<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Commission File Number 1-9319 Commission File Number 1-9320
PATRIOT AMERICAN HOSPITALITY, PATRIOT AMERICAN HOSPITALITY
INC. OPERATING COMPANY
- ------------------------------------------------------ ------------------------------------------------------
(Exact name of registrant as specified in its charter) (Exact name of registrant as 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 Identification No.) (I.R.S. Employer Identification No.)
3030 LBJ Freeway, Suite 1500 3030 LBJ Freeway, Suite 1500
Dallas, Texas 75234 Dallas, Texas 75234
- ------------------------------------------------------ ------------------------------------------------------
(Address of principal executive offices) (Zip Code) (Address of principal executive offices) (Zip Code)
(972) 888-8000 (972) 888-8000
- ------------------------------------------------------ ------------------------------------------------------
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
- ------------------------------------------------------ ------------------------------------------------------
______________________________________________________ ______________________________________________________
</TABLE>
1
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
ITEM 5. OTHER EVENTS
The Merger with WHG Resorts & Casinos, Inc ("WHG")
On September 30, 1997, Patriot American Hospitality Inc. (Patriot REIT),
Patriot American Hospitality Operating Company (Patriot Operating Company) and
WHG entered into an agreement (the "WHG Merger") providing for the merger of a
newly-formed subsidiary of Patriot Operating Company (and subsequent to the WHG
Merger, Wyndham International) with and into WHG, with WHG being the surviving
corporation. 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, 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.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses to be acquired
The index to the financial statements of WHG Resorts & Casinos,
Inc and affiliated entities is included on Page F-1 of this
report
(b) Pro forma financial information
The index to pro forma financial information for Patriot American
Hospitality, Inc. and Patriot American Hospitality Operating
Company is included on Page F-49 of this report
(c) Exhibits:
23.1 Consent of Ernst & Young LLP
2
<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: November 12, 1997
PATRIOT AMERICAN HOSPITALITY, INC.
By: /s/ Rex E. Stewart
-----------------------------------------------
Rex E. Stewart
Chief Financial Officer, Treasurer and Secretary
(Principal Accounting and Financial Officer)
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
By: /s/ Rex E. Stewart
-----------------------------------------------
Rex E. Stewart
Chief Financial Officer, Treasurer and Secretary
(Principal Accounting and Financial Officer)
3
<PAGE>
WHG RESORTS & CASINOS INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
WHG RESORTS & CASINOS INC.
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets at June 30, 1997 and June 30, 1996.......... F-3
Consolidated Statements of Operations for the years ended June 30, 1997,
1996 and 1995.......................................................... F-4
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1996 and 1995.......................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended June
30, 1997, 1996 and 1995................................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
Financial Statement Schedule II--Valuation and Qualifying Accounts for
the years ended June 30, 1997, 1996 and 1995........................... F-20
POSADAS DE SAN JUAN ASSOCIATES, a significant nonconsolidated affiliate of
WHG
Report of Independent Auditors.......................................... F-21
Balance Sheets at June 30, 1997 and 1996................................ F-22
Statements of Operations and Deficit for the years ended June 30, 1997,
1996 and 1995.......................................................... F-23
Statements of Cash Flows for the years ended June 30, 1997, 1996 and
1995................................................................... F-24
Notes to Financial Statements........................................... F-25
Financial Statement Schedule II--Valuation and Qualifying Accounts for
the years ended June 30, 1997, 1996 and 1995........................... F-30
WKA EL CON ASSOCIATES, a significant nonconsolidated affiliate of WHG
Report of Independent Auditors.......................................... F-31
Balance Sheets at June 30, 1997 and 1996................................ F-32
Statements of Operations and Deficit for the years ended June 30, 1997,
1996 and 1995.......................................................... F-33
Statements of Cash Flows for the years ended June 30, 1997, 1996 and
1995................................................................... F-34
Notes to Financial Statements........................................... F-35
EL CONQUISTADOR PARTNERSHIP L.P., a significant nonconsolidated affiliate
of WHG
Report of Independent Auditors.......................................... F-38
Balance Sheets at March 31, 1997 and 1996............................... F-39
Statements of Operations and (Deficiency in) Partners' Capital for the
years ended March 31, 1997, 1996 and 1995.............................. F-40
Statements of Cash Flows for the years ended March 31, 1997, 1996 and
1995................................................................... F-41
Notes to Financial Statements........................................... F-42
</TABLE>
F-1
<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.
Ernst & Young LLP
San Juan, Puerto Rico
August 7, 1997, except for Note
18, as to which the date is
September 17, 1997.
F-2
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents............................ $ 17,886 $ 6,616
Receivables, net of allowances of $649 in 1997 and
$475 in 1996........................................ 3,477 2,534
Receivables from nonconsolidated affiliates.......... 1,105 608
Inventories.......................................... 590 651
Other current assets................................. 791 689
----------- -----------
Total current assets............................... 23,847 11,098
Investments in, receivables and advances to
nonconsolidated affiliates............................ 30,603 27,126
Property and equipment, net............................ 43,861 44,919
Land held as investment................................ 5,095 5,095
Excess of purchase cost over amount assigned to net
assets acquired, net of accumulated amortization of
$3,739 in 1997 and $3,340 in 1996..................... 8,710 9,109
Other assets........................................... 5,355 7,387
----------- -----------
$ 117,473 $ 104,734
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable..................................... $ 3,760 $ 3,297
Accrued compensation and related benefits............ 2,855 2,128
Other accrued liabilities............................ 3,723 2,721
Dividend payable on preferred stock of Condado
Plaza............................................... -- 94
Notes payable........................................ 1,000 2,000
Current maturities of long-term debt................. 3,681 3,299
----------- -----------
Total current liabilities.......................... 15,019 13,539
Long-term debt, less current maturities................ 19,868 23,555
Deferred income taxes.................................. 2,638 2,291
Other noncurrent liabilities........................... 4,532 4,542
Payable to WMS Industries Inc.......................... 102 397
Minority interests..................................... 19,990 18,810
Preferred stock of Condado Plaza held by WMS Industries
Inc................................................... -- 4,100
Stockholders' equity:
Preferred stock, 2,000,000 shares authorized......... -- --
Common stock, class A, $.01 par value, non-voting,
3,000,000 shares authorized......................... -- --
Common stock, no par value, 12,000,000 shares, $.01
par value, authorized, 6,050,200 shares outstanding
in 1997 and 1,000 shares authorized and 100 shares
outstanding in 1996................................. 61 1
Additional paid-in capital............................. 14,296 3,849
Retained earnings...................................... 40,967 33,650
----------- -----------
Total stockholders' equity......................... 55,324 37,500
----------- -----------
$ 117,473 $ 104,734
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues:
WHGI management fees from nonconsolidated
affiliates................................. $ 13,937 $ 13,372 $ 13,348
Condado Plaza hotel/casino:
Casino...................................... 23,720 22,438 24,584
Casino promotional allowances............... (7,721) (6,986) (6,872)
Rooms....................................... 25,629 25,477 25,210
Food and beverages.......................... 11,034 11,478 11,412
Other....................................... 3,035 2,915 3,196
--------- --------- ---------
55,697 55,322 57,530
--------- --------- ---------
Total revenues............................ 69,634 68,694 70,878
Costs and expenses:
WHGI operating expenses (excl.
