Real estate and
personal property
taxes and casualty
insurance............. 43,469 2,027 -- 45,496
Marketing.............. -- 108,417 -- 108,417
Management fees........ -- 15,174 -- 15,174
Depreciation and
amortization.......... 138,430 45,996 -- 184,426
Participating lease
payments.............. -- 348,932 (348,932)(A) --
-------- ---------- ---------- ---------
Total expenses......... 453,927 1,490,644 (443,316) 1,501,255
-------- ---------- ---------- ---------
Income before equity in
earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests.... 18,751 10,758 -- 29,509
Equity in earnings of
unconsolidated
subsidiaries.......... 4,650 417 (42)(D) 5,025
-------- ---------- ---------- ---------
Income before income tax
provision and minority
interests.............. 23,401 11,175 (42) 34,534
Income tax (provision)
benefit............... (781) (7,449) -- (8,230)
-------- ---------- ---------- ---------
Income before minority
interests.............. 22,620 3,726 (42) 26,304
Minority interests in
the Patriot
Partnerships.......... (2,485) (35) -- (2,520)
Minority interest in
consolidated
subsidiaries.......... (4,159) (3,315) 42 (D) (7,432)
-------- ---------- ---------- ---------
Net income applicable to
common shareholders.... $ 15,976 $ 376 $ -- $ 16,352 (E)
======== ========== ========== =========
Net income per common
Paired Share........... $ 0.11 $ 0.00 $ 0.11 (E)
======== ========== =========
</TABLE>
- --------
(A) Represents elimination of participating lease revenue and expense related
to those hotel properties leased by Patriot REIT to Wyndham International.
(B) Represents elimination of rental income and expense related to the
Racecourse facility, land leased and the hotels sub-leased by Patriot REIT
to Wyndham International.
(C) Represents primarily the elimination of $832 of interest income and
expense related to a note receivable issued to Old Patriot REIT in
connection with the sale of certain assets to PAH RSI Lessee, which assets
are assumed to be acquired by Patriot Operating Company, the elimination
of $1,450 of interest income and expense related to the Subscription Notes
issued to Patriot Operating Company in connection with the subscription
for shares of Patriot Operating Company Common Stock and Patriot Operating
Company Partnership OP Units issued in connection with the Cal Jockey
Merger, and the elimination of $24 of other intercompany income and
expense items.
(D) Represents the elimination of equity in income of the New Non-Controlled
Subsidiaries and the Patriot/IHC Non-Controlled Subsidiaries.
(E) Pro forma earnings per share is computed based on 140,229 weighted average
common Paired Shares and common Paired Share equivalents outstanding for
the period. The number of shares used for the calculation includes
adjustments to reflect the impact of the conversion of preferred stock
into Paired Shares.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be $0.11 per Paired Share. The impact of Statement 128 on the
calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
F-69
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following unaudited Pro Forma Condensed Combined Balance Sheet is
presented as if the Patriot/IHC Merger and the Buena Vista Acquisition had
occurred as of September 30, 1997. The Pro Forma Condensed Combined Balance
Sheet is derived from the Patriot REIT and Wyndham International Pro Forma
Condensed Combined Balance Sheet as of September 30, 1997 included elsewhere
herein.
Such pro forma information is based in part upon the Consolidated Balance
Sheets of IHC and Wyndham as of September 30, 1997 which are included elsewhere
herein. This pro forma information is also based in part upon Patriot REIT's and
Patriot Operating Company's Combined Balance Sheet as of September 30, 1997
filed with the Patriot Companies' Joint Quarterly Report on Form 10-Q for the
nine months ended September 30, 1997 and such information should also be read in
conjunction with the financial statements filed in IHC's, Wyndham's, and WHG's
respective Quarterly Reports on Form 10-Q for the period ended September 30,
1997 all of which are incorporated by reference herein. In management's opinion,
all material adjustments necessary to reflect the effect of these transactions
have been made.
The accompanying Pro Forma Condensed Combined Balance Sheet reflects
adjustments to record the net assets of IHC at their estimated fair market
values and the elimination of IHC's historical shareholders' equity. The fair
market values of the assets and liabilities of IHC have been determined based
upon preliminary estimates and are subject to change as additional information
is obtained. Management does not anticipate that the preliminary allocation of
purchase costs based upon the estimated fair market values of the assets and
liabilities of IHC will materially change; however, the allocations of
purchase costs are subject to final determination based upon estimates and
other evaluations of fair market value as of the close of the transaction.
Therefore, the allocations reflected in the following unaudited Pro Forma
Condensed Combined Balance Sheet may differ from the amounts ultimately
determined. The following unaudited Pro Forma Condensed Combined Balance Sheet
is not necessarily indicative of what the actual financial position would have
been assuming such transactions had been completed as of September 30, 1997,
nor does it purport to represent the future financial position of Patriot REIT
and Wyndham International as adjusted for the Patriot/IHC Merger and the Buena
Vista Acquisition.
F-70
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PATRIOT
REIT AND
WYNDHAM BUENA
INTERNATIONAL VISTA PATRIOT/IHC
PRO FORMA ACQUISITION IHC MERGER PRO FORMA
TOTAL(A) PRO FORMA(B) HISTORICAL(C) ADJUSTMENTS(D) TOTAL
------------- ------------ ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Net investment in real
estate and related
improvements........... $2,514,216 $145,720 $1,140,291 $760,208 (E) $4,560,435
Mortgage notes and other
receivables from
unconsolidated
subsidiaries........... 116,092 -- -- -- 116,092
Notes and other
receivables from
affiliates............. 24,800 -- -- -- 24,800
Notes receivable........ 17,844 -- 5,184 (5,184)(F) 17,844
Investment in
unconsolidated
subsidiaries........... 24,545 -- 24,518 -- 49,063
Cash and cash
equivalents............ 55,275 1,064 31,924 -- 88,263
Restricted cash......... 39,132 5,222 7,745 -- 52,099
Accounts receivable,
net.................... 57,676 3,895 48,653 -- 110,224
Goodwill................ 476,790 -- 21,501 123,911 (G) 622,202
Deferred expenses, net.. 24,663 2,787 13,979 8,512 (H) 49,941
Deferred acquisition
costs.................. 39,970 (23,750) -- -- 16,220
Management contract and
leasehold costs........ 153,813 -- 28,344 101,987 (I) 284,144
Trade name and franchise
costs.................. 93,050 -- -- -- 93,050
Prepaid expenses and
other assets........... 59,101 769 25,831 -- 85,701
Deferred income taxes... 1,496 -- 2,283 -- 3,779
---------- -------- ---------- -------- ----------
Total assets........... $3,698,463 $135,707 $1,350,253 $989,434 $6,173,857
========== ======== ========== ======== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Borrowings under a line
of credit and mortgage
notes.................. $1,495,274 $123,423 $775,504 $434,124 (J) $2,828,325
Notes and other
liabilities............ 5,032 279 -- -- 5,311
Accounts payable and
accrued expenses....... 107,337 7,904 98,613 -- 213,854
Dividends and
distributions payable.. 21,727 -- -- -- 21,727
Sales taxes payable..... 2,968 -- -- -- 2,968
Deferred income tax
liability.............. 78,617 -- 13,878 13,460(K) 105,955
Deposits................ 4,033 2,023 -- -- 6,056
Deferred gain........... -- -- -- -- --
Due to unconsolidated
subsidiaries........... 5,904 -- -- -- 5,904
Minority interests in
the Patriot
Partnerships........... 264,862 2,078 -- -- 266,940
Minority interest in
consolidated
subsidiaries........... 52,522 -- 17,141 -- 69,663
Shareholders' equity:
Preferred stock........ 44 -- -- -- 44
Common stock........... 2,006 -- 354 287 (L) 2,647
Paid-in capital........ 1,807,850 -- 411,644 574,682 (M) 2,794,176
Unearned stock compen-
sation, net........... (15,075) -- (813) 813 (M) (15,075)
Notes receivable from
stockholders.......... (17,138) -- -- -- (17,138)
Receivable from affili-
ates.................. (1,229) -- -- -- (1,229)
Retained earnings...... (116,271) -- 33,932 (33,932) (M) (116,271)
---------- -------- ---------- -------- ----------
Total shareholders' eq-
uity.................. 1,660,187 -- 445,117 541,850 (M) 2,647,154
---------- -------- ---------- -------- ----------
Total liabilities and
shareholders' equity.. $3,698,463 $135,707 $1,350,253 $989,434 $6,173,857
========== ======== ========== ======== ==========
</TABLE>
See notes on following page.
F-71
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL, ADJUSTED FOR THE PATRIOT/IHC MERGER
AND BUENA VISTA ACQUISITION
NOTES TO PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997
(A) Represents the pro forma combined balance sheet of Patriot REIT and
Patriot Operating Company as of September 30, 1997 as adjusted for the
Wyndham Transactions and WHG Merger. See page F-60.
(B) Represents adjustments to Patriot REIT and Wyndham International's
combined balance sheet assuming the Buena Vista Acquisition had occurred
on September 30, 1997.
(C) Represents the historical balance sheet of IHC as of September 30, 1997.
(D) Represents adjustments to Patriot REIT and Wyndham International's
Combined balance sheet as adjusted for the Patriot/IHC Merger.
(E) Represents adjustments for the purchase method of accounting whereby the
investments in hotel properties owned by IHC are adjusted to record the
assets at their estimated fair market values.
(F) Represents adjustment to eliminate notes receivable from officers which
are to be extinguished prior to the Patriot/IHC Merger.
(G) Represents the purchase consideration in excess of the fair market value
of the net assets of IHC.
(H) Represents an increase in deferred loan costs expected to be incurred in
connection with an increase in the Revolving Credit Facility to finance
the cash portion of the purchase price and Patriot/IHC Merger related
costs.
(I) Represents adjustments for the purchase method of accounting whereby the
third-party management contracts and leaseholds held by IHC are adjusted
to their estimated fair market value. The management contracts have an
average remaining life of approximately 5 years. The leaseholds have an
average remaining life of 14 years.
(J) Represents additional borrowings assumed to be incurred in connection with
the Patriot/IHC Merger as follows:
<TABLE>
<S> <C>
Cash required to finance the acquisition of 40% of the IHC Out-
standing Shares at $37.50 per share............................. $ 531,312
Less: Net proceeds from concurrent public offering (see Note L).. (190,000)
---------
Cash required to finance stock purchase.......................... 341,312
Estimated transaction costs...................................... 30,000
Buyout of IHC options............................................ 24,300
Estimated severance costs........................................ 30,000
Additional loan costs............................................ 8,512
---------
Total cash requirements......................................... $ 434,124
=========
</TABLE>
In addition, immediately following the Patriot/IHC Merger, the shareholders of
IHC and Patriot REIT will receive a special dividend in order to distribute
the current and accumulated earnings and profits of IHC and Patriot REIT
through the date of the Patriot/IHC Merger.
(K) Represents adjustments to eliminate $11,800 of the deferred tax liability
of IHC which is associated with timing differences related to depreciation
of real property which will be owned by Patriot REIT following the
Patriot/IHC Merger offset by an increase in the deferred tax liability of
$25,260 related to purchased management contracts.
(L) Represents adjustments to record the exchange of IHC Common Stock for
Paired Shares. Pursuant to the Patriot/IHC Merger Agreement, IHC
Stockholders may elect to receive for each share of IHC Common Stock held
by them, either (i) cash for shares equal to $37.50 per share; or (ii)
Paired Shares, for which the exchange ratio is determined by dividing
$37.50 by the average closing price for a Paired Share as reported on the
NYSE over the 20 consecutive trading day period ending on the trading day
immediately preceding the fifth trading day prior to the date on which the
shareholder meeting is held (subject to certain adjustments). The
Patriot/IHC Merger Agreement also provides for purchase of 40% of the IHC
Outstanding Shares for cash, with the remainder in Paired Shares. At
September 30, 1997, there were 35,421 shares of IHC Common Stock
outstanding. Assuming 40% of the IHC Outstanding Shares are tendered for
cash, the remaining 21,253 shares will be exchanged for 25,621 Paired
Shares (based upon the average closing price of the Paired Shares for the
trading 20 days ended November 26, 1997 of $31.106). In addition, the
Patriot Companies have received a forward commitment from PaineWebber and
UBS to place $200,000 of Paired Shares concurrent with the Patriot/IHC
Merger. Assuming the Paired Shares were offered at the average closing
price of the Paired Shares for the trading 20 days ended November 26, 1997
of $31.106, an additional 6,430 Paired Shares will be outstanding
following the Patriot/IHC Merger. The increase in common stock is
summarized as follows:
<TABLE>
<S> <C>
Paired Shares exchanged in Patriot/IHC Merger........................ 25,621
Paired Shares offered in concurrent offering......................... 6,430
======
Increase in Paired Shares............................................ 32,051
Par value of each Paired Share....................................... $ 0.02
======
Increase in common stock............................................. $ 641
Less: IHC historical common stock.................................... (354)
------
Adjustment to common stock........................................ $ 287
======
</TABLE>
F-72
<PAGE>
(M) Represents adjustments to shareholders' equity to eliminate IHC's
historical equity accounts and record equity based upon the number of
Paired Shares issued in the Patriot/IHC Merger and the concurrent public
offering of Paired Shares as follows:
<TABLE>
<S> <C>
Purchase consideration for IHC Outstanding Shares (35,421 shares
of IHC Common Stock at $37.50 per share)....................... $1,328,279
Less: IHC Common Stock to be purchased for cash................. (531,312)
----------
Purchase consideration for shares............................... 796,967
Net proceeds from concurrent offering........................... 190,000
Book value of IHC paid-in capital............................... (411,644)
Adjustment to common stock...................................... (641)
----------
Adjustment to Paid-in Capital.................................. $ 574,682
----------
Elimination of IHC historical retained earnings................. (33,932)
Adjustment to unearned stock compensation....................... 813
Adjustment to common stock...................................... 287
----------
Adjustment to shareholders' equity............................. $ 541,850
==========
</TABLE>
F-73
<PAGE>
PATRIOT REIT
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT BUENA
REIT VISTA PATRIOT/IHC
PRO FORMA ACQUISITION MERGER PRO FORMA
TOTAL(A) PRO FORMA(B) ADJUSTMENTS(C) TOTAL
--------- ------------ -------------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $279,948 $22,434 $151,382 (D) $453,764
Racecourse facility,
hotel and land lease
revenue............... 17,714 -- 83,154 (E) 100,868
Interest and other
income................ 2,797 -- -- 2,797
-------- ------- -------- --------
Total revenue.......... 300,459 22,434 234,536 557,429
-------- ------- -------- --------
Expenses:
Ground lease and hotel
lease expense......... 16,824 -- 82,746 (F) 99,570
General and
administrative........ 7,097 -- -- 7,097
Interest expense....... 124,637 10,543 (G) 99,702 (G) 234,882
Real estate and
personal property
taxes and casualty
insurance............. 34,542 2,543 19,764 (H) 56,849
Depreciation and
amortization.......... 93,775 5,692 84,410 (I) 183,877
-------- ------- -------- --------
Total expenses......... 276,875 18,778 286,622 582,275
-------- ------- -------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 23,584 3,656 (52,086) (24,846)
Equity in earnings
(losses) of
unconsolidated
subsidiaries.......... 2,877 -- (781)(J) 2,096
-------- ------- -------- --------
Income (loss) before
income tax provision
and minority
interests.............. 26,461 3,656 (52,867) (22,750)
Income tax provision... (345) -- (700)(K) (1,045)
-------- ------- -------- --------
Income (loss) before mi-
nority interests....... 26,116 3,656 (53,567) (23,795)
Minority interest in
the Patriot REIT Part-
nership............... (2,428) -- 2,196 (L) (232)
Minority interest in
consolidated subsidi-
aries................. (1,832) (183) (2,753)(M) (4,768)
-------- ------- -------- --------
Net income (loss)
applicable to common
shareholders .......... $ 21,856 $ 3,473 $(54,124) $(28,795)(N)
======== ======= ======== ========
Net income (loss) per
common share........... $ 0.20 $ (0.21)(N)
======== ========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Patriot REIT for the
year ended December 31, 1996 as adjusted for the Wyndham Transactions and
WHG Merger. See page F-57.
(B) Represents adjustments to Patriot REIT's results of operations assuming
the Buena Vista Acquisition had occurred as of January 1, 1996.
(C) Represents adjustments to Patriot REIT's results of operations assuming
the Patriot/IHC Merger had occurred as of January 1, 1996.
(D) Represents pro forma lease payments from Wyndham International to Patriot
REIT for the 40 hotels Patriot REIT will own subsequent to the Patriot/IHC
Merger, based upon the historical revenue for the hotels for the period
presented.
(E) Represents pro forma hotel lease payments from Wyndham International to
Patriot REIT for the 88 hotels leased by IHC at September 30, 1997 that
Patriot REIT will sublease to Wyndham International subsequent to the
Patriot/IHC Merger, based upon the historical revenue of the hotels for
the period presented.
(F) Represents ground lease expense of $1,602 related to certain of the hotels
acquired by Patriot REIT in the Patriot/IHC Merger and hotel lease expense
of $81,144 related to the 88 hotels leased from third-party owners that
Patriot REIT will sublease to Wyndham International subsequent to the
Patriot/IHC Merger.
(G) For the Buena Vista Acquisition, the adjustment represents interest
expense on debt assumed and interest expense incurred on additional
borrowings under the Revolving Credit Facility, which will be used to
purchase the hotel. For the Patriot/IHC Merger, the adjustment represents
interest expense of $59,086 on approximately $775,504 of IHC debt assumed
in connection with the transaction, interest expense of $32,486 incurred
on borrowings which will be used to finance a portion of the Patriot/IHC
Merger, and amortization of deferred loan costs of $6,191. Amount also
represents an adjustment of $1,939 to reflect an increase in the interest
rate charged on borrowings under the Revolving Credit Facility and Term
Loan (to LIBOR plus 2%) based on Patriot REIT's estimated leverage ratio
following the Patriot/IHC Merger.
The deferred loan costs incurred on the new borrowings are being amortized
over the term of the loan. Interest expense on the Revolving Credit Facility
and Term Loan assumes an average interest rate of 7.483% (LIBOR plus 2%). An
increase of 0.25% in the interest rate
F-74
<PAGE>
would increase pro forma interest expense to $239,381, increase net loss
applicable to common shareholders to $33,140 and increase net loss per
common share to $0.24, based on 139,598 weighted average common shares and
common share equivalents outstanding.
(H) Represents real estate and personal property taxes and casualty insurance
related to the 40 IHC owned hotels which will be paid by Patriot REIT
following the Patriot/IHC Merger.
(I) Represents adjustment to increase depreciation of the real estate and
amortization of the cost of leaseholds acquired in the Patriot/IHC Merger.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for buildings and improvements and
5 to 7 years for F, F&E. These estimates are based upon management's
knowledge of the properties and the hotel industry in general. Leasehold
costs are amortized on a straight-line basis over the remaining term of
the lease.
(J) Represents Patriot REIT's share of the earnings of the Patriot/IHC Non-
Controlled Subsidiaries which will own the management contracts and hotel
management business and will be controlled by Wyndham International
following the Patriot/IHC Merger.
(K) Represents provision for Patriot REIT's estimated state tax liability.
(L) Represents adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Buena Vista Acquisition and
Patriot/IHC Merger of approximately 10%. The estimated minority interest
percentage prior to the Buena Vista Acquisition and Patriot/IHC Merger is
also approximately 10%.
(M) Represents the minority interest in income of consolidated entities which
will be acquired by Patriot REIT in connection with the Patriot/IHC
Merger.
(N) Pro forma earnings per share is computed based on 139,598 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of preferred stock into Paired Shares of
common stock.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be a net loss of $0.21 per common share. The impact of
Statement 128 on the calculation of diluted earnings per share is not
expected to differ significantly from the earnings per share amounts
reported.
F-75
<PAGE>
PATRIOT REIT
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PATRIOT
REIT BUENA VISTA PATRIOT/IHC
PRO FORMA ACQUISITION MERGER PRO FORMA
TOTAL(A) PRO FORMA(B) ADJUSTMENTS(C) TOTAL
--------- ------------ -------------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $229,977 $19,348 $126,974 (D) $376,299
Racecourse facility,
hotel and land lease
revenue .............. 19,759 -- 72,577 (E) 92,336
Interest and other
income................ 4,043 -- -- 4,043
-------- ------- -------- --------
Total revenue.......... 253,779 19,348 199,551 472,678
-------- ------- -------- --------
Expenses:
Ground lease and hotel
lease expense......... 20,017 -- 70,811 (F) 90,828
General and
administrative........ 7,137 -- -- 7,137
Interest expense....... 94,414 8,082 (G) 71,567 (G) 174,063
Real estate and
personal property
taxes and casualty
insurance............. 27,066 1,914 14,489 (H) 43,469
Depreciation and
amortization.......... 70,854 4,269 63,307 (I) 138,430
-------- ------- -------- --------
Total expenses......... 219,488 14,265 220,174 453,927
-------- ------- -------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 34,291 5,083 (20,623) 18,751
Equity in earnings
(losses) of
unconsolidated
subsidiaries.......... 6,027 -- (1,377)(J) 4,650
-------- ------- -------- --------
Income (loss) before
income tax provision
and minority
interests.............. 40,318 5,083 (22,000) 23,401
Income tax provision... (256) -- (525)(K) (781)
-------- ------- -------- --------
Income (loss) before mi-
nority interests....... 40,062 5,083 (22,525) 22,620
Minority interest in
the Patriot REIT
Partnership........... (3,819) -- 1,334 (L) (2,485)
Minority interest in
consolidated subsidi-
aries................. (1,869) (254) (2,036)(M) (4,159)
-------- ------- -------- --------
Net income (loss)
applicable to common
shareholders........... $ 34,374 $ 4,829 $(23,227) $ 15,976 (N)
======== ======= ======== ========
Net income per common
share.................. $ 0.31 $ 0.11 (N)
======== ========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Patriot REIT for the
nine months ended September 30, 1997 as adjusted for the Wyndham
Transactions and WHG Merger. See page F-58.
(B) Represents adjustments to Patriot REIT's results of operations assuming
the Buena Vista Acquisition had occurred as of January 1, 1996.
(C) Represents adjustments to Patriot REIT's results of operations assuming
the Patriot/IHC Merger had occurred as of January 1, 1996.
(D) Represents pro forma lease payments from Wyndham International to Patriot
REIT for the 40 hotels Patriot REIT will own subsequent to the Patriot/IHC
Merger, based upon the historical revenue for the hotels for the period
presented.
(E) Represents pro forma hotel lease payments from Wyndham International to
Patriot REIT for the 88 hotels leased by IHC at September 30, 1997 that
Patriot REIT will sublease to Wyndham International subsequent to the
Patriot/IHC Merger, based upon the historical revenue of the hotels for
the period presented.
(F) Represents ground lease expense of $1,138 related to certain of the hotels
acquired by Patriot REIT in the Patriot/IHC Merger and hotel lease expense
of $69,673 related to the 88 hotels leased from third-party owners that
Patriot REIT will sublease to Wyndham International subsequent to the
Patriot/IHC Merger.
(G) For the Buena Vista Acquisition, the adjustment represents interest
expense on debt assumed and interest expense incurred on additional
borrowings under the Revolving Credit Facility, which will be used to
purchase the hotel. For the Patriot/IHC Merger, the adjustment represents
interest expense of $40,657 on approximately $775,504 of IHC debt assumed
in connection with the transaction, interest expense of $24,754 incurred
on borrowings which will be used to finance a portion of the Patriot/ IHC
Merger, and amortization of deferred loan costs of $4,666. Amount also
represents an adjustment of $1,490 to reflect an increase in the interest
rate charged on borrowings under the Revolving Credit Facility and Term
Loan (to LIBOR plus 2%) based on Patriot REIT's estimated leverage ratio
following the Patriot/IHC Merger.
The deferred loan costs incurred on the new borrowings are being amortized
over the term of the loan. Interest expense on the Revolving Credit Facility
and Term Loan assumes an average interest rate of 7.603% (LIBOR plus 2%). An
increase of 0.25% in the interest rate
F-76
<PAGE>
would increase pro forma interest expense to $177,501, decrease net income
applicable to common shareholders to $12,655 and decrease net income per
common share to $0.09, based on 140,229 weighted average common shares and
common share equivalents outstanding.
(H) Represents real estate and personal property taxes and casualty insurance
related to the 40 IHC owned hotels which will be paid by Patriot REIT
following the Patriot/IHC Merger.
(I) Represents adjustment to increase depreciation of the real estate and
amortization of the cost of leaseholds acquired in the Patriot/IHC Merger.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for buildings and improvements and
5 to 7 years for F, F&E. These estimates are based upon management's
knowledge of the properties and the hotel industry in general. Leasehold
costs are amortized on a straight-line basis over the remaining term of
the lease.
(J) Represents Patriot REIT's share of the earnings of the Patriot/IHC Non-
Controlled Subsidiaries which will own the management contracts and hotel
management business and will be controlled by Wyndham International
following the Patriot/IHC Merger.
(K) Represents provision for Patriot REIT's estimated state tax liability.
(L) Represents adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Buena Vista Acquisition and
Patriot/IHC Merger of approximately 10%. The estimated minority interest
percentage prior to the Buena Vista Acquisition and Patriot/IHC Merger is
also approximately 10%.
(M) Represents the minority interest in income of consolidated entities which
will be acquired by Patriot REIT in connection with the Patriot/IHC
Merger.
(N) Pro forma earnings per share is computed based on 140,229 weighted average
common shares and common share equivalents outstanding for the period. The
number of shares used for the calculation includes adjustments to reflect
the impact of the conversion of preferred stock into Paired Shares of
common stock.
In February 1997, the Financial Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be $0.12 per common share. The impact of Statement
128 on the calculation of diluted earnings per share is not expected to
differ significantly from the earnings per share amounts reported.
F-77
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS
WYNDHAM ------------------------------------------
INTERNATIONAL BUENA VISTA PATRIOT/IHC
PRO FORMA ACQUISITION IHC MERGER PRO FORMA
TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS(D) TOTAL
------------- ------------ ------------ -------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $ 572,417 $38,089 $490,330 $ -- $1,100,836
Other hotel revenue.... 359,142 24,402 201,834 -- 585,378
Racecourse facility
revenue............... 51,946 -- -- -- 51,946
Management fee, service
fee and reimbursement
income................ 62,221 -- 40,758 -- 102,979
Interest and other
income................ 14,346 -- 1,656 -- 16,002
---------- ------- -------- -------- ----------
Total revenue.......... 1,060,072 62,491 734,578 -- 1,857,141
---------- ------- -------- -------- ----------
Expenses:
Departmental costs--
hotel, club and spa
operations............ 403,122 25,927 253,402 -- 682,451
Racecourse facility
operations............ 46,351 -- -- -- 46,351
Direct operating costs
of management company,
service department and
reimbursement
expenses.............. 47,564 -- 18,894 -- 66,458
General and
administrative........ 110,110 4,313 70,069 -- 184,492
Ground lease and hotel
lease expense ........ 12,502 4,607 1,602 81,552 (E) 100,263
Repair and
maintenance........... 41,991 2,318 31,240 -- 75,549
Utilities.............. 36,834 2,522 29,179 -- 68,535
Marketing.............. 73,533 3,681 64,394 (5,528)(F) 136,080
Management fees........ 9,469 1,677 661 3,993 (G) 15,800
Depreciation and
amortization.......... 40,943 -- 48,024 (26,015)(H) 62,952
Participating lease
payments.............. 247,218 22,434 81,144 (I) 70,238 (I) 421,034
Interest expense....... 4,866 -- 59,086 (59,086)(J) 4,866
Real estate and
personal property
taxes and insurance... 847 -- 22,021 (19,764)(J) 3,104
---------- ------- -------- -------- ----------
Total expenses......... 1,075,350 67,479 679,716 45,390 1,867,935
---------- ------- -------- -------- ----------
Income (loss) before eq-
uity earnings of uncon-
solidated subsidiaries
income tax provision,
and minority
interests.............. (15,278) (4,988) 54,862 (45,390) (10,794)
Equity in earnings of
unconsolidated subsidi-
aries.................. (3,407) -- -- -- (3,407)
---------- ------- -------- -------- ----------
Income (loss) before
income tax provision
and minority
interests.............. (18,685) (4,988) 54,862 (45,390) (14,201)
Income tax (provision)
benefit............... 4,647 -- (19,801) 14,106 (K) (1,048)
---------- ------- -------- -------- ----------
Income (loss) before mi-
nority interests....... (14,038) (4,988) 35,061 (31,284) (15,249)
Minority interest in
the Patriot Operating
Company Partnership... 1,359 -- -- (246)(L) 1,113
Minority interest in
consolidated
subsidiaries.......... 1,341 -- (2,753) 3,534 (M) 2,122
---------- ------- -------- -------- ----------
Net income (loss)
applicable to common
shareholders........... $ (11,338) $(4,988) $ 32,308 $(27,996) $ (12,014)(N)
========== ======= ======== ======== ==========
Net loss per common
share.................. $ (0.11) $ (0.09) (N)
========== ==========
</TABLE>
See notes on following page.
F-78
<PAGE>
WYNDHAM INTERNATIONAL, ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA
ACQUISITION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1996
(A) Represents the pro forma results of operations of Patriot Operating
Company for the year ended December 31, 1996 as adjusted for the Wyndham
Transactions and WHG Merger. See page F-62.
(B) Represents adjustments to Wyndham International's results of operations
assuming the Buena Vista had been acquired on January 1, 1996.
(C) Represents the pro forma results of operations of IHC for the year ended
December 31, 1996 prior to the Patriot/IHC Merger. See page .
(D) Represents adjustments to Wyndham International's results of operations
assuming the Patriot/IHC Merger had occurred as of January 1, 1996.
(E) Represents the following adjustments to pro forma ground lease and hotel
lease expense:
<TABLE>
<S> <C>
Eliminate ground lease expense which will be paid by Patriot
REIT subsequent to the Patriot/IHC Merger...................... $(1,602)
Reclassification of hotel lease expense for financial statement
presentation purposes related to the 88 hotels IHC leased from
third-party owners at September 30, 1997. Subsequent to the
Patriot/IHC Merger, these hotels will be sub-leased by Patriot
REIT to Wyndham International (see Note I)..................... 81,144
Incremental hotel lease expense related to the sub-lease of the
88 hotels by Patriot REIT to Wyndham International............. 2,010
-------
$81,552
=======
</TABLE>
(F) Represents the historical costs of IHC franchise fee payments related to
franchise agreements for ten Marriott International, Inc. hotels which are
assumed to be terminated concurrently with the Patriot/IHC Merger.
(G) Represents additional management fees to be incurred by IHC pursuant to new
management agreements with Marriott International, Inc., which are assumed
to be executed concurrently with the Patriot/IHC Merger.
(H) Represents an adjustment of $45,887 to allocate the IHC pro forma
depreciation and amortization related to real estate to Patriot REIT,
partially offset by an increase of $19,872 in amortization expense related
to amortization of goodwill and management contracts. The goodwill related
to the management business is amortized on a straight-line basis over an
estimated useful life of 20 years. Management contracts are amortized on a
straight-line basis over their estimated remaining lives of 5 years.
(I) The participating lease payment amount of $81,144 reflected in the IHC Pro
Forma Statement of Operations represents hotel lease payments made to
third parties in connection with the 88 leaseholds held by IHC as of
September 30, 1997. Following the Patriot/IHC Merger, Patriot REIT will
sublease these hotel leaseholds to Wyndham International. The pro forma
adjustment of $70,238 is composed of the following adjustments:
<TABLE>
<S> <C>
Pro forma participating lease payments related to the 40 owned
hotels leased by Patriot REIT to Wyndham International
subsequent to the Patriot/IHC Merger.......................... $151,382
Reclassification of hotel lease expense for financial statement
presentation purposes related to the 88 hotels IHC leased from
third-party owners at September 30, 1997. Subsequent to the
Patriot/IHC Merger, these hotels will be sub-leased by Patriot
REIT to Wyndham International (see Note E).................... (81,144)
--------
$ 70,238
========
</TABLE>
(J) Represents adjustments to the IHC pro forma results of operations to
eliminate interest expense and real estate and personal property taxes and
casualty insurance to be paid by Patriot REIT subsequent to the
Patriot/IHC Merger.
(K) Represents an adjustment to the IHC pro forma tax expense to reflect the
tax provision based upon Wyndham International's pro forma taxable income
following the Patriot/IHC Merger.
(L) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the Patriot/IHC Merger to
8.48%.
(M) Represents an adjustment of $2,753 to eliminate the IHC pro forma minority
interest in certain consolidated subsidiaries which will be owned by
Patriot REIT following the Patriot/IHC Merger, and an adjustment of $781
to reflect Patriot REIT's allocation of losses from the Patriot/IHC Non-
Controlled subsidiaries.
(N) Pro forma earnings per share subsequent to the Patriot/IHC Merger is
computed based on 139,598 weighted average common shares and common share
equivalents outstanding for the period. The number of shares used for the
calculation includes adjustments to reflect the impact of the conversion
of preferred stock into Paired Shares.
In February 1997, the Financing Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the year ended December
31, 1996 would be a net loss of $0.09. The impact of Statement 128 on the
calculation of diluted earnings per share is not expected to differ
significantly from the earnings per share amounts reported.
F-79
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE PATRIOT/IHC MERGER AND BUENA VISTA ACQUISITION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS
WYNDHAM ------------------------------------------
INTERNATIONAL BUENA VISTA PATRIOT/IHC
PRO FORMA ACQUISITION IHC MERGER PRO FORMA
TOTAL(A) PRO FORMA(B) PRO FORMA(C) ADJUSTMENTS(D) TOTAL
------------- ------------ ------------ -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $478,793 $31,573 $400,419 $ -- $ 910,785
Other hotel revenue.... 284,823 20,610 152,332 -- 457,765
Racecourse facility
revenue............... 33,399 -- -- -- 33,399
Management fee, service
fee and reimbursement
income................ 56,838 -- 30,877 -- 87,715
Interest and other
income................ 10,524 -- 1,214 -- 11,738
-------- ------- -------- -------- ---------
Total revenue.......... 864,377 52,183 584,842 -- 1,501,402
-------- ------- -------- -------- ---------
Expenses:
Departmental costs--
hotel, club and spa
operations............ 307,597 21,294 196,566 -- 525,457
Racecourse facility
operations............ 30,114 -- -- -- 30,114
Direct operating costs
of management company,
service department and
reimbursement
expenses.............. 43,427 -- 15,711 -- 59,138
General and
administrative........ 87,322 3,267 54,548 -- 145,137
Ground lease and hotel
lease expense ........ 16,778 3,826 1,138 71,439 (E) 93,181
Repair and
maintenance........... 34,512 2,239 23,490 -- 60,241
Utilities.............. 29,841 1,802 21,896 -- 53,539
Marketing.............. 61,334 2,529 48,962 (4,408)(F) 108,417
Management fees........ 9,657 1,464 765 3,288 (G) 15,174
Depreciation and
amortization.......... 29,489 -- 34,179 (17,672)(H) 45,996
Participating lease
payments.............. 202,610 19,348 69,673 (I) 57,301 (I) 348,932
Interest expense....... 3,291 -- 40,657 (40,657)(J) 3,291
Real estate and
personal property
taxes and insurance... 290 -- 16,226 (14,489)(J) 2,027
-------- ------- -------- -------- ---------
Total expenses......... 856,262 55,769 523,811 54,802 1,490,644
-------- ------- -------- -------- ---------
Income (loss) before eq-
uity earnings of uncon-
solidated subsidiaries
income tax provision,
and minority
interests.............. 8,115 (3,586) 61,031 (54,802) 10,758
Equity in earnings of
unconsolidated subsidi-
aries.................. 417 -- -- -- 417
-------- ------- -------- -------- ---------
Income (loss) before
income tax provision
and minority
interests.............. 8,532 (3,586) 61,031 (54,802) 11,175
Income tax (provision)
benefit............... (3,477) -- (22,418)(K) 18,446 (K) (7,449)
-------- ------- -------- -------- ---------
Income (loss) before mi-
nority interests....... 5,055 (3,586) 38,613 (36,356) 3,726
Minority interest in
the Patriot Operating
Company Partnership... (39) -- -- 4 (L) (35)
Minority interest in
consolidated
subsidiaries.......... (4,692) -- (2,036) 3,413 (M) (3,315)
-------- ------- -------- -------- ---------
Net income (loss)
applicable to common
shareholders........... $ 324 $(3,586) $ 36,577 $(32,939) $ 376 (N)
======== ======= ======== ======== =========
Net income per common
share.................. $ 0.01 $ 0.00 (N)
======== =========
</TABLE>
See notes on following page.
F-80
<PAGE>
WYNDHAM INTERNATIONAL, ADJUSTED FOR THE PATRIOT/ICH MERGER AND BUENA VISTA
ACQUISITION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997
(A) Represents the pro forma results of operations of Patriot Operating
Company for the nine months ended September 30, 1997 as adjusted for the
Wyndham Transactions and WHG Merger. See page F-63.
(B) Represents adjustments to Wyndham International's results of operations
assuming the Buena Vista had been acquired on January 1, 1996.
(C) Represents the pro forma results of operations of IHC for the nine months
ended September 30, 1997 prior to the Patriot/IHC Merger. See page .
(D) Represents adjustments to Wyndham International's results of operations
assuming the Patriot/IHC Merger had occurred as of January 1, 1996.
(E) Represents the following adjustments to pro forma ground lease and hotel
lease expense:
<TABLE>
<S> <C>
Eliminate ground lease expense which will be paid by Patriot
REIT subsequent to the Patriot/IHC merger...................... $(1,138)
Reclassification of hotel lease expense for financial statement
presentation purposes related to the 88 hotels IHC leased from
third-party owners at September 30, 1997. Subsequent to the
Patriot/IHC Merger, these hotels will be sub-leased by Patriot
REIT to Wyndham International (see Note I)..................... 69,673
Incremental hotel lease expense related to the sub-lease of the
88 hotels by Patriot REIT to Wyndham International............. 2,904
-------
$71,439
=======
</TABLE>
(F) Represents the historical costs of IHC franchise fee payments related to
franchise agreements for ten Marriott International, Inc. hotels which are
assumed to be terminated concurrently with the Patriot/IHC Merger.
(G) Represents additional management fees to be incurred by IHC pursuant to new
management agreements with Marriott International, Inc., which are assumed
to be executed concurrently with the Patriot/IHC Merger.
(H) Represents an adjustment of $32,943 to allocate the IHC pro forma
depreciation and amortization related to real estate to Patriot REIT,
partially offset by an increase of $15,271 in amortization expense related
to amortization of goodwill and management contracts. The goodwill related
to the management business is amortized on a straight-line basis over an
estimated useful life of 20 years. Management contracts are amortized on a
straight-line basis over their estimated remaining lives of 5 years.
(I) The participating lease payment amount of $69,673 reflected in the IHC Pro
Forma Statement of Operations represents hotel lease payments made to
third parties in connection with the 88 leaseholds held by IHC as of
September 30, 1997. Following the Patriot/IHC Merger, Patriot REIT will
sublease these hotel leaseholds to Wyndham International. The pro forma
adjustment of $57,301 is composed of the following adjustments:
<TABLE>
<S> <C>
Pro forma participating lease payments related to the 40 owned
hotels leased by Patriot REIT to Wyndham International
subsequent to the Patriot/IHC Merger.......................... $126,974
Reclassification of hotel lease expense for financial statement
presentation purposes related to the 88 hotels IHC leased from
third-party owners at September 30, 1997. Subsequent to the
Patriot/IHC Merger, these hotels will be sub-leased by Patriot
REIT to Wyndham International (see Note E).................... (69,673)
--------
$ 57,301
========
</TABLE>
(J) Represents adjustments to the IHC pro forma results of operations to
eliminate interest expense and real estate and personal property taxes and
casualty insurance to be paid by Patriot REIT subsequent to the
Patriot/IHC Merger.