depreciation).............................. 3,910 3,882 5,175
Condado Plaza operating expenses (excl.
depreciation):
Casino..................................... 11,334 12,375 13,737
Rooms...................................... 7,639 8,593 9,081
Food and beverages......................... 9,076 10,088 10,503
Other...................................... 4,968 5,281 6,463
--------- --------- ---------
33,017 36,337 39,784
Selling and administrative................... 9,913 9,487 12,301
Depreciation and amortization................ 5,707 5,430 5,994
--------- --------- ---------
Total costs and expenses.................. 52,547 55,136 63,254
--------- --------- ---------
Operating income............................. 17,087 13,558 7,624
Interest income, primarily from
nonconsolidated affiliates, and
other income................................ 2,334 1,830 2,548
Interest expense............................. (3,265) (3,689) (4,300)
Equity in loss of nonconsolidated
affiliates.................................. (1,196) (3,465) (7,003)
--------- --------- ---------
Income (loss) before tax credit (provision)
and minority interests...................... 14,960 8,234 (1,131)
Credit (provision) for income taxes.......... (3,397) (1,645) 234
Minority interests in income................. (4,000) (3,636) (2,910)
Dividend on preferred stock of Condado
Plaza....................................... (246) (516) (557)
--------- --------- ---------
Net income (loss)............................ $ 7,317 $ 2,437 $ (4,364)
========= ========= =========
Primary earnings (loss) per share............ $ 1.20 $ .40 $ (.72)
========= ========= =========
Shares used in primary earnings per share
calculation................................. 6,086,443 6,050,200 6,050,200
========= ========= =========
Fully diluted earnings (loss) per share...... $ 1.17 $ .40 $ (.72)
========= ========= =========
Shares used in fully diluted earnings per
share calculation........................... 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......................... $ 14,960 $ 8,234 $ (1,131)
Provision for income taxes.................. (3,478) (2,545) (1,902)
Minority interests in income................ (4,000) (3,636) (2,910)
Dividend on preferred stock of Condado
Plaza...................................... (246) (516) (557)
--------- --------- ---------
Net income (loss)......................... $ 7,236 $ 1,537 $ (6,500)
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1997 1996 1995
------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating activities:
Net income (loss)................................. $ 7,317 $ 2,437 $(4,364)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 5,707 5,430 5,994
Provision for loss on receivables............... 366 1,457 1,842
Undistributed loss of nonconsolidated
affiliates..................................... 1,196 3,465 7,003
Deferred income taxes........................... 347 3,239 (1,626)
Minority interests.............................. 4,000 3,636 2,910
Increase (decrease) resulting from changes in
operating assets and liabilities:
Receivables.................................... (1,309) 342 (541)
Other current assets........................... 54 459 471
Accounts payable and accruals.................. 2,192 (12) (1,152)
Net amounts due from nonconsolidated
affiliates.................................... (5,170) (1,931) (5,906)
Other assets and liabilities not reflected
elsewhere..................................... (10) (618) 218
------- -------- -------
Net cash provided by operating activities......... 14,690 17,904 4,849
Investing activities:
Purchase of property and equipment................ (3,153) (1,149) (2,066)
Purchase of additional shares of subsidiaries..... (1,500) -- (3,925)
Investments in and advances to nonconsolidated
affiliates....................................... -- -- (1,360)
Collections from nonconsolidated affiliates....... -- 985 2,010
Other investing................................... 1,760 -- --
------- -------- -------
Net cash used in investing activities............. (2,893) (164) (5,341)
Financing activities:
Payment of long-term debt and notes payable....... (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.............................................. 4,273 (6,275) 3,125
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....................................... (2,240) (1,189) (783)
------- -------- -------
Net cash (used) provided by financing activities.. (527) (14,751) 274
------- -------- -------
Increase (decrease) in cash and cash equivalents... 11,270 2,989 (218)
Cash and cash equivalents at beginning of year..... 6,616 3,627 3,845
------- -------- -------
Cash and cash equivalents at end of year........... $17,886 $ 6,616 $ 3,627
======= ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
(THOUSANDS OF DOLLARS)
<S> <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) -- --
---- ------- ------- -------
$ 61 $14,296 $40,967 $55,324
==== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<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.
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-7
<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-8
<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 were:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- -------------
(IN THOUSANDS)
<S> <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.......................... 51,732 50,124 $ 51,797
Management fees and interest
payable to WHGI.................. 5,325 4,738 4,691
Other costs and expenses.......... 44,431 46,746 49,507
Net income (loss)................. $ 1,976 $ (1,360) $ (2,401)
</TABLE>
F-9
<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 were:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- -------------
(IN THOUSANDS)
<S> <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)....... 10 (178) $ (356)
Equity in net loss of El
Conquistador for fiscal year
ended March 31................... (4,701) (6,120) (13,739)
Equity in income of Las Casitas... -- 313 1,627
Net (loss)........................ $ (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 were:
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- --------------
(IN THOUSANDS)
<S> <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....................... 92,958 89,214 $ 84,743
Management fees and interest
payable to WHGI............... 6,282 5,820 3,874
Interest payable to partners... 2,498 2,598 1,898
Other costs and expenses....... 84,434 82,538 95,324
Depreciation and amortization.. 9,147 10,499 11,124
Net (loss)..................... $ (9,403) $(12,241) $(27,477)
</TABLE>
F-10
<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-11
<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-12
<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-13
<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-an-
nual 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-14
<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-15
<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-16
<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-17
<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............. 15,340 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-18
<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-19
<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 $-- $ 181,000 $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-20
<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.