(K) Represents an adjustment to the IHC pro forma tax expense to reflect the
tax provision based upon Wyndham International's pro forma taxable income
following the Patriot/IHC Merger.
(L) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the Patriot/IHC Merger to 8.48%
(M) Represents an adjustment of $2,036 to eliminate the IHC pro forma minority
interest in certain consolidated subsidiaries which will be owned by
Patriot REIT following the Patriot/IHC Merger, and an adjustment of $1,377
to reflect Patriot REIT's allocation of earnings from the Patriot/IHC Non-
Controlled subsidiaries.
(N) Pro forma earnings per share subsequent to the Patriot/IHC Merger is
computed based on 140,229 weighted average common shares and common share
equivalents outstanding for the period. The number of shares used for the
calculations includes adjustments to reflect the impact of the conversion
of preferred stock into Paired Shares.
In February 1997, the Financing Accounting Standards Board issued Statement
128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and convertible preferred securities will
be excluded. Pro forma basic earnings per share for the nine months ended
September 30, 1997 would be $0.00. The impact of Statement 128 on the
calculation of diluted earnings per share is not expected is not expected to
differ significantly from the earnings per share amounts reported.
F-81
<PAGE>
WYNDHAM HOTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 11,517 $ 14,819
Cash, restricted................................... 865 936
Accounts receivable, less allowance of $941 at
December 31, 1996 and $2,063
at September 30, 1997............................. 13,330 15,682
Due from affiliates................................ 12,686 16,484
Inventories........................................ 1,430 1,887
Deferred income taxes.............................. 1,539 1,975
Other.............................................. 1,412 6,894
-------- --------
Total current assets............................. 42,779 58,677
Investment in hotel partnerships.................... 1,125 4,092
Notes and other receivables from affiliates......... 7,685 8,316
Notes receivable.................................... 6,307 1,931
Property and equipment, net......................... 134,176 290,391
Management contract costs, net...................... 7,766 10,119
Security deposits................................... 15,288 24,168
Deferred income taxes............................... 14,148 14,372
Other............................................... 13,688 17,376
Goodwill............................................ -- 20,857
-------- --------
Total assets..................................... $242,962 $450,299
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............. $ 23,556 $ 45,756
Deposits........................................... 959 1,652
Deposits from affiliates........................... 344 344
Current portion of long-term debt and capital
lease obligations................................. 510 1,320
-------- --------
Total current liabilities........................ 25,369 49,072
-------- --------
Borrowings under revolving credit facility.......... -- 72,000
Long-term debt and capital lease obligations........ 129,944 155,666
Deferred income taxes............................... -- 20,970
Deferred gain....................................... 12,065 11,511
-------- --------
142,009 260,147
-------- --------
Minority interest................................... -- 2,828
-------- --------
Stockholders' equity:
Common stock....................................... 200 216
Additional paid-in capital......................... 84,342 133,137
Retained earnings.................................. 11,714 22,668
Receivables from affiliates........................ (1,223) (1,229)
Notes receivable from stockholders................. (19,449) (17,138)
Unrealized gain on securities available for sale... -- 790
Foreign currency translation adjustments........... -- (192)
-------- --------
Total stockholders' equity......................... 75,584 138,252
-------- --------
Total liabilities and stockholders' equity....... $242,962 $450,299
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-82
<PAGE>
WYNDHAM HOTEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -------------------
1996 1997 1996 1997
------- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Hotel revenues......................... $30,388 $45,310 $ 71,302 $ 128,670
Management fees........................ 1,953 2,472 6,434 6,751
Management fees--affiliates............ 4,015 5,301 10,112 13,816
Service fees........................... 426 766 1,111 1,973
Service fees--affiliates............... 763 726 1,850 1,817
Reimbursements......................... 1,503 1,761 4,636 4,934
Reimbursements--affiliates............. 2,386 2,484 6,176 6,495
Other.................................. (19) 95 320 800
------- ------- -------- ---------
Total revenues....................... 41,415 58,915 101,941 165,256
------- ------- -------- ---------
Operating costs and expenses:
Hotel expenses......................... 23,923 34,091 52,227 96,275
Selling, general and administrative
expenses.............................. 4,373 5,729 12,877 16,335
Equity participation compensation...... -- -- 2,919 --
Reimbursable expenses.................. 1,503 1,761 4,636 4,934
Reimbursable expenses--affiliates...... 2,386 2,484 6,176 6,495
Depreciation and amortization.......... 2,151 3,581 5,609 8,789
Merger expenses........................ -- 913 -- 3,632
------- ------- -------- ---------
Total operating costs and expenses... 34,336 48,559 84,444 136,460
------- ------- -------- ---------
Operating income........................ 7,079 10,356 17,497 28,796
Interest income......................... 539 503 982 1,371
Interest income--affiliates............. 180 184 536 688
Interest expense........................ (3,407) (4,664) (8,462) (11,788)
Equity in earnings of hotel
partnerships........................... -- 120 870 120
Amortization of deferred gain........... 185 185 320 554
------- ------- -------- ---------
Income before minority interests, income
taxes and extraordinary item........... 4,576 6,684 11,743 19,741
Income attributable to minority
interests.............................. -- -- (571) --
------- ------- -------- ---------
Income before income taxes and
extraordinary item..................... 4,576 6,684 11,172 19,741
Income tax (provision) benefits......... (1,807) (3,008) 10,388 (9,240)
------- ------- -------- ---------
Income before extraordinary item........ 2,769 3,676 21,560 10,501
Extraordinary item (less applicable
income tax benefits of $270 for 1996
and $195 for 1997, respectively)....... -- (298) (1,131) (298)
------- ------- -------- ---------
Net income.............................. $ 2,769 $ 3,378 $ 20,429 $ 10,203
======= ======= ======== =========
Earnings per share:
Income before extraordinary item--
primary and fully diluted............. $ .14 $ .17 $ 1.08 $ .52
Extraordinary item..................... -- (.01) (.06) (.02)
------- ------- -------- ---------
Net income--primary and fully diluted.. $ .14 $ .16 $ 1.02 $ .50
======= ======= ======== =========
Average number of common shares
outstanding............................ 20,018 21,097 20,018 20,382
======= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-83
<PAGE>
WYNDHAM HOTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1997
--------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 20,429 $ 10,203
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 5,168 7,862
Current income taxes..................................... 2,569 8,916
Deferred income taxes.................................... (12,958) 129
Provision for bad debt................................... 628 1,283
Amortization of deferred debt issuance costs............. 441 927
Write-off of predecessor deferred debt issuance costs.... 1,401 493
Amortization of deferred gain............................ (312) (691)
Equity in earnings of hotel partnership.................. -- (120)
Equity participation compensation........................ 2,919 --
Minority interest........................................ 571 --
Net withdrawals from restricted cash..................... 2,196 (71)
Changes to operating assets and liabilities:
Accounts receivable...................................... (3,887) (3,424)
Net change in due to/from affiliates..................... (10,405) (3,739)
Other.................................................... (1,273) (7,345)
Accounts payable and accrued expenses.................... 10,409 471
Deposits................................................. (1,672) 362
Security deposits........................................ (13,676) (6,917)
--------- --------
Net cash provided by operating activities............... 2,548 8,339
--------- --------
Cash flows from investing activities:
Purchase of property and equipment....................... (4,964) (23,085)
Proceeds from sale of property and equipment............. 136,374 --
Investments in management contracts...................... (575) (2,724)
Advances on notes receivable............................. (11) (1,616)
Payment for purchase of hotels, net of cash acquired..... (33,470) (8,205)
Purchase of equity investment in hotel partnerships...... -- (2,848)
Acquisition of minority interest......................... (5,479) --
Increase in long-term restricted cash.................... (1,650) (140)
Collections on notes receivable.......................... 1,724 137
--------- --------
Net cash provided by (used in) investing activities..... 91,949 (38,481)
--------- --------
Cash flows from financing activities:
Partners' contributed capital............................ 4,801 --
Partners' capital distributions.......................... (29,593) --
Distribution made to withdrawing partners................ (982) --
Increase in payable to minority interest................. (218) --
Proceeds from borrowings under revolving credit
facility................................................ -- 78,750
Repayments of revolving credit facility.................. -- (6,750)
Proceeds from issuance of common stock................... 69,504 --
Proceeds from long-term borrowings and issuance of debt.. 94,383 9,675
Repayments of long-term borrowings and capital lease
obligations............................................. (197,516) (51,293)
Collections/(advances) on notes receivable from
stockholders............................................ (18,889) 3,062
--------- --------
Net cash provided by (used in) financing activities..... (78,510) 33,444
--------- --------
Increase in cash and cash equivalents..................... 15,987 3,302
Cash and cash equivalents at beginning of period.......... 4,160 11,517
--------- --------
Cash and cash equivalents at end of period................ $ 20,147 $ 14,819
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-84
<PAGE>
WYNDHAM HOTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Wyndham Hotel Corporation ("WHC") was incorporated and formed in February
1996. The accompanying consolidated financial statements of WHC at December
31, 1996 and September 30, 1997 and for the period from May 24, 1996 through
September 30, 1996 and the quarter and nine months ended September 30, 1997
include the accounts of WHC, its wholly owned subsidiaries and certain equity
interests in hotel partnerships (collectively, the "Company"). Financial
statements for the period from January 1, 1996 through May 24, 1996 relating
to the period prior to the Company's initial public offerings include the
combined accounts of WHC, its majority owned entities and a 30% owned hotel
entity which was accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. They do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation at
September 30, 1997 have been included. Operating results for the quarter and
nine months ended September 30, 1997 are not necessarily indicative of the
operating results for the year ending December 31, 1997. These financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the annual report on Form 10-K of
the Company for the year ended December 31, 1996.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. PROPOSED MERGER WITH PATRIOT AMERICAN HOSPITALITY, INC.:
On April 14, 1997, the Company entered into a merger agreement with Patriot
American Hospitality, Inc. ("Patriot"), (as amended, the "Patriot Merger
Agreement"), pursuant to which the Company will merge with and into the
successor to Patriot ("New Patriot REIT") following Patriot's merger with and
into California Jockey Club (the "Cal Jockey Merger"), with New Patriot REIT
being the surviving company (the "Patriot Merger"). Patriot also entered into
a related stock purchase agreement with the principal stockholder of the
Company (the "Stock Purchase Agreement"), to acquire all of such stockholder's
shares of the Company's common stock (the "Stock Purchase.") The Cal Jockey
Merger was completed on July 1, 1997. As a result of the Patriot Merger and
the Stock Purchase, New Patriot REIT will acquire all of the outstanding
shares of common stock of the Company. Pursuant to the Patriot Merger
Agreement and the Stock Purchase Agreement, each outstanding share of common
stock of the Company ("Wyndham Common Stock") generally will be converted into
the right to receive 1.372 shares (the "Patriot Exchange Ratio") of common
stock of each of New Patriot REIT and Patriot American Hospitality Operating
Company ("New Patriot Operating Company"), which shares will be paired and
transferable and trade together only as a single unit (the "Paired Shares").
The Patriot Exchange Ratio is subject to adjustment in the event that the
average of the closing prices of the Paired Shares on the twenty trading days
preceding the fifth trading day prior to the Company's stockholders' meeting
called to approve the Patriot Merger (the "Average Trading Price") is less
than $21.86 per Paired Share. If the Average Trading Price is between $21.86
and $20.87 per Paired Share, the Patriot Exchange Ratio will be adjusted so
that each outstanding share of Wyndham Common Stock will be converted into the
right to receive a number of Paired Shares equal to $30.00 divided by the
Average Trading Price. If the Average Trading Price is less than $20.87 per
Paired Share, there will be no further adjustments to the Patriot Exchange
Ratio, which at that point would equate to 1.438 Paired Shares per share of
Wyndham Common Stock; however, in such circumstances, the Company has the
right, waivable by it, to terminate the Patriot Merger Agreement without
liability.
On December 9, 1997, in connection with the Patriot/IHC Merger described
below, the Patriot Merger Agreement was further amended by Amendment No. 2 (the
"Second Amendment") so that if the Effective Time of the Patriot Merger does not
occur on or prior to December 31, 1997, other than as a result of the failure,
caused by Wyndham, of certain closing conditions to be satisfied (a "Wyndham
Delay"), and the Average Trading Price is less than $27.50 but greater than or
equal to $25.50, the Patriot Exchange Ratio will be adjusted so that each share
of Wyndham Common Stock, other than shares as to which cash consideration is to
be received, will be converted into the right to receive the number of Paired
Shares equal to $37.73 divided by the Average Trading Price. If the Effective
Time of the Patriot Merger does not occur on or prior to December 31, 1997,
other than as a result of such a Wyndham Delay, and the Average Trading Price is
less than $25.50, the Patriot Exchange Ratio will be adjusted so that each share
of Wyndham Common Stock, other than shares as to which cash consideration is to
be received, will be converted into the right to receive 1.480 Paired Shares,
provided, however, that in such circumstances the Company has the right,
waivable by it, to terminate the Patriot Merger Agreement.
The Second Amendment also provides that stockholders of the Company will be
entitled to receive additional cash consideration under certain circumstances
in the event that the Patriot Merger is not consummated on or prior to January
5, 1998. In addition, the Second Amendment provides that if any dividend is
declared on the New Patriot REIT common stock or the New Patriot Operating
Company common stock the record date for which is on or after November 26, 1997
but prior to the Patriot Merger (including the dividend declared by New Patriot
REIT and payable to holders of record of New Patriot REIT Common Stock, as of
December 26, 1997), stockholders of the Company will receive additional
consideration in the Patriot Merger that will result in such stockholders
receiving the economic benefit of the dividend as if they had been holders of
Paired Shares on the dividend record date.
Under the Second Amendment, in lieu of receiving Paired Shares, the Company's
stockholders have the right to elect to receive cash in
F-85
<PAGE>
WYNDHAM HOTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an amount per share equal to $42.80, up to a maximum aggregate amount of $100
million. If stockholders holding shares of Wyndham Common Stock with a value in
excess of this amount elect to receive cash, such cash will be allocated on a
pro rata basis among such stockholders in accordance with the Patriot Merger
Agreement. In connection with the Patriot Merger, New Patriot REIT will assume
the Company's existing indebtedness, which was approximately $229.0 million as
of September 30, 1997.
In connection with the execution of the Patriot Merger Agreement, Patriot also
entered into agreements with partnerships affiliated with members of the
Trammell Crow family providing for the acquisition by New Patriot REIT of up to
11 full-service Wyndham branded hotels with 3,072 rooms, located throughout the
United States, for approximately $331.7 million in cash, plus approximately $14
million in additional consideration if two hotels meet certain operational
targets (the "Crow Acquisition" and, collectively with the Patriot Merger and
the Stock Purchase, the "Proposed Patriot Transactions"). In connection with the
execution of the Patriot/IHC Merger Agreement described below, the parties to
the agreements for the Crow Acquisition agreed in principle that the closing of
these transactions would be scheduled for December 16, 1997. The parties further
agreed in principle that if the Patriot Merger fails to close by March 31, 1998,
then additional consideration will be required to be paid under certain
circumstances.
The Patriot Merger and the Crow Acquisition are subject to various conditions
including, without limitation, the approval of the Patriot Merger and certain of
the related transactions by the stockholders of New Patriot REIT, New Patriot
Operating Company and the Company. It is currently anticipated that the
stockholder meetings to approve the Proposed Patriot Transactions will occur in
December 1997.
New Patriot REIT and New Patriot Operating Company entered into an Agreement
and Plan of Merger dated December 2, 1997 (the "Patriot/IHC Merger Agreement")
with Interstate Hotels Company ("IHC") that provides for the merger of IHC with
and into New Patriot REIT, with New Patriot REIT being the surviving corporation
(the "Patriot/IHC Merger"). If the Patriot/IHC Merger is consummated,
approximately 40% of the total issued and outstanding shares of common stock,
par value $.01 per share, of IHC (the "IHC Common Stock") will be converted into
the right to receive $37.50 in cash (the "Patriot/IHC Cash Consideration") and
the remaining approximately 60% of IHC Common Stock will be converted into the
right to receive Paired Shares having a value of $37.50 pursuant to an exchange
ratio (the "Patriot/IHC Exchange Ratio") based on an average closing price of
the Paired Shares over a specified period prior to the meeting of stockholders
of IHC relating to the Patriot/IHC Merger (the "Patriot/IHC Average Closing
Price"). The Patriot/IHC Exchange Ratio may be adjusted under certain
circumstances depending on the Patriot/IHC Average Closing Price. The
Patriot/IHC Merger is subject to certain conditions, including approval of the
Patriot/IHC Merger Agreement by the stockholders of New Patriot REIT, New
Patriot Operating Company and IHC.
On April 14, 1997, an action styled Kwalbrun v. James D. Carreker, et al., was
filed in the Delaware Court of Chancery in and for New Castle County (the
"Wyndham Stockholders' Litigation"), purportedly as a class action on behalf of
the Company's stockholders, against the Company, New Patriot REIT and the
members of the Board of Directors of the Company. The Compliant alleges that the
Company's Board of Directors breached its fiduciary duties owed to the Company's
public stockholders in connection with the Board of Directors' approval of the
Patriot Merger. In particular, the complaint alleges that the Patriot Merger was
negotiated at the expense of the Company's public stockholders, and the
Company's Board of Directors permitted Patriot to negotiate on more favorable
terms the Crow Acquisition with members of the Trammel Crow family. The
complaint seeks to enjoin, preliminarily and permanently, consummation of the
Patriot Merger under the terms presently proposed and also seeks unspecified
damages. The defendants deny the allegations in the complaint.
In November 1997 an agreement in principle was reached to settle the Wyndham
Stockholders' Litigation (and such agreement was subsequently amended in
December 1997). The settlement arrangement among other things, would require
Wyndham to provide certain additional information and an updated fairness
opinion regarding the Patriot Merger to its stockholders, increase the
limitation on certain expenses payable to the Company in connection with the
Patriot Merger, and establish certain amounts payable to the Company in the
event the Patriot Merger is not consummated on or before December 31, 1997. The
agreement is subject to approval of the Boards of Directors of both the Company
and New Patriot, execution of definitive settlement documents and obtaining
court approval.
3. FEDERAL INCOME TAXES:
Since the Company's formation in 1996, federal income taxes have been
provided in accordance with Statement of Financial Accounting Standards No.
109. For the quarter and nine months ended September 30, 1996, income taxes
included the effect of recording deferred income tax benefits arising as a
result of the Company's incorporation in the amount of $13.0 million.
4. EARNINGS PER SHARE:
Earnings per share for the quarter and nine months ended September 30, 1996
and 1997 are computed based on the weighted average number of shares of common
stock outstanding. The impact of common stock equivalents to earnings per
share is immaterial.
In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share
("EPS"). SFAS 128 requires basic EPS to be computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period and diluted EPS to reflect the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. SFAS
128 is effective for financial statements issued
F-86
<PAGE>
WYNDHAM HOTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for periods ending after December 15, 1997 and requires restatement of all
prior period EPS data presented. Earlier application is not permitted.
The impact of the implementation of SFAS 128 on the Company's consolidated
financial statements is expected to be immaterial. If SFAS 128 were adopted,
basic EPS and diluted EPS would have been as follows:
<TABLE>
<CAPTION>
NINE MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
1996 1997 1996 1997
------ ------- ------- ------
<S> <C> <C> <C> <C>
Basic EPS:
Income before extraordinary item............ $ .14 $ .17 $ 1.08 $ .51
Net income.................................. .14 .16 1.02 .50
Diluted EPS:
Income before extraordinary item............ $ .14 $ .17 $ 1.06 $ .51
Net income.................................. .14 .16 1.00 .49
</TABLE>
5. ACQUISITIONS AND RELATED BORROWINGS:
On July 31, 1997, the Company acquired Kansas City-based ClubHouse Hotels,
Inc., ("ClubHouse") a privately held chain of 17 hotels operating in the mid-
scale segment of the lodging industry. The acquisition added 2,456 rooms, or
approximately 10% to the Company's current portfolio of hotels open or under
construction. In connection with the acquisition of ClubHouse, the Company
acquired direct or indirect ownership of 13 ClubHouse hotels, ownership of
partial interests in three additional managed ClubHouse hotels, ownership of
the ClubHouse Inns brand name and one license for a franchised ClubHouse
hotel. The terms of the merger and related transactions were reached following
arms-length negotiations among the parties involved. The total consideration
paid by the Company in connection with the merger and related transactions
included (1) the issuance of 1,599,448 shares of common stock of the Company
pursuant to the merger (with the total number of shares issuable subject to a
working capital adjustment to be made in the future), (2) the assumption of
approximately $23.5 million of debt and (3) the payment of approximately $55.6
million in cash. The cash portion of the purchase price was borrowed under the
Company's revolving credit facility with Bankers Trust Company, as agent for a
group of financial institutions.
In connection with the acquisition of ClubHouse, the Company amended the
revolving credit facility to (i) increase the aggregate amount of the credit
facility by $50 million to a total of $150.0 million, (ii) make certain
revisions to the method of calculating the borrowing base, (iii) amend certain
financial covenants, (iv) permit the Company to make certain debt and equity
investments and (v) make certain other amendments.
On September 26, 1997, the Company elected to fund a cash shortfall related
to renovation costs and assumed a 67.5% interest in a hotel partnership, as
the owner of the hotel partnership failed to fund the shortfall. The Company
contributed and converted its outstanding note receivable and accrued interest
thereon totaling $5.9 million to equity.
6. MERGER EXPENSES:
During the quarter and nine months ended September 30, 1997, the Company
incurred merger expenses totaling $913,000 and $3.6 million, respectively, in
connection with the Patriot Merger. These expenses were incurred for legal
services, investment banker fees and certain other professional fees. If the
merger is consummated, the Company will incur additional investment banker
fees of approximately $4.2 million.
F-87
<PAGE>
WYNDHAM HOTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. TERMINATION OF A MANAGEMENT AGREEMENT:
On July 25, 1997, the Company agreed to the termination of its management
relationship with Homegate Hospitality Inc. ("Homegate") which operates
extended-stay hotels. The termination was effective October 31, 1997 as a
result of the pending merger of Homegate with another company in the lodging
industry and is conditioned upon the completion of such merger. The Company
will receive $12.0 million in exchange for the termination. In 1996, the
Company and Homegate entered into an agreement under which the Company would
manage up to 60 Homegate mid-price extended-stay hotels as they were purchased
or developed by Homegate prior to December 31, 1998. The Company managed 9 of
these hotels at September 30, 1997.
8. COMMITMENTS AND CONTINGENCIES:
Litigation has been initiated against the Company pertaining to the right to
use the Wyndham name for hotel service in the New York metropolitan area. On
January 29, 1996, a temporary restraining order was issued by the Supreme
Court of the State of New York which, pending the outcome of a trial, prevents
the Company from using the Wyndham name in the New York area. An adverse
decision in the litigation could prevent the Company from operating Wyndham
brand hotels or advertising the Wyndham name in connection with the operation
of a Wyndham brand hotel within a 50 mile radius of a hotel in Manhattan
operated under the "Wyndham" name. It is management's opinion, based on legal
counsel, that the range of losses resulting from the ultimate resolution of
the aforementioned claim cannot be determined. The cost of $1.3 million at
September 30, 1997 for defending the trademark has been capitalized and is
being amortized over 17 years, pending the ultimate resolution. An adverse
decision may result in the immediate write-off of those capitalized costs.
The Company received a Notice of Intent to make Sales and Use Tax audit
changes from the Tampa Region of the Florida Department of Revenue for the
period from July 31, 1990 through June 30, 1995. The audit assessed additional
taxes of $584,000, penalty of $224,000 and interest of $201,000 for a total
assessment of $1,009,000. The previous owners (an affiliate) have agreed to
indemnify the Company with respect to any additional sales and use tax paid by
the Company for the audit period. Management, after review and consultation
with legal counsel, believes the Company has meritorious defenses to this
matter and that any potential liability in excess of the $189,000 accrued in
the financial statements would not materially effect the Company's
consolidated financial statements.
The Company is the subject of the class action lawsuit described under Note
2 above. The Company has pending several other claims incurred in the normal
course of business which, in the opinion of management, based on the advice of
legal counsel, will not have a material effect on the consolidated financial
statements.
Pursuant to the terms of a management agreement with an affiliate-owned
hotel under construction, the Company has undertaken certain commitments to
provide furniture, fixtures and equipment for the hotel at a fixed price
totaling $6.0 million. As of September 30, 1997, the Company has satisfied
commitments totaling $4.8 million.
The Company has also guaranteed to fund up to $230,000 in working capital
per year for three years on a hotel in the event that the hotel generates
inadequate cash flow and the Company has guaranteed $875,000 of its
indebtedness. The Company has not to date been required to make any capital
contribution under the guarantee.
Pursuant to the terms of a management agreement of a hotel in which the
Company has a 30% ownership interest, the Company has committed to loan up to
$2.5 million for the renovation of the hotel property. The loan will bear an
interest rate of 10% and will be collateralized by the outstanding partnership
interest of the owners. Interest will be due monthly and principal is payable
in installments beginning January 1998 based on the operating income of the
hotel. As of September 30, 1997, the Company has made $619,000 of such
advances. The Company also guarantees $2,340,000 in indebtedness of this
hotel.
F-88
<PAGE>
WYNDHAM HOTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of a management agreement of a hotel owned by an
affiliate, the Company has guaranteed to fund up to $600,000 of working
capital per year to the extent the entity experiences operating deficits, with
a maximum required contribution of $2.3 million over the term of the guarantee
extending from 1995 to 2000. The Company has not to date been required to make
any capital contribution under the guarantee.
The Company is subject to environmental regulations related to the
ownership, management, development and acquisition of real estate (hotels).
The cost of complying with the environmental regulations was not material to
the Company's consolidated statements of income for the nine months ended
September 30, 1996 and 1997. The Company is not aware of any environmental
condition on any of its properties which is likely to have a material adverse
effect on the Company's financial statements.
9. PRO FORMA FINANCIAL INFORMATION:
The pro forma condensed consolidated statements of income of the Company are
presented as if the ClubHouse Merger had occurred on January 1, 1996. These
pro forma condensed consolidated statements are presented for informational
purposes only and are not necessarily indicative of what actual results of
operations of the Company would have been assuming such transactions had been
completed as of January 1, 1996, nor do they purport to represent the results
of operations for future periods.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1996 1997
----------- -----------
(IN THOUSANDS, EXCEPT,
PER SHARE AMOUNTS)
<S> <C> <C>
Total revenues..................................... $ 128,121 $ 186,204
Operating income................................... 25,319 34,102
Income before extraordinary item................... 23,124 21,337
Earnings before extraordinary item per common share
outstanding....................................... 1.07 .56
</TABLE>
10. CONDENSED COMBINED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES:
In connection with the issuance of the $100 million subordinated notes
("Notes"), all of the Company's direct and indirect subsidiaries, with the
exception of a number of subsidiaries (which subsidiaries are individually and
collectively inconsequential), are fully and unconditionally guaranteeing the
Company's obligations under the Notes on a joint and several basis (the
"Guarantor Subsidiaries"). Accordingly, the condensed combined financial
information set forth below summarizes financial information for all of the
Guarantor Subsidiaries on a combined basis. Separate complete financial
statements and other disclosure for the Guarantor Subsidiaries have not been
presented because management does not believe that such information is
material to investors. The condensed combined financial information of the
Guarantor Subsidiaries as of December 31, 1996 and September 30, 1997, and for
the quarter and nine months ended September 30, 1996 and 1997 are presented as
follows:
F-89
<PAGE>
GUARANTOR SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 9,673 $ 17,725
Cash, restricted.................................. 865 469
Accounts receivable, net.......................... 22,085 40,815
Other............................................. 2,466 4,159
-------- --------
Total current assets............................ 35,089 63,168
Notes and other receivables from affiliates......... 7,685 8,316
Notes receivable.................................... 1,978 1,931
Investments in hotel partnerships................... -- 3,907
Property and equipment, net......................... 61,062 190,374
Management contract costs, net...................... 8,166 10,119
Security deposits................................... 15,105 24,041
Other............................................... 2,502 5,279
-------- --------
Total assets.................................... $131,587 $307,135
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $ 18,169 $ 32,139
Deposits.......................................... 1,147 1,365
Current portion of long-term debt and capital
lease obligations................................ 510 1,070
Due to affiliates................................. 42,666 164,002
-------- --------
Total current liabilities....................... 62,492 198,576
-------- --------
Long-term debt and capital lease obligations........ 29,944 52,440
-------- --------
Minority interest................................... -- 3,369
-------- --------
Stockholder's equity:
Receivable from affiliates........................ (1,223) (1,229)
Additional paid-in capital........................ 31,071 31,071
Retained earnings................................. 9,303 22,908
-------- --------
Total stockholder's equity...................... 39,151 52,750
-------- --------
Total liabilities and stockholder's equity.... $131,587 $307,135
======== ========
</TABLE>
See note to the condensed combined financial information.
F-90
<PAGE>
GUARANTOR SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -------------------
1996 1997 1996 1997
------- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................... $33,422 $40,441 $ 82,280 $ 126,463
------- ------- -------- ---------
Operating costs and expenses........... 25,514 34,668 61,298 97,362
Depreciation and amortization.......... 1,180 2,281 3,352 5,174
------- ------- -------- ---------
Total operating costs and expenses... 26,694 36,949 64,650 102,536
------- ------- -------- ---------
Operating income....................... 6,728 3,492 17,630 23,927
Interest expense, net.................. (338) (596) (2,128) (1,079)
Equity in earnings of hotel
partnerships.......................... -- 118 870 118
------- ------- -------- ---------
Income before minority interests,
income taxes and extraordinary item... 6,390 3,014 16,372 22,966
Income (loss) attributable to minority
interests............................. -- (15) 571 (15)
------- ------- -------- ---------
Income before income taxes and
extraordinary item.................... 6,390 3,029 15,801 22,981
Income taxes........................... 2,524 1,197 3,325 9,078
------- ------- -------- ---------
Income before extraordinary item....... 3,866 1,832 12,476 13,903
Extraordinary item (less applicable
taxes)................................ -- (298) (1,028) (298)
------- ------- -------- ---------
Net income........................... $ 3,866 $ 1,534 $ 11,448 $ 13,605
======= ======= ======== =========
</TABLE>
See note to the condensed combined financial information.
F-91
<PAGE>
GUARANTOR SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1997
--------- --------
(UNAUDITED)
<S> <C> <C>
Net cash provided by operating activities.................. $ 3,618 $ 16,694
--------- --------
Cash flows from investing activities:
Purchase of property and equipment....................... (3,581) (9,985)
Sale of property and equipment........................... 133,778 --
Investments in management contracts...................... (575) (2,724)
Advances on notes receivable from affiliates............. (11) (619)
Advances on other notes receivable....................... -- (53)
Advances on collection on notes receivables.............. -- 117
Payment for purchase of hotels, net of cash acquired..... (2,520) --
Acquisition of minority interest......................... (5,479) --
Decrease (increase) in long-term restricted cash......... (1,296) 778
Other.................................................... 1,674 --
--------- --------
Net cash provided by (used in) investing activities.... 121,990 (12,486)
--------- --------
Cash flows from financing activities:
Partners' contributed capital............................ 26,502 --
Partners' capital distributions.......................... (42,572) --
Decrease (increase) in receivables from affiliates....... 5,327 (20,726)
Increase in payables to affiliates....................... 32,379 25,105
Decrease in payable to minority interest................. (218) --
Proceeds from long-term borrowings....................... 2,500 9,675
Repayment of long-term debt and capital lease
obligations............................................. (148,195) (10,210)
--------- --------
Net cash provided by (used in) financing activities.... (124,277) 3,844
--------- --------
Increase in cash and cash equivalents...................... 1,331 8,052
Cash and cash equivalents at beginning of period........... 3,708 9,673
--------- --------
Cash and cash equivalents at end of period................. $ 5,039 $ 17,725
========= ========
</TABLE>
NOTE TO CONDENSED COMBINED FINANCIAL INFORMATION:
(1) The foregoing condensed combined financial information includes GHALP
Corporation, Waterfront Management Corporation, WHCMB, Inc., Wyndham
Management Corporation, Wyndham Hotels & Resorts (Aruba) N.V., WHC Vinings
Corporation, WH Interest, Inc., Wyndham IP Corporation, Rose Hall
Associates, L.P., XERXES Limited, WHC Caribbean, Ltd., WHC Development
Corporation, WHC Franchise Corporation, WHCMB Overland Park, Inc., WHCMB,
Toronto, Inc., WHC Columbus Corporation, Wyndham Hotels & Resorts
Management Ltd., WHC Salt Lake City Corporation, WHC Airport Corporation,
ClubHouse Hotels, Inc., CHMB, Inc., MBAH, Inc., PSMB, Inc., GHMB, Inc. and
a management subsidiary for a non-branded hotel. They all are wholly-owned
subsidiaries of the Company at September 30, 1997.
F-92
<PAGE>
11. SUBSEQUENT EVENTS:
Subsequent to September 30, 1997, the Company borrowed an additional $20.5
million under the revolving credit facility. Of the amount borrowed, $6.5
million was used to fund the purchase of the remaining interest in a hotel
property managed by ClubHouse of which the Company owned a 5% interest at
September 30, 1997 through the ClubHouse merger. The remaining balance was
used to fund renovation costs, to make security deposits on hotel properties
to be acquired and leased and to make interest payment on the Company's 10
1/2% Senior Subordinated Notes due 2006.
F-93
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners
Crow Family Hotel Partnerships
We have audited the accompanying combined balance sheets of Crow Family Hotel
Partnerships (identified in Note 1) (collectively the "Partnerships") as of
December 31, 1996 and 1995 and the related combined statements of operations,
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnerships' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined financial statements were prepared to present the
balance sheets and related results of operations and cash flows of the
Partnerships, which are to be acquired by Patriot American Hospitality, Inc.,
and may not necessarily reflect the financial position, results of operations
and cash flows of the Partnerships that might have resulted had they actually
operated as a stand-alone entity.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Partnerships as of December 31, 1996 and 1995 and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Dallas, Texas
September 17, 1997
F-94
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
------------------------------ ----------------
1995 1996 1997
-------------- -------------- ----------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 1,277 $ 2,127 $ 2,488
Cash, restricted........................................... 2,532 3,058 2,738
Accounts receivable, less allowance of $103 and $96 in 1995
and 1996................................................... 4,660 6,118 6,703
Inventories................................................ 925 946 861
Prepaid expenses and other................................. 1,102 1,359 907
-------- -------- --------
Total current assets................................... 10,496 13,608 13,697
-------- -------- --------
Cash, restricted for noncurrent assets...................... 4,093 2,764 2,640
Property and equipment, net................................. 150,617 162,908 165,140
Other assets................................................ 8,285 8,230 8,584
-------- -------- --------
Total assets........................................... $173,491 $187,510 $190,061
======== ======== ========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses....................... $ 16,673 $ 17,256 $ 14,769
Due to affiliates........................................... 4,278 384 1,724
Due to operator............................................. 1,925 2,778 2,167
Advance deposits............................................ 759 1,163 964
Current portion of long-term debt (net of discount of $1,779
and $1,746 in 1995 and 1996) and capital lease obligations. 1,827 67,996 66,261
-------- -------- --------
Total current liabilities.................................. 25,462 89,577 85,885
-------- -------- --------
Advances from partners...................................... 4,679 4,911 4,818
Long-term debt and capital lease obligations................ 202,104 146,239 149,776
-------- -------- --------
206,783 151,150 154,594
-------- -------- --------
Commitments and contingencies
Partners' deficit........................................... (58,754) (53,217) (50,418)
-------- -------- --------
Total liabilities and partners' deficit................ $173,491 $187,510 $190,061
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-95
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------- ---------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- --------------- ----------------
(UNAUDITED)
---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms................................... $ 42,588 $ 50,652 $ 64,362 $47,714 $ 58,044
Food and beverage....................... 30,275 33,217 35,137 24,827 28,400
Telephone............................... 2,413 3,464 4,386 3,270 3,300
Other departmental revenues............. 2,178 2,821 3,070 2,311 2,455
Other income............................ 663 1,190 1,753 1,136 1,393
-------- -------- -------- ------- --------
78,117 91,344 108,708 79,258 93,592
-------- -------- -------- ------- --------
Operating costs and expenses:
Rooms................................... 10,364 12,587 15,078 11,111 12,903
Food and beverage....................... 21,260 24,010 25,937 18,549 21,197
Telephone............................... 1,052 1,412 1,608 1,203 1,316
Lease expense........................... 1,964 1,982 1,993 1,472 1,554
Management fees......................... 3,238 3,951 5,349 3,771 4,279
Energy costs............................ 3,338 4,151 4,351 3,386 3,744
Property insurance and taxes............ 2,892 3,462 3,783 2,895 3,018
General and administrative.............. 15,841 19,065 22,309 16,336 18,138
Depreciation and amortization........... 5,877 6,569 8,136 5,143 7,176
Other expenses.......................... 2,359 2,483 3,066 1,490 2,163
-------- -------- -------- ------- --------
68,185 79,672 91,610 65,356 75,488
-------- -------- -------- ------- --------
Operating income...................... 9,932 11,672 17,098 13,902 18,104
Interest income............................ 85 179 76 - -
Interest expense........................... (16,182) (18,213) (19,008) (13,400) (15,318)
-------- -------- -------- ------- --------
Net income (loss).......................... $ (6,165) $ (6,362) $ (1,834) $ 502 $ 2,786
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-96
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
COMBINED STATEMENTS OF PARTNERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1993................................................................ $(85,133)
Capital contributions.................................................................... 13,074
Contribution of note payable............................................................. 11,608
Capital distributions.................................................................... (610)
Net loss................................................................................. (6,165)
--------
Balance at December 31, 1994................................................................ (67,226)
Capital contributions.................................................................... 16,379
Capital distributions.................................................................... (1,545)
Net loss................................................................................. (6,362)
--------
Balance at December 31, 1995................................................................ (58,754)
Capital contributions.................................................................... 7,740
Capital distributions.................................................................... (369)
Net loss................................................................................. (1,834)
--------
Balance at December 31, 1996................................................................ (53,217)
Capital contributions (unaudited)........................................................ 3,287
Capital distributions (unaudited)........................................................ (3,274)
Net income (unaudited)................................................................... 2,786
--------
Balance at September 30, 1997 (unaudited)................................................... $(50,418)
========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-97
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------- ----------------
1994 1995 1996 1997
-------------- -------------- -------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,165) $ (6,362) $ (1,834) $ 2,786
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization................................. 5,877 6,569 8,136 7,176
Amortization of loan cost..................................... 368 686 521 601
(Increase) decrease in accounts receivable.................... (2,423) 1,393 (1,458) (585)
(Increase) decrease in inventories............................ (242) 24 (21) 85
(Increase) decrease in prepaid expenses....................... (65) 215 (257) 452
Decrease (increase) in other assets........................... 416 (1,465) (596) (1,731)
Increase (decrease) in accounts payable and accrued
expenses................................................. 3,803 1,934 583 (2,487)
Net increase (decrease) in due to affiliates.................. 181 (2,881) (3,894) 1,340
Increase (decrease) in due to operator........................ 147 628 853 (611)
Increase (decrease) in advance deposits....................... 3 188 404 (199)
(Increase) decrease in restricted cash........................ (423) 3,552 (526) 320
-------- -------- -------- -------
Net cash provided by operating activities..................... 1,477 4,481 1,911 7,147
-------- -------- -------- -------
Cash flows from investing activities:
Property and equipment additions.............................. (27,512) (37,295) (20,297) (8,632)
(Increase) decrease in cash restricted for noncurrent assets.. (1,056) (2,561) 1,329 124
-------- -------- -------- -------
Net cash used in investing activities......................... (28,568) (39,856) (18,968) (8,508)
-------- -------- -------- -------
Cash flows from financing activities:
Net (decrease) increase in advances from partners............. (668) 970 232 (93)
Proceeds from long-term debt.................................. 22,256 21,773 13,249 3,705
Repayments of long-term debt and capital lease obligations... (6,487) (2,601) (2,945) (1,903)
Partners' contributions...................................... 13,074 16,379 7,740 3,287
Partners' distributions...................................... (610) (1,545) (369) (3,274)
Other........................................................ (902) - - -
-------- -------- -------- -------
Net cash provided by financing activities................ 26,663 34,976 17,907 1,722
-------- -------- -------- -------
(Decrease) increase in cash and cash equivalents.............. (428) (399) 850 361
Cash and cash equivalents at beginning of year................ 2,104 1,676 1,277 2,127
-------- -------- -------- -------
Cash and cash equivalents at end of year $ 1,676 $ 1,277 $ 2,127 $ 2,488
======== ======== ======== =======
Supplemental cash flow information:
Cash paid for interest $ 14,602 $ 17,210 $ 19,751 $18,325
Noncash activity:
Capital lease obligations 265 259 - -
Interest added to principal of notes payable 401 448 1,161 -
Contribution of note payable 11,608 - - -
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-98
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. COMBINED PARTNERSHIPS DESCRIPTION AND BASIS OF PRESENTATION:
The accompanying combined financial statements include the accounts of
10 hotel partnerships (the "Partnerships") which are owned by various
corporations, partnerships and joint ventures. These partnerships are
beneficially owned or controlled by various members of the family of
Trammell Crow. The Partnerships along with Wyndham Hotel Corporation
("WHC"), which manages the 10 hotels, are being considered for acquisition
by Patriot American Hospitality, Inc., a publicly traded real estate
investment trust ("REIT").