Ernst & Young LLP
San Juan, Puerto Rico
August 7, 1997
F-21
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,681,100 $ 2,443,700
Trade accounts receivable, less allowance for
doubtful accounts of $606,300 in 1997 and $357,100
in 1996........................................... 3,692,000 2,370,700
Inventories........................................ 969,500 906,400
Prepaid expenses................................... 790,400 837,100
----------- -----------
Total current assets............................. 8,132,900 6,557,900
Land, building and equipment:
Land............................................... 3,300,000 3,300,000
Building........................................... 14,350,700 14,350,700
Building improvements.............................. 14,285,400 12,439,600
Furniture, fixtures and equipment.................. 36,114,600 33,814,000
Construction in progress........................... 113,400 --
----------- -----------
68,164,100 63,904,300
Less accumulated depreciation...................... 33,353,000 30,080,700
----------- -----------
34,811,100 33,823,600
Operating equipment, net............................. 523,000 570,700
Deferred financing costs, less accumulated
amortization of $662,400 in 1997 and $530,900 in
1996................................................ 402,000 533,500
Other assets......................................... 68,300 270,500
----------- -----------
Total assets......................................... $43,937,300 $41,756,200
=========== ===========
LIABILITIES AND DEFICIENCY IN PARTNERSHIP CAPITAL
Current liabilities:
Trade accounts payable............................. $ 4,078,700 $ 4,039,900
Accrued compensation and related benefits.......... 1,376,600 1,139,300
Other accrued liabilities.......................... 2,032,600 1,458,700
Due to affiliated companies........................ 237,600 11,600
Note payable to bank............................... -- 300,000
Current portion of long-term debt.................. 3,170,600 3,152,000
----------- -----------
Total current liabilities........................ 10,896,100 10,101,500
Long-term debt, net of current portion............... 20,831,400 23,805,000
Due to Williams Hospitality Group Inc................ 25,590,800 23,206,700
Deficiency in partnership capital:
Capital contribution............................... 7,000,000 7,000,000
Deficit............................................ (20,381,000) (22,357,000)
----------- -----------
Total deficiency in partnership capital.............. (13,381,000) (15,357,000)
----------- -----------
Total liabilities and deficiency in partnership
capital............................................. $43,937,300 $41,756,200
=========== ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Rooms.............................. $ 22,588,800 $ 22,016,700 $ 22,517,300
Food and beverage.................. 13,218,000 13,424,400 12,688,200
Casino............................. 19,582,200 18,117,600 22,575,400
Rental and other income............ 3,255,800 3,503,000 2,852,400
Less casino promotional
allowances........................ (6,905,300) (6,937,900) (7,836,300)
------------ ------------ ------------
Net revenues..................... 51,739,500 50,123,800 51,797,000
Costs and expenses:
Rooms.............................. 6,764,600 6,891,000 6,775,000
Food and beverage.................. 9,297,400 9,506,100 9,340,600
Casino............................. 9,729,000 10,716,800 14,027,100
Selling, general and
administrative.................... 8,803,200 9,094,000 8,953,700
Management and incentive management
fees.............................. 4,336,700 3,850,100 3,893,000
Property operation, maintenance and
energy costs...................... 4,509,700 4,803,200 4,416,800
Depreciation and amortization...... 3,438,800 3,595,300 3,617,300
------------ ------------ ------------
46,879,400 48,456,500 51,023,500
------------ ------------ ------------
Income from operations........... 4,860,100 1,667,300 773,500
Interest income...................... -- -- 2,500
Interest expense..................... (2,884,100) (3,026,800) (3,176,800)
------------ ------------ ------------
Net income (loss).................... 1,976,000 (1,359,500) (2,400,800)
Deficit at beginning of year......... (22,357,000) (20,997,500) (18,596,700)
------------ ------------ ------------
Deficit at end of year............... $(20,381,000) $(22,357,000) $(20,997,500)
============ ============ ============
</TABLE>
See accompanying notes.
F-23
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net income (loss)...................... $ 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........ 3,438,800 3,595,300 3,617,300
Provision for losses on accounts
receivable.......................... 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.......................... 2,610,100 2,086,700 639,600
Trade accounts receivable........... (1,471,900) 503,900 833,200
Inventories and prepaid expenses.... (16,400) 193,600 21,600
Other assets........................ 167,200 (10,500) (125,600)
Trade accounts payable, accrued
expenses and other accrued
liabilities........................ 850,000 (990,600) (2,493,100)
----------- ----------- -----------
Net cash provided by operating
activities........................ 7,704,400 5,250,500 3,972,600
Investing Activities
Proceeds from sale of equipment...... -- 119,300 --
Purchases of property and equipment.. (4,059,700) (2,502,800) (3,310,000)
Purchases of operating equipment--
net................................. 47,700 78,800 635,900
----------- ----------- -----------
Net cash used in investing
activities........................ (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 --
Payment of short-term borrowings..... (300,000) -- --
Payments of long-term debt........... (3,155,000) (2,326,400) (2,046,800)
----------- ----------- -----------
Net cash used in financing
activities........................ (3,455,000) (2,026,400) (1,890,600)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents...................... 237,400 919,400 (592,100)
Cash at beginning of year.............. 2,443,700 1,524,300 2,116,400
----------- ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 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-24
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. 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-25
<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.
2. 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.
3. 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-26
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
4. 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).
5. 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.
6. 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-27
<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>
7. 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.
8. 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-28
<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-29
<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-30
<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 7, 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.
Ernst & Young LLP
San Juan, Puerto Rico
August 11, 1997
F-31
<PAGE>
WKA EL CON ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash............................................... $ 3,600 $ 3,200
Notes receivable from affiliated company........... 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 in 1997 and $71,000 in 1996........... 1,368,100 1,397,500
Deferred debt issuance costs and other assets, less
accumulated amortization of $598,600 in 1997 and
$496,200 in 1996.................................. 769,800 872,200
------------ ------------
Total assets................................... $ 20,727,300 $ 19,681,500
============ ============
LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL
Liabilities:
Long-term note payable........................... $ 5,527,400 $ 5,197,000
Due to affiliated company........................ 85,100 64,200
Due to partners.................................. 10,475,100 9,790,700
Losses in excess of equity investment in El
Conquistador Partnership L.P. .................. 12,464,200 7,762,600
------------ ------------
Total liabilities.............................. 28,551,800 22,814,500
Deficiency in partners' capital:
Contributed...................................... 20,286,200 20,286,200
Deficit.......................................... (28,110,700) (23,419,200)
------------ ------------
Total deficiency in partners' capital.......... (7,824,500) (3,133,000)
------------ ------------
Total liabilities and deficiency in partners'
capital....................................... $ 20,727,300 $ 19,681,500
============ ============
</TABLE>
See accompanying notes.
F-32
<PAGE>
WKA EL CON ASSOCIATES
STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest income...................... $ 1,241,100 $ 1,150,100 $ 1,027,600
Costs and expenses:
Interest........................... 1,078,400 1,145,800 1,137,600
Professional fees.................. 20,900 40,100 83,400
Amortization....................... 131,800 142,000 163,200
------------ ------------ ------------
1,231,100 1,327,900 1,384,200
------------ ------------ ------------
Income (loss) before equity in
operations of investees............. 10,000 (177,800) (356,600)
Equity in operations of investees:
El Conquistador Partnership L.P.... (4,701,500) (6,120,500) (13,738,400)
Las Casitas Development Company.... -- 313,200 1,627,100
------------ ------------ ------------
(4,701,500) (5,807,300) (12,111,300)
------------ ------------ ------------
Net loss............................. (4,691,500) (5,985,100) (12,467,900)
Accumulated deficit at beginning of
year................................ (23,419,200) (17,434,100) (4,966,200)
------------ ------------ ------------
Accumulated deficit at end of year... $(28,110,700) $(23,419,200) $(17,434,100)
============ ============ ============
</TABLE>
See accompanying notes.