The accompanying combined financial statements were prepared to present
the balance sheets and related results of operations and cash flows of the
Partnerships and may not necessarily reflect the financial position, results
of operations and cash flows of the Partnerships that might have resulted
had they actually operated as a stand-alone entity.
The accounts of the Partnerships and related hotels consist of the
following hotel entities:
<TABLE>
<CAPTION>
Partnerships Hotels
------------ ------
<S> <C>
Hotel Bel Age Associates, L.P. Wyndham Bel Age
Franklin Plaza Associates Wyndham Franklin Plaza
Itasca Hotel Company Wyndham Northwest Chicago
WHC-LG Hotel Associates, L.P. Garden Hotel at LaGuardia Airport
CLC Limited Partnership Wyndham Garden Hotel-Las Colinas
Novi Garden Hotel Associates Wyndham Garden Hotel-Novi
Pleasanton Hotel Associates, Ltd. Wyndham Garden Hotel-Pleasanton
Wood Dale Garden Hotel Partnership Wyndham Garden Hotel-Wood Dale
Convention Center Boulevard Hotel, Limited Wyndham Riverfront
Hotel and Convention Center Partners I-XI, Ltd. Wyndham Palm Springs
</TABLE>
Interim Financial Statements
The interim financial statements have been prepared by the Partnerships
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations; nevertheless, management believes
that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Partnerships with respect to
the results of their operations for the interim periods from January 1, 1996
to September 30, 1996, and from January 1, 1997 to September 30, 1997, have
been included herein. The results of operations for the interim periods are
not necessarily indicative of the results for the full year.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amount of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
F-99
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially subject the Partnerships to
concentration of credit risk consist principally of cash investments. The
Partnerships maintain cash and cash equivalents in accounts with major
financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. Management believes credit risk related to these
deposits is minimal.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents
For purposes of reporting cash flows, all highly liquid debt instruments
with original maturities of three months or less are considered to be cash
equivalents.
Restricted cash consists of amounts in escrow for the payment of property
taxes and interest. Cash restricted for noncurrent assets consists of a
reserve for fixed asset repairs and replacements and hotel renovations.
Inventories
Inventories consisting of food, beverage, china, linen, glassware,
silverware, uniforms and supplies are stated at cost which approximates
market, with cost determined using the first-in, first-out method.
Property and Equipment
Buildings and site improvements are carried at cost and are depreciated
using the straight-line method over 40 and 20 years, respectively. Furniture
and equipment are recorded at cost and are depreciated using the straight-line
method over their estimated useful lives of approximately 5 years. Normal
repairs and maintenance are charged to expense as incurred.
Investment in property is recorded at cost, except when it has been
determined that the property has sustained a permanent impairment in value.
At such time, a write-down is recorded to reduce the property to its estimated
recoverable amount. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
Cost of assets under construction are reported as construction in progress.
Construction in progress is not depreciated until the construction is
completed and the related assets are in use. Interest and taxes incurred
during the construction period are capitalized as part of the building cost.
F-100
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Other Assets
Other assets consist primarily of unamortized loan costs, capitalized
organization costs and capitalized lease acquisition costs. Other assets are
stated at cost, except when it has been determined that the asset has
sustained a permanent impairment in value. These costs are amortized using
the straight-line method over the following periods:
Loan costs Over the term of the loan
Organization costs 60 months
Preopening expenses 12 months
Lease acquisition costs Over the term of the lease
Income Taxes
The Partnerships are not taxable entities and the results of their
operations are included in the tax returns of the partners. The Partnerships'
tax returns and the amount of allocable income or loss are subject to
examination by federal and state taxing authorities. If such examinations
result in changes to income or loss, the tax liability of the partners could
be changed accordingly.
Revenue Recognition
Room, food and beverage, telephone and other revenues are recognized when
earned.
Self-Insurance
The Partnerships are self-insured for various levels of general liability,
workers' compensation and employee medical coverages. The general and auto
liability premiums are paid to a related party who maintains a loss reserve
fund. Workers' compensation premiums are paid to an independent insurance
company. The Partnerships' workers' compensation insurance is subject to a
"retro adjustment" which could result in additional premiums or a refund of
premiums based on actual claims settled by the insurance company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31
--------------------------------------
1995 1996
------------------ ------------------
<S> <C> <C>
Land $ 17,575 $ 20,924
Buildings 133,761 147,881
Furniture, fixtures and equipment 17,854 23,065
Construction in progress 12,329 8,345
-------- --------
181,519 200,215
Less accumulated depreciation (30,902) (37,307)
-------- --------
$150,617 $162,908
======== ========
</TABLE>
Substantially all the Partnerships' property and equipment are pledged as
collateral for mortgage notes payable.
F-101
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS:
The Partnerships entered into management agreements with a wholly-owned
subsidiary of Wyndham Hotel Corporation (the "Operator"). These management
agreements, having terms ranging from 10 to 22 years, provide for base
management fees and chain service fees ranging from 2.5% to 5% of gross
revenues, plus incentive fees ranging from 14% to 25% of income after fixed
charges or excess cash, as defined in the respective management agreements.
The Partnerships incurred incentive management fees of $509,000, $870,000 and
$1,638,000, during the years ended December 31, 1994, 1995 and 1996,
respectively. In addition, the agreements require the Partnerships to pay a
marketing contribution to the Operator equal to 1.5% of monthly room revenues.
The Partnerships made marketing contributions of $639,000 $760,000 and
$965,000 in 1994, 1995 and 1996, respectively. Due to operator represents
management fees, chain service fees and other expenses payable to the
Operator.
The Partnerships receive services from and provide services to affiliates,
which are reimbursed in the normal course of business. In 1994, 1995 and
1996, the Partnerships reimbursed the Operator for services such as
administrative, tax, legal, accounting, finance, risk management, sales and
central reservations totaling $1,132,000, $1,409,000, and $1,404,000,
respectively.
Certain partnerships, in the normal course of business, have made advances
to or received advances from (including operating deficit loans) the partners
and their affiliates. Such amounts are classified as "Due to affiliates" in
the accompanying combined financial statements and accrue interest at rates
ranging from 2.62% to 10%. Interest expense of $222,000, $305,000, and
$303,000 in 1994, 1995 and 1996, respectively, on advances from partners and
affiliates is included in other accrued expenses in the accompanying combined
financial statements. No due dates have been specified for these advances and
such advances may be repaid from available cash flow.
Pursuant to one of the partnership agreements, the general partner of the
partnership earns an annual management fee for services rendered in connection
with the business of the partnership equal to 1% of gross revenues ($207,000,
$220,000 and $233,000 in 1994, 1995 and 1996, respectively). Unpaid general
partner management fees are classified as "Due to affiliates" in the
accompanying combined financial statements.
The Partnerships participate in a centralized cash management system with
affiliates who are excluded from these combined financial statements. Gross
receipts from the hotels are deposited into the centralized cash management
system, from which operating expenses and other disbursements are paid. The
net position with the pool is reported as "Due to affiliates" in the
accompanying combined financial statements.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31
-----------------------------------------
1995 1996
-------------------- -------------------
<S> <C> <C>
Accounts payable $ 3,943 $ 4,350
Taxes 2,417 2,433
Accrued interest 6,716 5,973
Payroll and related costs 2,230 2,628
Other 1,367 1,871
------- -------
$16,673 $17,255
======= =======
</TABLE>
F-102
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT:
Substantially all of the hotel property is pledged as collateral for long-
term debt consisting of the following (in thousands):
<TABLE>
<CAPTION>
December 31
------------------------------------------
1995 1996
-------------------- --------------------
<S> <C> <C>
Mortgage note, bearing interest at 10% with monthly payments of interest
only, maturing August 1, 1997. The note was extended until December 31,
1997, for a fee of $33,333.................................................... $ 11,308 $ 11,308
Mortgage note, bearing interest at 10%, with monthly payments of interest
only at 5%, pay rate increasing 1% per year (7% and 8% at December 31,
1995 and 1996). Net cash flow, as defined, is payable quarterly and is
applied first to deferred interest with balance, if any, applied to
principal. The note matured August 1, 1997, but was extended until
December 31, 1997, for a fee of $33,333. Monthly interest payments at 10%
are due beginning September 1, 1997, through maturity......................... 7,627 6,662
Note payable to a financial institution, for which payment is guaranteed by
certain partners, bearing interest at 9.75%. Interest only is payable
through November 1, 1996, with principal and interest payable in monthly
installments commencing November 1, 1996. Additional interest of 30% of
net cash flow, as defined, is payable quarterly. Note matures October 31,
2000.......................................................................... 8,500 8,470
Mortgage note, bearing interest at 10%, with monthly payments of interest
only. Note matures August 1, 1997. The note was extended until December
31, 1997, for a fee of $33,333................................................ 10,521 10,521
Mortgage note, bearing interest at 10.71%, with current pay rate of 6.5%
increasing to 8.5% on January 1, 1997, with annual increases of .5% per
year to maturity. The difference between the amount of interest accrued
and that paid is payable quarterly from available gross income, as
defined. The amounts accrued at December 31, 1995 and 1996, respectively,
were $3,132,000 and $1,866,000. In addition, additional interest, based
on net cash flows, as defined, is payable through December 31, 1997. No
additional interest was paid in 1994, 1995, or 1996. At maturity, April
1, 2001, or upon sale, an additional amount equal to 40% of the residual
value, as defined, is due .................................................... 47,000 47,000
Noninterest bearing mortgage shortfall payable, maturing April 1, 2001.......... 2,917 2,917
Mortgage note, bearing interest at 9.82%, principal and interest payable in
monthly installments through October, 1999, maturing October 13, 1999......... 10,781 10,591
Mortgage note, bearing interest at annually increasing rates ranging from
5.78% to 13.07%. Specified interest payments are due monthly, with the
difference between the amount of interest paid and accrued at the contract
rate added to the principal of the note. Additional interest is due
quarterly equal to 30% of adjusted gross revenue, as defined. The note
matures on October 13, 2004. At maturity, the lender is due Shared
Appreciation Interest, as defined. The note is callable after February 1,
2000. The loan has an interest reserve account of $1,028,000 and
$1,000,000, as of December 31, 1995 and 1996, respectively. The related
partnership may make withdrawals from this reserve to cover any interest
shortfalls, as defined. The loan agreement provides for a release of the
interest reserve account to the related partnership after October 1, 1997,
if certain conditions are met................................................ 9,219 9,378
</TABLE>
F-103
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31
--------------------------------------------
1995 1996
--------------------- ---------------------
<S> <C> <C>
Mortgage note, bearing interest at 11%, principal and interest payable
monthly through July 1997, and maturing August 1997. The note was
extended until December 31, 1997, for a fee of $120,922. Interest is
payable on the first of each month, beginning September 1, 1997, through
maturity at a rate equal to the sum of LIBOR plus 300 basis points.............. 24,928 24,446
Note payable, due on April 21, 2003, or on demand by lender....................... 10 10
Mortgage note, bearing interest at 9.25% with interest only. Payments
through January 1, 1998, and principal and interest payable monthly
beginning February 1, 1998, based upon a twenty year amortization. In
addition, net cash flow, as defined, is payable quarterly. On December
31, 2000, all remaining principal and interest are due, net cash flow, as
defined, payable quarterly...................................................... 6,876 12,610
Mortgage note, bearing interest at an initial rate of 9.125%, adjusted for
the Citibank Base Rate plus .625%. All principal and interest payable on
January 12, 1997, extended to April 12, 1997. The loan was subsequently
refinanced with a $13,750,000 note bearing interest at 8.25%., with
monthly payments of principal and interest totaling $118,150 through
September 2001, with the remaining balance due October 1, 2001.................. 6,105 13,430
Certificates of Participation, bearing interest at a variable rate,
adjusted weekly to be the rate necessary to remarket the certificates at
par (4.8% and 4% at December 31, 1995 and 1996). Interest payments are
due monthly, and principal payments are due annually until maturity in
2014. Upon the occurrence of certain events, the variable interest rate
will convert to a fixed rate. The certificates were issued at a discount
of $2,046,000 which is being amortized to interest expense over the life
of the certificates using the effective interest method. In addition to
the hotel property, the certificates are secured by letters of credit
totaling the outstanding principal balance of the certificates. The letters of
credit are secured by other property and ownership interests owned by the
partners of the hotel partnership. The letters of credit bear an annual fee of
2% of the outstanding principal balance of the certificates. Until expiration
in December 1995, pursuant to the terms of an interest rate swap agreement,
interest payments were fixed at 5.69% for the hotel partnership, and the
counterparty paid interest at one half of its daily prime rate. The original
cost of the agreement was capitalized as an other asset and amortized over the
life of the swap agreement using the straight line method. Additional interest
expense incurred as a result of the swap agreement totaled $1,130 and $449 in
1994 and 1995................................................................... 59,300 58,200
Discount on certificates.......................................................... (1,779) (1,746)
-------- --------
203,313 213,797
Current portion of long-term debt................................................. (1,647) (67,811)
-------- --------
Long-term debt, excluding current portion......................................... $201,666 $145,986
======== ========
</TABLE>
F-104
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The annual principal requirements of the long-term debt for the five years
subsequent to December 31, 1996 (excluding a discount of $1,746,000) are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 67,811
1998 1,773
1999 11,772
2000 22,190
2001 52,117
Thereafter 59,880
--------
Total long-term debt at December 31, 1996 $215,543
========
</TABLE>
As discussed above, certain of the mortgage notes payable contain
provisions which require additional payments to the lenders based on residual
values or shared appreciation of the properties at the maturity of the loan or
sale of the property. If the properties are acquired, management estimates
that additional payments related to these provisions ranging from $11,500,000
to $14,000,000 will be paid to the lenders from the proceeds of the sale.
These amounts are considered as additional costs to sell the properties and
they will be reflected in the financial statements at the time the transaction
is completed.
The terms of substantially all of the mortgage notes require the respective
partnerships to make deposits, on a monthly basis, to tax escrow accounts for
the payment of real estate and personal property taxes and assessments. The
terms of the mortgage notes also require hotel partnerships to maintain
furniture, fixture and equipment reserve accounts ("FF&E Reserve") equal to an
amount ranging from 3% to 4% of gross revenues, as defined, to be used for
capital expenditures. The balances of the tax escrow accounts and the FF&E
Reserve are included in "Cash, restricted" and "Cash, restricted for
noncurrent assets", respectively, in the accompanying combined financial
statements.
The Partnerships will use the proceeds from the sale of the properties to
repay existing debt. Approximately $67,800,000 of the combined partnerships'
debt matures in 1997. In the event the assets are not sold before the debt
matures, management intends to extend or refinance these existing mortgage
notes.
7. CONTRIBUTION OF NOTE PAYABLE:
In May 1994, a revolving credit facility utilized by one of the hotel
partnerships was converted to a related party note payable and was then
contributed by the partners to the hotel partnership. This contribution is
reflected on the accompanying combined statement of partners' deficit for the
year ended December 31, 1994. Prior to the conversion, the revolving credit
facility bore interest at LIBOR plus .65% and was secured by property owned by
affiliates of the partners of the hotel partnership.
8. EMPLOYEE BENEFIT PLANS:
All employees at the Partnerships are employees of WHC. The Partnerships
reimburse WHC for all expenses and charges related to the employees'
participation in any of the WHC benefit programs. Included in these plans are
the Wyndham Employees Savings and Retirement Plan, a 401(k) retirement savings
plan (the "Plan") and a self-insured group health plan.
Employees who are over 21 years of age and have completed one year of
service are eligible to participate in the Plan. The Plan matches employee
contributions up to 4% of the employee's salary. For the years ended December
31, 1994, 1995 and 1996, the Partnerships reimbursed WHC $205,000, $194,000
and $281,000, respectively for the Plan.
F-105
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Partnerships also reimburse WHC for costs related to the employees'
participation in a self-insured group health plan. For the years ended
December 31, 1994, 1995 and 1996, the Partnership reimbursed WHC $791,000,
$902,000 and $1,005,000, respectively.
One hotel makes contributions, based on monthly rates per employee, as
specified in union agreements, to union-administered, multi-employer, defined
benefit retirement plans. Because the plans cover numerous employees from
many organizations, no plan benefit information is presented. Expenses
relating to these plans totaled $82,000, $80,000 and $105,000 in 1994, 1995
and 1996 respectively.
9. COMMITMENTS AND CONTINGENCIES:
Certain hotel partnerships lease equipment and land under capital and
operating leases having noncancellable agreements extending beyond one year.
Capital leases have imputed interest rates ranging from 8% to 14.29%. Future
minimum lease payments required under the capital leases (together with the
present value of net minimum lease payments) and operating leases at December
31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
----------------- -----------------
<S> <C> <C>
Year ending December 31:
1997 $224 $ 1,639
1998 172 1,616
1999 68 1,508
2000 45 1,499
2001 - 1,482
Thereafter - 49,367
---- -------
Total minimum lease payments 509 $57,111
=======
Less imputed interest 71
----
Present value of net minimum lease payment 438
Less current portion 185
----
Long-term portion of net minimum lease payments $253
====
</TABLE>
A partnership leases the land on which the hotel is built through two lease
agreements. Rent of $1 is payable annually to one of the partners under one
of these leases. The partner financed this purchase of land with an interest-
free advance from the partnership of $3,625,000. The remainder of the land is
leased from a state authority for $653,000 annually, payable in quarterly
installments of $163,000. These leases are dated July 31, 1978, with an
initial term of 65 years, and two renewal options of 15 years each, subject to
the term of the lessor's legal existence.
Another hotel partnership leases the land on which the hotel is built under
a sub-lease effective January 1, 1985, with an initial term of 75 years and
one renewal option of 25 years. Lease payments include two components: (1)
"basic rent" which escalate every 5 years based on the consumer price index,
and (2) "additional rent," as defined in the master lease, to the extent that
it exceeds basic rent. Basic rent payments are due annually on December 20 on
a prepaid basis, and the current basic rent payment is $672,000 per year. To
date, no additional rent has been paid as the basic rent exceeds all amounts
calculated as additional rent.
The Partnerships incurred rent expense totaling $1,964,000, 1,982,000 and
$1,993,000 in 1994, 1995 and 1996, respectively, which includes operating
leases and the three land leases.
F-106
<PAGE>
CROW FAMILY HOTEL PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Partnerships may be subject to certain litigation and claims in the
ordinary course of business which are generally covered by insurance policies.
In management's opinion, litigation and claims will not have a material
adverse effect upon the financial position or results of operations of the
Partnerships.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Partnerships have estimated the fair value of its financial instruments
at December 31, 1996 as required by Statement of Financial Accounting
Standards No. 107. The carrying values of cash and cash equivalents, accounts
receivable and accrued expenses are reasonable estimates of their fair values
due to their short-term maturities. Long-term debt had a fair value of
approximately $202,053,000 and $215,597,000 at December 31, 1995 and 1996,
respectively. Fair value was estimated using an interest rate of prime plus
one percent at December 31, 1995 and 1996.
F-107
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
WHG Resorts & Casinos Inc.
We have audited the accompanying consolidated balance sheets of WHG Resorts
& Casinos Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended June 30, 1997. Our audits also included the
financial statement schedule of valuation and qualifying accounts for each of
the three years in the period ended June 30, 1997. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WHG
Resorts & Casinos Inc. as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Juan, Puerto Rico
August 7, 1997, except for Note
18, as to which the date is
September 17, 1997.
F-108
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------ -----------------------
1997 1997 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents............................ $ 18,941 $ 17,886 $ 6,616
Receivables, net of allowances of $649 and $475 at
June 30, 1997 and 1996, respectively, and $809 at
September 30, 1997.................................. 3,454 3,477 2,534
Receivables from nonconsolidated affiliates.......... 1,731 1,105 608
Inventories.......................................... 575 590 651
Other current assets................................. 931 791 689
----------- ----------- -----------
Total current assets............................... 25,632 23,849 11,098
Investments in, receivables and advances to
nonconsolidated affiliates............................ 29,791 30,603 27,126
Property and equipment, net............................ 43,955 43,861 44,919
Land held as investment................................ 5,095 5,095 5,095
Excess of purchase cost over amount assigned to net
assets acquired, net of accumulated amortization of
$3,739 and $3,340 at June 30, 1997 and 1996,
respectively, and $3,836 at September 30, 1997........ 8,613 8,710 9,109
Other assets........................................... 5,266 5,355 7,387
----------- ----------- -----------
$ 118,352 $ 117,473 $ 104,734
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable..................................... $ 3,952 $ 3,760 $ 3,297
Accrued compensation and related benefits............ 2,342 2,855 2,128
Other accrued liabilities............................ 4,910 3,723 2,721
Dividend payable on preferred stock of Condado
Plaza............................................... -- -- 94
Notes payable........................................ 500 1,000 2,000
Current maturities of long-term debt................. 3,869 3,681 3,299
----------- ----------- -----------
Total current liabilities.......................... 15,573 15,019 13,539
Long-term debt, less current maturities................ 18,494 19,868 23,555
Deferred income taxes.................................. 2,192 2,638 2,291
Other noncurrent liabilities........................... 4,532 4,532 4,542
Payable to WMS Industries Inc.......................... -- 102 397
Minority interests..................................... 20,410 19,990 18,810
Preferred stock of Condado Plaza held by WMS
Industries Inc........................................ -- -- 4,100
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, 300,000 shares outstanding.............. 3 -- --
Common stock, class A, $.01 par value, non-voting,
3,000,000 shares authorized......................... -- -- --
Common stock, $.01 par value, 12,000,000 shares
authorized, 6,050,200 shares outstanding
in 1997 and 1,000 shares authorized and 100 shares
outstanding in 1996................................. 61 61 1
Additional paid-in capital............................. 17,293 14,296 3,849
Retained earnings...................................... 39,794 40,967 33,650
----------- ----------- -----------
Total stockholders' equity......................... 57,151 55,324 37,500
----------- ----------- -----------
$ 118,352 $ 117,473 $ 104,734
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-109
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
------------------ -------------------------------
1997 1996 1997 1996 1995
--------- -------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
WHGI management fees from nonconsolidated
affiliates................................. $ 2,256 $ 1,935 $ 13,937 $ 13,372 $ 13,348
Condado Plaza hotel/casino:
Casino...................................... 6,172 4,635 23,720 22,438 24,584
Casino promotional allowances............... (2,018) (1,432) (7,721) (6,986) (6,872)
Rooms....................................... 5,159 4,849 25,629 25,477 25,210
Food and beverages.......................... 2,255 2,240 11,034 11,478 11,412
Other....................................... 747 652 3,035 2,915 3,196
--------- --------- --------- --------- ---------
12,315 10,944 55,697 55,322 57,530
--------- --------- --------- --------- ---------
Total revenues............................ 14,571 12,879 69,634 68,694 70,878
Costs and expenses:
WHGI operating expenses (excl.
depreciation).............................. 1,013 870 3,910 3,882 5,175
Condado Plaza operating expenses (excl.
depreciation):
Casino..................................... 2,917 2,629 11,334 12,375 13,737
Rooms...................................... 1,844 1,752 7,639 8,593 9,081
Food and beverages......................... 2,071 2,050 9,076 10,088 10,503
Other...................................... 1,112 1,188 4,968 5,281 6,463
--------- --------- --------- --------- ---------
7,944 7,619 33,017 36,337 39,784
Selling and administrative................... 2,528 2,205 9,913 9,487 12,301
Depreciation and amortization................ 1,514 1,395 5,707 5,430 5,994
--------- --------- --------- --------- ---------
Total costs and expenses.................. 12,999 12,089 52,547 55,136 63,254
--------- --------- --------- --------- ---------
Operating income............................. 1,572 790 17,087 13,558 7,624
Interest income, primarily from
nonconsolidated affiliates, and
other income................................ 774 547 2,334 1,830 2,548
Interest expense............................. (764) (848) (3,265) (3,689) (4,300)
Equity in loss of nonconsolidated
affiliates.................................. (1,010) (1,289) (1,196) (3,465) (7,003)
Merger costs to date......................... (1,000) -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before tax credit (provision)
and minority interests...................... (428) (800) 14,960 8,234 (1,131)
Credit (provision) for income taxes.......... (163) 89 (3,397) (1,645) 234
Minority interests in income................. (535) (421) (4,000) (3,636) (2,910)
Dividend on preferred stock of Condado
Plaza....................................... -- (82) (246) (516) (557)
--------- --------- --------- --------- ---------
Net income (loss)............................ $ (1,126) $ (1,214) $ 7,317 $ 2,437 $ (4,364)
========= ========= ========= ========= =========
Primary earnings (loss) per share............ $ (0.19) $ (0.20) $ 1.20 $ .40 $ (.72)
========= ========= ========= ========= =========
Shares used in primary earnings per share
calculation................................. 6,050,000 6,050,000 6,086,443 6,050,200 6,050,200
========= ========= ========= ========= =========
Fully diluted earnings (loss) per share...... $ (0.19) $ (0.20) $ 1.17 $ .40 $ (.72)
========= ========= ========= ========= =========
Shares used in fully diluted earnings per
share calculation........................... 6,050,000 6,050,000 6,247,241 6,050,200 6,050,200
========= ========= ========= ========= =========
Pro forma information reflecting income taxes
on a separate return basis (unaudited):
Income (loss) before tax provision and
minority interests......................... $ (800) $ 14,960 $ 8,234 $ (1,131)
Provision for income taxes.................. (372) (3,478) (2,545) (1,902)
Minority interests in income................ (421) (4,000) (3,636) (2,910)
Dividend on preferred stock of Condado
Plaza...................................... (82) (246) (516) (557)
--------- --------- --------- ---------
Net income (loss)......................... $ (1,675) $ 7,236 $ 1,537 $ (6,500)
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-110
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTMBER 30, YEARS ENDED JUNE 30,
------------------ --------------------------
1997 1996 1997 1996 1995
-------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $ (1,126) $ (1,214) $ 7,317 $ 2,437 $(4,364)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 1,514 1,395 5,707 5,430 5,994
Provision for loss on receivables............... 160 72 366 1,457 1,842
Undistributed loss of nonconsolidated
affiliates..................................... 1010 1,289 1,196 3,465 7,003
Deferred income taxes........................... (446) -- 347 3,239 (1,626)
Minority interests.............................. 535 421 4,000 3,636 2,910
Increase (decrease) resulting from changes in
operating assets and liabilities:
Receivables.................................... (137) 119 (1,309) 342 (541)
Other current assets........................... (125) (303) 54 459 471
Accounts payable and accruals.................. 866 655 2,192 (12) (1,152)
Net amounts due from nonconsolidated
affiliates.................................... (626) (596) (5,170) (1,931) (5,906)
Other assets and liabilities not reflected
elsewhere..................................... (105) 399 (10) (618) 218
-------- --------- ------- -------- -------
Net cash provided by operating activities......... 1,520 2,237 14,690 17,904 4,849
Investing activities:
Purchase of property and equipment................ (1,466) (331) (3,153) (1,149) (2,066)
Purchase of additional shares of subsidiaries..... -- -- (1,500) -- (3,925)
Investments in and advances to nonconsolidated
affiliates....................................... (198) (186) -- -- (1,360)
Collections from nonconsolidated affiliates....... -- -- -- 985 2,010
Other investing................................... . . . -- -- 1,760 -- --
-------- --------- ------- -------- -------
Net cash used in investing activities............. (1,664) (517) (2,893) (164) (5,341)
Financing activities:
Payment of long-term debt and notes payable....... (1,686) (2,285) (8,703) (3,887) (4,568)
Proceeds from short-term note..................... -- -- 4,500 -- --
Capital contribution from WMS Industries Inc...... -- -- 1,643 -- --
Net intercompany transactions with WMS Industries
Inc.............................................. -- (528) 4,273 (6,275) 3,125
Issuance of preferred stock....................... 3,000 -- -- -- --
Purchase of preferred stock of Condado Plaza by
WMS Industries Inc............................... -- -- -- -- 2,500
Redemption of preferred stock of Condado Plaza
from WMS Industries Inc.......................... -- -- -- (3,400) --
Dividends paid to minority shareholders of
subsidiary....................................... (115) (151) (2,240) (1,189) (783)
-------- --------- ------- -------- -------
Net cash (used) provided by financing activities.. 1,199 (2,964) (527) (14,751) 274
-------- --------- ------- -------- -------
Increase (decrease) in cash and cash equivalents... 1,055 (1,244) 11,270 2,989 (218)
Cash and cash equivalents at beginning of year..... 17,886 6,616 6,616 3,627 3,845
-------- --------- ------- -------- -------
Cash and cash equivalents at end of year........... $ 18,941 $ 5,372 $17,886 $ 6,616 $ 3,627
======== ========= ======= ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-111
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance as of June 30, 1994............................. $ -- $ 1 $ 3,849 $35,577 $39,427
Net loss.............................................. -- -- -- (4,364) (4,364)
---- ------- ------- -------
Balance as of June 30, 1995............................. -- 1 3,849 31,213 35,063
Net income............................................ -- -- -- 2,437 2,437
----- ---- ------- ------- -------
Balance as of June 30, 1996............................. -- 1 3,849 33,650 37,500
Net income............................................ -- -- -- 7,317 7,317
Capital contributions by WMS Industries Inc........... -- -- 10,507 -- 10,507
6,050.2 for 1 stock split............................. -- 60 (60) -- --
Balance as of June 30, 1997............................. -- 61 14,296 40,967 55,324
Net loss (unaudited).................................. -- -- -- (1,126) (1,126)
Issue preferred stock (unaudited)..................... 3 -- 2,997 -- 3,000
Preferred stock dividends (unaudited)................. -- -- -- (47) (47)
----- ---- ------- ------- -------
Balance as of September 30, 1997 (unaudited)............ $ 3 $ 61 $17,293 $39,794 $57,151
===== ==== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-112
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND COMPANY OPERATIONS
Basis of Presentation
WHG Resorts & Casinos Inc. ("WHG") was formerly known as WMS Hotel
Corporation. Prior to the April 21, 1997 spin-off, WHG was a wholly owned
subsidiary of Williams Hotel Corporation ("WHC"). WHC was a wholly-owned
subsidiary of WMS Industries Inc. ("WMS"). WMS merged WHC, just prior to the
April 21, 1997 spin-off, into WHG at which time the predecessor financial
statements of WHC appearing herein became the financial statements of WHG.
The consolidated financial statements of WHG reflect results of operations,
cash flows, financial position and changes in stockholders' equity and have
been prepared using the historical basis in the assets and liabilities and
historical results of operations of WHG and subsidiaries and affiliates.
The pro forma information reflecting income taxes on a separate return basis
(unaudited), included with the consolidated statements of operations, reflects
the provision for income taxes without the tax benefits allocated to WHG from
WMS for utilization of partnership losses in the WMS consolidated Federal
income tax return, see Note 6--Income Taxes. WHG during the periods presented
did not have income subject to Federal income tax that could have been
included in its consolidated Federal income tax return or in the separate tax
returns of certain of its subsidiaries along with the partnership losses to be
able to realize the tax benefits.
Company Operations
WHG through its subsidiaries and affiliates owns, operates and manages two
of the leading hotels and casinos located in San Juan, Puerto Rico, and
through a second affiliate, the El Conquistador Resort & Country Club, a
destination resort complex in Las Croabas, Puerto Rico. WHG's holdings
include: a 100% interest in Posadas de Puerto Rico Associates, Incorporated,
the owner of the Condado Plaza Hotel & Casino ("Condado Plaza"); a 50%
interest in Posadas de San Juan Associates, a partnership which owns the El
San Juan Hotel & Casino ("El San Juan"); a 23.3% indirect interest in El
Conquistador Partnership L.P. which owns the El Conquistador Resort & Country
Club; and a 62% interest in Williams Hospitality Group Inc. ("WHGI"), the
management company for the above properties.
WHG was a wholly owned subsidiary of WMS prior to April 21, 1997. On April
21, 1997 WMS distributed 100% of the outstanding voting common stock of WHG to
WMS's stockholders, thereby creating a new independent public corporation.
The consolidated interim financial statements as of and for the three months
ended September 30, 1997 and 1996 included herein are unaudited. Such
information reflects all adjustments consisting solely of normal recurring
adjustments, which are in the opinion of management necessary for a fair
presentation of the consolidated balance sheet as of September 30, 1997 and the
consolidated results of operations and cash flows for the three months ended
September 30, 1997 and 1996. Due to the seasonality of the businesses, the
reported results are not necessarily indicative of those expected for the entire
year. Certain information and disclosures normally included in annual financial
statements in accordance with generally accepted accounting principles have been
excluded or omitted in presentation of the consolidated interim financial
statements.
NOTE 2: PRINCIPAL ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts of WHG and its
majority-owned subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated. Investments in companies that
are 20% to 50% owned are accounted for by the equity method. WHG records its
equity in the results of operations of El Conquistador Partnership L.P., based
on that partnership's fiscal year end of March 31.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates.
F-113
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
Inventories, which consist mainly of food, beverages and supplies, are
valued at the lower of cost (determined by the first-in, first-out method) or
market.
Property and Equiptment
Property and equipment are stated at cost and depreciated by the straight-
line method over their estimated useful lives.
Excess of Purchase Cost Over Amount Assigned to Net Assets Acquired
(Goodwill)
Goodwill arising from acquisitions is being amortized by the straight-line
method over 20 to 40 years.
Casino Revenues
Casino revenues are the net win from gaming activities, which is the
difference between gaming wins and losses.
Casino Promotional Allowances
Casino promotional allowances represent the retail value of complimentary
food, beverages and hotel services furnished to patrons, commissions and
transportation costs.
Advertising Expense
The cost of advertising is charged to earnings as incurred and for fiscal
1997, 1996 and 1995 was $809,000, $988,000 and $1,103,000, respectively.
NOTE 3: ACQUISITIONS
In July 1994, the Company acquired 5% of Williams Hospitality increasing its
interest from 57% to 62%. In July 1994, the Company acquired 2.5% of Posadas
de Puerto Rico Associates, Incorporated increasing its interest from 92.5% to
95%. In April 1997, the Company acquired the remaining 5% of Posadas de Puerto
Rico Associates, Incorporated increasing its interest from 95% to 100%.
NOTE 4: INVESTMENTS IN NONCONSOLIDATED AFFILIATES
Investments in nonconsolidated affiliates consist of a 50% interest in
Posadas de San Juan Associates, a partnership ("PSJA") and a 23.3% indirect
interest in El Conquistador Partnership L.P. ("El Conquistador") through a
46.5% interest in WKA El Con Associates, a partnership ("WKA El Con").
F-114
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Current receivables from nonconsolidated affiliates at June 30 were:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
PSJA................................................... $ 252 $ 61
WKA El Con............................................. 85 64
El Conquistador........................................ 768 483
-------- --------
$ 1,105 $ 608
======== ========
Investments in and noncurrent receivables and advances to nonconsolidated
affiliates at June 30 were:
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Investments:
PSJA................................................. $ (6,690) $ (7,678)
WKA El Con........................................... (2,813) (612)
Receivables and advances:
PSJA................................................. 25,541 23,148
WKA El Con........................................... 5,062 4,556
El Conquistador...................................... 9,503 7,712
-------- --------
$ 30,603 $ 27,126
======== ========
</TABLE>
PSJA operates as a partnership, therefore, 50% of its accumulated deficit is
recorded as an investment. Summarized financial data for PSJA's financial
position at June 30, 1997 and 1996 and PSJA's results of operations for fiscal
1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 were:
<TABLE>
<CAPTION> SEPTEMER 30, SEPTEMBER 30,
1997 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
----------- ------------ ------------ ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current assets................... $ -- -- $ 8,133 $ 6,558 --
Noncurrent assets................ -- -- 35,804 35,198 --
Total assets..................... -- -- 43,937 41,756 --
Payable to affiliates............ -- -- 237 61 --
Other current liabilities........ -- -- 10,659 10,101 --
Total current liabilities........ -- -- 10,896 10,162 --
Noncurrent payable to
affiliates...................... -- -- 25,591 23,148 --
Other noncurrent liabilities..... -- -- 20,831 23,803 --
Total noncurrent liabilities..... -- -- 46,422 46,951 --
Partners' capital deficiency..... -- -- (13,381) (15,357) --
Total liabilities and partners'
capital deficiency.............. -- -- 43,937 41,756 --
Revenues......................... $ 10,944 9,600 51,732 50,124 $ 51,797
Management fees and interest
payable to WHGI................. 955 836 5,325 4,738 4,691
Other costs and expenses......... 10,927 10,472 44,431 46,746 49,507
Net income (loss)................ $ (938) $ (1,708) $ 1,976 $ (1,360) $ (2,401)
</TABLE>
F-115
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a 46.5% interest in WKA El Con which has a 50% interest in
El Conquistador. Summarized financial data for WKA El Con's financial position
at June 30, 1997 and 1996 and WKA El Con's results of operations for fiscal
1997, 1996 and 1995 and the three months ended September 30, 1997 and 1996 were:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------ ------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loans receivable from El
Conquistador.................... -- -- $ 18,343 $ 16,116 --
Investment in El Conquistador,
net............................. -- -- (12,464) (7,763) --
Other assets, net................ -- -- 2,384 3,566 --
Total assets..................... -- -- 8,263 11,919 --
Current payable to WHGI.......... -- -- 85 64 --
Long-term note payable including
interest........................ -- -- 5,527 5,197 --
Long-term notes payable to
partners including interest..... -- -- 10,475 9,791 --
Partners' (capital deficiency)... -- -- (7,824) (3,133) --
Total liabilities and partners'
capital deficiency.............. -- -- 8,263 11,919 --
Net operating income (loss)...... $ 5 $ (11) 10 (178) $ (356)
Equity in net loss of El
Conquistador to March 31 for
fiscal years and to June 30 for
the three months ended
September 30.................. (1,168) (922) (4,701) (6,120) (13,739)
Equity in income of Las Casitas.. -- -- -- 313 1,627
Net (loss)....................... $(1,163) $(933) $ (4,691) $ (5,985) $(12,468)
</TABLE>
The WKA El Con's long-term note payable is collateralized by a pledge of a
second mortgage on land owned by the Company that cost $3,761,000 and a WMS
guarantee of $1,000,000 as to which WHG will indemnify WMS in the event of any
payments made on the guarantee. The other partners of WKA El Con have pledged
cash and a portion of their interest in WHGI stock, in proportion to their
interests in WKA El Con, to WHG to be used in the event the guarantee is drawn
on.