F-33
<PAGE>
WKA EL CON ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Operating Activities
Net loss............................... $(4,691,500) $(5,985,100) $(12,467,900)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Amortization......................... 131,800 142,000 163,200
Equity in operations of affiliates
including $1,050,000 in 1997 and
$950,000 in 1996 in cash
distributions received.............. 5,751,600 6,757,300 12,111,300
Changes in operating assets and
liabilities:
Accrued interest income added to
notes receivable.................... (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..................... -- -- (36,700)
Due to affiliated company............ -- 58,900 --
----------- ----------- ------------
Net cash provided by (used in)
operating activities.............. 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.................... (1,050,000) (950,000) (423,500)
----------- ----------- ------------
Net cash used in investing
activities........................ (1,050,000) (267,500) (553,900)
Financing Activities
Partners' contributed capital.......... -- 1,295,700 1,870,500
Partners' loans--net................... 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.................. 705,300 (682,500) 796,900
----------- ----------- ------------
Net increase in cash................... 400 3,200 --
Cash at beginning of year.............. 3,200 -- --
----------- ----------- ------------
Cash at end of year.................... $ 3,600 $ 3,200 $ --
=========== =========== ============
</TABLE>
See accompanying notes.
F-34
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. 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-35
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
2. 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.
3. 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.
4. 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 2).
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-36
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
5. 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 2).
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.
6. 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.
7. 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-37
<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 13, 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.
Ernst & Young LLP
San Juan, Puerto Rico
May 2, 1997
F-38
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash.............................................. $ 2,380,218 $ 856,983
Restricted cash and investments held by bank...... 3,360,607 2,879,355
Trade accounts receivable, less allowance for
doubtful accounts of $269,115 in 1997 and
$301,765 in 1996................................. 4,764,607 5,302,884
Due from affiliated companies..................... 428,987 314,999
Inventories....................................... 1,662,877 1,522,463
Prepaid expenses and other current assets......... 1,020,716 945,905
------------ ------------
Total current assets............................ 13,618,012 11,822,589
Due from affiliated company........................ 418,957 817,868
Land, building and equipment:
Land.............................................. 14,372,707 14,372,707
Building.......................................... 158,039,190 158,039,190
Furniture, fixture and equipment.................. 32,664,796 31,359,202
------------ ------------
205,076,693 203,771,099
Less accumulated depreciation..................... 21,116,551 14,777,283
------------ ------------
183,960,142 188,993,816
Operating equipment, net........................... 1,592,219 1,469,350
Deferred debt issuance costs, net of accumulated
amortization of $5,709,747 in 1997 and $4,731,745
in 1996........................................... 2,980,622 3,958,624
Deferred pre-opening costs, net of accumulated
amortization of $10,519,175 in 1997 and $8,751,425
in 1996........................................... 2,860,504 4,628,254
------------ ------------
Total assets.................................... $205,430,456 $211,690,501
============ ============
LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL
- -----------------------------------------------
Current liabilities:
Trade accounts payable............................ $ 5,474,496 $ 7,657,546
Advance deposits.................................. 5,572,317 3,568,390
Accrued interest.................................. 1,785,687 1,510,080
Other accrued liabilities......................... 5,271,335 4,673,189
Due to affiliated companies....................... 545,824 652,896
Note payable to bank.............................. 1,500,000 2,773,359
Current portion of long-term debt................. 120,000,000 --
Current portion of chattel mortgages and capital
lease obligations................................ 2,679,819 2,444,993
------------ ------------
Total current liabilities....................... 142,829,478 23,280,453
Long-term debt..................................... 25,000,000 145,000,000
Chattel mortgages and capital lease obligations,
net of current portion............................ 1,660,040 4,324,358
Due to affiliated companies........................ 11,491,977 8,531,671
Due to partners.................................... 37,377,424 34,079,309
Deficiency in partners' capital:
Limited partners.................................. (10,989,193) (2,996,497)
General partners.................................. (1,939,270) (528,793)
------------ ------------
Total deficiency in partners' capital........... (12,928,463) (3,525,290)
------------ ------------
Total liabilities and deficiency in partners'
capital.......................................... $205,430,456 $211,690,501
============ ============
</TABLE>
See accompanying notes.
F-39
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
STATEMENTS OF OPERATIONS AND (DEFICIENCY IN) PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Rooms.............................. $ 40,023,903 $ 38,817,160 $ 37,942,821
Food and beverage.................. 26,235,365 26,188,693 27,298,340
Casino............................. 6,005,242 6,179,133 6,054,569
Rental and other income............ 21,959,328 19,165,969 14,652,328
------------ ------------ ------------
94,223,838 90,350,955 85,948,058
Less casino promotional
allowances........................ (1,265,710) (1,136,499) (1,205,380)
------------ ------------ ------------
Net revenues..................... 92,958,128 89,214,456 84,742,678
Costs and expenses:
Rooms.............................. 12,377,694 12,853,157 14,755,239
Food and beverage.................. 17,602,484 17,638,186 20,797,173
Casino............................. 3,848,981 3,686,904 3,923,817
Selling, general and
administrative.................... 14,657,312 12,992,841 18,115,433
Management and incentive management
fees.............................. 5,680,355 5,394,675 3,703,819
Property operation, maintenance and
energy costs...................... 12,382,577 12,396,063 14,408,347
Depreciation and amortization...... 9,146,664 10,499,296 11,124,075
Other expenses..................... 9,702,212 9,201,228 9,722,662
------------ ------------ ------------
85,398,279 84,662,350 96,550,565
------------ ------------ ------------
Income (loss) from operations.... 7,559,849 4,552,106 (11,807,887)
Interest income...................... 199,110 228,625 467,922
Interest expense..................... 17,162,132 17,021,764 16,136,755
------------ ------------ ------------
Net loss............................. (9,403,173) (12,241,033) (27,476,720)
(Deficiency in) partners' capital at
beginning of year................... (3,525,290) 8,715,743 36,191,325
Partners' capital contribution....... -- -- 1,138
------------ ------------ ------------
(Deficiency in) partners' capital at
end of year......................... $(12,928,463) $ (3,525,290) $ 8,715,743
============ ============ ============
</TABLE>
See accompanying notes.
F-40
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................ $ (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..... 9,146,664 10,499,296 11,124,075
Provision for losses on accounts
receivable....................... 205,400 363,245 1,808,641
Incentive management fees......... 2,375,526 2,224,381 679,259
Deferred interest expense to
partners and affiliates.......... 3,100,085 2,995,431 2,063,981
Changes in operating assets and
liabilities:
Restricted cash and investments
held by bank................... (481,252) 503,353 2,549,446
Trade accounts receivable....... 332,877 1,987,789 2,187,211
Inventories..................... (140,414) 529,503 61,249
Prepaid expenses and other
current assets................. (74,811) 26,105 491,032
Trade accounts payable and
advance deposits............... (179,123) (3,663,803) (1,323,693)
Accrued interest and other
accrued liabilities............ 873,753 (1,220,058) 1,156,483
Affiliated companies, net....... 99,017 (97,985) 1,967,073
------------ ------------ ------------
Net cash provided by (used in)
operating activities............... 5,854,549 1,906,224 (4,711,963)
INVESTING ACTIVITIES
Purchases of property and
equipment.......................... (1,305,594) (826,611) (3,525,762)
Usage of operating equipment, net... (122,869) (37,454) 523,641
------------ ------------ ------------
Net cash used in investing
activities......................... (1,428,463) (864,065) (3,002,121)
FINANCING ACTIVITIES
Payments of principal on long-term
debt............................... (2,429,492) (2,198,146) (1,976,625)
Proceeds from long-term debt........ -- -- 776,000
Proceeds from notes payable to
bank............................... 9,500,000 7,684,685 --
Payments of principal on notes
payable to bank.................... (10,773,359) (6,549,685) (200,000)
Proceeds from partners' and
affiliated loans, and capital
contributions...................... 800,000 -- 8,698,134
------------ ------------ ------------
Net cash used in financing
activities......................... (2,902,851) (1,063,146) 7,293,509
------------ ------------ ------------
Net increase (decrease) in cash..... 1,523,235 (20,987) (420,575)
Cash at beginning of year........... 856,983 877,970 1,298,545
------------ ------------ ------------
Cash at end of year................. $ 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-41
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. 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-42
<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.
2. RESTRICTED CASH AND INVESTMENTS HELD BY BANK
Pursuant to the terms of the bond agreement (see Note 8), 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>
3. 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>
4. 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-43
<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 6). 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 7) 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.
5. 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-44
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
6. 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-45
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
7. 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 4 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>
8. 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-46
<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.
9. 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-47
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
10. 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.
11. 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.
12. 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.
13. 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 8). 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-48
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.,
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY AND
WYNDHAM HOTEL CORPORATION
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
PRO FORMA FINANCIAL INFORMATION
<S> <C>
PATRIOT REIT AND PATRIOT OPERATING COMPANY:
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1996 (unaudited). ....................................... F-58
Pro Forma Condensed Combined Statement of Operations for the six months
ended June 30, 1997 (unaudited). ..................................... F-60
Pro Forma Condensed Combined Balance Sheet as of
June 30, 1997 (unaudited). ........................................... F-63
PATRIOT REIT:
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1996 (unaudited)................................... F-67
Pro Forma Condensed Consolidated Statement of Operations for the six
months ended June 30, 1997 (unaudited). .............................. F-70
PATRIOT OPERATING COMPANY:
Pro Forma Condensed Consolidated Statement of Operations for the year
ended
December 31, 1996 (unaudited)......................................... F-73
Pro Forma Condensed Consolidated Statement of Operations for the six
months ended June 30, 1997 (unaudited). .............................. F-76
COMBINED LESSEES:
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1996 (unaudited) and the six months ended June
30, 1997 (unaudited) ................................................. F-80
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-85
Pro Forma Condensed Combined Statement of Operations for the six months
ended June 30, 1997 (unaudited). ..................................... F-87
Pro Forma Condensed Combined Balance Sheet as of
June 30, 1997 (unaudited)............................................. F-90
PATRIOT REIT:
Pro Forma Condensed Consolidated Statement of Operations for the year
ended
December 31, 1996 (unaudited)......................................... F-93
Pro Forma Condensed Consolidated Statement of Operations for the six
months ended June 30, 1997 (unaudited). .............................. F-95
WYNDHAM INTERNATIONAL:
Pro Forma Condensed Consolidated Statement of Operations for the year
ended
December 31, 1996 (unaudited)......................................... F-97
Pro Forma Condensed Consolidated Statement of Operations for the six
months ended June 30, 1997 (unaudited). .............................. F-99
COMBINED LESSEES:
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1996 (unaudited) and the six months ended June
30, 1997 (unaudited).................................................. F-102
</TABLE>
F-49
<PAGE>
PRO FORMA FINANCIAL INFORMATION--AS ADJUSTED FOR THE WHG MERGER
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PATRIOT REIT AND WYNDHAM INTERNATIONAL:
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1996 (unaudited)......................................... F-104
Pro Forma Condensed Combined Statement of Operations for the six months
ended June 30, 1997 (unaudited). ..................................... F-105
Pro Forma Condensed Combined Balance Sheet as of
June 30, 1997 (unaudited)............................................. F-107
WYNDHAM INTERNATIONAL:
Pro Forma Condensed Consolidated Statement of Operations for the year
ended
December 31, 1996 (unaudited)......................................... F-109
Pro Forma Condensed Consolidated Statement of Operations for the six
months ended June 30, 1997 (unaudited). .............................. F-110
</TABLE>
F-50
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
INTRODUCTION TO
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
BACKGROUND
On July 1, 1997, pursuant to the Cal Jockey Merger, Old Patriot REIT merged
with and into Cal Jockey, with Cal Jockey being the surviving legal entity. In
connection with the Cal Jockey Merger, Cal Jockey changed its name to Patriot
American Hospitality, Inc. and Bay Meadows changed its name to Patriot
American Hospitality Operating Company. 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
Old Patriot REIT Common Stock was converted into 0.51895 shares of Patriot
REIT Common Stock and 0.51895 shares of 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.
In connection with the Cal Jockey Merger, Bay Meadows formed the Patriot
Operating Company Partnership into which Bay Meadows contributed its assets in
exchange for OP Units of the Patriot Operating Company Partnership, and Cal
Jockey contributed certain of its assets to the Patriot REIT Partnership in
exchange for OP Units of the Patriot REIT Partnership. 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 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 Non-
Controlled Subsidiaries, to either Patriot Operating Company or the Lessee
that is responsible for operating such hotel. 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 Lessees, in turn, have entered
into separate agreements with 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-51
<PAGE>
As of October 15, 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.
BUSINESSES ACQUIRED
Since June 30, 1997, Patriot REIT, through the Patriot REIT Partnership and
its subsidiaries, has invested approximately $319,019 to acquire 14 hotels
with a total of 3,658 rooms (the "Recent Acquisitions"), which are described
below. 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").