El Conquistador is a destination resort and casino which began operations in
November 1993. Summarized financial data for El Conquistador's financial
position at March 31, 1997 and 1996 (the partnership's fiscal year end) and El
Conquistador's results of operations for fiscal years ended March 31, 1997,
1996 and 1995 and the three months ended June 30, 1997 and 1996 were:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
------------ ------------- -------------- -------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current assets................ -- -- $ 13,618 $ 11,823 --
Land, building and equipment,
net.......................... -- -- 185,552 190,463 --
Deferred debt issuance and
pre-opening costs, net....... -- -- 5,841 8,587 --
Other assets.................. -- -- 419 818 --
Total assets.................. -- -- 205,430 211,691 --
Current liabilities........... -- -- 22,829 23,281 --
Debt due February 1, 1998..... -- -- 120,000 -- --
Long-term debt................ -- -- 26,660 149,324 --
Long-term due to partners and -- --
affiliates................... -- -- 48,869 42,611 --
Partners' (capital
deficiency).................. -- -- (12,928) (3,525) --
Total liabilities and capital
deficiency................... -- -- 205,430 211,691 --
Revenues...................... $ 24,438 $ 23,995 92,958 89,214 $ 84,743
Management fees and interest
payable to WHGI.............. 1,529 1,503 6,282 5,820 3,874
Interest payable to partners.. 611 702 2,498 2,598 1,898
Other costs and expenses...... 22,326 21,358 84,434 82,538 95,324
Depreciation and
amortization................. 2,307 2,276 9,147 10,499 11,124
Net (loss).................... $ (2,335) $ (1,844) $ (9,403) $(12,241) $(27,477)
</TABLE>
F-116
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At March 31, 1997 WHGI has provided guarantees amounting to $2,170,000 in
connection with leasing and other financing transactions of El Conquistador.
Debt of the El Conquistador of $120,000,000 is collateralized by a letter of
credit which terminates on March 9, 1998. Under the terms of the loan
agreement, such debt is required to be repaid on February 1, 1998 in the event
the letter of credit is not renewed or replaced prior to November 9, 1997. El
Conquistador has engaged investment advisors to investigate obtaining an
alternative letter of credit or financing arrangement. If such an alternative
is not found, the Company's investment in, receivables from, advances to and
potential payments on guarantees for El Conquistador totaling $18,463,000 at
June 30, 1997 may not be recoverable. In the event this amount is not
recovered the 38% minority interest in WHGI would absorb approximately
$5,900,000 of the charge. WHGI would also incur a loss of future management
fees from El Conquistador. For the years ended June 30, 1997, 1996 and 1995,
the Company accrued approximately $5,650,000, $5,395,000 and $3,704,000,
respectively, in management fee revenue from El Conquistador. The Company also
recorded equity in losses of El Conquistador of $2,188,000, $2,786,000 and
$5,803,000 in the years ending June 30, 1997, 1996 and 1995, respectively.
Consolidated retained earnings of the Company at June 30, 1997 is reduced by
$23,262,000 for the Company's ownership percentage in the accumulated deficit
of PSJA and WKA El Con which are accounted for under the equity method.
Interest earned by the Company from all the nonconsolidated affiliates for
the years ended June 30, 1997, 1996 and 1995 was $1,823,000, $1,650,000 and
$1,373,000, respectively.
NOTE 5: PROPERTY AND EQUIPMENT
At June 30 net property and equipment were:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 7,535 $ 7,535
Buildings and improvements............................. 47,865 45,294
Furniture, fixtures and equipment...................... 31,975 30,473
-------- --------
87,375 83,302
Less accumulated depreciation.......................... (43,514) (38,383)
-------- --------
Net property and equipment............................. $ 43,861 $ 44,919
======== ========
</TABLE>
NOTE 6: INCOME TAXES
The Company's two operating subsidiaries and two nonconsolidated affiliates
operate under the provisions of the Puerto Rico Tourism Incentives Act of 1993
which provides a ten-year incentive grant which may be extended for ten years.
Major benefits include a 90% exemption from income taxes on income deemed to
be derived from tourism operations. The grant also provides a 90% exemption
from municipal real and personal property taxes. Income deemed to be derived
from casino operations are not covered by the grant.
The two operating subsidiaries, the Condado Plaza and WHGI elect to file
income tax returns under Section 936 of the United States Internal Revenue
Code which provides for total or, after 1994, partial exemption from Federal
income taxes on income from sources within Puerto Rico if certain conditions
are met. The portion of taxes that can be exempt under Section 936 is
determined by the calculation of certain limits prescribed by Section 936.
These limits are either based on certain costs and expenses ("economic
activity method") or a fixed
F-117
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
percentage as prescribed in Section 936 ("percentage limitation method").
Corporations that operate under Section 936 cannot be members of a
consolidated Federal income tax return. The tax exemption under Section 936
generally decreases each year until the benefits terminate in 2005.
The Condado Plaza elected the economic activity method which results in a
100% exemption from Federal income taxes. WHGI elected the percentage
limitation method which resulted in a Federal tax provision of $2,793,000 in
fiscal 1997, $1,741,000 in fiscal 1996 and $1,149,000 in fiscal 1995.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes in the consolidated Federal income tax
return of WMS and allocated to the Company through April 22, 1997.
Significant components of the Company's deferred tax assets and liabilities
at June 30 were:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities resulting from:
Tax over book deductions of WKA El Con.................. $(1,033) $ (686)
Tax over book deductions of PSJA........................ (1,605) (1,605)
------- -------
Deferred tax liability.................................. $(2,638) $(2,291)
======= =======
</TABLE>
The Company's provision for income taxes was calculated on a historical
basis. WHG and certain of its subsidiaries were members of the WMS
consolidated Federal income tax return since their inception until April 21,
1997, the effective date of the spin off. Accordingly, losses for Federal
income tax purposes which were primarily generated by the Company's equity in
loss of nonconsolidated affiliates in the form of partnership losses were
utilized by WMS in its consolidated tax return and resulted in tax benefits.
The Company received the tax benefits of $428,000, $4,139,000 and $510,000 for
usage of such losses during the years ended June 30, 1997, 1996 and 1995,
respectively.
Significant components of the (provision) credit for income taxes for the
years ended June 30, 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal:
Certain Puerto Rico corporate income subject
to federal tax............................... $(2,793) $(1,741) $(1,149)
U.S. subsidiaries--primarily partnership
losses of nonconsolidated affiliates......... 428 4,139 510
------- ------- -------
Total federal............................... (2,365) 2,398 (639)
Puerto Rico.................................... (685) (804) (753)
------- ------- -------
Total current (provision) credit............ (3,050) 1,594 (1,392)
Deferred--federal, primarily from book to tax
differences on partnership losses.............. (347) (3,239) 1,626
------- ------- -------
(Provision) credit for income taxes............. $(3,397) $(1,645) $ 234
======= ======= =======
</TABLE>
F-118
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For financial reporting purposes, income (loss) before income tax credit
(provision) and minority interests is comprised of the following components
for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income tax credit
(provision) and minority interests:
Puerto Rico corporate income.................. $16,908 $11,487 $ 5,652
U.S. subsidiaries--primarily partnership
losses of nonconsolidated affiliates......... (1,948) (3,253) (6,783)
------- ------- -------
$14,960 $ 8,234 $(1,131)
======= ======= =======
</TABLE>
The provision (credit) for income taxes differs from the amount computed
using the statutory federal income tax rate as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal income tax at 35%............. $ 5,236 $ 2,882 $ (395)
Puerto Rico corporate loss resulting in no tax
benefit........................................ -- 199 1,525
Puerto Rico corporate income taxed at lower
rates.......................................... (2,180) (1,671) (1,602)
Other, net...................................... 341 235 238
------- ------- -------
$ 3,397 $ 1,645 $ (234)
======= ======= =======
</TABLE>
Undistributed earnings of the Puerto Rico subsidiaries that operate as
Section 936 corporations under Federal income tax regulations were
approximately $41,800,000 at June 30, 1997. Those earnings are considered
indefinitely reinvested and, accordingly, no provision for income or toll gate
taxes has been provided thereon. Upon distribution of those earnings in the
form of dividends, the Company would be subject to U.S. income tax of
approximately $2,300,000 and toll gate withholding taxes of approximately
$750,000.
WHG and WMS have entered into a tax sharing agreement that provides for the
rights and obligations of each company regarding deficiencies and refunds, if
any, relating to Federal and Puerto Rico income taxes for tax years up to and
including fiscal 1997.
During fiscal 1997, 1996 and 1995 income taxes paid to taxing authorities
were $2,728,000, $2,289,000 and $1,549,000, respectively.
NOTE 7: NOTES PAYABLE AND LONG-TERM DEBT
The Condado Plaza has a $2,000,000 bank line of credit which is payable on
demand with interest at the prime rate plus 1 percentage point, 9.5% and 9.25%
at June 30, 1997 and 1996, respectively. Borrowings under the line were
$1,000,000 on June 30, 1997 and $2,000,000 on June 30, 1996. The line of
credit is collateralized by a mortgage on the Condado Plaza property and
accounts receivable.
F-119
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt at June 30 was:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Condado Plaza mortgage note, due in increasing semi-
annual amounts through 1999, 12%..................... $21,900 $24,150
Other................................................. 1,649 2,704
------- -------
23,549 26,854
Less current maturities............................... (3,681) (3,299)
------- -------
$19,868 $23,555
======= =======
</TABLE>
Scheduled payments by fiscal year on long-term debt are as follows:
$3,681,000 in 1998 and $19,868,000 in 1999.
The amount of interest paid during fiscal 1997, 1996 and 1995 was
$3,255,000, $3,679,000 and $4,306,000, respectively.
NOTE 8: AUTHORIZED SHARES
At June 30, 1997 the authorized common stock of WHG consists of 12,000,000
shares of $.01 par value of which 6,050,200 shares were issued and
outstanding. The Company's capital structure at June 30, 1997 also consists of
3,000,000 shares of Class A non-voting common stock of which none are
outstanding. The Company also has 2,000,000 shares of authorized preferred
stock, none were issued at June 30, 1997. The preferred stock will be issuable
in series, and the relative rights and preferences and the number of shares in
each series are established by the Board of Directors. At June 30, 1997,
300,000 shares of the Preferred Stock were designated as Series B Preferred
Stock and reserved for issuance. See Note 16. At June 30, 1996 the capital
structure consisted of 1,000 shares of no par value common stock of which 100
were issued and outstanding.
NOTE 9: STOCK OPTION PLAN
The Company's stock option plan allows for the grant of both incentive stock
options and nonqualified options on shares of voting common stock through the
year 2007. The stock option plan allows for the grant of options on 900,000
shares of common stock to officers, directors, employees and under certain
conditions to consultants and advisers to the Company and its subsidiaries.
The stock option committee has the authority to fix the terms and conditions
upon which each option is granted, but in no event shall the term exceed ten
years or be granted at less than 100% of the fair market value of the stock at
the date of grant in the case of incentive stock options and 85% of the fair
market value of the stock on the date of grant in the case of non-qualified
stock options.
The Company accounts for stock options for purposes of determining net
income in accordance with APB Opinion No. 25 "Accounting for Stock Issued to
Employees." SFAS No. 123 regarding stock option plans permits the use of APB
No. 25 but requires the inclusion of certain pro forma disclosures in the
footnotes.
If the Company had adopted the expensing provisions of SFAs No. 125 the
Company's pro forma net income for fiscal 1997 would have been $5,876,000. Pro
forma primary and fully diluted earnings per share for fiscal 1997 would have
been $0.97 and $0.96, respectively. There is no effect on reported amounts for
fiscal 1996, since the options were not granted until fiscal 1997.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants, all of which were in 1997: dividend yield 0%;
expected volatility 32%; risk free interest rates of 6.2%; and expected lives
of four years.
F-120
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
During fiscal 1997, there were 898,000 options granted, all of which were
outstanding on June 30, 1997 and have a weighted average exercise price of
$8.49, a weighted average fair market value of $2.94, a weighted average
contractual life of 9.8 years and exercise prices that range from $8.38 to
$11.00. At June 30, 1997, 472,000 options are exercisable with a weighted
average exercise price of $8.38.
NOTE 10: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to
concentrations of credit and market risk consist primarily of cash equivalents
and accounts receivable. By policy, the Company places its cash equivalents
only in high credit quality securities and limits the amounts invested in any
one security. At June 30, 1997, accounts receivable are from hotel and casino
guests and travel agents located throughout North America and Latin America
and because of the number and geographic distribution, concentration is
limited.
The estimated fair value of financial instruments at June 30, 1997 has been
determined by the Company, using available market information and valuation
methodologies considered to be appropriate. The amounts reported for cash
equivalents and current notes payable are considered to be a reasonable
estimate of their fair value.
At June 30, 1997, the $21,900,000 Condado Plaza 12% mortgage note payable is
estimated to have a fair value of $22,781,000 using discounted cash flow
analysis based on an estimated interest rate of 8.25%. The mortgage note is
subject to a substantial prepayment penalty based on interest rate
differentials plus a fixed percentage.
NOTE 11: LEASE COMMITMENTS
Operating leases relate principally to hotel facilities and equipment. A
portion of the Condado Plaza hotel facilities are leased from a partnership
owned by a former minority shareholder of the Condado Plaza. The former
minority shareholder lease extends through 2008 at an annual rent of $684,000
through September 30, 1998 with periodic escalations thereafter to an annual
rent of $827,000 in 2004. Rent expense for fiscal 1997, 1996 and 1995 was
$760,000, $1,027,000 and $1,077,000, respectively (including $684,000, paid in
each fiscal 1997, 1996 and 1995, under the former minority shareholder lease
at the Condado Plaza). Total net future lease commitments for minimum rentals
at June 30, 1998, 1999, 2000, 2001, 2002 and thereafter are $718,000,
$769,000, $786,000, $786,000, $786,000 and $1,490,000, respectively.
F-121
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12: TRANSACTIONS WITH WMS
The Company's two operating subsidiaries and two nonconsolidated affiliates
have each provided for its off-season cash needs through its own operating
cash and from individual short-term note arrangements. Plant and equipment
additions at each property have also generally been provided by its own cash
from operations or third party financing. Cash advances from WMS, for the
periods reported, have been used for investment purposes. A summary of
advances and repayments between WMS and the Company prior to the April 21,
1997 spin-off for the years ended June 30, 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Advances from (repayments to) WMS by use or
source:
Purchase of additional shares in subsidiaries.... $ -- $ -- $3,738
Investment in and advances to (repayments from)
WKA El Con...................................... -- (546) 157
Cash primarily generated from Williams
Hospitality dividends........................... -- (1,590) (260)
Cash received from WMS for cumulative tax
benefits........................................ 4,357 -- --
Other, net....................................... 409 -- --
Income tax benefits from partnership losses
utilized by WMS-- see Note 6.................... (493) (4,139) (510)
------ ------- ------
$4,273 $(6,275) $3,125
====== ======= ======
</TABLE>
During fiscal 1995 the Condado Plaza sold to WMS 50 shares of 8% non-voting
preferred stock with a liquidation preference of $50,000 per share for
$2,500,000 bringing the total of such preferred stock held by WMS to 150
shares and $7,500,000 at June 30, 1995. During fiscal 1996 the Condado Plaza
redeemed 68 of those preferred shares at $50,000 per share for $3,400,000.
During fiscal 1997 the remaining 82 preferred shares were contributed to the
capital of WHG. In April 1997, the Condado Plaza redeemed 41 of those
preferred shares at $50,000 per share for $2,050,000. Subsequent to June 30,
1997 (July and August 1997), an additional 24 shares were redeemed at $50,000
per share for $1,200,000.
<TABLE>
<S> <C>
During fiscal 1997 WMS contributed the following to the capital of
WHG (in thousands):
Net, intercompany payable to WMS................................. $ 4,764
Cash contribution................................................ 1,643
82 preferred shares of PPRA, liquidation preference of $50,000... 4,100
-------
Total contribution............................................... $10,507
=======
</TABLE>
NOTE 13: PENSION PLAN
Certain subsidiaries are required to make contributions on behalf of
unionized employees to defray part of the costs of the multi-employer pension
plans established by their respective labor unions. Such contributions are
computed using a fixed charge per employee. Contributions to the plans for
fiscal 1997, 1996 and 1995 were $377,000, $340,000 and $352,000, respectively.
F-122
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1997 and 1996 are as
follows, in thousands except per share amounts:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1997 Quarters:
Revenues................... $ 12,879 $ 17,175 $ 21,592 $ 17,988
========== ========== ========== ==========
Operating income........... $ 790 $ 4,312 $ 8,115 $ 3,870
Interest expense, net...... (301) (282) (263) (85)
Equity in income (loss) of
nonconsolidated
affiliates................ (1,289) (1,739) 633 1,199
Credit (provision) for
income taxes.............. 89 (313) (2,078) (1,095)
Minority interests......... (421) (841) (1,670) (1,068)
Dividend on preferred stock
of subsidiary............. (82) (82) (82) --
---------- ---------- ---------- ----------
Net income (loss).......... $ (1,214) $ 1,055 $ 4,655 $ 2,821
========== ========== ========== ==========
Primary earnings per
share..................... $ (.20) $ (.17) $ .77 $ .46
========== ========== ========== ==========
Shares used in
calculation............... 6,050,200 6,050,200 6,050,200 6,195,774
========== ========== ========== ==========
Fully diluted earnings per
share..................... $ (.20) $ (.17) $ .77 $ .45
========== ========== ========== ==========
Shares used in
calculation............... 6,050,200 6,050,200 6,050,200 6,247,241
========== ========== ========== ==========
Pro forma net income (loss)
reflecting income taxes on
a separate return basis... $ (1,675) $ 435 $ 5,121 $ 3,355
========== ========== ========== ==========
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1996 Quarters:
Revenues................... $ 13,404 $ 17,452 $ 21,450 $ 16,388
========== ========== ========== ==========
Operating income (loss).... $ (226) $ 4,069 $ 7,248 $ 2,467
Interest expense, net...... (560) (493) (395) (411)
Equity in income (loss) of
nonconsolidated
affiliates................ (2,087) (1,510) (318) 450
Credit (provision) for
income taxes.............. 448 (153) (1,005) (935)
Minority interests......... (298) (896) (1,585) (857)
Dividend on preferred stock
of subsidiary............. (150) (146) (126) (94)
---------- ---------- ---------- ----------
Net income (loss).......... $ (2,873) $ 871 $ 3,819 $ 620
========== ========== ========== ==========
Earnings per share......... $ (.47) $ .14 $ .63 $ .10
========== ========== ========== ==========
Shares used................ 6,050,200 6,050,200 6,050,200 6,050,200
========== ========== ========== ==========
Pro forma net income (loss)
reflecting income taxes on
a separate return basis... $ (3,623) $ 361 $ 3,713 $ 1,086
========== ========== ========== ==========
</TABLE>
For pro forma net income (loss), see Note 1--Basis of Presentation.
F-123
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15: SEGMENT INFORMATION
The Company's operations are conducted through two industry segments: the
operation of the Condado Plaza and the management of hotels/casinos. Industry
segment information for the fiscal years ended June 30 follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Condado Plaza................................ $ 55,697 $ 55,322 $ 57,530
WHGI........................................ 18,227 16,939 17,350
Intersegment revenues elimination--WHGI fees
charged to Condado Plaza................... (4,290) (3,567) (4,002)
-------- -------- --------
Total revenues............................ $ 69,634 $ 68,694 $ 70,878
======== ======== ========
Operating income (loss)
Condado Plaza............................... $ 6,348 $ 2,830 $ (1,465)
WHGI........................................ 11,923 10,837 9,174
General corporate administrative expenses... (1,184) (109) (85)
-------- -------- --------
Total operating income.................... $ 17,087 $ 13,558 $ 7,624
======== ======== ========
Identifiable assets
Condado Plaza............................... $ 55,385 $ 53,323 $ 57,879
WHGI........................................ 15,086 18,582 17,737
General investment and corporate............ 15,294 5,095 5,994
Investments in, receivables and advances to
nonconsolidated affiliates................. 31,708 27,734 29,696
-------- -------- --------
Total identifiable assets................. $117,473 $104,734 $111,306
======== ======== ========
Depreciation of property and equipment
Condado Plaza............................... $ 4,227 $ 4,120 $ 4,656
WHGI........................................ 777 769 681
-------- -------- --------
Total depreciation of property and
equipment................................ $ 5,004 $ 4,889 $ 5,337
======== ======== ========
Capital expenditures
Condado Plaza............................... $ 3,181 $ 1,078 $ 2,030
WHGI........................................ 41 71 36
-------- -------- --------
Total capital expenditures................ $ 3,222 $ 1,149 $ 2,066
======== ======== ========
</TABLE>
NOTE 16: CONTINGENT LIABILITIES
The Company is involved in various disputes arising in the ordinary course
of business, which may result in litigation. Management expects no material
adverse effect on the Company's financial condition as a result of these
matters.
NOTE 17: SALE OF PREFERRED STOCK SUBSEQUENT TO JUNE 30, 1997
The Board of Directors exercised the put provisions of a Put Option and Call
Option Agreement that was established on April 21, 1997 which resulted in the
Chairman of the Board purchasing on July 31, 1997, 300,000 shares of Series B
Preferred Stock for $3,000,000 in cash. Each share of Series B Preferred Stock
has 5 votes
F-124
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
per share voting collectively with the common stockholders and a liquidation
preference of $10.00 per share plus accrued dividends, has a quarterly
dividend equal to the prime rate plus one half percent calculated on the
liquidation preference and the holder has a redemption right after three years
or earlier in the event of two unpaid quarterly dividends. The holder of the
Series B Preferred Stock can convert into shares of common stock. The
conversion price is $9.00, which is the lower of the closing price of the
voting common stock on its first day of official trading ($9.00) and the
closing price in the New York Stock Exchange at the close of business on the
business day immediately prior to the date of issuance of the Preferred Stock
($12.50).
NOTE 18: PROPOSED ACQUISITION SUBSEQUENT TO JUNE 30, 1997
On September 17, 1997, the Company executed an asset purchase agreement to
acquire an existing 127 room Hotel and related land next to the Condado Plaza
for $9,600,000, subject to certain terms and conditions, including
satisfactory due diligence. If the agreement is finalized, the Company intends
to finance the purchase price through long term financing and the use of
excess cash currently available.
F-125
<PAGE>
SCHEDULE II
WHG RESORTS & CASINOS INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------------- ------------ ----------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS-- BALANCE AT
BEGINNING OF COSTS AND OTHER AMOUNTS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITTEN OFF PERIOD
----------- ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for
receivables:
1997.................. $474,000 $ 366,000 $-- $ 191,000 $649,000
======== ========== ==== ========== ========
1996.................. $399,000 $1,457,000 $-- $1,382,000 $474,000
======== ========== ==== ========== ========
1995.................. $755,000 $1,842,000 $-- $2,198,000 $399,000
======== ========== ==== ========== ========
Unrealized holding loss
on noncurrent
marketable equity
securities:
1997.................. $ -- $ -- $-- $ -- $ --
======== ========== ==== ========== ========
1996.................. $ -- $ -- $-- $ -- $ --
======== ========== ==== ========== ========
1995.................. $ -- $ -- $-- $ -- $ --
======== ========== ==== ========== ========
</TABLE>
- --------
(1) Included as a direct reduction of stockholders' equity.
F-126
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Posadas de San Juan Associates
We have audited the accompanying balance sheets of Posadas de San Juan
Associates as of June 30, 1997 and 1996, and the related statements of
operations and deficit, and cash flows for each of the three years in the
period ended June 30, 1997. Our audits also included the financial statement
schedule of valuation and qualifying accounts for each of the three years in
the period ended June 30, 1997. These financial statements and schedule are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Posadas de San Juan
Associates at June 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1997,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
San Juan, Puerto Rico
August 7, 1997
F-127
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------ ------------------------
1997 1997 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,787,000 $ 2,681,100 $ 2,443,700
Trade accounts receivable, less allowance for
doubtful accounts of $606,300 and $357,100
at June 30, 1997 and 1996, respectively, and
$947,300 at September 30, 1997.................... 3,697,600 3,692,000 2,370,700
Inventories........................................ 893,800 969,500 906,400
Prepaid expenses................................... 534,300 790,300 837,100
----------- ----------- -----------
Total current assets............................. 7,912,700 8,132,900 6,557,900
Land, building and equipment:
Land............................................... 3,300,000 3,300,000 3,300,000
Building........................................... 14,350,700 14,350,700 14,350,700
Building improvements.............................. 14,533,900 14,285,400 12,439,600
Furniture, fixtures and equipment.................. 36,234,900 36,114,600 33,814,000
Construction in progress........................... 658,200 113,400 --
---------- ----------- -----------
69,077,700 68,164,100 63,904,300
Less accumulated depreciation...................... 34,203,200 33,353,000 30,080,700
---------- ----------- -----------
34,874,500 34,811,100 33,823,600
Operating equipment, net............................. 434,300 523,000 570,700
Deferred financing costs, less accumulated
amortization of $662,400 and $530,900 at
June 30, 1997 and 1996, respectively,
and $696,000 at September 30, 1997.................. 368,400 402,000 533,500
Other assets......................................... 172,900 68,300 270,500
---------- ----------- -----------
Total assets......................................... $43,762,800 $43,937,300 $41,756,200
=========== =========== ===========
LIABILITIES AND DEFICIENCY IN PARTNERSHIP CAPITAL
Current liabilities:
Trade accounts payable............................. $ 4,187,400 $ 4,078,700 $ 4,039,900
Accrued compensation and related benefits.......... 1,419,900 1,376,600 1,139,300
Other accrued liabilities.......................... 2,345,100 2,032,600 1,458,700
Due to affiliated companies........................ 1,040,900 237,600 11,600
Note payable to bank............................... -- -- 300,000
Current portion of long-term debt.................. 3,170,600 3,170,600 3,152,000
---------- ----------- -----------
Total current liabilities........................ 12,163,900 10,896,100 10,101,500
Long-term debt, net of current portion............... 20,045,600 20,831,400 23,805,000
Due to Williams Hospitality Group Inc................ 25,872,900 25,590,800 23,206,700
Deficiency in partnership capital:
Capital contribution............................... 7,000,000 7,000,000 7,000,000
Deficit............................................ (21,319,600) (20,381,000) (22,357,000)
---------- ----------- -----------
Total deficiency in partnership capital.............. (14,319,600) (13,381,000) (15,357,000)
---------- ----------- -----------
Total liabilities and deficiency in partnership
capital............................................. $43,762,800 $43,937,300 $41,756,200
=========== =========== ===========
</TABLE>
See accompanying notes.
F-128
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------------- ----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rooms.............................. $ 4,264,700 $ 3,760,000 $ 22,588,800 $ 22,016,700 $ 21,517,300
Food and beverage.................. 2,476,300 2,370,800 13,218,000 13,424,400 12,688,200
Casino............................. 4,917,500 3,926,700 19,582,200 18,117,600 22,575,400
Rental and other income............ 871,000 665,600 3,255,800 3,503,000 2,852,400
Less casino promotional
allowances........................ (1,586,000) (1,002,400) (6,905,300) (6,937,900) (7,836,300)
------------ ------------ ------------ ------------ ------------
Net revenues..................... 10,943,500 9,720,700 51,739,500 50,123,800 51,797,000
Costs and expenses:
Rooms.............................. 1,643,500 1,493,200 6,764,600 6,891,000 6,775,000
Food and beverage.................. 1,920,000 1,900,900 9,297,400 9,506,100 9,340,600
Casino............................. 2,524,500 2,439,200 9,729,000 10,716,800 14,027,100
Selling, general and
administrative.................... 2,352,500 2,293,800 8,803,200 9,094,000 8,953,700
Management and incentive management
fees.............................. 773,400 589,100 4,336,700 3,850,100 3,893,000
Property operation, maintenance and
energy costs...................... 1,060,400 1,150,000 4,509,700 4,803,200 4,416,800
Depreciation and amortization...... 891,900 818,500 3,438,800 3,595,300 3,617,300
------------ ------------ ------------ ------------ ------------
11,166,200 10,684,700 46,879,400 48,456,500 51,023,500
------------ ------------ ------------ ------------ ------------
Income (loss) from operations.... (222,700) (964,000) 4,860,100 1,667,300 773,500
Interest income...................... -- -- -- -- 2,500
Interest expense..................... (715,900) (743,700) (2,884,100) (3,026,800) (3,176,800)
------------ ------------ ------------ ------------ ------------
Net income (loss).................... (938,600) (1,707,700) 1,976,000 (1,359,500) (2,400,800)
Deficit at beginning of year......... (20,381,000) (22,357,000) (22,357,000) (20,997,500) (18,596,700)
------------ ------------ ------------ ------------ ------------
Deficit at end of year............... $(21,319,600) $(24,064,700) $(20,381,000) $(22,357,000) $(20,997,500)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-129
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
------------------------ -------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)...................... $ (938,600) $(1,707,700) $ 1,976,000 $(1,359,500) $(2,400,800)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 891,900 818,500 3,438,800 3,595,300 3,617,300
Provision for losses on accounts
receivable.......................... 214,900 214,900 150,600 1,278,200 3,880,400
Gain or sale of equipment............ -- -- -- (46,600) --
Changes in operating assets and
liabilities:
Amounts due to/from affiliated
companies.......................... 1,085,400 461,500 2,610,100 2,086,700 639,600
Trade accounts receivable........... (220,500) 212,600 (1,471,900) 503,900 833,200
Inventories and prepaid expenses.... 331,700 121,700 (16,400) 193,600 21,600
Other assets........................ (112,700) (734,500) 167,200 (10,500) (125,600)
Trade accounts payable, accrued
expenses and other accrued
liabilities........................ 464,500 551,700 850,000 (990,600) (2,493,100)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities........................ 1,716,600 (61,300) 7,704,400 5,250,500 3,972,600
Investing Activities
Proceeds from sale of equipment...... -- -- -- 119,300 --
Purchases of property and equipment.. (913,600) (457,400) (4,059,700) (2,502,800) (3,310,000)
Purchases of operating equipment--
net................................. 88,700 25,400 47,700 78,800 635,900
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities........................ (824,900) (432,000) (4,012,000) (2,304,700) (2,674,100)
Financing Activities
Proceeds from long-term debt......... -- -- -- -- 156,200
Proceeds from short-term borrowings.. -- 300,000 -- 300,000 --
Payment of short-term borrowings..... -- -- (300,000) -- --
Payments of long-term debt........... (785,800) (785,800) (3,155,000) (2,326,400) (2,046,800)
----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities........................ (785,800) (485,800) (3,455,000) (2,026,400) (1,890,600)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents...................... 105,900 (979,100) 237,400 919,400 (592,100)
Cash at beginning of year.............. 2,681,100 2,443,700 2,443,700 1,524,300 2,116,400
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 2,787,000 $ 1,464,600 $ 2,681,100 $ 2,443,700 $ 1,524,300
=========== =========== =========== =========== ===========
Included in cash provided by operating
activities above:
Interest paid........................ -- -- $ 2,887,600 $ 3,031,400 $ 3,232,500
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-130
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. INTERIM INFORMATION (UNAUDITED)
The interim financial statements as of and for the three months ended
September 30, 1997 and 1996 included herein are unaudited. Such information
reflects all adjustments, consisting solely of normal recurring adjustments,
which are in the opinion of management necessary for a fair presentation of the
balance sheet as of September 30, 1997 and the results of operations and cash
flows for the three months ended September 30, 1997 and 1996. Due to the
seasonality of the business, the reported results are not necessarily indicative
of those expected for the entire year. Certain information and disclosures
normally included in annual financial statements in accordance with generally
accepted accounting principles have been excluded or omitted in presentation of
the interim financial statements.
2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES
Organization
Posadas de San Juan Associates (the Partnership), is a joint venture
organized under the General Partnership Laws of the State of New York,
pursuant to a Joint Venture Agreement dated July 27, 1984, as amended (the
Agreement). The Partnership is 50% owned by ESJ Hotel Corporation, a wholly-
owned subsidiary of Posadas de Puerto Rico Associates, Incorporated (Posadas
de Puerto Rico), with the remainder owned by entities owned by individual
investors (collectively, the Partners). Posadas de Puerto Rico is 100% owned
by WHG Resorts & Casinos Inc., a publicly-held corporation. The Partnership
shall continue to exist until July 27, 2024, unless terminated earlier by
mutual agreement of the Partners pursuant to the Agreement. The Agreement
provides that the net profits or losses of the Partnership shall be allocated
to the Partners in the same proportion as their capital contributions.
The Partnership owns and operates the El San Juan Hotel & Casino (the
"Hotel"), a luxury resort hotel and casino property in San Juan, Puerto Rico.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.
Inventories
Inventories, which consist mainly of food, beverages and supplies, are
valued at the lower of cost (first-in, first-out method) or market.
Land, Building and Equipment
Land, building and equipment are stated on the basis of cost. Building and
equipment are depreciated by the straight-line method over their estimated
useful lives.
Deferred Financing Costs
Deferred financing costs are being amortized over the maturities of the
related debt.
Casino Revenues
Casino revenues are the net win from gaming activities, which is the
difference between gaming wins and losses.
F-131
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
Promotional Allowances
Casino promotional allowances represent the retail value of complimentary
food, beverage and hotel services furnished to patrons, commissions and
transportation costs.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs
for fiscal years 1997, 1996 and 1995 amounted to approximately $1,388,000,
$1,394,000 and $1,299,000, respectively.
Fair Values of Financial Instruments
The methods and assumptions used to estimate the fair value of the different
classes of financial instruments were as follows:
Long-term debt: The carrying amount of the long-term borrowings at June 30,
1997 approximates fair value. The fair values were estimated using discounted
cash flows, based on the current borrowing rates for similar types of
borrowing arrangements.
3. FURNITURE, FIXTURES AND EQUIPMENT FUND
In accordance with the terms of the Management Agreement and a certain loan
agreement (see Note 6), the Partnership is required to deposit cash equal to
4% of hotel gross revenues each month into a furniture, fixtures and equipment
fund.
Williams Hospitality Group Inc. (Williams Hospitality), a hotel/casino
management company that is an affiliated company, (on behalf of the
Partnership) withdraws from the fund amounts required to pay the cost of
replacements of, and additions to, furniture, fixtures and equipment at the
Hotel. At June 30, 1997 and 1996, there were no unexpended funds available.
4. TRADE ACCOUNTS RECEIVABLE
At June 30, 1997 and 1996 trade accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Trade accounts receivable--casino................... $2,001,600 $1,045,100
Less allowance for doubtful accounts................ 516,100 266,100
---------- ----------
1,485,500 779,000
Trade accounts receivable--hotel.................... 2,296,700 1,682,700
Less allowance for doubtful accounts................ 90,200 91,000
---------- ----------
2,206,500 1,591,700
---------- ----------
$3,692,000 $2,370,700
========== ==========
</TABLE>
Approximately 51% and 31% of the trade accounts receivable--casino, as of
June 30, 1997 and 1996, respectively, are from customers in Latin America.
F-132
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
5. DUE TO AFFILIATED COMPANY
Amounts due to affiliated company consist of fees earned by Williams
Hospitality and other payments made by Williams Hospitality for services
rendered on behalf of the Partnership. At June 30, 1997 and 1996 amounts due
to an affiliated company consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Due to Williams Hospitality--noncurrent:
Incentive management fees....................... $11,283,400 $ 9,878,900
Interest on incentive management fees........... 5,506,400 4,526,800
Basic management fees........................... 8,801,000 8,801,000
----------- -----------
$25,590,800 $23,206,700
=========== ===========
</TABLE>
Payment of substantially all the noncurrent amounts due to Williams
Hospitality are restricted under the terms of the Loan Agreement (see Note 6).
6. LINE OF CREDIT
The Partnership has available a $1,000,000 revolving line of credit with a
bank, which is payable on demand, bearing interest at one percentage over the
prime rate. The line of credit is collateralized by substantially all trade
accounts receivable and leases with concessionaires as well as the mortgage
covering long-term debt. As of June 30, 1997, there was no balance outstanding
under the line of credit.
7. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Mortgage note payable to bank.......................... $23,250,000 $26,250,000
Capital lease obligation bearing interest at 11.18%
payable in monthly installments of $3,450, including
interest through 1999................................. 70,000 109,600
Capital lease obligation bearing interest at 9.5%
payable in monthly installments of $10,413, including
interest through 2001................................. 396,100 480,700
Chattel mortgage note payable bearing interest at 9%,
payable in monthly installments of $3,900, including
interest through 1998, collateralized with personal
property.............................................. 85,900 116,700
Note payable to a non-related party, non-interest
bearing, payable in two annual installments of
$100,000 beginning on October 1, 1998................. 200,000 --
----------- -----------
24,002,000 26,957,000
Less current portion................................... 3,170,600 3,152,000
----------- -----------
$20,831,400 $23,805,000
=========== ===========
</TABLE>
The mortgage note payable to bank is collateralized by all the Partnership's
real and personal property. The note is payable in accelerating monthly
installments with a final installment of $7,500,000 due in fiscal 2003.
Interest is payable at rates from 6.7% to 7.3% on $18,250,000 of the note.
Interest rates have not been fixed on
F-133
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
$5,000,000 of the note, which at June 30, 1997 was at an interest rate of
7.97%, which is reset every seven days. Under the terms of the loan agreement,
50% of the excess net free cash flow, as defined, each year is required to be
used to prepay the final installment of the note until it is reduced to
$3,000,000. Further, distributions to the partners and payment of basic and
incentive management fees and accrued interest thereon outstanding at the date
of the borrowing may only be paid to the extent of the remaining 50% of the
excess net free cash flow. Excess net free cash flow, as defined, amounted to
$648,000 at June 30, 1997.
Maturities of long-term debt are as follows:
Fiscal year ending in:
<TABLE>
<S> <C>
1998........................................................... $ 3,170,600
1999........................................................... 3,392,000
2000........................................................... 3,726,000
2001........................................................... 3,588,400
2002........................................................... 2,625,000
Thereafter..................................................... 7,500,000
-----------
$24,002,000
===========
</TABLE>
8. INCOME TAXES
The Partnership operated under the provisions of the Puerto Rico Tourism
Incentives Act of 1993 (the 1993 Act). The 1993 Act provides for a ten-year
grant which may be extended for an additional ten-year term. Major benefits of
this grant are: a 90% exemption from income taxes on hotel income through the
entire term of the grant, and a 90% exemption from municipal real and personal
property taxes for the first five years. The Partnership's casino operations
are not covered by the tax exemption grant and are fully taxable.
As of June 30, 1997, the Partnership had net operating loss carryforwards of
approximately $20,391,600, net of approximately $1,600,000 used to offset 1997
taxable income for Puerto Rico income tax purposes from its combined hotel and
casino operations and, accordingly, no Puerto Rico taxes have been provided in
the accompanying financial statements. Such losses may be utilized to offset
future Puerto Rico taxable income through June 30, 2001 as follows: 1998,
$2,064,000; 1999, $3,271,000; 2000, $3,896,600; 2001, $6,046,000 and 2002,
$5,114,000.