In July 1997, Patriot REIT acquired 90% of the equity interests in four
separate limited liability companies which own the 266-room Holiday Inn
Westlake, the 196-room Radisson Beachwood, and the 113-room Courtyard by
Marriot Beachwood, all in Cleveland, Ohio and the 130-room Radisson Hotel in
Akron, Ohio (the "Snavely Portfolio"). The Radisson Beachwood hotel is subject
to a mortgage loan with a financial institution with a principal balance of
approximately $5,774. In addition, Patriot REIT, through the Patriot REIT
Partnership and its subsidiaries, acquired the 224-room Holiday Inn at the San
Francisco International Airport; the 323-room Ramada Inn at the San Francisco
International Airport; the 219-room Ambassador West, a Grand Heritage Hotel in
Chicago, Illinois; and the 124-room Union Station Hotel, a Grand Heritage
Hotel in Nashville, Tennessee. These acquisitions were financed primarily with
the proceeds from the sale of certain land described below and with funds
drawn on the Patriot Companies' Revolving Credit Facility as described below.
In August 1997, Patriot REIT, through the Patriot REIT Partnership and its
subsidiaries, acquired the 227-room Park Shore Hotel in Honolulu, Hawaii. The
acquisition was financed primarily with funds drawn on the Patriot Companies'
Revolving Credit Facility. The following unaudited Pro Forma Condensed
Combined Statements of Operations do not include the results of operations of
the Park Shore Hotel.
On September 4, 1997, Patriot REIT, through a consolidated partnership in
which the Patriot REIT Partnership owns an 85% general partnership interest
and an affiliate of Doubletree Hotels Corporation owns a 15% limited
partnership interest, acquired four Doubletree Hotels in Houston, Texas,
Anaheim, California, St. Louis, Missouri and Overland Park, Kansas, with an
aggregate of 1,482 rooms (the "Met-Doubletree Hotels"). The Met-Doubletree
Hotels were financed with a combination of mortgage debt and cash
contributions to the partnership by the Patriot REIT Partnership and by the
affiliate of Doubletree Hotels Corporation and the issuance of 614,046 paired
OP Units in the Patriot REIT Partnership and the Patriot Operating Company
Partnership. Patriot REIT Partnership's contribution was financed primarily
with funds drawn on the Patriot Companies' Revolving Credit Facility.
In August 1997, the Patriot Companies 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.
On October 15, 1997, Patriot REIT, through certain of its subsidiaries,
acquired The Buttes, a 353-room resort hotel in Tempe, Arizona. The purchase
was financed primarily with funds drawn on Patriot REIT's revolving credit
facility. Patriot REIT has leased the hotel to Patriot Operating Company and a
Patriot Operating Company subsidiary will manage the hotel.
F-52
<PAGE>
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
for a purchase price of approximately $80,864. 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.
FINANCING TRANSACTIONS
On July 21, 1997, the Patriot Companies entered into the Revolving Credit
Facility with Paine Webber Real Estate, Chase and certain other lenders for a
three-year $700,000 unsecured revolving line of credit. Borrowings have been
made under the Revolving Credit Facility to repay all outstanding amounts
under Old Patriot REIT's secured line of credit with Paine Webber Real Estate
(the "Old Line of Credit"). The Revolving Credit Facility generally is used
for the acquisition of additional properties, businesses and other assets, for
capital expenditures and for general working capital purposes. In addition, it
is expected that the Revolving Credit Facility will be used to refinance that
portion of existing Wyndham indebtedness that is not refinanced through the
Term Loan (see below). 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
interest rate currently in effect for the Revolving Credit Facility is 7.656%
per annum.
Additionally, Patriot REIT has entered into a commitment letter with Paine
Webber Real Estate and Chase for the $500,000 Term Loan. It is anticipated
that the Term Loan will be secured by specific assets and properties of the
Patriot Companies that will be transferred to a special purpose "bankruptcy
remote" entity. The Term Loan will be used primarily to refinance
substantially all of the existing indebtedness of Wyndham and to finance
payments to be made in connection with the Merger and the Related Transactions
and the Crow Assets Acquisition. The Term Loan is expected to have an interest
rate per annum equal to LIBOR plus 1.75%.
The Patriot Companies have entered into three interest rate swap
arrangements to swap floating rate LIBOR-based interest rates for fixed rate
interest amounts as a hedge against $375,000 of the $700,000 Revolving Credit
Facility. Each of the interest rate swaps covers $125,000 of borrowings under
the Revolving Credit Facility and fixes the LIBOR portion of the interest rate
at 6.09%, 6.255% and 6.044%, respectively. The interest rate swap arrangements
expire November 2002. The following unaudited Pro Forma Condensed Combined
Statements of Operations do not include adjustments to pro forma interest
expense to reflect these interest rate swap arrangements.
F-53
<PAGE>
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
Paine Webber Real Estate (the "Paine Webber Mortgage Financing"), whereby such
affiliate loaned Patriot REIT $103,000 through April 15, 1998 at a rate equal
to the greater of 30-day LIBOR plus 1.75% or the borrowing rate on the
Revolving Credit Facility. This financing is secured by a collateral
assignment of the mortgage loans encumbering the four hotels. 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 August 1, 1997, Patriot Operating Company purchased a participating loan
from National Resort Ventures, L.P., a Delaware limited partnership, related
to the 1,013-room Buena Vista Palace Hotel in Orlando, Florida for $23,750 in
cash (the "Participating Note"). The Participating Note acquisition closed
simultaneously with the closing of the public offering of common stock
discussed below. The Buena Vista Palace Hotel is owned by a joint venture
between Equitable Life Insurance Company, which owns a 55% interest, and Hotel
Venture Partners, Ltd., a Florida limited partnership, which owns a 45%
interest. The Participating Note is subordinated to a ground lease, a $51,000
first leasehold mortgage loan and a separate $8,500 participating loan.
In August 1997, the Patriot Companies completed a public offering (the
"Offering") of 10,580,000 Paired Shares (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.
ACQUISITION OF GENCOM AMERICAN HOSPITALITY AND MERGER WITH CHC INTERNATIONAL,
INC.
In September 1997, Patriot REIT, through certain of its subsidiaries,
acquired six 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 four additional hotels. These
ten hotels were acquired from entities affiliated with the Gencom and CHCI for
an aggregate purchase price of approximately $236,984. 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 through a
merger of the parent company of the Gencom-related entity that owns such
interest with Patriot REIT or by other means for approximately $19,314. The
ten hotels will be leased to and managed by Patriot Operating Company and its
subsidiaries. The purchase of the ten 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 Paine Webber
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,
F-54
<PAGE>
the management contracts with 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 $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. 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.
By operation of the CHCI Merger and the transactions related thereto, each
issued and outstanding CHCI Share and certain stock option rights will be
converted into the right to receive shares of Operating Company Series A
Preferred Stock and shares of Operating Company Series B 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
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
F-55
<PAGE>
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 Acquisition of GAH, 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.
As part of the above-described acquisitions, Karim Alibhai, the chief
executive officer of Gencom, was appointed to the position of president, chief
operating officer and director of Patriot Operating Company. Patriot Operating
Company has entered into an employment agreement with Mr. Alibhai, pursuant to
which Mr. Alibhai serves as president and chief operating officer of Patriot
Operating Company for a term of three years at an initial annual base
compensation of $350, subject to any increases in base compensation approved
by the Compensation Committee of the Patriot Operating Company Board of
Directors. In addition, under the terms of the employment contract, Mr.
Alibhai is eligible to receive cash incentive compensation in an amount to be
determined by the Compensation Committee, but not less than $75 per year, up
to 80% of his annual base compensation, as adjusted. In addition, Mr. Alibhai
was granted nonqualified options to purchase 280,000 Paired Shares at an
exercise price of $32.0625 per Paired Share (the closing market price of a
Paired Share on the date of grant). The options to purchase Paired Shares vest
in equal quarterly installments over a period of three years.
SUMMARY
As of November 3, 1997, Patriot REIT owned interests in 80 hotels and
resorts and held an approximate 83.6% ownership interest in the Patriot REIT
Partnership. Patriot Operating Company held an approximate 82.1% ownership
interest in the Patriot Operating Company Partnership. The unaudited Pro Forma
Financial Statements reflect an approximate 16.3% minority ownership interest
in the Patriot REIT Partnership and a 16.8% minority ownership interest in the
Patriot Operating Company Partnership, which represents the estimated
ownership interest subsequent to consummation of the GAH Acquisition and the
CHCI Merger.
The following unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1996 and the six months ended June 30, 1997 of
Patriot REIT and Patriot Operating Company are derived from the individual
unaudited Pro Forma Condensed Consolidated Statements of Operations of Patriot
REIT and Patriot Operating Company which are located on pages 193 through 204.
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 and the Joint Quarterly
Report on Form 10-Q for the six months ended June 30, 1997;
(ii) the Consolidated Statements of Operations of Old Patriot REIT filed
with the Old Patriot REIT Annual Report on Form 10-K for the year ended
December 31, 1996 and the Joint Quarterly Report on Form 10-Q for the six
months ended June 30, 1997;
F-56
<PAGE>
(iii) the historical financial statements of certain hotels acquired by
Old Patriot REIT filed in Old Patriot REIT's Current Reports on Form 8-K
dated April 2, 1996, as amended, December 5, 1996 and January 16, 1997, as
amended;
(iv) the historical financial statements of the 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
(v) the Pro Forma Condensed Combined Statements of Operations of the
Lessees which are located on page 206.
The following unaudited Pro Forma Condensed Combined Statements of
Operations assume the following transactions (the "Recent Transactions") have
occurred at the beginning of the periods presented:
(i) the Cal Jockey Merger and the related transactions have been
consummated on terms set forth in the Cal Jockey Merger Agreement;
(ii) the PaineWebber Land Sale has been consummated, the PaineWebber
affiliate has leased that portion of the land upon which the Racecourse is
situated to Patriot REIT, and Patriot REIT has subleased 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);
(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 REIT 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 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 the beginning of the period presented, nor do they purport to
represent the results of operations for future periods. Further the unaudited
Pro Forma Condensed Combined Statement of Operations for the interim period
ended June 30, 1997 is not necessarily indicative of the results of operations
for the full year.
F-57
<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
revenue.................... $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 service
fee income................. -- 13,522 -- 13,522
Interest and other income... 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
operations................. -- 46,351 (5,611)(B) 40,740
Direct operating costs of
management company, service
department and development
costs...................... -- 11,143 -- 11,143
Ground lease expense........ 5,693 733 -- 6,426
General and administrative.. 6,797 71,700 (34)(C) 78,463
Repair and maintenance...... -- 29,897 -- 29,897
Utilities................... -- 26,843 -- 26,843
Interest expense............ 64,877 1,393 (5,882)(C) 60,388 (D)
Real estate and personal
property taxes and casualty
insurance.................. 22,488 398 -- 22,886
Marketing................... -- 51,238 -- 51,238
Management fees............. -- 9,469 -- 9,469
Depreciation and
amortization............... 62,723 10,348 -- 73,071
Participating lease
payments................... -- 172,119 (172,119)(A) --
-------- -------- --------- --------
Total expenses.............. 162,578 673,424 (183,646) 652,356
-------- -------- --------- --------
Income (loss) before equity
in earnings of
unconsolidated subsidiaries,
income tax provision and
minority interests.......... 59,532 (25,652) -- 33,880
Equity in earnings of
unconsolidated
subsidiaries............... 7,559 -- -- 7,559
-------- -------- --------- --------
Income (loss) before income
tax provision and minority
interests................... 67,091 (25,652) -- 41,439
Income tax provision........ (170) (760) -- (930)
-------- -------- --------- --------
Income (loss) before minority
interests................... 66,921 (26,412) -- 40,509
Minority interest in the
Patriot Partnerships....... (10,610) 4,437 -- (6,173)
Minority interest in
consolidated subsidiaries.. (1,832) -- -- (1,832)
-------- -------- --------- --------
Net income (loss) applicable
to common shareholders(F)... $ 54,479 $(21,975) $ -- $ 32,504 (D)
======== ======== ========= ========
Net income (loss) per common
Paired Share(E)............. $ 0.74 $ (0.30) $ 0.44 (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-58
<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 $61,963, decrease net income
applicable to common shareholders to $31,186 and decrease net income per
common share to $0.42
In connection with the closing of the Revolving Credit Facility, deferred
loan costs totaling approximately $13,192, including fees, legal and other
expenses were incurred and amortization expense of approximately $4,397 is
reflected in pro forma interest expense. Amortization of deferred loan costs
is computed using the straight-line method over the 3-year loan term. As a
result of closing the Revolving Credit Facility, deferred loan costs
totaling approximately $2,910 related to the Old Line of Credit are to be
written off. This amount will be reported as an extraordinary item in the
Patriot Companies' results of operations and has been reflected as an
adjustment to retained earnings for pro forma presentation purposes.
(E) Pro forma earnings per share is computed based on 73,516 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 $0.44 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
one-time 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; however, the Patriot Companies will not deduct this expense
for purposes of calculating funds from operations, due to the non-
recurring nature of the expense.