Following the provisions of SFAS No. 109, the deferred tax asset that
results from the cumulative net operating loss carryforwards has been fully
reserved.
For Puerto Rico income tax purposes the Partnership is taxed as if it were a
corporation. Income of the Partnership for federal income tax purposes is
taxable to the Partners.
9. TRANSACTIONS WITH RELATED PARTIES
The Partnership has an Operating and Management Agreement (the Management
Agreement) dated October 2, 1986 with Williams Hospitality. The Management
Agreement provides that Williams Hospitality is to manage the Hotel until the
year 2005 for a basic management fee of 5% of the Hotel's gross revenues (as
defined in the Management Agreement) and an incentive management fee of 12% of
the Hotel's gross operating profits (as defined in the Management Agreement).
In addition, the Partnership is required to pay certain administrative
expenses incurred by Williams Hospitality in connection with management of the
Hotel.
F-134
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
During fiscal years 1997, 1996 and 1995 basic management fees amounted to
$2,932,200, $2,852,500 and $2,981,600, respectively. Incentive management fees
amounted to $1,404,500, $997,600 and $911,500, respectively, for the same
fiscal years. Administrative costs and service fees charged by Williams
Hospitality during fiscal years 1997, 1996 and 1995, amounted to $1,422,600,
$1,446,700 and $1,844,000, respectively.
During fiscal years 1997, 1996 and 1995, interest at 10% charged to the
Partnership by Williams Hospitality amounted to $987,900, $888,100 and
$797,000, respectively.
During fiscal years 1997, 1996 and 1995, the Partnership was charged by
Posadas de Puerto Rico $338,100, $243,600 and $92,800, respectively, for
certain services provided.
During fiscal years 1997, 1996 and 1995, the Partnership charged Posadas de
Puerto Rico $337,400, $256,100 and $191,500, respectively, for certain
services rendered.
F-135
<PAGE>
SCHEDULE II
POSADAS DE SAN JUAN ASSOCIATES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------------- -------- ----------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS-- BALANCE AT
BEGINNING OF COSTS AND OTHER AMOUNTS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITTEN OFF PERIOD
----------- ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for
receivables:
1997.................... $ 357,100 $ 150,600 $-- $ (98,599) $606,299
========== ========== ==== =========== ========
1996.................... $ 434,546 $1,278,200 $-- $ 1,355,646 $357,100
========== ========== ==== =========== ========
1995.................... $1,290,819 $3,880,413 $-- $ 4,736,686 $434,546
========== ========== ==== =========== ========
</TABLE>
F-136
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
WKA El Con Associates
We have audited the accompanying balance sheets of WKA El Con Associates (a
joint venture partnership) as of June 30, 1997 and 1996, and the related
statements of operations and deficit, and cash flows for each of the three
years in the period ended June 30, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WKA El Con Associates as
of June 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that WKA
El Con Associates will continue as a going-concern. As more fully described in
Note 8, El Conquistador Partnership L.P., a 50% owned partnership, has not
renewed or replaced a letter of credit collateralizing $120,000,000 of
indebtedness. In the event that the letter of credit is not renewed or
replaced prior to November 9, 1997, the debt will be required to be repaid on
February 1, 1998. This condition raises substantial doubt about the
Partnership's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classifications of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
San Juan, Puerto Rico
August 11, 1997
F-137
<PAGE>
WKA EL CON ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, --------------------------
1997 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash............................................... $ 3,600 $ 3,600 $ 3,200
Notes receivable from affiliated company........... 18,863,700 18,343,200 16,116,000
Investment in Las Casitas Development Company...... -- 242,600 1,292,600
Capitalized interest, less accumulated amortization
of $100,400 and $71,000 at June 30, 1997 and 1996,
respectively, and $107,700 at September 30, 1997.. 1,360,800 1,368,100 1,397,500
Deferred debt issuance costs and other assets, less
accumulated amortization of $598,600 and
$496,200 at June 30, 1997 and 1996, respectively,
and $624,400 at September 30, 1997................ 744,000 769,800 872,200
------------ ------------ ------------
Total assets................................... $ 20,972,100 $ 20,727,300 $ 19,681,500
============ ============ ============
LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL
Liabilities:
Long-term note payable........................... $ 5,526,200 $ 5,527,400 $ 5,197,000
Due to affiliated company........................ 90,600 85,100 64,200
Due to partners.................................. 10,653,900 10,475,100 9,790,700
Losses in excess of equity investment in El
Conquistador Partnership L.P. .................. 13,689,200 12,464,200 7,762,600
------------ ------------ ------------
Total liabilities.............................. 29,959,900 28,551,800 22,814,500
Deficiency in partners' capital:
Contributed...................................... 20,286,200 20,286,200 20,286,200
Deficit.......................................... (29,274,000) (28,110,700) (23,419,200)
------------ ------------ ------------
Total deficiency in partners' capital.......... (8,987,800) (7,824,500) (3,133,000)
------------ ------------ ------------
Total liabilities and deficiency in partners'
capital....................................... $ 20,972,100 $ 20,727,300 $ 19,681,500
============ ============ ============
</TABLE>
See accompanying notes.
F-138
<PAGE>
WKA EL CON ASSOCIATES
STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------------- ----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Interest income..................... $ 325,300 $ 295,500 $ 1,241,100 $ 1,150,100 $ 1,027,600
Costs and expenses:
Interest.......................... 282,400 265,400 1,078,400 1,145,800 1,137,600
Professional fees................. 5,500 7,400 20,900 40,100 83,400
Amortization...................... 33,100 33,100 131,800 142,000 163,200
------------ ------------ ------------ ------------ ------------
321,000 305,900 1,231,100 1,327,900 1,384,200
------------ ------------ ------------ ------------ ------------
Income (loss) before equity in
operations of investees............ 4,300 (10,400) 10,000 (177,800) (356,600)
Equity in operations of investees:
El Conquistador Partnership L.P... (1,167,600) (923,500) (4,701,500) (6,120,500) (13,738,400)
Las Casitas Development Company... -- -- -- 313,200 1,627,100
------------ ------------ ------------ ------------ ------------
(1,167,600) (923,500) (4,701,500) (5,807,300) (12,111,300)
------------ ------------ ------------ ------------ ------------
Net loss............................ (1,163,300) (933,900) (4,691,500) (5,985,100) (12,467,900)
Accumulated deficit at beginning of
year............................... (28,110,700) (23,419,200) (23,419,200) (17,434,100) (4,966,200)
------------ ------------ ------------ ------------ ------------
Accumulated deficit at end of year.. $(29,274,000) $(24,353,100) $(28,110,700) $(23,419,200) $(17,434,100)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-139
<PAGE>
WKA EL CON ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
------------------------- --------------------------------------
1997 1996 1997 1996 1995
----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Operating Activities
Net loss............................... $(1,163,300) $ (933,900) $(4,691,500) $(5,985,100) $(12,467,900)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Amortization......................... 33,100 33,100 131,800 142,000 163,200
Equity in operations of affiliates
including $1,050,000 and $950,000
in cash distributions received in
fiscal years 1997 and 1996,
respectively, and $300,100 and
$600,000 in cash distributions
received during the three months
ended September 30, 1997 and 1996,
respectively........................ 1,467,600 1,523,500 5,751,600 6,757,300 12,111,300
Changes in operating assets and
liabilities:
Accrued interest income added to
notes receivable.................... (351,400) (626,900) (1,177,200) (1,122,800) (1,000,600)
Other receivables.................... -- -- -- -- 13,200
Accrued interest expense added to
long-term liabilities............... -- -- 330,400 1,102,900 974,500
Accounts payable..................... (1,200) 94,200 -- -- (36,700)
Due to affiliated company............ 5,500 7,500 -- 58,900 --
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
operating activities.............. (9,700) 97,500 345,100 953,200 (243,000)
Investing Activities
Sale of certificate of deposit held in
escrow................................ -- -- -- 682,500 100,000
Increase on deferred debt issuance
costs and other assets................ -- -- -- -- (230,400)
Increase in notes receivable from
affiliated company.................... (169,100) (268,200) (1,050,000) (950,000) (423,500)
----------- ----------- ----------- ----------- ------------
Net cash used in investing
activities........................ (169,100) (268,200) (1,050,000) (267,500) (553,900)
Financing Activities
Partners' contributed capital.......... -- -- -- 1,295,700 1,870,500
Partners' loans--net................... 178,800 171,100 684,400 (852,900) 323,500
Payments to affiliated company......... -- -- 20,900 (1,125,300) (1,397,100)
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
financing activities.................. 178,800 171,100 705,300 (682,500) 796,900
----------- ----------- ----------- ----------- ------------
Net increase in cash................... -- 400 400 3,200 --
Cash at beginning of year.............. 3,600 3,200 3,200 -- --
----------- ----------- ----------- ----------- ------------
Cash at end of year.................... $ 3,600 $ 3,600 $ 3,600 $ 3,200 $ --
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-140
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. INTERIM INFORMATION (UNAUDITED)
The interim financial statements as of and for the three months ended
September 30, 1997 and 1996, included herein are unaudited. Such information
reflects all ajustments, consisting solely of normal recurring adjustments,
which are in the opinion of management necessary for a fair presentation of the
balance sheet as of September 30, 1997 and the results of operations and cash
flows for the three months ended September 30, 1997 and 1996. Due to the
seasonality of the business, the reported results are not necessarily indicative
of those expected for the entire year. Certain information and disclosures
normally included in annual financial statements in accordance with generally
accepted accounting principles have been excluded or omitted in presentation of
the interim financial statements.
2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES
Organization
WKA El Con Associates (the Partnership) is a joint venture organized under
the General Partnership Law of the State of New York, pursuant to a Joint
Venture Agreement (the Agreement) dated January 9, 1990, as amended, for the
purpose of becoming a general and limited partner of El Conquistador
Partnership L.P. (El Con). The Partnership is owned 46.54% by WHG El Con Corp.
(formerly known as WMS El Con Corp.), which is wholly-owned by WHG Resorts &
Casino Inc., 37.23% by AMK Conquistador, S.E. and 16.23% by Hospitality
Investor Group, S.E. The Partnership shall continue to exist until January 9,
2040, unless terminated earlier pursuant to the Agreement. Net profits or
losses of the Partnership will be allocated to the partners in accordance with
the terms of the Agreement.
The Partnership is a 50% limited partner in Las Casitas Development Company
I, S en C (S.E.) ("Las Casitas"), a joint venture constructing and selling
condominiums on property adjacent to El Con.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in Affiliated Companies
The investments in affiliated companies are accounted for under the equity
method. El Con equity is recorded by the Partnership based on El Con's fiscal
year of March 31. Las Casitas equity is recorded by the Partnership based on
Las Casitas' fiscal year of June 30. Capitalized interest is being amortized
by the straight-line method over the estimated useful life of the El
Conquistador property.
Deferred Debt Issuance Costs and Other Assets
Deferred debt issuance costs include legal and bank fees incurred in
connection with the issuance of the debt, and are being amortized over the
maturity of the related debt. Certain other capital and pre-opening costs
relating to El Con were incurred by the Partnership and are being amortized
over 5 to 50 years.
Fair Values of Financial Instruments
Note payable: The carrying amount of the note payable at June 30, 1997
approximates fair value. The fair value was estimated using discounted cash
flows, based on the current borrowing rates for similar types of borrowing
arrangements.
F-141
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
3. NOTES RECEIVABLE FROM AFFILIATED COMPANY
At June 30, 1997 and 1996 notes receivable from El Con consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note receivable due on demand......................... $ 136,000 $ 136,000
Note receivable due through May, 2002 (See Note 5)....... 4,000,000 4,000,000
Subordinated notes receivable due in 2003 to 2005 (See
Note 4).............................................. 8,229,700 8,229,700
Accrued interest receivable........................... 3,977,500 2,800,300
Deficiency loan participation......................... 2,000,000 950,000
----------- -----------
$18,343,200 $16,116,000
=========== ===========
</TABLE>
Repayment of the notes, including accrued interest, is subordinated to other
long-term debt of El Con.
4. INVESTMENT IN AFFILIATED COMPANIES
In 1991, the Partnership borrowed $9,000,000 from Williams Hospitality Group
Inc. (Williams Hospitality), a hotel/casino management company that is an
affiliated company, and invested the proceeds in the partnership capital of El
Con, a joint venture organized to acquire the El Conquistador property. The
Partnership owns a 50% interest, as both a general and limited partner, of El
Con (See Note 4).
Summarized financial information for El Con as of March 31, 1997 and 1996
and for the years then is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Total assets...................................... $205,430,000 $211,691,000
Total liabilities................................. 218,359,000 215,216,000
Deficiency in partners capital.................... 12,929,000 3,525,000
Revenues.......................................... 92,958,000 89,214,000
Net loss.......................................... 9,403,000 12,241,000
</TABLE>
The Partnership's investment in Las Casitas amounts to $5,000.
5. DUE TO AFFILIATED COMPANY AND PARTNERS
At various times, the partners loaned the Partnership $8,229,700 under the
terms of loan agreements. The notes are payable in 2003 to 2005 and bear
interest at the prime rate commencing on various dates. The Partnership has
advanced the same amount under a subordinated note to El Con under the same
terms as the borrowing from the partners. (See Note 3).
In November 1993, the partners advanced $782,500 to the Partnership that was
invested in a bank certificate of deposit. During fiscal year 1996 the
remaining balance of $682,500 was withdrawn from the certificate and
distributed to the partners. The certificate of deposit was held in escrow and
was pledged as collateral to the bank for a bank loan of an equal amount to El
Con. Interest accrued on the partners' advances at the same interest rate
earned on the certificate of deposit.
During fiscal year 1997 and 1996, respectively, the Partnership purchased
from Williams Hospitality $1,050,000 and $950,000, respectively, of
participation in a deficiency loan to El Con. The loan and interest at 9.16%
are payable from specified future cash flow of El Con. The partnership
guarantees a revolving credit facility with a bank in the aggregate amount of
up to $4,000,000 of El Conquistador.
F-142
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
6. LONG-TERM NOTE PAYABLE
The long-term note payable to a bank includes accrued interest of $1,527,400
and $1,197,000 at June 30, 1997 and 1996, respectively. The note is payable in
quarterly installments of $250,000 commencing in May 2000. Any unpaid
principal and interest is payable in May 2002. The note bears interest at a
variable rate, computed quarterly, equal to LIBOR, plus 1.75%. Under the terms
of the Credit Facility Agreement dated May 5, 1992, interest payments are
deferred during the first five years. The $4,000,000 borrowing was loaned to
El Conquistador under similar terms. (See Note 3).
The note is collateralized by second mortgages on parcels of land owned by
Williams Hospitality and Posadas de Puerto Rico Associates, Incorporated,
affiliated companies through common ownership, with a cost of approximately
$3,761,000, and a guarantee of $1,000,000 by WHG Resorts & Casino Inc., the
ultimate owner of WHG El Con Corp.
7. INCOME TAXES
The Partnership is not taxable for Puerto Rico income tax purposes pursuant
to an election submitted to the Puerto Rico Treasury Department. Instead, each
partner reports their distributive share of the Partnership's profit or losses
in their respective income tax returns and, therefore, no provision for income
taxes has been made in the accompanying financial statements. Income or loss
of the Partnership for Federal income tax purposes is reported by the
partners.
8. REFINANCING
El Con, a partnership 50% owned by the Partnership, has not renewed or
replaced a letter of credit collateralizing $120,000,000 of Industrial Revenue
Bonds, which expires on March 9, 1998. The debt is required to be repaid on
February 1, 1998 in the event the letter of credit is not renewed or replaced
prior to November 9, 1997. El Con has retained an investment banking firm to
assist in structuring the refinancing of El Con's debt. Based on operating
history of the El Con resort, El Con's management believes such refinancing
will be achieved, but there can be no assurance thereof. If such refinancing
is not renewed or replaced, it raises substantial doubt about El Con's and the
Partnership's ability to continue as going-concerns.
F-143
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
El Conquistador Partnership L.P.
We have audited the accompanying balance sheets of El Conquistador
Partnership L.P. as of March 31, 1997 and 1996, and the related statements of
operations and (deficiency in) partners' capital, and cash flows for each of
the three years in the period ended March 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of El Conquistador
Partnership L.P. at March 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that El
Conquistador Partnership L.P. will continue as a going-concern. As more fully
described in Note 14, to date El Conquistador Partnership L.P. has not renewed
or replaced a letter of credit collateralizing $120,000,000 of indebtedness.
In the event that the letter of credit is not renewed or replaced prior to
November 9, 1997, the debt will be required to be repaid on February 1, 1998.
This condition raises substantial doubt about the El Conquistador Partnership
L.P.'s ability to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classifications of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
San Juan, Puerto Rico
May 2, 1997
F-144
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, --------------------------
1997 1997 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash.............................................. $ 937,088 $ 2,380,218 $ 856,983
Restricted cash and investments held by bank...... 3,438,722 3,360,607 2,879,355
Trade accounts receivable, less allowance for
doubtful accounts of $269,115 and $301,765
at March 31, 1997 and 1996, respectively,
and $263,336 at June 30, 1997.................... 5,259,173 4,764,607 5,302,884
Due from affiliated companies..................... 496,268 428,987 314,999
Inventories....................................... 1,722,260 1,662,877 1,522,463
Prepaid expenses and other current assets......... 1,506,524 1,020,716 945,905
------------- ------------ ------------
Total current assets............................ 13,360,035 13,618,012 11,822,589
Due from affiliated company........................ 258,185 418,957 817,868
Land, building and equipment:
Land.............................................. 14,372,707 14,372,707 14,372,707
Building.......................................... 158,039,190 158,039,190 158,039,190
Furniture, fixture and equipment.................. 32,968,909 32,664,796 31,359,202
------------- ------------ ------------
205,380,806 205,076,693 203,771,099
Less accumulated depreciation..................... 22,721,318 21,116,551 14,777,283
------------- ------------ ------------
182,659,488 183,960,142 188,993,816
Operating equipment, net........................... 1,463,570 1,592,219 1,469,350
Deferred debt issuance costs, net of accumulated
amortization of $5,709,747 and $4,731,745 at
March 31, 1997 and 1996, respectively, and
$3,921,345 at June 30, 1994....................... 2,736,120 2,980,622 3,958,624
Deferred pre-opening costs, net of accumulated
amortization of $10,519,175 and $8,751,425 at
March 31, 1997 and 1996, respectively, and
$10,961,112 at June 30, 1997...................... 2,418,567 2,860,504 4,628,254
------------- ------------ ------------
Total assets.................................... $ 202,895,965 $205,430,456 $211,690,501
============= ============ ============
LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL
- -----------------------------------------------
Current liabilities:
Trade accounts payable............................ $ 5,037,984 $ 5,474,496 $ 7,657,546
Bank overdraft.................................... 1,023,130 -- --
Advance deposits.................................. 2,192,643 5,572,317 3,568,390
Accrued interest.................................. 1,701,436 1,785,687 1,510,080
Other accrued liabilities......................... 5,070,540 5,271,335 4,673,189
Due to affiliated companies....................... 768,358 545,824 652,896
Note payable to bank.............................. 3,500,000 1,500,000 2,773,359
Current portion of long-term debt................. 120,000,000 120,000,000 --
Current portion of chattel mortgages and capital
lease obligations................................ 2,679,819 2,679,819 2,444,993
------------- ------------ ------------
Total current liabilities....................... 141,973,910 142,829,478 23,280,453
Long-term debt..................................... 25,000,000 25,000,000 145,000,000
Chattel mortgages and capital lease obligations,
net of current portion............................ 1,038,142 1,660,040 4,324,358
Due to affiliated companies........................ 12,246,673 11,491,977 8,531,671
Due to partners.................................... 37,900,913 37,377,424 34,079,309
Deficiency in partners' capital:
Limited partners.................................. (12,974,122) (10,989,193) (2,996,497)
General partners.................................. (2,289,551) (1,939,270) (528,793)
------------- ------------ ------------
Total deficiency in partners' capital........... (15,263,673) (12,928,463) (3,525,290)
------------- ------------ ------------
Total liabilities and deficiency in partners'
capital.......................................... $ 202,895,965 $205,430,456 $211,690,501
============= ============ ============
</TABLE>
See accompanying notes.
F-145
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
STATEMENTS OF OPERATIONS AND (DEFICIENCY IN) PARTNERS' CAPITAL
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEAR ENDED MARCH 31,
---------------------------- ----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms............................. $ 10,110,204 $ 9,763,440 $ 40,023,903 $ 38,817,160 $ 37,942,821
Food and beverage................. 7,558,329 8,061,916 26,235,365 26,188,693 27,298,340
Casino............................ 1,278,377 1,395,740 6,005,242 6,179,133 6,054,569
Rental and other income........... 5,691,174 5,057,452 21,959,328 19,165,969 14,652,328
------------ ------------ ------------ ------------ ------------
24,638,084 24,278,548 94,223,838 90,350,955 85,948,058
Less casino promotional
allowances....................... (200,573) (283,888) (1,265,710) (1,136,499) (1,205,380)
----------- ------------ ------------ ------------ ------------
Net revenues.................... 24,437,511 23,994,660 92,958,128 89,214,456 84,742,678
Costs and expenses:
Rooms............................. 3,606,885 3,243,593 12,377,694 12,853,157 14,755,239
Food and beverage................. 4,805,250 5,014,481 17,602,484 17,638,186 20,797,173
Casino............................ 903,494 944,037 3,848,981 3,686,904 3,923,817
Selling, general and
administrative................... 4,661,954 4,295,248 14,657,312 12,992,841 18,115,433
Management and incentive
management fees.................. 1,450,084 1,479,997 5,680,355 5,394,675 3,703,819
Property operation, maintenance
and energy costs................. 2,190,925 1,974,600 12,382,577 12,396,063 14,408,347
Depreciation and amortization..... 2,306,617 2,276,010 9,146,664 10,499,296 11,124,075
Other expenses.................... 2,446,679 2,460,549 9,702,212 9,201,228 9,722,662
----------- ------------ ------------ ------------ ------------
22,371,888 21,688,515 85,398,279 84,662,350 96,550,565
----------- ------------ ------------ ------------ ------------
Income (loss) from operations... 2,065,623 2,306,145 7,559,849 4,552,106 (11,807,887)
Interest income..................... -- -- 199,110 228,625 467,922
Interest expense.................... 4,400,833 4,150,594 17,162,132 17,021,764 16,136,755
----------- ------------ ------------ ------------ ------------
Net loss............................ (2,335,210) (1,844,449) (9,403,173) (12,241,033) (27,476,720)
(Deficiency in) partners' capital at
beginning of year.................. (12,928,463) (3,525,290) (3,525,290) 8,715,743 36,191,325
Partners' capital contribution...... -- -- -- -- 1,138
----------- ------------ ------------ ------------ ------------
Deficiency in partners' capital at
end of year........................ $ (15,263,673) $ (5,369,739) $(12,928,463) $ (3,525,290) $ 8,715,743
============= ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-146
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEAR ENDED MARCH 31,
---------------------------- ----------------------------------------
1997 1996 1997 1996 1995
---------------------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................ $ (2,335,210) $ (1,844,449) $ (9,403,173) $(12,241,033) $(27,476,720)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization..... 2,306,617 2,276,010 9,146,664 10,499,296 11,124,075
Provision for losses on accounts
receivable....................... 28,000 45,400 205,400 363,245 1,808,641
Incentive management fees......... 587,751 630,222 2,375,526 2,224,381 679,259
Deferred interest expense to
partners and affiliates.......... 562,568 530,471 3,100,085 2,995,431 2,063,981
Changes in operating assets and
liabilities:
Restricted cash and investments
held by bank................... (78,115) (83,038) (481,252) 503,353 2,549,446
Trade accounts receivable....... (522,566) 1,328,065 332,877 1,987,789 2,187,211
Inventories..................... (59,383) 219 (140,414) 529,503 61,249
Prepaid expenses and other
current assets................. (501,219) (183,159) (74,811) 26,105 491,032
Trade accounts payable and
advance deposits............... (3,816,186) (3,180,618) (179,123) (3,663,803) (1,323,693)
Accrued interest and other
accrued liabilities............ 738,084 (319,669) 873,753 (1,220,058) 1,156,483
Affiliated companies, net....... 316,025 (79,210) 99,017 (97,985) 1,967,073
----------- ----------- ---------- ---------- -----------
Net cash provided by (used in)
operating activities............... (2,773,634) (879,756) 5,854,549 1,906,224 (4,711,963)
INVESTING ACTIVITIES
Purchases of property and
equipment.......................... (304,113) (189,259) (1,305,594) (826,611) (3,525,762)
Usage of operating equipment, net... 128,649 (25,638) (122,869) (37,454) 523,641
----------- ----------- ---------- ---------- -----------
Net cash used in investing
activities......................... (175,464) (214,897) (1,428,463) (864,065) (3,002,121)
FINANCING ACTIVITIES
Payments of principal on long-term
debt............................... (621,898) (262,449) (2,429,492) (2,198,146) (1,976,625)
Proceeds from long-term debt........ -- -- -- -- 772,000
Proceeds from notes payable to
bank............................... 2,000,000 4,000,000 9,500,000 7,684,685 --
Payments of principal on notes
payable to bank.................... -- (2,773,359) (10,773,359) (6,549,685) (200,000)
Proceeds from partners' and
affiliated loans, and capital
contributions...................... 127,866 195,019 800,000 -- 8,698,134
----------- ----------- ---------- ---------- -----------
Net cash used in financing
activities......................... 1,505,968 1,159,211 (2,902,851) (1,063,146) 7,293,509
----------- ----------- ---------- ---------- -----------
Net increase (decrease) in cash..... (1,443,130) 64,558 1,523,235 (20,987) (420,575)
Cash at beginning of year........... 2,380,218 856,983 856,983 877,970 1,298,545
----------- ----------- ---------- ---------- -----------
Cash at end of year................. $ 937,088 $ 921,541 $ 2,380,218 $ 856,983 $ 877,970
=========== =========== ============ ============ ============
Supplemental disclosure of cash flow
information:
Interest paid..................... -- -- $ 13,789,097 $ 14,026,453 $ 14,314,600
=========== =========== ============ ============ ============
</TABLE>
See accompanying notes.
F-147
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. INTERIM INFORMATION (UNAUDITED)
The interim financial statements as of and for the three months ended June 30,
1997 and 1996 included herein are unaudited. Such information reflects all
adjustments consisting solely of normal recurring adjustments, which are in the
opinion of management necessary for a fair presentation of the balance sheet as
of June 30, 1997 and the results of operations and cash flows for the three
months ended June 30, 1997 and 1996. Due to the seasonality of the business, the
reported results are not necessarily indicative of those expected for the entire
year. Certain information and disclosures normally included in annual financial
statements in accordance with generally accepted accounting principles have been
excluded or omitted in presentation of the interim financial statements.
2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES
Organization
El Conquistador Partnership L.P. (the Partnership), is a limited partnership
organized under the laws of Delaware, pursuant to a Joint Venture Agreement
dated January 12, 1990 (the Agreement). The Partnership is 50% owned by WKA El
Con Associates (WKA El Con), a partnership owned by several partners
affiliated with Williams Hospitality Group Inc. (Williams Hospitality), and
50% by Kumagai Caribbean, Inc. (Kumagai), a wholly-owned subsidiary of Kumagai
International USA, Inc. The joint venture partners (Partners) are both General
Partners and Limited Partners in the Partnership. The Partnership shall
continue to exist until March 31, 2030, unless terminated earlier by mutual
agreement of the General Partners. The Agreement provides that net profits or
losses of the Partnership after deducting a preferred cumulative annual return
of 8.5% on the Partners unrecovered capital accounts, as defined, will be
allocated to the Partners on a 50-50 ratio subject to certain exceptions, as
defined.
The Partnership owns and operates a luxury resort hotel and casino in Las
Croabas, Puerto Rico (the Resort).
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories, which consist mainly of food, beverages and supplies, are
valued at the lower of cost (first-in, first-out method) or market.
Land, Building and Equipment
Land, building and equipment are stated on the basis of cost. Building and
equipment are depreciated by the straight-line method over their estimated
useful lives.
Deferred Debt Issuance Costs
Debt issuance costs include legal and underwriting fees, other fees incurred
in connection with the financing and other costs. These costs are being
amortized on a straight-line basis over the term of the debt.
Deferred Pre-Opening Costs
Pre-opening costs consist of amounts incurred in connection with the
marketing, organization, planning and development of the Resort. Such costs
include staffing, marketing, legal and other costs incurred prior to the
commencement of operations of the Resort. The costs are being amortized on a
straight-line basis over a five year period through November 1998.
Casino Revenues
Casino revenues are the net win from gaming activities, which is the
difference between gaming wins and losses.
F-148
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
Casino Promotional Allowances
Casino promotional allowances represent the retail value of complimentary
rooms, food, beverage and hotel services furnished to patrons.
3. RESTRICTED CASH AND INVESTMENTS HELD BY BANK
Pursuant to the terms of the bond agreement (see Note 9), the Partnership
had cash and investments on deposit with the trustee for the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Interest due May 1.................................. $1,778,961 $1,584,000
Interest due August 1............................... 1,581,646 1,295,355
---------- ----------
$3,360,607 $2,879,355
========== ==========
</TABLE>
4. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Trade accounts receivable--hotel................... $4,559,108 $5,259,478
Less allowance for doubtful accounts............... 144,615 217,362
---------- ----------
4,414,493 5,042,116
Trade accounts receivable--casino.................. 474,614 345,171
Less allowance for doubtful accounts............... 124,500 84,403
---------- ----------
350,114 260,768
---------- ----------
Trade accounts receivable, net..................... $4,764,607 $5,302,884
========== ==========
</TABLE>
5. TRANSACTIONS WITH RELATED PARTIES
The Partnership has an Operating and Management Agreement (the Management
Agreement) with Williams Hospitality. The Management Agreement provides that
Williams Hospitality will manage the Resort for a period of 20 years for a
basic management fee of 3.5% of the Resorts' gross revenues, as defined, and
an incentive management fee of 10% of the Resorts' operating profit, as
defined. Incentive management fees accrued each year are not payable until
significant cash flows levels are achieved. In addition, the Partnership is
required to pay certain administrative expenses incurred by Williams
Hospitality in connection with management of the Resort.
During fiscal years 1997 and 1996, basic management fees amounted to
$3,305,000 and $3,170,000, respectively. Incentive management fees amounted to
approximately $2,376,000 and $2,224,000 during fiscal years 1997 and 1996,
respectively. In addition, Williams Hospitality charged the Partnership
approximately $3,258,000 and $2,728,000 in fiscal years 1997 and 1996,
respectively, for services provided to the Resort.
In addition, the Partnership was charged by Posadas de Puerto Rico
Associates, Incorporated (Posadas de Puerto Rico), hotel and casino operations
affiliated through common ownership, approximately $410,000 and $437,000 in
fiscal years 1997 and 1996, respectively, for services provided to the Resort.
F-149
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
As of March 31, 1997 each partner had advanced $8,365,685 to the Partnership
under notes that are due for various periods up to ten years with interest at
the Citibank, N.A. in New York base rate. Repayment of interest and principal
is subordinated to other long-term debt. In addition, each partner had
advanced to the Partnership $4,000,000 under a May 5, 1992 loan agreement. The
loan agreement provides for the payment of interest at a variable rate,
computed quarterly, equal to LIBOR plus 1.75%. Interest payments will be
deferred during the first five years. The principal and deferred interest
accrued at March 31, 1997 is payable in quarterly installments of $250,000
commencing in March 2000 and a final lump-sum payment in February 2002. The
loan is collateralized by a subordinated pledge of the Partnership's assets.
As of March 31, 1997 each partner had provided $3,800,000 to cover cash flow
deficiency in the Partnership's operations as provided by the Agreement. The
deficiency loans consist of $3,800,000 in cash by Kumagai, and the conversion
of amounts due from the Partnership to Williams Hospitality to loans for WKA
El Con. The deficiency loans bear interest at 9.16%. Repayment of interest and
principal is subordinated to other long-term debt.
As of March 31, 1997, the outstanding balance of advances made by the
Partnership to Williams Hospitality for the purchase of transportation
equipment leased to the Partnership under a five year service agreement
amounted to $727,200. Service agreement payments by the Partnership are equal
to the $39,819 monthly amounts receivable under the advance. Repayment of the
advances by Williams Hospitality are limited to amounts payable under the
service agreement. This transportation equipment is pledged as collateral by
Williams Hospitality to the Partnership's chattel mortgage notes.
In addition, a subsidiary of Williams Hospitality financed other
transportation equipment from an external borrowing amounting to $441,000
repayable over five years. Monthly payments amount to $9,699. Also, in
February 1997, a subsidiary of Williams Hospitality financed a ferryboat from
an external borrowing amounting to $456,000, repayable over seven years.
Monthly payments amount to $7,561. The Partnership chartered the
transportation equipment and ferryboat under terms similar to the transaction
described in the preceding paragraph.
In October 1996, each partner advanced $400,000 as required by a loan
agreement (see Note 7). The notes bear interest at the prime rate at the Chase
Bank in the New York base rate. Repayment of principal are subordinated to
other debt.
The chattel mortgage notes payable (see Note 8) are collateralized by a bank
standby letter of credit of $3,423,000. The letter of credit is collateralized
by certificates of deposit for $2,000,000 issued by the bank in equal amounts
to Williams Hospitality and Kumagai. The chattel mortgage notes, and capital
leases are guaranteed by Williams Hospitality and Kumagai.
6. NOTES PAYABLE TO BANK
On October 4, 1996 the Partnership entered into an amendment to a loan
agreement whereby the Government Development Bank for Puerto Rico (GDB)
extended the Partnership a $6,000,000 credit facility. The notes issued under
the credit facility will bear interest at 1% over LIBOR, and are secured by a
mortgage note on the Partnership's real property and a leasehold mortgage note
on leased land of $120,000. At March 31, 1997 the Partnership had outstanding
borrowings of $1,500,000 with an interest rate at March 31, 1997 of 6.56%.
As of March 31, 1996, the Partnership's borrowings of $2,500,000 with a bank
were repaid during fiscal year 1997.
F-150
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
7. DUE TO AFFILIATED COMPANIES AND PARTNERS
Amounts due to affiliated companies consist of fees earned by Williams
Hospitality, funds advanced to the Partnership and other payments made by
Williams Hospitality, and for services rendered by Posadas de Puerto Rico and
Posadas de San Juan. Amounts due to affiliated companies consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
Current:
Due to Williams Hospitality:
Basic management fees............................ $ 435,309 $ 414,718
Other............................................ 83,891 195,523
Due to Posadas de Puerto Rico.................... 26,624 37,380
Due to Posadas de San Juan....................... -- 5,275
----------- ----------
$ 545,824 $ 652,896
=========== ==========
Non current:
Affiliate:
Due to Williams Hospitality:
Incentive management fees...................... $ 5,542,528 $3,167,002
Interest at 10% on incentive management fees... 338,405 89,350
Advances....................................... 3,800,000 3,800,000
Interest on advances........................... 856,282 503,368
Other.......................................... 375,528 375,528
----------- ----------
10,912,743 7,935,248
Due to KG Caribbean.............................. 579,234 596,423
----------- ----------
$11,491,977 $8,531,671
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Partners:
Due to WKA El Con:
Advances......................................... $12,765,685 $12,365,685
Interest on advances............................. 3,594,886 2,522,285
Due to Kumagai:
Advances......................................... 16,565,685 16,165,685
Interest on advances............................. 4,451,168 3,025,654
----------- -----------
$37,377,424 $34,079,309
=========== ===========
</TABLE>
F-151
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
8. CHATTEL MORTGAGES AND CAPITAL LEASE OBLIGATIONS
Chattel mortgages and capital lease obligations on equipment consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Chattel mortgage notes payable bearing interest at
9%, payable in monthly installments of $215,784,
including interest, through 1998, collateralized
with personal property.............................. $3,868,202 $6,023,820
Capital lease obligations bearing interest at 11.5%,
payable in monthly installments of $28,335,
including interest, through 1998, collateralized
with personal property, net of $48,307 in 1997 and
$121,571 in 1996 representing interest.............. 471,657 745,531
---------- ----------
4,339,859 6,769,351
Less current portion................................. 2,679,819 2,444,993
---------- ----------
$1,660,040 $4,324,358
========== ==========
</TABLE>
Maturities of chattel mortgages and capital lease obligations are as follows:
<TABLE>
<S> <C>
1998........................................................... $2,679,819
1999........................................................... 1,660,040
----------
$4,339,859
==========
</TABLE>
See Note 5 for additional collateral and guarantees.
Assets and accumulated depreciation recorded under capital lease obligations
are included in land, building and equipment as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Equipment............................................. $1,288,373 $1,288,373
Less accumulated depreciation......................... 880,393 622,717
---------- ----------
$ 407,980 $ 665,656
========== ==========
</TABLE>
9. LONG-TERM DEBT
At March 31, 1997 and 1996, long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Industrial Revenue Bonds Series A................. $ 90,000,000 $ 90,000,000
Industrial Revenue Bonds Series B................. 30,000,000 30,000,000
Government Development Bank of Puerto Rico........ 25,000,000 25,000,000
------------ ------------
145,000,000 145,000,000
Less current portion.............................. 120,000,000 --
------------ ------------
$ 25,000,000 $145,000,000
============ ============
</TABLE>
F-152
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
On February 7, 1991 the Puerto Rico Industrial, Medical, Educational and
Environmental Pollution Control Facilities Financing Authority (the Authority)
sold industrial revenue bonds (Bonds) for $120,000,000 and loaned the proceeds
to the Partnership to be used for the payment of project costs pursuant to a
Loan Agreement. The Loan Agreement provides that the Partnership will pay all
interest and principal on the Bonds.
The Authority issued 1991 Series A, Industrial Revenue Bonds for $90,000,000
and 1991 Series B, Industrial Revenue Bonds for $30,000,000.
Commencing on May 1, 1996, the Bonds are subject to redemption at the
Partnership's option at par plus accrued interest, if any. The Bonds are due
on November 1, 1999 and interest is payable quarterly. The 1991 Series A Bonds
and the 1991 Series B Bonds bear interest at a variable rate, computed
quarterly, equal to 100% and 94%, respectively, of a LIBOR rate minus 1/8th of
1%. Effective November 1, 1996, the interest rate on the 1991 Series A Bonds
increased to 100% of the LIBOR rate. On February 7, 1991 the Partnership
entered into an Interest Swap Agreement that expires on March 8, 1998 by which
the Partnership agrees to pay, effective May 1, 1991, a fixed rate of 7.55% on
the outstanding principal of $120,000,000 in exchange for the counterparty's
obligation to pay the variable interest rate described above.
The Loan Agreement provides that the Partnership will deposit with the
trustee all interest which will become due not later than the 124th day
preceding the date of payment. The Bonds are collateralized by a letter of
credit, that terminates on February 7, 1998, issued by the Mitsubishi Bank,
Limited.
The Partnership pays an annual letter of credit fee of approximately 1.25%
of the Bond principal except under certain circumstances the rate may be
reduced to 1.2%. In addition, in connection with the letter of credit the
Partnership pays an annual agent's fee of approximately .25% of the Initial
Stated Amount, as defined.
Under the provisions of a term loan agreement with the GDB, the Partnership
borrowed $25,000,000 for the payment of project costs. The loan is due on
February 7, 2006. The loan agreement provides for a variable interest rate
equivalent to a LIBOR rate minus .5% plus an add-on margin as provided in the
loan agreement. Interest is payable quarterly in arrears.
Commencing on April 1, 1993, the Partnership is required to deposit annually
with an escrow agent 50% of the Available Cash Flow, as defined in the Loan
Agreement with GDB, up to a maximum of $1,666,700 plus any prior year
requirement in arrears. Through March 31, 1997, there had been no amounts
deposited in escrow under this provision.
The Bonds and the term loan with GDB are collateralized by a first and
second mortgage lien on the Resort, a chattel mortgage on personal property,
and an assignment of various contracts and a management agreement with a
related party. The collateral is subject to a subordination agreement in favor
of the Mitsubishi Bank, Limited.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107 "Disclosures About
Fair Value of Financial Instruments", requires the disclosure of the fair
value of the Partnership's financial instruments at March 31, 1997 and 1996.
The carrying amount of cash and investments, notes payable to bank, chattel
mortgage notes and capitalized leases approximates fair value because of the
short maturity of the instruments or recent issuance. The fair value of the
Partnership's long-term debt has not been determined because similar terms and
conditions may no longer be available.
F-153
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
11. INCOME TAXES
The Partnership is not taxable for Puerto Rico income tax purposes pursuant
to an election submitted to the Puerto Rico Treasury Department. Instead, each
Partner reports their distributive share of the Partnership's profit and
losses in their respective income tax returns and, therefore, no provision for
income taxes has been made in the accompanying financial statements.
During 1997, the Partnership was granted a tax exemption grant under the
provisions of the Puerto Rico Tourism Incentives Act of 1993 (the Tourism
Act). The Tourism Act provides for a ten-year grant which may be extended for
an additional ten-year term. Major benefits of this Act are: a 90% exemption
from income taxes on hotel income, and a 90% exemption from municipal real and
personal property taxes through the entire term of the grant. The
Partnership's casino operations are not covered by the tax exemption grant and
are fully taxable.
12. ADVERTISING COSTS
The Partnership recognizes the costs of advertising as expense in the year
in which they are incurred. Advertising costs amounted to approximately
$1,446,000 and $847,000 for fiscal years 1997 and 1996, respectively.
13. COMMITMENTS
The Partnership leases land under an operating lease agreement for thirty-
one years with renewal options for two five-year periods. Following are the
minimum annual rental payments on the operating lease subsequent to March 31,
1997:
<TABLE>
<S> <C>
1998........................................................... $ 190,000
1999........................................................... 210,000
2000........................................................... 210,000
2001........................................................... 210,000
2002........................................................... 210,000
Thereafter..................................................... 5,840,000
----------
$6,870,000
==========
</TABLE>
Total rent expense for fiscal years 1997, and 1996 amounted to approximately
$1,391,000 and $985,000, respectively.
14. REFINANCING
The Industrial Revenues Bonds amounting to $120,000,000 at March 31, 1997
are collateralized by a letter of credit which expires on March 9, 1998. Under
the terms of the loan agreement, such debt is required to be repaid on
February 1, 1998 in the event the letter of credit is not renewed or replaced
prior to November 9, 1997 (See Note 9). El Conquistador Partnership L.P. has
engaged an investment banking firm to assist in structuring the refinancing of
El Conquistador Partnership L.P.'s debt. Based on operating history of the
Resort, El Conquistador Partnership L.P.'s management believes such
refinancing will be achieved, but there can be no assurance thereof. If such
refinancing is not renewed or replaced, it raises substantial doubt about El
Conquistador Partnership L.P.'s ability to continue as a going-concern.
F-154
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and
Shareholders of CHC International, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of the
hospitality division of CHC International, Inc. at November 30, 1995 and 1996,
and the results of its operations and its cash flows for the years ended
November 30, 1995 and 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements were prepared on the basis of presentation
as described in Note 1.
/s/ Price Waterhouse, LLP
Miami, Florida
October 3, 1997
F-155
<PAGE>
<TABLE>
<CAPTION>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
November 30, August 31,
------------
1995 1996 1997
-------- --------- -----------
Assets (unaudited)
------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 1,105 $ 1,627 $ 1,261
Trade accounts receivable , net of
allowance for doubtful accounts of
$1,352, $699 and $523 at November 30, 1995
and 1996 and August 31, 1997, respectively 1,150 1,482 2,308
Trade accounts receivable - affiliates, net
of allowance for doubtful accounts of $488,
$716 and $696 at November 30, 1995, 1996
and August 31, 1997, respectively 1,261 1,108 2,133
Notes and stock subscription receivable -
affiliates and officers 340 480 2,039
Receivables, net 7,200 - -
Other current assets 713 921 401
-------- -------- --------
Total current assets 11,769 5,618 8,142
Property and equipment, net 623 669 1,891
Investments in and advances to affiliates 8,324 8,457 7,846
Receivables, net 1,900 1,900 1,950
Deferred charges, net 1,932 1,609 948
Intangibles, net 6,716 6,047 5,616
Other assets 1,859 1,939 2,352
-------- -------- --------
Total Assets $ 33,123 $ 26,239 $ 28,745
======== ======== ========
Liabilities and Stockholders' Equity (Deficit)
---------------------------------------------
Current Liabilities
Accounts payable $ 903 $ 672 $ 1,911
Due to affiliates and officers 1,069 1,617 2,220
Accrued interest 70 414 820
Accrued expenses 5,204 5,878 7,339
Current portion of long-term debt and
capital lease obligations 1,566 12,069 13,869
-------- -------- --------
Total current liabilities 8,812 20,650 26,159
Deferred compensation plan liability 5,537 6,102 6,891
Long-term debt 17,272 5,459 5,282
Other liabilities 1,710 108 193
-------- -------- --------
Total liabilities 33,331 32,319 38,525
-------- -------- --------
Commitments and contingencies (Note 11) - - -
Stockholders' Equity (Deficit)
Preferred stock, $.01 par value; 1,000
sharesauthorized; no shares issued or
outstanding - - -
Common stock, $.005 par value; 20,000
shares authorized; 10,355, 10,621 and
10,621 shares issued and outstanding at
November 30, 1995 and 1996 and August 31,
1997, respectively 52 53 53
Additional paid-in capital 17,050 13,853 15,177
Accumulated deficit (10,217) (12,012) (17,238)
Notes receivable stock purchases - affiliates (6,686) (7,675) (7,675)
Unearned compensation (407) (299) (97)
-------- -------- --------
Total stockholders' equity (deficit) (208) (6,080) (9,780)
-------- -------- --------
Total liabilities and stockholders'
equity (deficit) $ 33,123 $ 26,239 $ 28,745
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-156
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended ------------------
November 30, August 31,
-------------------- ------------------
1995 1996 1996 1997
--------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues
Rooms $ 4,638 $ 5,282 $ 3,703 $ 4,164
Food and beverage 3,907 4,351 3,047 3,559
Management service fees - from
affiliates 5,212 4,284 3,636 3,041
Management service fees - from
non-affiliates 5,391 4,748 3,616 3,706
------- ------- ------- -------
Total revenues 19,148 18,665 14,002 14,470
------- ------- ------- -------
Operating Expenses
Rooms 1,075 1,223 858 902
Food and beverage 2,386 2,772 2,005 2,291
Other costs and expenses 14,455 14,097 10,341 11,276
Depreciation and amortization 832 853 659 792
------- ------- ------- -------
Total operating expenses 18,748 18,945 13,863 15,261
------- ------- ------- -------
Income (loss) from operations before
equity in net earnings of affiliates 400 (280) 139 (791)
Equity in net earnings of affiliates 355 1,003 1,297 (131)
------- ------- ------- -------
Income from operations 755 723 1,436 (922)
------- ------- ------- -------
Other Income (Expense)
Interest income 1,720 686 519 590
Interest expense (2,365) (3,304) (2,387) (1,934)
Loss on impairment of notes (4,431) - - -
receivable
Merger and other costs - - - (3,000)
Other income (expense) (104) 29 29 -
------- ------- ------- -------
Total other income (expense) (5,180) (2,589) (1,839) (4,344)
Minority interests 148 163 118 114
------- ------- ------- -------
Income (loss) before provision for
income taxes (4,277) (1,703) (285) (5,152)
Provision for income taxes 131 92 46 74
------- ------- ------- -------
Net income (loss) $(4,408) $(1,795) $ (331) $(5,226)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-157
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED NOVEMBER 30, 1995 AND 1996 AND
NINE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Notes
Receivable
Common Stock Additional Stock Stockholders'
---------------- Paid-in Accumulated Purchases Unearned Equity
Shares Amount Capital Deficit Affiliates Compensation (Deficit)
-------- ------ ----------- ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1994 10,355 $ 52 $ 22,645 $ (5,809) $ (7,350) $ (523) $ 9,015
Receipts from notes receivable stock
purchases - affiliates - - - - 664 - 664
Amortization of unearned
compensation - - - - - 116 116
Net change in gaming division - - (5,595) - - - (5,595)
intercompany account
Net loss - - - (4,408) - - (4,408)
-------- ------ ---------- ----------- ---------- ----------- -----------
Balance, November 30, 1995 10,355 52 17,050 (10,217) (6,686) (407) (208)
-------- ------ ---------- ----------- ---------- ----------- -----------
Additional common shares issued 266 1 2,999 - (3,000) - -
Receipts from notes receivable stock
purchases - affiliates - - - - 2,011 - 2,011
Amortization of unearned
compensation - - - - - 108 108
Net change in gaming division - - (6,196) - - - (6,196)
intercompany account
Net loss - - - (1,795) - - (1,795)
-------- ------ ---------- ----------- ---------- ----------- -----------
Balance, November 30, 1996 10,621 53 13,853 (12,012) (7,675) (299) (6,080)
-------- ------ ---------- ----------- ---------- ----------- -----------
Amortization of unearned
compensation - - - - - 202 202
Net change in gaming division - - 1,324 - - - 1,324
intercompany account
Net loss - - - (5,226) - - (5,226)
-------- ------ ---------- ----------- ---------- ----------- -----------
Balance, August 31, 1997 (unaudited) 10,621 $ 53 $ 15,177 $ (17,238) $ (7,675) $ (97) $ (9,780)
======== ====== ========== =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-158
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(PAGE 1 OF 2)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
November 30, August 31,
-------------------- -------------------
1995 1996 1996 1997
--------- --------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,408) $(1,795) $ (331) $(5,226)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Provision (benefit) for losses or impairments on
receivables and equity investments 5,765 (212) 154 (11)
Depreciation and amortization 832 853 659 792
Amortization of deferred charges 844 1,533 1,023 871
Undistributed equity in net earnings of affiliates (355) (1,003) (1,297) 131
Minority interests (148) (163) (118) (114)
Change in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (292) 313 263 (635)
Trade accounts receivable - affiliates (796) 227 (19) (835)
Deferred charges (28) (1,084) (1,084) 89
Other assets and other receivables (964) (707) (387) (405)
Increase (decrease) in:
Accounts payable (667) (231) 3 1,238
Accrued interest 37 344 (41) 4
Accrued expenses (239) (822) (1,921) 1,415
Deferred compensation plan liability 600 565 411 788
Other liabilities (34) 56 133 200
------- ------- ------- -------
Net cash provided (used) by operating activities 147 (2,126) (2,552) (1,698)
------- ------- ------- -------
Cash flows from investing activities:
Sales of notes receivable - 7,200 7,200 -
Purchases of property and equipment (168) (134) (94) (1,538)
Investments in and advances to affiliates (2,645) (50) - (1,451)
Sales of or distributions from investments in affiliates 959 834 659 1,932
Project loans and advances (1,900) - - (50)
------- ------- ------- -------
Net cash flows (used) provided by investing activities (3,754) 7,850 7,765 (1,107)
------- ------- ------- -------
Cash flows from financing activities:
Receipts from notes receivable stock purchases - affiliates 7,756 2,011 106 -
Increase (decrease) in due to affiliates (1,145) 408 61 (508)
Borrowings 2,900 500 - 2,255
Payments of debt and capital lease obligations and
other deferred charges (577) (1,926) (1,294) (632)
Net change in gaming division intercompany account (5,595) (6,195) (5,088) 1,324
------- ------- ------- -------
Net cash flows provided (used) by financing activities 3,339 (5,202) (6,215) 2,439
------- ------- ------- -------
Net increase (decrease) in cash and equivalents (268) 522 (1,002) (366)
Cash and cash equivalents at beginning of period 1,373 1,105 1,105 1,627
------- ------- ------- -------
Cash and cash equivalents at end of period $ 1,105 $ 1,627 $ 103 $ 1,261
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-159
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(PAGE 2 OF 2)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
November 30, August 31,
---------------- ---------------
1995 1996 1996 1997
------- ------- ------ -------
(Unaudited)
Supplemental disclosure of cash flow
information:
<S> <C> <C> <C> <C>
Cash paid during the period for
interest (net of amount capitalized) $1,626 $ 1,718 $1,110 $ 981
====== ======= ====== ======
Cash paid during the period for
income taxes $ 96 $ 89 $ 48 $ 30
====== ======= ====== ======
Cash received during the period for
income taxes $ 29 $ 34
Supplemental Schedule of noncash ======= ======
investing and financing activities:
Investments in Affiliates:
Loan for purchase of interest in
GAH-II, L.P. $3,750
Loan for investment in CHC Lease
Partners 1,088
Operating partnership units
received as payment of interest 572
Operating partnership units
received as payment of
notes receivable stock 388
purchases - affiliates ------
Total investments in affiliates $5,798
======
Other:
Common stock issued for notes
receivable stock purchase-affiliates $ 3,000
=======
Capital leases $ 166 $ 41 $ 41
====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-160
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The financial statements of CHC International, Inc. - Hospitality Division (the
"Company") have been prepared pursuant to the Agreement and Plan of Merger by
and among Patriot American Hospitality Operating Company ("Opco"), Patriot
American Hospitality, Inc. ("PAH") and CHC International, Inc. ("CHC") dated as
of September 30, 1997 (the "Merger Agreement"). The Merger Agreement
contemplates, subject to appropriate approvals, (i) CHC's contribution of its
gaming business to a wholly-owned subsidiary ("Spinco"), (ii) CHC's distribution
of all of the common stock of Spinco to the stockholders of CHC pro rata based
on their ownership in CHC, (iii) CHC's retention of its hospitality business and
(iv) CHC merging into OpCo subsequent to the distribution of Spinco. CHC's major
operations consist of (i) the hospitality business including managing, leasing
and developing of and investing in hotel and resort properties and (ii) the
gaming business including owning, managing and developing casino properties.
The financial statements have been prepared as if the Company has operated as an
independent, stand alone entity for all periods presented and give no effect to
the net changes of assets and liabilities contemplated by the Merger Agreement.
Such financial statements have been prepared using the historical basis of
accounting and include all of the assets, liabilities, revenues and expenses
previously included in CHC's consolidated financial statements prior to the
transactions contemplated by the Merger Agreement, except for all the assets,
liabilities, (including contingent liabilities), revenues and expenses of the
gaming business of CHC and its subsidiaries. Consequently, these financial
statements include certain balances for goodwill and other assets and
liabilities related to the Company that were previously included in CHC's
consolidated financial statements including (i) the allocation of certain fixed
assets and related depreciation expense, (ii) notes receivable and borrowings
and related interest income and expense and (iii) other liabilities and related
expenses. In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 55 ("SAB 55"), the Company's financial statements
exclude certain corporate expenses incurred by CHC on the gaming division's
behalf. The Company's fiscal year ends on November 30. All significant
intercompany balances and transactions have been eliminated. Investments in less
than majority-owned non-gaming businesses, in which a significant equity
ownership interest is held, are accounted for on the equity method.
Summary of Significant Accounting Policies
- ------------------------------------------
These financial statements have been prepared in accordance with generally
accepted accounting principles. Significant accounting policies are summarized
below.
F-161
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
- -------------------
Hotel room and food and beverage revenues and expenses from leased hotel
operations are included in the statements of operations during the lease term.
Revenues from rooms and food and beverage sales are recognized at the time the
related service is performed.
Revenue from management service fees for management of hotels are based upon
contracted terms and are recognized when the services are performed.
Reimbursed Operating Expenses
- -----------------------------
The Company is fully reimbursed by certain managed hotels for salaries and
related costs for hotel personnel employed by the Company in accordance with
management contract terms and the administration of services consisting
primarily of sales, marketing and reservations. These costs amounted to
$47,324 and $50,237 for the years ended November 30, 1995 and 1996,
respectively. All such costs and related reimbursements have been netted in the
statements of operations, with reimbursable amounts and accrued salaries and
related costs reflected as trade accounts receivable and accrued expenses,
respectively, in the balance sheets.
During the year ended November 30, 1995 the Company was reimbursed for $1,400 of
costs incurred in conjunction with an unconsummated transaction previously
expensed in the statements of operations during the period inception (February
3, 1994) to November 30, 1994.
Stock Based Compensation
- ------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation". SFAS No. 123, the disclosure provisions of which must be
implemented for fiscal years beginning subsequent to December 15, 1995,
establishes a fair value based method of accounting for stock based compensation
plans, the effect of which can either be disclosed or recorded. The Company
intends to adopt the provisions of SFAS No. 123 in fiscal 1997 and upon adoption
intends to retain its intrinsic value method of accounting for stock based
compensation.
F-162
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include short-term investments with original purchase
maturities of 90 days or less.
Trade Accounts Receivable and Trade Accounts Receivable - Affiliates
- --------------------------------------------------------------------
Trade accounts receivable are from non-affiliated hotels under management and
lease, and hotel customers. Trade accounts receivable - affiliates are
receivables from hotel or other entities in which the Company, CHC, its
stockholders or officers have an investment interest. The Company provides an
allowance for doubtful accounts based upon a periodic review of outstanding
receivables and evaluation of aggregate collectibility.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization
are provided on a straight-line basis over estimated useful lives of the
assets. Useful lives range from three to five years. Expenditures for repairs
and maintenance are charged to expenses as incurred. Expenditures for major
renewals and betterments, which significantly extend the useful lives of
existing equipment, are capitalized and depreciated.
Equipment held under capital leases is amortized over the lesser of
useful life or lease term.
Deferred Charges
- ----------------
Costs incurred in connection with the Company's term loan are recorded as
deferred charges and are amortized over the term of the loan. Trademark and
organization costs are amortized on a straight line basis over 40 and 5
years, respectively.
Deferred charges consist of the following at November 30,:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred debt costs $ 2,022 $ 3,197
Trademark and organization costs 1,180 1,110
------- -------
3,202 4,307
Accumulated amortization (1,270) (2,698)
------- -------
Deferred charges, net $ 1,932 $ 1,609
======= =======
</TABLE>
F-163
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Intangibles
- -----------
Goodwill is amortized on a straight line basis over 30 to 40 years. Management
contract intangibles are amortized on a straight-line basis over 9 to 25 years.
The Company periodically assesses the future benefit associated with management
contract intangibles through a review on a contract by contract basis of
estimated undiscounted future operating cash flow. Any impairment of intangible
assets is charged to operations and reflected as a reduction of the related
intangible asset account.
Impairment of Long-Lived Assets
- -------------------------------
The Company during fiscal 1996 adopted SFAS No. 121, "Accounting for Impairment
of Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-term
assets, including related goodwill, be reviewed for impairment and written down
to fair value whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.
Income Taxes
- ------------
Income taxes are provided based on the liability method of accounting pursuant
to SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are
recorded to reflect tax consequences on future years' differences between tax
bases of assets and liabilities and their financial reporting amounts at each
year-end as if the Company were a stand alone taxpayer.
Interim Unaudited Financial Information
- ---------------------------------------
The consolidated financial statements for the nine months ended August 31, 1996
and 1997 are unaudited; however, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month periods
ended August 31, 1996 and 1997 are not necessarily indicative of the results
that may be expected for a full year.
Concentration of Credit Risk
- ----------------------------
Financial instruments which potentially subject The Company to concentrations of
credit risk exist principally in receivable balances.
The Company provides its services to the hotel industry. Hotel management
services are contracted for terms normally ranging from 1 to 20 years,
and in limited instances on a month-to-month basis. To reduce credit risk, the
Company, through its management of such hotels, monitors the hotels' financial
condition. The Company does not generally require collateral. Five management
contracts accounted for 26% of management service fees revenues for each of the
years ended November 30, 1995 and 1996.
F-164
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has a note receivable from the Rhode Island Convention Center
Authority in conjunction with agreements to develop and operate a hotel. To
reduce credit risk with respect to the note receivable from the Rhode Island
Convention Center Authority, the Company, through its management of the
property, which is the primary source of repayment, monitors the hotel's
financial condition, and management believes the credit risk related to the
receivable is minimal.
The Company has notes receivable from certain stockholders for the purchase of
the Company's common stock. Management believes the concentration of credit
risk with respect to the notes from certain stockholders for the purchase of
company common stock is minimal. (See note 13.)
The estimated fair value of financial instruments have been determined by the
Company using available market and effective interest rate information for such
instruments and the carrying amounts approximate their fair value.
Common Share Data
- -----------------
In February 1996, the Company's common stock was adjusted pursuant to a 2-for-1
stock split where each share of the Company's common stock, $.01 par value per
share was converted into two shares of the Company's common stock, $.005 par
value per share. All share and per share amounts have been retroactively
adjusted to give effect to the stock splits.
NOTE 2 - RECEIVABLES
Noncurrent receivables consist of a $1,900 note receivable from the Rhode Island
Convention Center Authority (the "Authority") with an interest rate equal to the
lesser of manager share of net cash flow as defined or 11% (effective interest
rate of 3.90% and 1.0% as of November 30, 1995 and 1996, respectively) payable
annually, interest only, with principal due on earlier of December 30, 2024 or
the date the management agreement between the Authority and the Company is
terminated.
The Company owned nonrecourse subordinated notes in the amount of $12,500
("Notes Receivable Crystal Palace") secured by a leasehold interest in the
Crystal Palace Hotel. The Company originally recorded a discount of $1,000 on
the Notes Receivable Crystal Palace. On December 29, 1995, The Company sold its
interest in the Notes Receivable Crystal Palace to the issuer for $7,200, plus
accrued interest. The Company recorded a loss on the impairment in value for the
Notes Receivable Crystal Palace of $4,431 during the year ended November 30,
1995.
F-165
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at November 30,:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Furniture, fixtures and other equipment $ 509 $ 615
Leasehold improvements 195 198
Equipment under capital leases 335 384
------ ------
1,039 1,197
Accumulated depreciation and (416) (528)
amortization ------ ------
Property and equipment, net $ 623 $ 669
====== ======
</TABLE>
Depreciation expense was $82 and $129 for the years ended November 30, 1995 and
1996, respectively.
NOTE 4 - LEASES
Capital Leases
- --------------
The Company leases certain equipment under capital leases. Minimum rentals
under such capital leases are as follows at November 30, 1996:
<TABLE>
<CAPTION>
Year ending November 30,:
-------------------------
<S> <C>
1997 $ 69
1998 70
1999 59
2000 55
2001 9
----
Total minimum lease payments 262
Less amount representing interest 54
----
Net obligations 208
Less current portion 47
----
Long-term portion $161
====
</TABLE>
The long-term portion of capital lease obligations is included in long-term
debt.
F-166
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating Leases
- ----------------
The Company leases office and warehouse space under operating lease agreements.
The Company also leases office space from a partnership owned 58% by certain of
its officers under an operating lease whose term runs through April 30, 2004
(see Note 14).
The Company entered into an agreement to lease and operate the Washington Duke
Inn, located in Durham, North Carolina. The initial lease term, which is
through July 31, 1997 and can be extended through July 31, 1998, includes
payment of $95 on or before August 1, 1996 and a monthly rent of $134 plus 6% of
gross revenues through July 31, 1996; $134 plus 7% of gross revenues through
July 31, 1997; and $155 plus 7% of gross revenues from August 1, 1997 through
July 31, 1998 (See Note 15).
Future minimum lease payments, for all operating leases with non-cancelable
terms in excess of one year are as follows at November 30, 1996:
<TABLE>
<CAPTION>
Year ending November 30,:
-------------------------
<S> <C>
1997 $2,008
1998 1,558
1999 319
2000 319
2001 319
Thereafter 772
------
Total minimum lease payments $5,295
======
</TABLE>
Rental expense amounted to $2,143, and $2,437 for the years ended November 30,
1995 and 1996, respectively.
F-167
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
On October 2, 1995 the Company and a principal owner of the Gencom group of
companies (which includes GAH-II, L.P. noted below) formed CHC Lease Partners,
with each owning 50%. At November 30, 1996, CHC Lease Partners leases 24 hotels
pursuant to operating leases with terms averaging 11 years from Patriot American
Hospitality Partnership, L.P. (the "Operating Partnership"), a majority owned
subsidiary of Patriot American Hospitality, Inc., a publicly traded, self-
administered real estate investment trust. CHC Lease Partners entered into
separate management agreements with a wholly-owned subsidiary of the Company and
the Company's 50% owned subsidiary, GAH-II, L.P. ("GAH"), a Houston, Texas
based hotel management business, to manage the leased hotels. Management fees
earned under such agreements are subordinate to CHC Lease Partners' obligations
to the Operating Partnership under the lease agreements. If, after payment of
management fees at the contract rate, CHC Lease Partners would be deficient in
lease payments to the Operating Partnership under any of the lease agreements in
any year, the Company and GAH would be required to refund and forego the
management fee for each of the hotels which are deficient in lease payments. If
after the management fees are refunded and foregone, CHC Lease Partners would
still be deficient in lease payments under any of the lease agreements, the
Company and GAH would each be required to pay CHC Lease Partners up to 50% of
the total management fees earned.
Summarized balance sheet and statement of operations information for CHC Lease
Partners, which is accounted for using the equity method, at November 30, 1995
and 1996 and the period from inception (October 2, 1995) to November 30, 1995
and the year ended November 30, 1996 are as follows:
<TABLE>
<CAPTION>
Summarized balance sheet information
- ------------------------------------
November 30,
------------
1995 1996
------- -------
<S> <C> <C>
Current assets $18,768 $25,245
Investments 5,100 5,100
Other assets 100 391
------- -------
Total assets $23,968 $30,736
======= =======
Current liabilities $12,530 $19,376
Long-term liabilities 2,020 2,369
------- -------
Total liabilities 14,550 21,745
------- -------
Net assets $ 9,418 $ 8,991
======= =======
</TABLE>
F-168
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Summarized statement of operations information
- ----------------------------------------------
November 30,
------------
1995 1996
------- --------
<S> <C> <C>
Revenues $22,807 $156,086
------- --------
Income before lessee income (expense) $ 957 $ 2,921
------- --------
Lessee income (expense) $ (639) $ (2,258)
------- --------
Net income $ 318 $ 663
------- --------
</TABLE>
CHC Lease Partners is required to maintain minimum net worth and adequate
working capital for the term of the leases. At inception, the Company and its
partner each contributed to CHC Lease Partners cash of $2,000 and units of
limited partnership interest in the Operating Partnership ("O.P. Units"), which
after an appropriate discount from the fair market value of Patriot American
Hospitality, Inc. common stock, were valued at $2,550. The O.P. Units may be
redeemed for, subject to certain restrictions, the common stock of PAH. The
Company received distributions from CHC Lease Partners of $545 for the year
ended November 30, 1996.
On October 2, 1995 the Company purchased a 50% ownership interest in GAH from
Patriot American Hospitality, L.P. for a nonrecourse note in the amount of
$3,750 (See Note 9) and also contributed $150 to GAH.
Summarized balance sheet and statement of operations information for GAH, which
is accounted for using the equity method, at December 31, 1995 and 1996 and the
period date of acquisition (October 2, 1995) to December 31, 1995 and the year
ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Summarized balance sheet information
- ------------------------------------
December 31,
------------
1995 1996
------ ------
<S> <C> <C>
Current assets $ 761 $1,983
Other assets 344 1,077
------ ------
Total assets $1,105 $3,060
====== ======
Current liabilities $ 640 $1,586
Long-term liabilities 103 107
------ ------
Total liabilities 743 1,693
------ ------
Net assets $ 362 $1,367
====== ======
Summarized statement of operations information
- ----------------------------------------------
December 31,
------------
1995 1996
------ ------
Revenues $1,149 $7,284
====== ======
Income (loss) before minority interest $ (30) $1,211
====== ======
Net income (loss) $ (33) $1,194
====== ======
</TABLE>
F-169
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The cost of the Company's initial investment in excess of its interest in the
net assets has been assigned principally to management contracts and goodwill
which are being amortized on a straight-line basis over 12 and 30 years,
respectively. The unamortized excess of the Company's investment over the
Company's interest in GAH is $3,627 and $3,425 at November 30, 1995 and 1996
respectively. The Company received distributions of $123 from GAH for the year
ended November 30, 1996.
The Company's remaining investments in and advances to affiliates in the
aggregate are not significant.
NOTE 6 - INTANGIBLES
Intangibles are summarized as follows:
<TABLE>
<CAPTION>
Management
Contract Total
Intangibles Goodwill Intangibles
----------- ---------- ------------
<S> <C> <C> <C>
Net balance, November 30, 1994 $2,389 $4,966 $7,355
Amortization, net (490) (149) (639)
------ ------ ------
Net balance, November 30, 1995 1,899 4,817 6,716
Amortization, net (521) (148) (669)
------ ------ ------
Net balance, November 30, 1996 $1,378 $4,669 $6,047
====== ====== ======
</TABLE>
The Company has included in amortization the write-off of $35 and $83 of
management contract intangibles related to terminated contracts for the years
ended November 30, 1995 and 1996, respectively.
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Company maintains a non-qualified defined benefit deferred compensation plan
which covers most management employees and provides an annual retirement
benefit, after twenty-five years of service, equal to 50% of the participant's
average last five years, pay reduced by social security benefits and further
reduced for years of service less than twenty-five, on a pro rata basis.
Benefits are vested on an eleven year cliff basis. Assets designated to cover
plan liabilities include cash, accounts receivable, life insurance policies on
the lives of certain participants, short-term investments and a loan to an
officer. While it is the intention of management to utilize the assets
designated for the deferred compensation plan to pay plan benefits, such assets
have not been placed in trust and are not otherwise restricted and accordingly,
they are available for general corporate purposes.
F-170
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Under the terms of the life insurance policies, the Company receives the cash
surrender value if the policies are terminated or all benefits due upon the
death of the insured. In addition, the Company can borrow against the available
net cash surrender value of the policies.
The following is a summary of the assets designated for the deferred
compensation plan which are included in other assets at November 30,:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Gross cash surrender value of insurance
policies $ 1,170 $ 1,225
Less policy loans (1,085) (1,157)
------- -------
Cash surrender value of insurance
policies, net 85 68
Accounts receivable 82 82
Cash and cash equivalents 625 614
Loan to officer 1,006 1,077
------- -------
Total assets designated for the deferred
compensation plan $ 1,798 $ 1,841
======= =======
</TABLE>
Deferred compensation plan costs, net of forfeitures, included in the combined
statements of operations for the years ended November 30, 1995 and 1996 were
approximately $569 and $374, respectively. The earnings rate for the deferred
compensation plan benefit liability was 7% for the years ended November 30, 1995
and 1996.
Deferred compensation plan costs, net of forfeitures, for the years ended
November 30, 1995 and 1996, includes the following components:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Service cost $ 381 $ 142
Interest cost on projected benefit
obligation 188 232
------- -------
Deferred compensation plan costs $ 569 $ 374
======= =======
The following table details the status
of the plan at November 30:
1995 1996
------- -------
Actuarial present value of benefit
obligations:
Vested benefits $ 4,257 $ 5,016
Non-vested benefits 1,280 1,086
------- -------
Projected benefit obligations $ 5,537 $ 6,102
======= =======
Plan assets less than projected benefit
obligations $(5,537) $(6,102)
======= =======
</TABLE>
F-171
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company plans to adopt a new non-qualified defined contribution deferred
compensation plan which, when enacted, will be effective retroactively to
January 1, 1992. The cost of the new plan will be substantially the same as the
existing plan.
NOTE 8 - INCOME TAXES
The Company files income tax returns as part of CHC's consolidated group.
Income taxes in the accompanying financial statements are computed as if the
Company had been a separate taxable entity.
The Company's provision for income taxes attributable to continuing operations
is comprised of the following for the years ended November 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----- -----
Current tax expense:
<S> <C> <C>
State $ 81 $ 52
Foreign 50 40
----- -----
Total provision for income taxes $ 131 $ 92
===== =====
</TABLE>
The Company generated a tax net operating loss carryforward of approximately
$3,661 during the year ended November 30, 1996 and has accumulated tax net
operating loss carryforwards of approximately $4,221 as of November 30, 1996.
Approximately $560 and $3,661 of the net operating loss carryforwards will
expire in the years 2009 and 2011, respectively. The tax net operating loss
carryforward is generally available to offset future taxable earnings.
The difference between the taxes provided for continuing operations at the U.S.
federal statutory rate and the Company's actual tax provision is reconciled
below for the years ended November 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Taxes provided at statutory rate $ - $ -
State tax expense 81 52
Foreign tax expense 50 40
----- -----
Total provision for income taxes $ 131 $ 92
===== =====
</TABLE>
F-172
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The approximate effect of the Company's temporary differences and carryforwards
that give rise to deferred tax balances at November 30, were as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Net operating loss carryforwards $ 224 $ 1,688
Deferred compensation plan liability 2,106 2,330
Allowance for doubtful accounts 559 800
receivable
Valuation allowance for notes receivable 1,772 -
Other, net 1,275 878
------- -------
5,936 5,696
Deferred tax asset valuation allowance (5,936) (5,696)
------- -------
Noncurrent deferred tax asset $ - $ -
======= =======
</TABLE>
In accordance with SFAS No.109, the Company recorded a valuation allowance on
the entire amount of the deferred tax asset at November 30, 1995 and 1996
because the Company sustained taxable losses and there was no assurance that a
deferred tax asset would be realized. The net decrease in the valuation
allowance for deferred tax assets of approximately $240 during the year ended
November 30, 1996 was primarily due to increases in deferred tax assets in net
operating loss carryforwards and allowance for doubtful receivables reduced for
the sale of Notes Receivable Crystal Palace.
F-173
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - LONG-TERM DEBT
Long-term debt is comprised of the following as of November 30,:
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Variable-rate term loan (effective
interest rate of 10.375% and 10.0% at
November 30, 1995 and 1996,
respectively) interest payable
quarterly with balance due at maturity
February 28, 1997 (see below) $11,500 $ 11,500
Variable rate non-recourse loan
(effective interest rate of 9.0% at
November 30, 1995 and 1996) interest
and principal payable quarterly from
25% of net cash flow of GAH, as
defined, with balance due October 2,
2000 3,750 3,750
Variable rate loan (effective interest
rate of 10.75% and 10.25% at November
30, 1995 and 1996, respectively)
interest payable monthly and principal
payable in annual installments of $190
from December 30, 1995 with balance
due December 30, 1997 1,900 1,710
Variable rate unsecured demand loans
(effective interest rate of 9.75% at
November 30, 1995) interest payable
monthly. 1,000 -
8% note payable - interest payable
annually and principal payable in
annual installments of $120 through
October 10, 1999 480 360
Capital lease obligations (see Note 4) 208 208
------- --------
Total debt 18,838 17,528
Current portion (1,566) (12,069)
------- --------
Total long-term debt $17,272 $ 5,459
======= ========
</TABLE>
Aggregate principal payments for the long-term debt including capital lease
obligations are as follows at November 30, 1996:
<TABLE>
<CAPTION>
Year ending November 30:
------------------------
<S> <C>
1997 $12,069
1998 1,906
1999 381
2000 3,163
2001 9
-------
Total $17,528
=======
</TABLE>
F-174
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's $11,500 variable-rate term loan (the "Term Loan"), as amended, (i)
bears interest at the bank's base lending rate plus 2.0% or, at the Company's
option, London Interbank Market Rate (LIBOR) plus 4 1/2%, (ii) is secured by
substantially all of the Company's assets and (iii) matures February 28, 1997.
On February 28, 1997, the Term Loan was further amended whereby the Term Loan
(i) bears interest at the bank's lending rate plus 1.5% or, at the Company's
option, LIBOR plus 2.5% and (ii) matures in quarterly installments of 2.5% of
the principal amount outstanding commencing June 30, 1997 with the balance due
June 30, 1998. The Company has also agreed to pay the lender a fee equal to
1.5% of the fair market value of the Company, but in no event less than $2,500
or more than $6,000. The fee is payable at the lender's option at any time
during the ten-year period commencing February 28, 1997. Interest expense for
the years ended November 30, 1995 and 1996 include $500 and $1,200 respectively
related to the lender fee. The Term Loan agreement contains customary financial
covenants, and various covenants including limitations on indebtedness,
liabilities, liens, distributions, dividends, redemptions, prepayments of other
indebtedness, mergers, purchases and sales of assets, loans, investments and
guarantees, and prohibitions of any change of control.
In December, 1994, the Company entered into a loan agreement with a commercial
bank in the amount of $1,900. The loan bears interest at the bank prime rate
plus 2% per annum payable monthly. Principal is payable in annual installments
of $190 in December 1995 and 1996, with the balance due in December 1997.
In October 1995, in connection with the Company's purchase of a 50% interest in
GAH (see Note 5), the Company entered into a nonrecourse loan agreement with the
seller in the amount of $3,750. The loan bears interest at the lesser of 9.0%
and the maximum non-usurious amount permissible. Interest and principal are
payable quarterly commencing January 25, 1996 from 25% of GAH net cash flow, as
defined, continuing until the earlier of October 2, 2000 and the date all
amounts outstanding under the nonrecourse term loan are paid in full.
In January 1996, CHC established a $1,500,000 line of credit on an unsecured
basis with a commercial bank guaranteed by two shareholders of CHC. Advances
under the line of credit bear interest at the bank rate plus 1% per annum
payable on demand. No amounts are currently outstanding under the line of
credit.
F-175
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Related Party Borrowings
- ------------------------
In October 1995, the Company borrowed 53,314 O.P. Units from certain
shareholders. As permitted by the securities loan agreement, the O.P. Units,
valued after an appropriate discount, at $1,088, were contributed by the Company
to CHC Lease Partners (see Note 5). The Company must return O.P. Units to the
shareholders on demand and pay to the shareholders interest equal to
distributions received by the Company from the O.P. Units. The obligation under
the O.P. Units borrowing is included in due to affiliates and officers in the
balance sheets.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of its business, the Company is named as defendant in
legal proceedings resulting from incidents taking place at hotels it manages, or
in which it has an ownership interest. The Company maintains comprehensive
liability insurance and also requires hotel owners to maintain adequate
insurance coverage. Management believes such coverage to be of a nature and
amount sufficient to ensure that the Company is adequately protected from any
material financial loss as a result of such claims.
The Company owns a 30% interest in Plaza Associates Limited Partnership ("Plaza
Associates") which owns and operates the Holiday Inn - Dayton Mall in Dayton,
Ohio. The Company has joint and severally guaranteed partial payment of two
Plaza Associates notes payable. The joint and several guaranty is mitigated by
a contribution agreement among Plaza Associates partners which reduced the
Company's obligation to 30% of the guaranty. The total maximum potential
liability to the Company under the guaranty after giving effect to the
contribution agreement is as follows: through December 31, 1999 up to $375;
January 1, 2000 to December 31, 2002 up to $225; January 1, 2003 to March 1,
2004 up to $150 and zero thereafter. In addition, The Company has joint and
severally guaranteed payment of certain other Plaza Associates obligations, the
maximum potential liability to the Company is $540.
In November 1996, the Company entered into an agreement with Grant Hotels, Inc.
to manage the Sam Lord's Castle Resort in Barbados, West Indies and provide
consulting and technical services with respect to the conversion of the resort
to a Carnival Resort. The agreement provides the Company will loan the resort
up to $900 for conversion of the resort, working capital, referral fees and
certain other expenses of which no amounts have been advanced as of November 30,
1996.
NOTE 12 - MINORITY INTEREST
The Company owns a 75% interest in the TCC-Registry Joint Venture (the "Registry
Venture") acquired in October 1994. The Company's combined financial statements
include 100% of the assets, liabilities and operations of the Registry Venture.
The effects of the minority interests have
F-176
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
been reflected in the accompanying combined statements of operations. Included
in other liabilities in the accompanying combined balance sheets is minority
interest of the Registry Venture of $78 and $108 as of November 30, 1995 and
1996, respectively.
NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIT)
As a result of the basis of presentation as outlined in Note 1, including the
allocation of certain assets and liabilities to the gaming division, the
Company's equity (deficit) includes balances arising from the net change in the
gaming divisions' intercompany account with the Company.
In June 1994, the Company granted to an executive officer 155,000 shares of
common stock valued at $3.75 per share, subject to forfeiture if employment is
terminated prior to vesting. The stock grant originally scheduled to vest over
five years has been accelerated and now vests as to 50% of the shares of common
stock in January 1997 and 50% of the shares of common stock in January 1998.
The amortization period of the unearned compensation has been revised
accordingly. The stock grant also becomes fully vested on the earlier to occur
of any termination of employment due to death or disability, or May 1997, if the
Company does not offer to extend the employment agreement until May 1999 for any
reason other than cause. Compensation expense for the stock grant was $116 and
$108 for the years ended November 30, 1995 and 1996, respectively.
Pursuant to the terms of a stock purchase agreement dated November 30, 1994
between the Company, Carnival Corporation and certain shareholders, the Company
agreed to sell to such persons an aggregate of 4,000,000 shares of common stock
at $6.25 per share. The aggregate purchase price of $25,000 was satisfied by
the conversion of a $10,000 principal balance due by the Company to Carnival
Corporation under a revolving credit loan, $9,350 in notes payable to the
Company due November 1998 and the balance in cash. The notes bear interest at
7.1% payable annually with principal installments due annually of $2,337. The
installment due November 30, 1995, was partially satisfied by cash payments of
$2,106 and $125 of O.P. Units. In addition, prepayments totaling $432 of O.P.
Units were received during the year ended November 30, 1995. The installment
due November 30, 1996 less prepayments received was satisfied by cash payments
of $2,011. The notes are secured by a pledge of all purchased shares of common
stock.
Pursuant to the terms of a stock purchase agreement dated November 29, 1996
between the Company and CHC Investor Partners, L.P. ("CHC Investor"), a Texas
limited partnership controlled by a principal owner of the Gencom group of
companies, the Company agreed to sell 265,513 shares of common stock at $11.30
per share and grant non-qualified stock options to purchase 61,130 shares of
common stock at a per share exercise price of $11.30. The aggregate purchase
price of $3,000 was satisfied with a note. The note is due in installments of
$500 on November 29, 1997 and $2,500 on November 29, 1998; however, the note
plus accrued interest becomes due and payable 180 days after any public offering
by the Company. The note bears interest at 7.1% payable annually.
F-177
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has an Employee Stock Option Plan (the "Plan") which provides for
the grant to employees of both incentive stock options (within the meaning of
Section 422 of the Internal Revenue Code) and non-statutory stock options to
eligible employees (including officers and directors) and non-employee
directors. A total of 1,700,000 shares of common stock has been reserved for
issuance under the Plan.
The table below summarizes common stock option activity as of and for the years
ended November 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
-------- -----------
<S> <C> <C>
Options outstanding, beginning of period 988,052 988,052
Granted - 264,317
Returned - (30,564)
-------- ----------
Options outstanding, end of year 988,052 1,221,805
-------- ----------
Options exercisable end of year 197,610 419,672
-------- ----------
Exercise price per share $ 6.25 $ 6.25
of options exercisable to to
during the period $ 6.25 $ 11.50
-------- ----------
</TABLE>
All options issued were granted at the fair market value of CHC's common stock
on the date of grant, have a term of ten years, and generally become exercisable
with respect to 20% of the covered shares commencing one year after grant, and
are generally exercisable with respect to an additional 20% of the covered
shares after each additional year until fully exercisable.
NOTE 14 - RELATED PARTY TRANSACTIONS AND ALLOCATIONS
The Company provides services and pays certain costs which are reimbursable
under management agreements with hotels, which are affiliated with the Company
by virtue of common ownership. Total fees earned from affiliated hotels for the
years ended November 30, 1995 and 1996 were $5,212 and $4,284, respectively.
Total fees and reimbursable expenses due from affiliated hotels were $1,261 and
$1,108 at November 30, 1995 and 1996, respectively.
In March, 1994, CHC and Carnival Corporation entered into a 20 year Trademark
License Agreement providing for CHC's use of the "Carnival" trademark so that
CHC may do business as "Carnival Hotels and Casinos" (and the Company may do
business as "Carnival Hotels and Resorts"). Fees due under the agreement are the
greater of $100, or 1% of CHC's revenues, as defined. The trademark license
fees for the Company the years ended November 30, 1995 and 1996 were $115 and
$150, respectively.
F-178
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Certain of the Company's officers hold a 58% interest in a partnership which
owns the office building in which the Company's executive offices are located.
Under this lease, rental expense for the years ended November 30, 1995 and 1996
were $401 and $375, respectively.
The Company provides accounting services, at cost, to certain entities owned and
controlled by certain of its officers. The entities are obligated to reimburse
the Company for such services provided. The cost of such services were $175 and
$145 for the years ended November 30, 1995 and 1996, respectively.
Pursuant to the terms of a stock purchase agreement dated November 30, 1994
between certain shareholders and Carnival Corporation, certain shareholders
agreed to buy at $6.25 per share, 2,610,000 shares of Company common stock from
Carnival Corporation. The aggregate purchase price of $16,313 was paid in
promissory notes due November 30, 1998 subject to certain condition as defined
in the stock purchase agreement. The notes bear interest at 6.0% payable at
maturity. The stock purchase agreement provides certain shareholders a put
option which requires Carnival Corporation to repurchase at $6.25 per share plus
a rate of return of 6.1% per annum, all of the 2,610,000 shares of Company
common stock, by November 30, 1998. The stock purchase agreement also requires
Carnival Corporation to reduce its ownership in the Company's common stock
(assuming exercise of the put option ) to less than 25% of the Company's
outstanding common stock no later than November 30, 1998, as defined in the
stock purchase agreement (See Note 13).
Pursuant to the terms of a stock purchase agreement dated November 29, 1996
between the Company, certain shareholders and CHC Investor, CHC Investor agreed
to buy at $11.30 per share 265,513 shares of Company common stock from certain
shareholders for $3,000 in cash (See Note 13).
The Company entered into a borrowing arrangement with certain shareholders (See
Note 9).
CHC has allocated a portion of its corporate expenses to the gaming division.
These expenses include management and corporate overhead; benefit
administration; risk management/insurance administration, and other support and
executive functions. Allocations and charges were based on either a direct cost
pass through or a percentage allocation for such services provided based on
factors such as revenues, management time, or headcount. Such allocations and
charges totaled $3,734 and $3,720 for the years ended November 30, 1995 and
1996, respectively.
Management believes that the basis used for allocating corporate services is
reasonable and that the terms of these transactions would not materially differ
from those that would result from transactions among unrelated parties.
F-179
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15 - SUBSEQUENT EVENTS
Effective January 1, 1997, the Company entered into a new agreement to lease and
operate the Washington Duke Inn which supersedes the previous agreement. The
term which is through December 31, 2002 includes rent for each year of 22% of
gross revenues up to $10,000, adjusted annually, plus 30% of gross revenues in
excess of $10,000, adjusted annually, provided in any event a minimum rent of
$1,800. Rent is payable monthly. In addition, the Company purchased $1,505 of
furniture, fixtures and equipment in exchange for a promissory note and is
required to fund a reserve account for furniture, fixtures and equipment
expenditures in an amount not less than 3% of gross revenues in 1997 and 4% of
gross revenues thereafter. The loan bears interest at 7% per annum. Principal
and interest are payable monthly installments of $26 with balance due December
31, 2002. The loan is secured by the furniture, fixtures and equipment and
limits the sale or encumbrance of the furniture, fixtures and equipment. In
connection with the expiration of the lease, the Company has the right to resell
the furniture, fixtures and equipment to the original seller and the original
seller has the right to repurchase the furniture, fixtures and equipment for
$1,505.
****************************
F-180
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Interstate Hotels Company:
We have audited the accompanying consolidated balance sheets of Interstate
Hotels Company (the Company) as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 1995 and 1996, and the consolidated results
of its operations, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
600 Grant Street Pittsburgh, Pennsylvania
February 12, 1997, except for Note 21, Note 22 and the last paragraph of Note
2, as to which the date is December 2, 1997
F-181
<PAGE>
INTERSTATE HOTELS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 14,035 $ 32,323 $ 31,924
Accounts receivable, net................... 10,654 21,556 48,653
Stock subscription receivable, net......... -- 14,286 --
Deferred income taxes...................... -- 1,649 2,283
Prepaid expenses and other assets.......... 712 11,961 14,161
-------- -------- ----------
Total current assets..................... 25,401 81,775 97,021
Restricted cash.............................. 2,096 15,995 7,745
Property and equipment, net.................. 1,894 709,151 1,140,291
Investments in hotel real estate............. 12,884 5,605 24,518
Officers and employees notes receivable...... 1,219 4,643 5,184
Affiliates notes receivable.................. 8,718 -- --
Intangible and other assets.................. 9,189 66,592 75,494
-------- -------- ----------
Total assets............................. $ 61,401 $883,761 $1,350,253
======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade.................... 926 12,152 14,297
Accounts payable--health trust............. 5,505 2,440 7,372
Accrued payroll and related benefits....... 3,026 15,072 19,584
Income taxes payable....................... -- -- 142
Other accrued liabilities.................. 5,546 23,926 56,005
Current portion of long-term debt.......... 363 11,767 61,059
-------- -------- ----------
Total current liabilities................ 15,366 65,357 158,459
Long-term debt............................... 35,907 396,044 714,445
Deferred income taxes........................ -- 4,081 13,878
Other liabilities............................ -- 1,213 1,213
-------- -------- ----------
Total liabilities........................ 51,273 466,695 887,995
-------- -------- ----------
Minority interests........................... 872 7,768 17,141
Commitments and contingencies................ -- -- --
-------- -------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000
shares authorized; no shares outstanding.. -- -- --
Common stock, $.01 par value; 75,000 shares
authorized; 35,421 shares issued and out-
standing as of September 30, 1997......... 3 352 354
Paid-in capital............................ 26,883 407,784 411,644
Retained (deficit) earnings................ (12,737) 1,432 33,932
Unearned compensation...................... (3,263) (270) (813)
Receivable from shareholders............... (1,630) -- --
-------- -------- ----------
Total shareholders' equity............... 9,256 409,298 445,117
-------- -------- ----------
Total liabilities and shareholders' equi-
ty...................................... $ 61,401 $883,761 $1,350,253
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-182
<PAGE>
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------
1994 1995 1996 1996 1997
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms........................ $ -- $ -- $ 89,930 $ 37,351 $ 318,132
Food and beverage............ -- -- 42,502 16,792 90,886
Other departmental........... -- -- 8,685 3,840 27,250
Management fees................ 22,285 27,022 29,304 21,872 18,915
Other management-related fees.. 14,441 17,996 19,964 13,916 14,406
------- ------- -------- -------- ---------
36,726 45,018 190,385 93,771 469,589
------- ------- -------- -------- ---------
Lodging expenses:
Rooms........................ -- -- 20,900 8,064 72,227
Food and beverage............ -- -- 31,033 12,513 68,498
Other departmental........... -- -- 3,936 1,680 11,928
Property costs............... -- -- 41,707 16,618 123,411
General and administrative..... 8,302 9,811 10,912 7,240 10,628
Payroll and related benefits... 12,420 15,469 17,529 12,564 15,711
Non-cash compensation.......... -- -- 11,896 11,896 --
Lease expense.................. -- -- 3,477 -- 54,910
Depreciation and amortization.. 3,659 4,201 14,862 7,762 28,524
------- ------- -------- -------- ---------
24,381 29,481 156,252 78,337 385,837
------- ------- -------- -------- ---------
Operating income........... 12,345 15,537 34,133 15,434 83,752
Other income (expense):
Interest, net................ 30 99 (12,421) (5,315) (29,496)
Other, net................... 14 203 (270) 329 (1,802)
------- ------- -------- -------- ---------
Income before income tax
expense................... 12,389 15,839 21,442 10,448 52,454
Income tax expense............. -- -- 15,325 11,145 19,954
------- ------- -------- -------- ---------
Income (loss) before ex-
traordinary items......... 12,389 15,839 6,117 (697) 32,500
Extraordinary loss from early
extinguishment of debt, net of
tax benefit................... -- -- 7,733 7,643 --
------- ------- -------- -------- ---------
Net income (loss).......... $12,389 $15,839 $ (1,616) $ (8,340) $ 32,500
======= ======= ======== ======== =========
Earnings per common share and
common share equivalent (Note
19)........................... $ .91
=========
Weighted average number of
common shares and common share
equivalents outstanding....... 35,638
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-183
<PAGE>
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED RECEIVABLE
COMMON PAID-IN (DEFICIT) UNEARNED PARTNERS' FROM
STOCK CAPITAL EARNINGS COMPENSATION CAPITAL STOCKHOLDERS TOTAL
------ -------- --------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... $ 57 $ 17,856 $ (269) $ -- $1,962 $(2,979) $ 16,627
Effect of
recapitalization...... (21) 21 -- -- -- -- --
Common stock of new
entities and capital
contributions......... 6 3 -- -- -- -- 9
Net decrease in
receivable from
shareholders.......... -- -- -- -- -- 776 776
Distributions paid..... -- -- (5,987) -- (4,956) -- (10,943)
Net income............. -- -- 5,517 -- 6,872 -- 12,389
---- -------- ------- ------ ------ ------- --------
Balance at December 31,
1994................... 42 17,880 (739) -- 3,878 (2,203) 18,858
Effect of
reorganization........ (42) 4,520 -- -- (4,478) -- --
Assumption of liability
by principal
shareholder........... -- 1,220 -- -- -- -- 1,220
Common stock of new
entities and capital
contributions......... 3 -- -- -- 600 -- 603
Stock options granted.. -- 3,263 -- (3,263) -- -- --
Assumption of
shareholders'
liability............. -- -- (12,995) -- -- -- (12,995)
Net decrease in
receivable from
shareholders.......... -- -- -- -- -- 573 573
Distributions paid..... -- -- (14,842) -- -- -- (14,842)
Net income............. -- -- 15,839 -- -- -- 15,839
---- -------- ------- ------ ------ ------- --------
Balance at December 31,
1995................... 3 26,883 (12,737) (3,263) -- (1,630) 9,256
Cancellation of stock
options issued in
1995.................. -- (3,263) -- 3,263 -- -- --
Issuance of stock (Note
11)................... 8 12,154 -- (379) -- -- 11,783
Unearned compensation
recognized............ -- -- -- 109 -- -- 109
Net decrease in
receivable from
shareholders.......... -- -- -- -- -- 1,630 1,630
Dividends and capital
distributions......... -- (30,000) (8,423) -- -- -- (38,423)
Contribution of IHC's
net assets for Common
Stock................. 125 (24,333) 24,208 -- -- -- --
Issuance of Common
Stock, net............ 186 357,287 -- -- -- -- 357,473
Stock subscription
receivable, net....... 6 14,280 -- -- -- -- 14,286
Issuance of Common
Stock for
acquisitions.......... 24 54,776 -- -- -- -- 54,800
Net loss............... -- -- (1,616) -- -- -- (1,616)
---- -------- ------- ------ ------ ------- --------
Balance at December 31,
1996................... 352 407,784 1,432 (270) -- -- 409,298
Unearned compensation
recognized............ -- -- -- 24 -- -- 24
Issuance of stock...... -- 567 -- (567) -- -- --
Issuance of Common
Stock................. 2 3,070 -- -- -- -- 3,072
Options exercised...... -- 223 -- -- -- -- 223
Net income............. -- -- 32,500 -- -- -- 32,500
---- -------- ------- ------ ------ ------- --------
Balance at September 30,
1997 (Unaudited)....... $354 $411,644 $33,932 $ (813) -- -- $445,117
==== ======== ======= ====== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-184
<PAGE>
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)....... $ 12,389 $ 15,839 $ (1,616) $ (8,340) $ 32,500
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation and amorti-
zation................. 3,659 4,201 14,862 7,762 28,524
Minority interests'
share of equity (loss)
income from investments
in hotel real estate... -- (10) 503 (106) 2,636
Non-cash compensation... -- -- 11,896 11,896 --
Deferred income taxes... -- -- 6,671 1,835 9,163
Write-off of deferred
financing fees......... -- -- 6,169 6,231 --
Other................... (53) (299) (231) (340) (537)
Cash (used in) provided
by assets and liabili-
ties:
Accounts receivable,
net.................... (2,652) (2,377) 1,280 (3,348) (27,097)
Prepaid expenses and
other assets........... (17) (257) (11,289) (3,486) (2,122)
Accounts payable........ 915 4,775 2,953 (2,566) 7,077
Income taxes payable.... -- -- -- 2,373 142
Accrued liabilities..... 1,077 3,456 10,073 2,799 36,591
-------- -------- --------- ---------- ---------
Net cash provided by
operating activities.. 15,318 25,328 41,271 14,710 86,877
-------- -------- --------- ---------- ---------
Cash flows from investing
activities:
Change in restricted
cash................... (814) (811) (13,899) (2,661) (36,035)
Acquisition of hotels,
net of cash received... -- -- (417,601) (236,673) (338,315)
Purchase of property and
equipment, net......... (607) (438) (16,253) (1,148) (60,718)
Restricted funds used to
purchase property and
equipment.............. -- -- 10,383 674 44,285
Investments in hotel
real estate............ -- (13,038) (5,605) (5,146) (18,525)
Change in notes receiv-
able, net.............. 529 (7,686) (3,424) (3,289) (541)
Other................... (2,960) (885) (3,015) 2,172 (10,641)
-------- -------- --------- ---------- ---------
Net cash used in in-
vesting activities.... (3,852) (22,858) (449,414) (246,071) (420,490)
-------- -------- --------- ---------- ---------
Cash flows from financing
activities:
Proceeds from long-term
debt................... 3,548 35,000 360,100 265,750 369,400
Repayment of long-term
debt................... (2,642) (15,265) (247,939) (241,689) (56,857)
Financing costs paid,
net.................... (33) (2,088) (14,997) (9,349) (3,925)
Minority interests,
net.................... -- 882 6,896 (1,736) 6,737
Proceeds from issuance
of Common Stock, net... -- -- 357,473 263,752 17,859
Capital contributions... 9 603 -- -- --
Repayment of funds ad-
vanced to shareholders,
net.................... 776 573 1,630 1,630 --
Repayment of notes pay-
able to shareholders... -- -- (30,000) (30,000) --
Dividends and capital
distributions paid..... (10,943) (14,842) (6,732) (6,732) --
-------- -------- --------- ---------- ---------
Net cash (used in) pro-
vided by financing ac-
tivities.............. (9,285) 4,863 426,431 241,626 333,214
-------- -------- --------- ---------- ---------
Net change in cash and
cash equivalents........ 2,181 7,333 18,288 10,265 (399)
Cash and cash equivalents
at beginning of period.. 4,521 6,702 14,035 14,035 32,323
-------- -------- --------- ---------- ---------
Cash and cash equivalents
at end of period........ $ 6,702 $ 14,035 $ 32,323 $ 24,300 $ 31,924
======== ======== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-185
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Interstate Hotels Company (the Company) was formed on April 19, 1996 in
anticipation of an initial public offering of the Company's Common Stock (see
Note 3). As of December 31, 1996, the Company owned 18 hotels and had a
majority equity interest in nine other hotels (collectively, the Owned
Hotels). As a result of the transactions discussed in Notes 3 and 4, the
consolidated financial statements of the Company consist of the historical
results of Interstate Hotels Corporation and Affiliates (IHC), the Company's
predecessor, and the operations of the Owned Hotels from the respective dates
of their acquisitions. Prior thereto, the consolidated financial statements
reflect only the historical activity of IHC. The working capital and operating
results of hotels operated under long-term operating leases (the Leased
Hotels) are also included in the Company's consolidated financial statements
because the operating performance associated with such hotels is guaranteed by
the Company (see Note 9).
The Company provides management and other related services principally to
owned, managed and leased hotels through its wholly owned subsidiaries. The
Company provides these services to hotels located in 34 states, the District
of Columbia, Canada, Israel, the Caribbean, Thailand, Panama and Russia, with
the largest concentration of hotels in the states of Florida and California.
These hotels are operated under a number of franchise agreements, with the
largest franchisors being Marriott International, Inc. and Promus Hotels, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and entities more than 50% owned. All significant intercompany transactions
and balances have been eliminated in consolidation. The Company accounts for
investments in less than 50% but greater than 20% owned entities in which it
can exert significant influence under the equity method of accounting. All
other investments are accounted for under the cost method. These investments
are included in investments in hotel real estate in the consolidated balance
sheets.
Minority interests represent the proportionate share of the equity that is
owned by third parties in entities more than 50% owned by the Company. The net
income or loss of such entities is allocated to the minority interests based
on their percentage ownership throughout the year and is included in other
income (expense) in the consolidated statements of operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Cash and Cash Equivalents:
All unrestricted, highly liquid investments purchased with a remaining
maturity of three months or less are considered to be cash equivalents.
Restricted Cash:
The long-term debt agreements discussed in Note 8 and the franchise
agreements referred to in Note 17 provide that cash from hotel operations be
restricted for the future acquisition or replacement of property and equipment
each year based on a percentage of gross hotel revenues. The requirements
range from 3% to 6%.
F-186
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Capital restricted under applicable government insurance regulations is also
included in restricted cash, and represents 20% of the annual insurance
premiums written by the Company (see Note 15).
Property and Equipment:
Property and equipment are recorded at cost, which includes the allocated
purchase price for hotel acquisitions, and are depreciated primarily on the
straight-line method over their estimated useful lives. Expenditures for
maintenance and repairs are expensed as incurred. Expenditures for major
renewals and betterments that significantly extend the useful life of existing
property and equipment are capitalized and depreciated. The cost and related
accumulated depreciation applicable to property no longer in service are
eliminated from the accounts and any gain or loss thereon is included in
operations.
The Company is currently in the process of finalizing certain purchase price
allocations for hotel acquisitions that occurred in the fourth quarter of
1996. Management anticipates that such purchase price allocations will be
finalized in the first half of 1997. Adjustments, if any, would not result in
material changes in the results of operations, but may result in the
reclassification of certain long-term assets.
Officers and Employees Notes Receivable:
Officers notes receivable consist principally of notes from two executives.
Such notes bear interest, are fully recourse to the borrowers and are forgiven
and expensed ratably, if certain conditions are met, until the notes mature in
June 2006. The Company also makes loans from time to time to other employees,
which are payable upon demand and generally do not bear interest until such
demand is made. Certain officers and employees notes receivable may be
forgiven and expensed provided certain conditions are satisfied.
Intangible and Other Assets:
Intangible and other assets consist of the amounts paid to obtain management
and lease contracts and deferred financing fees. Goodwill is also included in
intangible and other assets, and represents the excess of the purchase price
over the net assets of businesses acquired. Intangible and other assets are
amortized on the straight-line method over the life of the underlying
contracts or estimated useful lives.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of:
The carrying values of long-lived assets, which include property and
equipment and all intangibles, are evaluated periodically in relation to the
operating performance and future undiscounted cash flows of the underlying
assets. Adjustments are made if the sum of expected future net cash flows is
less than book value.
Deferred Income Taxes:
Deferred income taxes are recorded using the liability method. Under this
method, deferred tax assets and liabilities are provided for the differences
between the financial statement and the tax basis of assets and liabilities
using enacted tax rates in effect for the years in which the differences are
expected to reverse.
Revenue Recognition:
Management fees and other management-related fees are recognized when
earned. The Owned Hotels and Leased Hotels recognize revenue from their rooms,
food and beverage and other departments as earned on the close of each
business day. Hotels managed under short-term operating leases with certain
lessee and lessor cancellation clauses are treated as management contracts,
with the revenue earned from those leases recognized when earned.
F-187
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reimbursable Expenses:
The Company is reimbursed for costs associated with providing insurance
services, purchasing and renovation services, MIS support, centralized
accounting, leasing, training and relocation programs to owned, managed and
leased hotels. These revenues are included in other management-related fees
and the corresponding costs are included in general and administrative and
payroll and related benefits in the consolidated statements of operations.
Insurance:
Insurance premiums are recorded as income on a pro-rata basis over the life
of the related policies, with the portion applicable to the unexpired terms of
the policies in force recorded as unearned premium reserves. Losses are
provided for reported claims, claims incurred but not reported and claims
settlement expense at each balance sheet date. Such losses are based on
management's estimate of the ultimate cost of settlement of claims. Actual
liabilities may differ from estimated amounts. Any changes in estimates are
reflected in current earnings.
Concentration of Credit Risk:
The Company maintains cash and cash equivalents with various financial
institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. Management believes the credit risk related to these cash and
cash equivalents is minimal.
Financial Instruments:
The Company uses interest rate hedge contracts for the purpose of hedging
interest rate exposures, which involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal amounts.
The amounts to be paid or received are accrued as interest rates change and
recognized over the life of the contracts as an adjustment to interest
expense. Gains and losses realized from the termination of interest rate
hedges are recognized over the remaining life of the hedge contract. As a
policy, the Company does not engage in speculative or leveraged transactions,
nor does the Company hold or issue financial instruments for trading purposes.
Reclassifications:
Certain amounts in previously issued financial statements have been
reclassified to conform to the presentation adopted in the 1996 consolidated
financial statements.
Unaudited Financial Statements:
The unaudited consolidated balance sheet as of September 30, 1997 and the
unaudited consolidated statements of operations, shareholders' equity and cash
flows for the nine months ended September 30, 1996 and 1997, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and include all significant adjustments (consisting
primarily of normal recurring adjustments) considered necessary for a fair
presentation of the results of these interim periods. The data disclosed in
these notes to the consolidated financial statements for these periods are
also unaudited. Operating results for the nine-month period ended September
30, 1997 are not necessarily indicative of the results for the entire year.
3. PUBLIC OFFERINGS:
Initial Offering:
In June 1996, the Company completed an initial public offering of its Common
Stock resulting in the sale of 12,448,350 shares (including 1,448,350 shares
from the underwriters' exercise of over-allotment options) at a
F-188
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
price of $21 per share (the Initial Offering). Net proceeds to the Company
were $240,453. In connection with the Initial Offering, Blackstone Real Estate
Advisors, L.P. and certain of its affiliates (collectively, Blackstone)
exercised an option to receive 2,133,333 shares of Common Stock of the Company
for an exercise price of $23,300.
In connection with the Initial Offering, the Company acquired all of
Blackstone's equity interests in 13 of the Owned Hotels for a cash purchase
price of $124,400, and Blackstone contributed to the Company its equity
interest in one Owned Hotel in consideration of $8,300 of Common Stock of the
Company. Additionally, in connection with the Initial Offering, the principal
shareholders of IHC contributed to the Company all of the outstanding shares
of common stock of IHC and their equity interests in these 14 Owned Hotels in
exchange for Common Stock of the Company. The acquisition of Blackstone's
equity interests has been accounted for using the purchase method of
accounting, except that carryover basis was used for 9.3% of the acquired
interests. The contributions of IHC's common stock and equity interests in
hotels in exchange for Common Stock of the Company have been accounted for
using carryover bases.
Follow-on Offering:
In December 1996, the Company completed a follow-on public offering of
4,000,000 shares of its Common Stock at a price of $25 per share (the Follow-
on Offering). In January 1997, the underwriters purchased an additional
600,000 shares of Common Stock at $25 per share pursuant to over-allotment
options. Net proceeds to the Company were $93,720 from the Follow-on Offering
and $14,286 from the exercise of the over-allotment options. The Company
recorded the exercise of the over-allotment options as stock subscription
receivable, net of the underwriting discount, in the consolidated balance
sheets as of December 31, 1996.
4. POST-INITIAL OFFERING ACQUISITIONS:
Subsequent to the Initial Offering and related transactions discussed in
Note 3, the Company acquired 13 hotels with an aggregate purchase price of
approximately $323,579. On November 15, 1996, the Company acquired for
1,957,895 shares of Common Stock the management and leasing businesses
affiliated with Equity Inns, Inc., a publicly traded real estate investment
trust, which resulted in goodwill of approximately $21,691. The businesses
consisted of eight management contracts and 48 long-term lease contracts. The
above acquisitions were accounted for using the purchase method of accounting.
One of the hotels acquired since the Initial Offering was purchased from an
entity partially owned by a significant shareholder (see Note 17).
5. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The following unaudited pro forma information is presented as if the
transactions discussed in Notes 3, 4 and 8 had occurred on January 1, 1995. In
management's opinion, all pro forma adjustments necessary to reflect the
effects of these transactions have been made. The pro forma information does
not include earnings on the Company's pro forma cash and cash equivalents or
certain one-time charges to income, and does not purport to present what the
actual results of operations of the Company would have been if the previously
mentioned transactions had occurred on such date or to project the results of
operations of the Company for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Total revenues..................................... $445,472 $477,506
Operating income................................... 59,891 81,265
Net income......................................... 19,023 32,948
Pro forma earnings per common share and common
share equivalent.................................. .54 .93
Weighted average common shares and common share
equivalents....................................... 35,387,677 35,387,677
</TABLE>
F-189
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------ -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land......................................... $ -- $ 95,192 $ 139,369
Buildings and improvements (15 to 40 years).. 678 545,565 901,977
Furniture, fixtures and equipment (5 to 10
years)...................................... 3,776 112,808 171,853
Construction in progress..................... -- 669 15,026
------ -------- ----------
4,454 754,234 1,228,225
Less accumulated depreciation................ 2,560 45,083 87,934
------ -------- ----------
$1,894 $709,151 $1,140,291
====== ======== ==========
</TABLE>
Depreciation expense was approximately $421, $467 and $8,420 for the years
ended December 31, 1994, 1995 and 1996, respectively.
7. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Management contracts (3 to 10 years)........... $22,794 $24,825 $ 8,194
Lease contracts (15 years)..................... -- 22,600 24,932
Goodwill (25 years)............................ -- 21,691 22,225
Deferred financing fees (3 to 7 years)......... 2,101 14,862 17,995
Other.......................................... 2,088 4,477 12,515
------- ------- -------
26,983 88,455 85,861
Less accumulated amortization.................. 17,794 21,863 10,367
------- ------- -------
$ 9,189 $66,592 $75,494
======= ======= =======
</TABLE>
8. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- -------- ----------------
(UNAUDITED)
REFER TO NOTE 21
<S> <C> <C> <C>
Term Loans and Revolving Credit Facili-
ty...................................... $ -- $321,600 $613,150
CGL Loan................................. -- 29,250 29,250
Owned Hotel Loans........................ -- 56,420 132,434
IHC revolving credit and term loan facil-
ity..................................... 35,000 -- --
Other.................................... 1,270 541 670
------- -------- --------
36,270 407,811 775,504
Less current portion..................... 363 11,767 61,059
------- -------- --------
$35,907 $396,044 $714,445
======= ======== ========
</TABLE>
In June 1996, the Company entered into a $195,000 Term Loan and a $100,000
Revolving Credit Facility (collectively, the Credit Facilities). In October
1996, the Company amended the Credit Facilities by converting
F-190
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the borrowings outstanding under the Revolving Credit Facility to a $100,000
Term Loan and increasing the Revolving Credit Facility capacity to $200,000.
The Term Loans are payable through June 2003 in escalating quarterly
installments and a final balloon payment. The Revolving Credit Facility,
payable in June 2003, provides for borrowings under letters of credit,
revolving loans for working capital and acquisition loans to be used to
finance additional hotel acquisitions. The Credit Facilities include certain
mandatory prepayment provisions.
The Company purchased a subordinated participation interest in the $119,250
mortgage indebtedness of Interstone/CGL Partners, L.P., a majority-owned
subsidiary of the Company (the CGL Loan). As of December 31, 1996, on a
consolidated basis, the Company had outstanding, in addition to the Credit
Facilities, $29,250 of the CGL Loan. The CGL Loan requires no principal
payments until the indebtedness matures in June 2003. All other terms of the
CGL Loan, including interest and covenants, are identical to the Credit
Facilities.
Interest on the Credit Facilities and the CGL Loan is payable subject to the
Company's election of the base rate option or the Eurodollar option. The base
rate option is the lender's prime rate plus 1%. The Eurodollar option is LIBOR
plus 2%. The Company elected the Eurodollar option to be in effect as of
December 31, 1996, which was 7.69%. Additionally, the Company has entered into
five interest rate hedge contracts: an interest rate cap that limits LIBOR to
6% on up to $105,000 of the indebtedness through June 1999; an interest rate
cap that limits LIBOR to 6% on up to $234,750 of the indebtedness through
October 1997; an interest rate cap that limits LIBOR to 6% on up to $225,900
of the indebtedness from October 1997 through October 1998; an interest rate
cap that limits LIBOR to 7% on up to $208,750 of the indebtedness from October
1998 through October 1999; and an interest rate swap that provides for a fixed
LIBOR rate of 5.8% on $72,000 of the indebtedness through December 2000.
A nonrefundable commitment fee equal to 3/8 of 1% of the unused portion of
the Revolving Credit Facility is payable quarterly. Additionally, letter of
credit fees equal to 2.25% of the outstanding letters of credit are payable
quarterly.
The Credit Facilities and the CGL Loan contain certain restrictive
covenants, including several financial ratios and restrictions on the payment
of dividends, among other things. The Company has pledged substantially all of
the assets of the Company and an interest in the rights to the cash flows of
certain of the Owned Hotels as collateral for the Credit Facilities and the
CGL Loan.
In December 1996, the Company incurred loans (the Owned Hotel Loans)
totaling $56,420 related to the acquisitions of two hotels. One of the Owned
Hotel Loans is non recourse and is due in the form of a balloon payment of
$31,000 in January 1998. The other loans are payable monthly through October
2005 and include certain mandatory prepayment provisions. Interest is payable
monthly on the Owned Hotel Loans at rates between 7.5% and 9.08% as of
December 31, 1996. The Owned Hotel Loans are collateralized by the assets of
the two hotels.
Aggregate scheduled maturities of long-term debt for each of the five years
ending December 31 and thereafter are as follows:
<TABLE>
<S> <C>
1997............................................................. $ 11,767
1998............................................................. 50,495
1999............................................................. 31,024
2000............................................................. 46,057
2001............................................................. 57,581
Thereafter....................................................... 210,887
---------
$ 407,811
=========
</TABLE>
F-191
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. COMMITMENTS AND CONTINGENCIES:
The Company provides financial guarantees to the owners of the Leased Hotels
for certain minimum operating performance levels, which are annually increased
by the consumer price index and expire through 2011. Presently, management
does not expect to incur any claims against these lease guarantees. Minimum
future lease payments are computed based on the base rent of each lease, as
defined, and are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 25,709
1998.............................................................. 25,709
1999.............................................................. 25,709
2000.............................................................. 25,709
2001.............................................................. 25,709
Thereafter........................................................ 254,944
--------
$383,489
========
The Company accounts for the leases of office space (the office leases
expire at varying times through 2002), certain office equipment (the equipment
leases expire at varying times through 2003) and land leases associated with
two of the Owned Hotels (the land leases expire at varying times through 2086)
as operating leases. Total rent expense amounted to approximately $739, $912
and $2,922 for the years ended December 31, 1994, 1995 and 1996, respectively.
The following is a schedule of future minimum lease payments under these
leases:
1997.............................................................. $ 2,975
1998.............................................................. 2,692
1999.............................................................. 2,358
2000.............................................................. 1,988
2001.............................................................. 1,728
Thereafter........................................................ 35,527
--------
$ 47,268
========
</TABLE>
In the ordinary course of business, various lawsuits, claims and proceedings
have been or may be instituted or asserted against the Company. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
10. PREFERRED AND COMMON STOCK:
The Company has the authority to issue up to 25,000,000 shares of preferred
stock having such rights, preferences and privileges as designated by the
Board of Directors of the Company. The rights of the holders of the Company's
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any shares of such preferred stock that may be issued in the
future.
F-192
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following represents shares of Common Stock authorized for issuance
under the Company's stock plans:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Equity Incentive Plan, including the Stock Option Plan for
Non-Employee Directors....................................... 2,500,000
Employee Stock Purchase Plan.................................. 500,000
Management Bonus Plan......................................... 250,000
---------
3,250,000
=========
</TABLE>
The Equity Incentive Plan provides for options to be granted to eligible
employees to purchase shares of Common Stock. The option price is established
at the grant date at a price not less than the current market value. The
options generally vest over a three year period and expire after ten years.
The Employee Stock Purchase Plan is designed to be a non-compensatory plan,
whereby eligible employees may elect to withhold a maximum of 8% of their
salary and use such amounts to purchase Common Stock. The Management Bonus
Plan provides for bonuses to be paid to key executives of the Company based
upon the achievement of specified goals of both the Company and the executive.
Bonuses are based on a percentage of the individual's annual salary, and up to
20% of each executive's bonus, at the discretion of management, may be payable
in the form of shares of Common Stock.
The Company has elected to account for stock-based employee compensation
arrangements under the provisions of Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" rather than Statement of
Financial Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based
Compensation." If compensation cost had been determined based on the fair
value at the grant dates according to SFAS No. 123, the Company's net loss
would have been increased to the pro forma amount shown below:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Net loss:
As reported.................................................... $ (1,616)
Pro forma...................................................... (2,781)
</TABLE>
The effect on earnings per share is not meaningful and, therefore, has not
been provided (see Note 19).
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Weighted average risk-free interest rate............................... 6.3%
Expected dividend yield................................................ --
Expected volatility.................................................... 30.3%
Expected life (number of years)........................................ 3
</TABLE>
F-193
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The transactions for stock options issued under the Equity Incentive Plan
and the Stock Option Plan for Non-Employee Directors were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGED
-------------------------------
NUMBER OF REMAINING VALUE EXERCISE RANGE OF
OPTIONS LIFE (YEARS) PER SHARE PRICE EXERCISE PRICE
--------- ------------ --------- -------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding, December
31, 1995............... --
Granted................. 1,589,250 $22.66 $21.00--$26.75
Exercised............... -- -- --
Canceled................ 12,500 $21.00 $21.00
---------
Outstanding, December
31, 1996............... 1,576,750 9.6 $6.44 $22.66 $21.00--$26.75
=========
Exercisable, December
31, 1996............... --
Shares reserved for
future options as of
December 31, 1996...... 923,250
</TABLE>
11. NON-CASH COMPENSATION:
In December 1995, IHC granted stock options to certain officers to purchase
shares of common stock of IHC. The exercise price of certain stock options was
determined to be below fair market value based on an independent market
valuation. No stock options were exercisable at December 31, 1995. The
unearned compensation related to the stock options granted by IHC was being
charged to expense over the vesting period.
Prior to the Initial Offering, the Company issued 785,533 shares of Common
Stock to certain employees in consideration for the cancellation of the stock
options issued by IHC in 1995. The shares were valued based on the estimated
value of the Common Stock at the time the shares were issued. As a result of
the cancellation of the stock options issued by IHC in 1995 and the issuance
of the Common Stock at no cost to the recipients, the Company reversed the
unamortized unearned compensation recorded by IHC in 1995 and recorded non-
cash compensation expense of $11,896.
12. INCOME TAXES:
Prior to the consummation of the Initial Offering, the Company's
predecessors were organized as S corporations, partnerships and limited
liability companies for federal and state income tax purposes. Accordingly,
the predecessors were not subject to income tax because all taxable income or
loss of the predecessors was reported on the tax returns of their owners. As a
result of the change in the Company's tax status to a C corporation concurrent
with the Initial Offering, the Company recorded income tax expense of $4,881
to establish deferred taxes existing as of the date of the change in tax
status.
F-194
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The provision for income taxes for the year ended December 31, 1996
consisted of:
<TABLE>
<S> <C>
Current
Federal.......................................................... $ 4,153
State............................................................ 504
-------
4,657
-------
Deferred:
Federal.......................................................... 6,223
State............................................................ 448
-------
6,671
-------
Income tax expense................................................ 11,328
Income tax benefit from extraordinary loss........................ 3,997
-------
$15,325
=======
</TABLE>
A reconciliation of the Company's effective tax rate to the federal
statutory rate for the year ended December 31, 1996 follows:
<TABLE>
<S> <C>
Federal statutory rate................................................ 35%
State taxes, net of federal benefit................................... 2
IHC loss as an S corporation.......................................... 23
Conversion from S corporation to C corporation........................ 50
Other................................................................. 7
---
Effective tax rate.................................................... 117%
===
</TABLE>
The components of net deferred tax assets and liabilities as of December 31,
1996 consisted of:
<TABLE>
<CAPTION>
DEFERRED TAX
------------------
ASSETS LIABILITIES
------ -----------
<S> <C> <C>
Depreciation and amortization........................... $ -- $10,809
Minority interests...................................... 7,298 --
Payroll and related benefits............................ 1,588 --
Self-insured health trust............................... 927 --
Other................................................... -- 1,436
------ -------
$9,813 $12,245
====== =======
</TABLE>
13. EXTRAORDINARY ITEMS:
In 1996, the Company recorded an extraordinary loss of $7,733, net of a tax
benefit of $3,997, as a result of the early extinguishment of certain debt.
The extraordinary loss related principally to the payment of prepayment
penalties and loan commitment fees and the write-off of deferred financing
fees.
F-195
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes consisted of:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1994 1995 1996 1996 1997
---- ---- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest................................ $261 $507 $13,629 $ 5,957 $ 29,729
Income taxes............................ -- -- 7,710 -- 8,039
</TABLE>
Non-cash investing and financing activities consisted of:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1994 1995 1996 1996 1997
------ ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Notes payable issued to acquire
contracts....................... $1,176 $ -- $ -- $ -- $ --
Assumption of liability by
principal shareholder........... -- 1,220 -- -- --
Assumption of shareholders'
liability....................... -- 12,295 --
Unearned compensation related to
1995 stock options.............. -- 3,263 (3,263) -- --
Unearned compensation related to
Common Stock (Note 11).......... -- -- 379 -- --
Notes payable issued to
shareholders.................... -- -- 30,000 30,000 --
Stock subscription receivable,
net............................. -- -- 14,286 -- --
Issuance of Common Stock for
acquisitions.................... -- -- 54,800 8,300 --
Assumption of long-term debt
related to acquisitions......... -- -- -- -- 55,150
</TABLE>
15. INSURANCE:
The Company provides certain insurance coverage to hotels under the terms of
the various management and lease contracts. This insurance is generally
arranged through a third-party carrier. Northridge Insurance Company
(Northridge), a subsidiary of the Company, reinsures a portion of the coverage
from this third-party primary insurer. The policies provide for layers of
coverage with minimum deductibles and annual aggregate limits. The policies
are for coverage relating to innkeepers' losses (general/comprehensive
liability), wrongful employment practices, garagekeeper's legal liability,
replacement cost automobile losses and real and personal property insurance.
All policies are short-duration contracts and expire through March 1997.
The Company is liable for any deficiencies in the IHC Employee Health and
Welfare Plan (and related Health Trust), which provides employees of the
Company with group health insurance benefits. The Company has a financial
indemnity liability policy with Northridge which indemnifies the Company for
certain obligations for the deficiency in the related Health Trust. The
premiums for this coverage received from the properties managed by the
Company, net of intercompany amounts paid for employees at the Company's
corporate offices and Owned and Leased Hotels, are recorded as direct premiums
written. There was no deficiency in the related Health Trust at December 31,
1996.
All accounts of Northridge are classified with assets and liabilities of a
similar nature in the consolidated balance sheets. The consolidated statements
of operations include the insurance income earned and related
F-214
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
insurance expenses incurred. The insurance income earned has been included in
other management-related fees in the consolidated statements of operations and
is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Reinsurance premiums written....................... $ 3,428 $ 4,981 $ 4,848
Direct premiums written............................ 2,581 2,477 2,032
Reinsurance premiums ceded......................... -- (422) (414)
Change in unearned premiums reserve................ 42 (62) 158
Loss sharing premiums.............................. 910 698 1,101
------- ------- -------
Insurance income................................... $ 6,961 $ 7,672 $ 7,725
======= ======= =======
</TABLE>
16. FINANCIAL INSTRUMENTS:
The carrying values and fair values of the Company's financial instruments
at December 31 consisted of:
<TABLE>
<CAPTION>
1995 1996
---------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $14,035 $14,035 $ 32,323 $ 32,323
Restricted cash......................... 2,096 2,096 15,995 15,995
Investment in marketable securities..... -- -- 540 540
Noncurrent receivables.................. 9,937 9,937 4,643 4,643
Interest rate caps...................... -- -- 5,056 3,268
Interest rate swap...................... -- -- -- 976
Long-term debt, including current por-
tion................................... 36,207 36,207 407,811 406,835
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents and restricted cash:
The carrying amounts approximate fair value because of the short maturity of
these investments.
Investment in marketable securities:
The fair value of the investment in marketable securities is based on the
quoted market price at December 31, 1996, and is included in investments in
hotel real estate in the consolidated balance sheets.
Noncurrent receivables:
The fair value of noncurrent receivables is based on anticipated cash flows
and approximates carrying value.
Interest rate hedges:
The Company manages its debt portfolio by using interest rate caps and swaps
to achieve an overall desired position of fixed and floating rates. The fair
value of interest rate hedge contracts is estimated based on quotes from the
market makers of these instruments and represents the estimated amounts that
the Company would expect to receive or pay to terminate the contracts. Credit
and market risk exposures are limited to the net interest
F-197
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
differentials. The Company is exposed to credit loss in the event of
nonperformance by counterparties on the above instruments, but does not
anticipate nonperformance by any of the counterparties.
Long-term debt:
The fair value of long-term debt is based on interest rates that are
currently available to the Company for issuance of debt with similar terms and
remaining maturities. The fair value of the notional amount of long-term debt
hedged by the swap has been reduced by the fair value of the swap.
17. FRANCHISE AGREEMENTS AND RELATED PARTY TRANSACTIONS:
Franchise Agreements:
The Owned Hotels and the Leased Hotels are generally operated under
franchise agreements with various franchisors. The Owned Hotels are licensed
under the following franchise names: Marriott (13), Hilton (4), Radisson (4),
Embassy Suites (2), Westin (2) and Holiday Inn (1). The Leased Hotels are
licensed under the following franchise names: Hampton Inn (32), Holiday Inn
(5), Residence Inn (5), Super 8 Motel (5), Sleep Inn (4), Homewood Suites (3)
and Comfort Inn (3). The terms of the franchise agreements range from 2 to 28
years and require ongoing fees principally based on a percentage of hotel room
revenues and food and beverage revenues.
Revenues and Accounts Receivable:
Of the total revenues earned, approximately $6,678, $7,886 and $7,386 for
the years ended December 31, 1994, 1995 and 1996, respectively, was earned
from hotels in which a significant shareholder of the Company has an ownership
interest. Accounts receivable of approximately $1,028 and $302 at December 31,
1995 and 1996, respectively, was due from these hotels. The Company has waived
the management fees for one of these hotels through November 1998.
Transaction with Significant Shareholders:
In December 1996, the Company acquired a 97.12% interest in one hotel for
$23,787, which includes a $10,000 contribution for future capital expenditures
and $9,627 in loans to the previous owners. Significant shareholders of the
Company previously owned a 50% interest in the hotel, one of which retained a
1.44% limited partnership interest as a result of the acquisition. The $9,627
in loans incurred as a result of the acquisition includes a $2,733 note
payable to the significant shareholder, which is included in the Owned Hotel
Loans described in Note 8.
18. PREDECESSOR ENTITY EQUITY TRANSACTIONS:
In 1994, IHC recapitalized certain companies and created two classes of
common stock. The recapitalization resulted in the reclassification of $21
between common stock and paid-in capital.
Pursuant to a reorganization in 1995, IHC merged a number of companies and
created subsidiaries for certain other entities which were all under common
control. The reorganization was accounted for in a manner similar to that used
in pooling-of-interests accounting. Additionally, concurrent with the
reorganization, IHC assumed a $12,995 obligation of its principal shareholder
that was accounted for as a distribution of capital. IHC also recorded a
contribution of capital when indebtedness in the amount of $1,220 that was
owed to an affiliate was assumed by the principal shareholder. The
reorganization resulted in the reclassification of $42 between common stock
and paid-in capital and the reclassification of $4,478 between partners'
capital and paid-in capital.
F-198
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In March 1996, the Company made a capital distribution by issuing notes
payable to the shareholders of IHC in the aggregate amount of $30,000. Such
notes were repaid in June 1996 with the proceeds from the Initial Offering.
19. EARNINGS PER SHARE:
Prior to the consummation of the Company's Initial Offering, the
predecessors of the Company were organized as S corporations, partnerships and
limited liability companies. Accordingly, the Company believes that the
earnings per share calculations required to be presented are not meaningful
for periods prior to the Initial Offering and, therefore, have not been
provided. As such, earnings per share for the three-month periods ended
September 30, 1996 and December 31, 1996 and pro forma earnings per share for
the years ended December 31, 1995 and 1996 are a more meaningful measure of
the Company's results of operations (see Notes 5 and 20).
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table sets forth certain items included in the Company's
unaudited consolidated financial statements for each quarter of fiscal 1996
and 1995:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- -------- ---------- ----------
<S> <C> <C> <C> <C>
FISCAL 1996:
Total revenues..................... $12,295 $ 15,946 $ 65,530 $ 96,614
Operating income (loss)............ 4,607 (5,775) 16,602 18,699
Income (loss) before extraordinary
items............................. 4,236 (12,299) 7,366 6,814
Net income (loss).................. 4,236 (19,942) 7,366 6,724
Earnings per common share and
common share equivalent (Note
19)............................... -- -- .26 .22
Weighted average common shares and
common share equivalents.......... -- -- 28,664,549 30,586,186
FISCAL 1995:
Total revenues..................... $10,249 $ 11,403 $ 11,236 $ 12,130
Operating income................... 3,293 4,636 4,409 3,199
Net income......................... 3,345 4,712 4,472 3,310
</TABLE>
21. SUBSEQUENT EVENTS:
Merger:
On December 2, 1997, the Company entered into an Agreement and Plan of
Merger with Patriot American Hospitality, Inc. and Patriot American
Hospitality Operating Company (collectively, Patriot) pursuant to which the
Company will merge into Patriot, with Patriot being the survivor. The
transaction is contingent upon approval by the shareholders of the Company and
Patriot.
Long-Term Debt:
In May 1997, the Company amended its credit facilities by converting certain
borrowings outstanding under the revolving credit facility to a $135 million
term loan and increasing the revolving credit facility from $250 million to
$350 million. In addition, the Company's permitted non-recourse and
subordinated debt capacity was increased from $250 million to $290 million.
The interest rate on the revolving credit facility and certain term debt was
amended to be subject to reduced rates based on leveraged EBITDA ratio
benchmarks. The interest rate on the $135 million term loan is based on a
fixed percentage of 2.25 over a reserve-adjusted Eurodollar rate.
Acquisitions:
During the nine months ended September 30, 1997, the Company acquired 11
Owned Hotels with a total of 3,619 rooms and minority interests in four other
hotels for a total acquisition price of $406,700 with closing
F-199
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
costs of approximately $5,300. Such acquisitions were accounted for using the
purchase method of accounting. In connection with three of these acquisitions,
the Company entered into operating leases for certain furniture, fixtures and
equipment of these hotels with an approximate fair market value of $17,000. In
addition, one Owned Hotel with 121 rooms, which the Company developed for a
total cost of approximately $9,700, was opened in September 1997. The Company
also entered into long-term operating leases with Equity Inns, Inc. for 40
hotels during this same period.
22. NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128 "Earnings Per Share." The new standard, which is effective
for the fiscal year ending December 31, 1997, revises the disclosure
requirements and simplifies the computations of earnings per share. Management
believes that the impact of this standard will not be material.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." The new standard, which is effective for
the fiscal year ending December 31, 1998, requires that all public business
enterprises report information about operating segments, as well as specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. Management has not yet
determined the impact of this standard.
F-200
<PAGE>
INTERSTATE HOTELS COMPANY
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS
The following unaudited Pro Forma Statements of Income of the Company for
the year ended December 31, 1996 and for the nine months ended September 30,
1997 assume the following transactions have occurred at the beginning of the
periods presented:
(i) the Initial Offering and Follow-on Offering
(ii) the acquisitions of 39 Owned Hotels in connection with and since the
Initial Offering through September 30, 1997
(iii) the acquisition of the management and leasing business affiliated
with Equity Inns, Inc., in which the Company entered into long-term
operating leases for 88 Leased Hotels through September 30, 1997 (the
Equity Inns Transaction)
(iv) the Company's original debt financing associated with the Initial
Offering and all subsequent refinancings through September 30, 1997
In management's opinion, all material pro forma adjustments necessary to
reflect the effects of these transactions have been made. The pro forma
information does not include earnings on the Company's pro forma cash and cash
equivalents or certain other one-time charges to income (such as non-recurring
takeover and repositioning costs associated with acquisitions), and does not
purport to present what the actual results of operations of the Company would
have been if the previously mentioned transactions had occurred on such dates
or to project the results of operations of the Company for any future periods.
F-201
<PAGE>
INTERSTATE HOTELS COMPANY
PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION PRO FORMA
COMPANY ADJUSTMENTS(A) TOTAL
------------ --------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Hotel revenues................ $ 141,117 $ 551,047 $ 692,164
Management and related fees... 49,268 (8,510) 40,758
Interest income............... 1,656 -- 1,656
------------ ------------ ------------
Total revenues.............. 192,041 542,537 734,578
------------ ------------ ------------
Expenses:
Departmental costs--hotel op-
erations..................... 55,869 197,533 253,402
Direct operating costs of man-
agement company.............. 17,529 1,365 18,894
General and administrative.... 22,978 48,693 71,671
Repairs and maintenance....... 6,079 25,161 31,240
Utilities..................... 5,835 23,344 29,179
Real estate and personal
property taxes and casualty
insurance.................... 5,206 16,815 22,021
Marketing..................... 12,172 52,222 64,394
Management fees............... 349 312 661
Non-cash compensation......... 11,896 (11,896)(B) --
Lease expense................. 3,477 77,667 (C) 81,144
Depreciation and amortiza-
tion......................... 14,862 33,162 (D) 48,024
------------ ------------ ------------
156,252 464,378 620,630
------------ ------------ ------------
Operating income................ 35,789 78,159 113,948
------------ ------------ ------------
Other expenses:
Interest expense.............. 14,077 45,009 (E) 59,086
Minority interests, net....... 270 2,483 (F) 2,753
------------ ------------ ------------
14,347 47,492 61,839
------------ ------------ ------------
Income before income tax ex-
pense.......................... 21,442 30,667 52,109
Income tax expense.............. 15,325 4,476 (G) 19,801
------------ ------------ ------------
Net income...................... $ 6,117 $ 26,191 $ 32,308
============ ============ ============
Pro forma earnings per common
share and common share
equivalent..................... $ 0.90
============
Pro forma weighted average
number of common shares and
common share equivalents
outstanding.................... 35,738
============
</TABLE>
See notes on page .
F-202
<PAGE>
INTERSTATE HOTELS COMPANY
PRO FORMA STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION PRO FORMA
COMPANY ADJUSTMENTS(A) TOTAL
------------ --------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Hotel revenues................ $ 436,268 $ 116,483 $ 552,751
Management and related fees... 33,321 (2,444) 30,877
Interest income............... 1,214 -- 1,214
------------ ------------ ------------
Total revenues.............. 470,803 114,039 584,842
------------ ------------ ------------
Expenses:
Departmental costs--hotel
operations................... 152,653 43,913 196,566
Direct operating costs of
management company........... 15,711 -- 15,711
General and administrative.... 45,509 10,177 55,686
Repairs and maintenance....... 18,505 4,985 23,490
Utilities..................... 17,905 3,991 21,896
Real estate and personal
property taxes and casualty
insurance.................... 12,834 3,392 16,226
Marketing..................... 38,455 10,507 48,962
Management fees............... 831 (66) 765
Lease expense................. 54,910 14,763 (C) 69,673
Depreciation and
amortization................. 28,524 5,655 (D) 34,179
------------ ------------ ------------
385,837 97,317 483,154
------------ ------------ ------------
Operating income................ 84,966 16,722 101,688
------------ ------------ ------------
Other expenses:
Interest expense.............. 30,710 9,947 (E) 40,657
Minority interests, net....... 1,802 234 (F) 2,036
------------ ------------ ------------
32,512 10,181 42,693
------------ ------------ ------------
Income before income tax
expense........................ 52,454 6,541 58,995
Income tax expense.............. 19,954 2,464 (G) 22,418
------------ ------------ ------------
Net income...................... $ 32,500 $ 4,077 $ 36,577
============ ============ ============
Pro forma earnings per common
share and common share
equivalent..................... $ 1.02
============
Pro forma weighted average
number of common shares and
common share equivalents
outstanding.................... 35,738
============
</TABLE>
See notes on following page.
F-203
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(A) Represents adjustments to reflect addition of pro forma revenues and
operating expenses for the Owned and Leased Hotels acquired after the
Initial Offering for the period prior to ownership by IHC.
(B) Adjustment to reflect the elimination of one-time non-cash compensation
associated with the Initial Offering.
(C) Adjustment to reflect the pro forma lease expense related to the
acquisition of hotel leases in the Equity Inns transaction.
(D) Adjustment to reflect the pro forma depreciation and amortization expense
related to the acquisitions of the Owned and Leased Hotels acquired after
the initial offering for the period prior to ownership by IHC. Property
and equipment is depreciated using the straight-line method over estimated
useful lives ranging between 15 and 40 years. Furniture, fixtures and
equipment is depreciated using the straight-line method over estimated
useful lives ranging between 5 and 10 years. Deferred expenses are
amortized using the straight-line method over the estimated useful life of
the assets.
(E) Represents adjustment to reflect the net increase in interest expense as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Pro forma interest expense related to the IHC
Term Loans...................................... $ 32,598 $ 23,854
Pro forma interest expense related to the IHC Re-
volving Credit Facility......................... 13,388 7,021
Pro forma interest expense related to the unused
commitment fee on the IHC Revolving Credit
Facility........................................ 587 440
Pro forma interest expense related to various ho-
tel non-recourse loans.......................... 12,513 9,342
Elimination of historical interest expense of
IHC............................................. (14,077) (30,710)
-------- --------
$ 45,009 $ 9,947
======== ========
</TABLE>
Pro forma interest expense on the $430,000 IHC Term Loans is calculated
assuming: (i) principal of $223,000 bears interest at LIBOR (assumed to be
5.5%) plus 2%, (ii) $72,000 bears interest at 7.8%, and (iii) the remainder
bears interest at LIBOR (5.5%) plus 2.25%. Pro forma interest expense on
the IHC Revolving Credit Facility is calculated at LIBOR (5.5%) plus 2%.
Pro forma interest expense related to the unused commitment fee is
calculated at 3/8 of 1% on the available debt remaining on the facility.
Interest on the various hotel non-recourse loans is calculated at rates
varying from LIBOR (5.5%) plus 1.5% to a fixed rate of 9.5% with varying
amortization and maturity dates.
(F) Represents adjustment to reflect the net increase in minority interests
resulting from acquisitions.
(G) Represents adjustment to record estimated income tax expense related to
the pro forma adjustments using an effective income tax rate of 38%.
F-204
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Royal Palace Hotel Associates
Tampa, Florida
We have audited the accompanying balance sheets of Royal Palace Hotel Associates
(the Partnership) as of December 31, 1996 and 1995, and the related statements
of operations, partners' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Royal Palace Hotel Associates
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Tampa, Florida
January 17, 1997, except for
Note 7, as to which the
date is November 25, 1997
F-205
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
BALANCE SHEETS
December 31, 1996 and 1995 and September 30, 1997
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1996 1995 1997
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 255,127 $ 1,370,927 $ 1,063,452
Restricted cash 2,826,659 1,369,471 3,685,785
Accounts receivable, less allowance for doubtful accounts of
approximately $57,000 and $32,000 for 1996 and 1995,
respectively 3,760,964 2,369,002 3,894,881
Receivables from related parties 0 5,389 0
Inventories 413,086 350,419 464,412
Prepaid expenses:
Insurance 43,943 103,186 44,315
Other 89,288 119,386 243,544
----------- ----------- -----------
Total current assets 7,389,067 5,687,780 9,396,389
Property and equipment, less accumulated depreciation 71,636,939 70,771,796 72,410,128
Restricted cash designated for property and equipment 2,835,311 3,000,000 1,536,450
Deferred loan costs, net of accumulated amortization 1,411,391 999,616 1,357,621
Other 17,246 17,246 17,371
----------- ----------- -----------
$83,289,954 $80,476,438 $84,717,959
=========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,146,048 $ 902,640 $ 1,193,102
Accounts payable 2,492,279 2,329,501 2,317,145
Accrued expenses:
Ground lease rent 1,132,701 1,016,984 1,006,700
Other 2,277,612 2,250,890 4,168,998
Advance deposits 1,586,061 1,287,851 2,023,042
Deferred revenue 479,361 698,205 411,125
----------- ----------- -----------
Total current liabilities 9,114,062 8,486,071 11,120,112
Long-term debt, less current portion 50,542,151 51,600,882 49,653,721
Commitments and contingencies (Note 6)
Partners' equity 23,633,741 20,389,485 23,944,126
----------- ----------- -----------
$83,289,954 $80,476,438 $84,717,959
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-206
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
STATEMENTS OF OPERATIONS
for the years ended December 31, 1996 and 1995
and nine-month period ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
--------------------------- ---------------------------
1996 1995 1997 1996
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenue $ 61,913,161 $ 58,603,431 $ 51,058,987 $ 46,753,031
Departmental expenses:
Cost of sales 6,267,339 6,032,575 4,897,046 4,771,670
Payroll and related expenses 13,400,453 12,486,088 10,875,092 10,205,303
Other expenses 5,392,038 4,996,441 4,453,226 3,906,149
------------ ------------ ------------ ------------
25,059,830 23,515,104 20,225,364 18,883,122
------------ ------------ ------------ ------------
Gross operating income 36,853,331 35,088,327 30,833,623 27,869,909
------------ ------------ ------------ ------------
Unallocated operating expenses:
Payroll and related expenses 5,066,791 4,594,669 3,984,532 3,803,719
Other expenses 9,795,801 9,528,735 7,220,762 7,341,575
------------ ------------ ------------ ------------
14,862,592 14,123,404 11,205,294 11,145,294
------------ ------------ ------------ ------------
Income before fixed charges 21,990,739 20,964,923 19,628,329 16,724,615
------------ ------------ ------------ ------------
Fixed charges:
Depreciation and amortization 4,246,044 4,282,499 3,510,896 3,153,749
Interest expense 4,797,247 9,768,373 3,571,282 3,607,535
Rent, property taxes and insurance 7,291,728 7,086,887 5,864,473 5,582,595
Loss (gain) on disposal of property and equipment 34,516 (3,416) 4,236 27,796
------------ ------------ ------------ ------------
16,369,535 21,134,343 12,950,887 12,371,675
------------ ------------ ------------ ------------
Net income (loss) $ 5,621,204 $ (169,420) 6,677,442 4,352,940
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-207
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
STATEMENTS OF PARTNERS' EQUITY
for the years ended December 31, 1996 and 1995 and
nine-month period ended September 30, 1997
<TABLE>
<CAPTION>
THE EQUITABLE
LIFE ASSURANCE
HOTEL VENTURE SOCIETY OF THE
TOTAL PARTNERS, LTD. UNITED STATES
------------- -------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1995 $(27,939,532) $(14,819,619) $(13,119,913)
Partner contributions 48,498,437 21,824,296 26,674,141
Net loss (169,420) (84,710) (84,710)
------------ ------------ ------------
Balance, December 31, 1995 20,389,485 6,919,967 13,469,518
Distributions to partners (2,376,948) (1,069,627) (1,307,321)
Net income 5,621,204 2,529,542 3,091,662
------------ ------------ ------------
Balance, December 31, 1996 23,633,741 8,379,882 15,253,859
============ ============ ============
Distributions to partners (unaudited) (6,367,057) (2,865,176) (3,501,881)
Net income (unaudited) 6,677,442 3,004,849 3,672,593
------------ ------------ ------------
Balance, September 30, 1997 (unaudited) $ 23,944,126 $ 8,519,555 $ 15,424,571
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-208
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1995 and the nine month periods
ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
1996 1995 1997 1996
----------- ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,621,204 $ (169,420) $ 6,677,442 $ 4,352,940
----------- ------------ ----------- -----------
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation 4,171,540 4,082,997 3,407,328 3,097,871
Amortization 74,504 199,502 103,568 55,878
Bad debt expense (57,134) (32,102) (20,506) (49,831)
Loss (gain) on disposal of equipment 34,516 (3,416) 4,236 27,796
Increase (decrease) in cash due to changes in assets
and liabilities:
Restricted cash (1,457,188) (283,164) (859,126) (3,015,532)
Accounts receivable (1,334,828) 104,507 (131,322) (149,797)
Receivables from related parties 5,389 21,320 0 5,389
Inventories (62,667) (16,586) (51,326) (110,727)
Prepaid insurance 59,243 7,576 (372) (121,502)
Prepaid other 30,098 (46,989) (154,256) (177,533)
Other assets (560,155) 52,910 (32,243) (497,347)
Accounts payable 162,778 945,547 (175,134) (1,175,285)
Accrued ground lease rent 115,717 30,857 (126,001) (10,284)
Accrued property and real estate taxes 0 (1,321,028) 0 0
Accrued expenses, other 26,721 418,719 1,891,385 2,010,351
Advance deposits 298,210 21,583 436,981 274,430
Deferred revenue (218,844) (292,959) (68,236) 314,087
----------- ------------ ----------- -----------
Total adjustments 1,287,900 3,889,274 4,224,976 477,964
----------- ------------ ----------- -----------
Net cash provided by operating activities 6,909,104 3,719,854 10,902,418 4,830,904
----------- ------------ ----------- -----------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 7,956 15,035 0 7,956
Payments made to acquire property and equipment (5,005,278) (2,014,407) (4,184,521) (3,086,495)
Decrease (increase) in restricted cash designated for property
and equipment 164,689 (3,000,000) 1,298,861 31,738
----------- ------------ ----------- -----------
Net cash used in investing activities (4,832,633) (4,999,372) (2,885,660) (3,046,801)
----------- ------------ ----------- -----------
Cash flows from financing activities:
Repayment of long-term debt (815,323) (1,562,197) (841,377) (542,347)
Bank overdraft 0 0 0 100,946
Contributions by partners 0 3,836,993 0 0
Distributions to partners (2,376,948) 0 (6,367,057) (2,713,629)
----------- ------------ ----------- -----------
Net cash (used in) provided by financing activities (3,192,271) 2,274,796 (7,208,434) (3,155,030)
----------- ------------ ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,115,800) 995,278 808,324 (1,370,927)
Cash and cash equivalents, beginning of year 1,370,927 375,649 255,128 1,370,927
----------- ------------ ----------- -----------
Cash and cash equivalents, end of year $ 255,127 $ 1,370,927 1,063,452 0
=========== ============ =========== ===========
Supplemental information to cash flow information:
Cash paid during the year for interest expense $ 4,877,461 $ 9,923,000 3,565,815 3,482,267
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-209
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS - The Partnership owns and operates a 1014-room hotel in
Lake Buena Vista, Florida known as the Buena Vista Palace. The hotel
commenced operations in March 1983.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of
certain highly liquid investments with maturities of three months or less
when purchased.
RESTRICTED CASH - Restricted cash consists of amounts required under the
terms of the Partnership's mortgage debt facility more fully described in
Note 4. Amounts classified as current will be used to fund current
liabilities; restricted cash classified as long-term is designated for
property and equipment.
INVENTORIES - Inventories consist of food, beverage and attraction tickets
and are stated at cost, which is determined on the first-in, first-out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is being provided for financial reporting purposes on the
straight-line method over the estimated useful lives of the assets.
Maintenance and repairs are charged to expense as incurred, while major
renewals and betterments are capitalized. The cost and related allowance for
depreciation or amortization of assets sold or otherwise disposed of are
removed from the related accounts and the resulting gains or losses are
reflected in income.
Operating assets consist of china, glassware, silver and linen and are stated
at cost, which is generally determined on the first-in, first-out basis.
DEFERRED LOAN COSTS - Loan costs are stated at cost and are being amortized
using the straight-line method over the term of the related indebtedness.
DEFERRED REVENUE - Deferred revenue represents cancellation fees which, under
agreements, may be used by the canceling parties as future credits for a
given period. The Partnership will reduce deferred revenue as credits are
used. Any remaining amount at the end of the agreement period will be
recognized as revenue.
INCOME TAXES - Partnership income and losses are allocated to the partners in
accordance with the terms of the Partnership Agreement; accordingly, any
income tax liability or benefit resulting from the operations of the
Partnership is the responsibility of the Partners, and is not reflected in
the accompanying financial statements.
F-210
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
CONCENTRATIONS OF CREDIT RISK - The Partnership has no instruments which
subject it to off-balance-sheet risk. Financial instruments which potentially
subject the Partnership to concentrations of credit risk consist principally
of temporary cash investments and trade receivables.
The Partnership maintains its temporary cash investments in highly liquid
instruments with high credit quality financial institutions. Concentrations
of credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Partnership's customer base and their
dispersion across many different industries and geographies.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. PARTNERSHIP AGREEMENT:
In accordance with the terms of the Partnership Agreement, profits are
allocated 55 percent to the corporate partner and 45 percent to the non-
corporate partner, while losses are allocated equally among the two partners
(the Partners).
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Building $ 88,760,494 $ 87,880,615
Furniture and equipment 16,730,875 13,811,113
Land improvements 471,209 281,334
------------ ------------
105,962,578 101,973,062
Less accumulated depreciation (35,563,860) (32,365,612)
------------ ------------
70,398,718 69,607,450
Operating assets 1,238,221 1,164,346
------------ ------------
$ 71,636,939 $ 70,771,796
============ ============
</TABLE>
F-211
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Mortgage note payable, with interest at 9.11%;
monthly installments of principal and interest of
$473,657 through November 2015; collateralized by
substantially all property and equipment and
accounts receivable $ 51,355,362 $ 52,000,000
Note payable, with interest at 12.5%; monthly
installments of principal and interest of $12,545
through June 1998; remaining principal balance
together with accrued interest thereon due June 15,
1998; collateralized by equipment 204,932 321,792
Note payable, with interest at 8.5%; monthly
installments of principal and interest of $5,600
through January 1999; collateralized by equipment 127,905 181,730
------------ ------------
51,688,199 52,503,522
Less current portion (1,146,048) (902,640)
------------ ------------
$ 50,542,151 $ 51,600,882
============ ============
</TABLE>
Annual maturities of long-term debt subsequent to December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
-----------------------
<S> <C>
1997 $ 1,146,048
1998 $ 1,183,546
1999 $ 1,153,671
2000 $ 1,258,762
2001 $ 1,380,078
2002 and thereafter $45,566,094
</TABLE>
F-212
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT, CONTINUED:
On December 8, 1995, the Partnership refinanced its mortgage note payable,
the terms of which are summarized in the long-term debt summary. Under the
provisions of the transaction, the Partners reduced the outstanding mortgage
debt by $13,929,000 on behalf of the Partnership and refinanced the remaining
balance of $52,000,000. In addition, the Partners paid approximately
$1,015,000 of loan costs at closing. These non-cash transactions have been
excluded from the accompanying statement of cash flows. The new loan contains
certain financial covenants, the most restrictive of which requires the
Partnership to maintain a minimum quarterly debt service coverage ratio of
not less than 1.2 to 1.0, as defined, with other required ratios if the debt
service ratio is not met. In addition, the Partnership is required to make
monthly deposits into the following escrow accounts: Tax and Insurance Escrow
Fund, Replacement Reserve Fund, Ground Lease Escrow Fund, and the Capital
Reserve Fund, as defined. The deposits to these accounts are classified as
restricted cash in the Partnership's balance sheet.
5. RELATED PARTY TRANSACTIONS:
The hotel is managed by BVP Management Associates, which is affiliated with
one of the general partners through common ownership. Terms of the management
agreement provide for annual management fees equal to 3% of gross receipts
each year plus an incentive fee, as defined. Management fees were
approximately $1,677,000 for 1996 and 1995, of which approximately $42,000
and $118,000 were unpaid at December 31, 1996 and 1995, respectively, and are
included in accrued expenses in the accompanying balance sheets.
The Partnership purchases their medical insurance for its employees from
Buena Vista Investment Fund, which is affiliated with one of the general
partners through common ownership. Insurance expense was approximately
$1,734,000 and $1,363,000 for the years ended December 31, 1996 and 1995,
respectively.
Certain management expenses common to hotel properties were shared by the
Buena Vista Palace and other properties affiliated with one of the general
partners through common ownership. These costs consisted principally of
shared management salaries. The affiliated properties' share of such costs
aggregated approximately $88,946 and $9,100 for 1996 and 1995, respectively,
of which no amounts were due from the affiliates at December 31, 1996 and
1995.
The management agreement is subordinate to the mortgage debt facility more
fully described in Note 4.
During the year ended December 31, 1995, notes payable to partners were
converted to partners' equity, resulting in a non-cash transaction of
approximately $29,717,000.
F-213
<PAGE>
ROYAL PALACE HOTEL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
On December 11, 1980, simultaneous with the formation of the Partnership, the
Partnership leased land on which the hotel is built (ground lease) from Lake
Buena Vista Communities, Inc. The ground lease terminates on the earlier of
(1) the 50th anniversary of the date of completion of the building, as
defined, or (2) the 55th anniversary of the ground lease (defined as initial
term). The lease agreement provides for an automatic 25-year extension at the
expiration of the initial term. Rent under the ground lease is based on a
percentage of net revenue, as defined, with minimum annual rental payments of
$160,000. Such rent aggregated approximately $4,600,000 and $4,330,000 for
1996 and 1995, respectively.
The Partnership is involved in certain legal actions and claims arising in
the ordinary course of its business. It is the opinion of management (based
on advice of legal counsel) that such litigation and claims will be resolved
without material adverse effect on the Partnership's financial position.
7. SUBSEQUENT EVENTS
During 1997, Patriot American Hospitality, Inc. ("Patriot") entered into
several agreements with the partners of the Partnership to acquire an
aggregate 95% equity interest in the hotel for an aggregate of approximately
$97,250,000 and the assumption of an existing first leasehold mortgage with a
current balance of approximately $50,700,000 and ground lease.
8. INTERIM INFORMATION (UNAUDITED)
The interim financial statements are unaudited but, in the opinion of
management reflect all adjustments necessary for a fair presentation of the
results of operations and financial position for such periods. All such
adjustments reflected in the interim financial statements are considered to
be of normal recurring nature. The results of operations for any interim
period are not necessary indicative of results for the full year. These
financial statements should be read in conjunction with the financial
statements and notes thereto for the years ended December 31, 1996 and 1997.
F-214
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(C) EXHIBITS
Exhibit
Number Description
------- -----------
23.1 Consent of Arthur Andersen LLP -- Dallas, Texas
23.2 Consent of Ernst & Young LLP -- San Juan, Puerto Rico
23.3 Consent of Coopers & Lybrand LLP -- Pittsburgh, Pennsylvania
23.4 Consent of Coopers & Lybrand LLP -- Tampa, Florida
23.5 Consent of Price Waterhouse LLP -- Miami, Florida
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrants have duly caused the report to be signed on their behalf by the
undersigned thereunto duly authorized.
DATED: December 8, 1997
PATRIOT AMERICAN HOSPITALITY, INC.
By: /s/ Rex E. Stewart
------------------------------------------
Rex E. Stewart
Executive Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
By: /s/ Rex E. Stewart
------------------------------------------
Rex E. Stewart
Executive Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Joint Registration Statement on Form S-3 (File No. 333-29671
and 333-29671-01) and the Joint Registration Statement on Form S-4 (File No.
333-39875 and 333-39875-01) of Patriot American Hospitality, Inc. and Patriot
American Hospitality Operating Company of our report dated September 17, 1997 on
the combined financial statements of the Crow Family Hotel Partnerships (and to
all references to our Firm), which are included in the Joint Current Report on
Form 8-K of Patriot American Hospitality, Inc. and Patriot American Hospitality
Operating Company dated December 10, 1997.
/s/ Arthur Andersen LLP
Dallas, Texas
December 5, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Joint Registration Statement
on Form S-3 (File No. 333-29671 and 333-29671-01) and the Joint Registration
Statement on Form S-4 (File No. 333-39875 and 333-39875-01) of Patriot American
Hospitality, Inc. and Patriot American Hospitality Operating Company of our
reports (a) dated August 7, 1997 (except for Note 18, as to which the date is
September 17, 1997) with respect to the Consolidated Financial Statements of WHG
Resorts & Casinos Inc. and related financial statement schedule; (b) dated
August 7, 1997 with respect to the financial statements of Posadas de San Juan
Associates and related financial statement schedule; (c) dated August 11, 1997
with respect to the financial statements of WKA El Con Associates; and (d) dated
May 2, 1997 with respect to the financial statements of El Conquistador
Partnership L.P.; all of which are included in the Joint Current Report on Form
8-K of Patriot American Hospitality, Inc. and Patriot American Hospitality
Operating Company, dated December 10, 1997.
/s/ ERNST & YOUNG LLP
San Juan, Puerto Rico
December 5, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference in the Registration Statement on Form S-3 (File No.
333-29671 333-29671-01) and the Joint Registration Statement on Form S-4 (File
No. 333-39875 and 333-39875-01) of Patriot American Hospitality, Inc. and
Patriot American Hospitality Operating Company as amended of our reports dated
(i) February 12, 1997, except for Note 21, Note 22 and the last paragraph of
Note 2, as to which the date is December 1, 1997, of our audit of the
consolidated financial statements of Interstate Hotels Company, (ii) dated
January 17, 1996, on our audit of the financial statements of Troy Hotel
Investors and (iii) dated February 7, 1995, on our audit of the financial
statements of Troy Park Associates.
/s/ Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
December 8, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference in the Registration Statement on Form S-3 (File No.
333-29671 333-29671-01) and the Joint Registration Statement on Form S-4 (File
No. 333-39875 and 333-39875-01) of Patriot American Hospitality, Inc. and
Patriot American Hospitality Operating Company as amended of our report dated
January 17, 1997, except for Note 7, as to which the date is November 25, 1997,
on our audit of the financial statements of Royal Palace Hotel Associates.
/s/ Coopers & Lybrand L.L.P.
Tampa, Florida
December 8, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (File No. 333-29671
and 333-29671-01) and the Registration Statement on Form S-4 (File No. 333-39875
and 333-39875-01) of Patriot American Hospitality, Inc. and Patriot American
Hospitality Operating Company of our report dated October 3, 1997 relating to
the financial statements of CHC International, Inc. Hospitality Division for the
years ended November 30, 1995 and 1996 which appears in the Joint Current Report
on Form 8-K of Patriot American Hospitality, Inc. and Patriot American
Hospitality Operating Company.
/s/ Price Waterhouse LLP
Miami, Florida
December 5, 1997