F-59
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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
revenue.................... $117,348 $ -- $ (95,694)(A) $ 21,654
Hotel revenue............... -- 313,694 -- 313,694
Racecourse facility and land
lease revenue.............. 2,802 22,538 (2,635)(B) 22,705
Management fee and service
fee income................. -- 7,866 -- 7,866
Interest and other income... 2,806 5,364 (2,965)(C) 5,205
-------- -------- --------- --------
Total revenue............... 122,956 349,462 (101,294) 371,124
-------- -------- --------- --------
Expenses:
Departmental costs--hotel
operations................. -- 127,484 -- 127,484
Racecourse facility
operations................. -- 20,282 (2,635)(B) 17,647
Direct operating costs of
management company, service
department and development
costs...................... -- 6,639 -- 6,639
Ground lease expense........ 2,804 446 -- 3,250
General and administrative.. 5,077 36,332 (24)(C) 41,385
Repair and maintenance...... -- 15,882 -- 15,882
Utilities................... -- 12,887 -- 12,887
Interest expense............ 32,694 623 (2,941)(C) 30,376 (D)
Real estate and personal
property taxes and casualty
insurance.................. 12,084 220 -- 12,304
Marketing................... -- 26,629 -- 26,629
Management fees............. -- 6,000 -- 6,000
Depreciation and
amortization............... 32,188 5,113 -- 37,301
Participating lease
payments................... -- 95,694 (95,694)(A) --
-------- -------- --------- --------
Total expenses.............. 84,847 354,231 (101,294) 337,784
-------- -------- --------- --------
Income (loss) before equity
in earnings of
unconsolidated subsidiaries,
income tax provision and
minority interests.......... 38,109 (4,769) -- 33,340
Equity in earnings of
unconsolidated
subsidiaries............... 3,093 -- -- 3,093
-------- -------- --------- --------
Income (loss) before income
tax provision and minority
interests................... 41,202 (4,769) -- 36,433
Income tax (provision)
benefit.................... (85) 222 -- 137
-------- -------- --------- --------
Income (loss) before minority
interests................... 41,117 (4,547) -- 36,570
Minority interest in the
Patriot Partnerships....... (6,541) 764 -- (5,777)
Minority interest in
consolidated subsidiaries.. (987) -- -- (987)
-------- -------- --------- --------
Net income (loss) applicable
to common shareholders(F)... $ 33,589 $ (3,783) $ -- $ 29,806 (D)
======== ======== ========= ========
Net income (loss) per common
Paired Share(E)............. $ 0.45 $ (0.05) $ 0.40 (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 $2,356 of interest
income and expense related to the Subscription Notes issued to Patriot
Operating Company in connection with the subscription for shares of
Patriot Operating Company Common Stock and Patriot Operating Partnership
OP Units issued in connection with the Cal Jockey Merger, the elimination
of $585 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 7.264%
per annum (representing LIBOR plus 1.7%) on the amounts outstanding under
the Revolving Credit Facility. An increase of 0.25% in the interest rate
would increase pro forma interest expense to $31,165 and decrease net
income applicable to common shareholders to $29,145. Net income per common
share would be $0.39. In connection with the closing of the Revolving
Credit Facility, deferred loan costs totaling approximately $13,192,
including fees, legal
F-60
<PAGE>
and other expenses were incurred and amortization expense of approximately
$2,199 is reflected in pro forma interest expense. Amortization of deferred
loan costs is computed using the straight-line method over the 3-year loan
term. As a result of closing the Revolving Credit Facility, deferred loan
costs totaling approximately $2,910 related to the Old Line of Credit are to
be written off. This amount will be reported as an extraordinary item in the
Patriot Companies' results of operations and has been reflected as an
adjustment to retained earnings for pro forma presentation purposes.
(E) Pro forma earnings per share is computed based on 74,045 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 six months ended
June 30, 1997 would be $0.44 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 six months ended June 30, 1997 is to reflect the expected
continuing impact of the above-described transactions on the Patriot
Companies, the one-time 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; however, the Patriot Companies will
not deduct this expense for purposes of calculating funds from operations,
due to the non-recurring nature of the expense.
F-61
<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 Recent Transactions have occurred as of June 30, 1997:
(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);
(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 REIT has acquired the Participating Note; and
(ix) the Offering of 10,580,000 Paired Shares has been completed.
The following unaudited Pro Forma Condensed Combined Balance Sheet also
assumes the following additional transactions have occurred as of June 30,
1997:
(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.
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 Old Patriot REIT's Consolidated Balance Sheet as of June 30, 1997
and Patriot REIT's and Patriot Operating Company's Combined Balance Sheet as
of June 30, 1997 and should be read in conjunction with the financial
statements filed with the Patriot Companies' Joint Quarterly Report on Form
10-Q for the six months ended June 30, 1997 (which included the financial
statements of Old Patriot REIT as of and for the six months ended June 30,
1997).
The Cal Jockey Merger has been accounted for as a reverse acquisition
whereby Cal Jockey is considered to be the acquired company for accounting
purposes. The unaudited Pro Forma Condensed Combined Balance Sheet reflects
adjustments for the purchase method of accounting whereby the Racecourse
facilities and related leasehold improvements owned by Cal Jockey and Bay
Meadows are adjusted to estimated fair market value and Cal Jockey's and Bay
Meadows' historical shareholders' equity is eliminated. The following Pro
Forma Condensed Combined Balance Sheet is not necessarily indicative of what
the actual financial position would have been assuming such transactions had
been completed as of June 30, 1997, nor does it purport to represent the
future financial position of Patriot REIT and Patriot Operating Company.
F-62
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CAL JOCKEY
OLD AND BAY ACQUISITION
PATRIOT MEADOWS OF GAH AND
REIT COMBINED CAL JOCKEY OTHER CHC HOTELS CERTAIN CHCI PRO
HISTORICAL HISTORICAL MERGER ACQUISITIONS ACQUISITION LEASEHOLDS MERGER FORMA
(A) (B) (C) (D) (E) (F) (G) TOTAL
----------- ---------- ---------- ------------ ----------- ----------- -------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Net investment in
hotel and resort
properties and land
held for sale....... $ 1,011,940 $ -- $ -- $ 323,682 $ 255,813 $ -- $ -- $ 1,591,435
Net investment in
Racecourse facility
and related
improvements........ -- 21,080 485 (H) -- -- -- -- 21,565
Mortgage notes and
other receivables
from unconsolidated
subsidiaries........ 74,424 -- -- -- -- -- -- 74,424
Other notes and
receivables......... 33,796 -- (2,900)(I) 96,842 (J) (103,125)(K) -- -- 24,613
Management
contracts........... -- -- -- 10,960 (L) -- 9,942 (L) 22,911 (L) 43,813
Trade names and
franchise costs..... -- -- -- 11,500 (L) -- -- 5,000 (L) 16,500
Investment in
unconsolidated
subsidiaries........ 12,448 -- -- -- -- -- -- 12,448
Cash and cash
equivalents......... 8,975 4,256 -- 7,515 (M) -- (1,508)(N) -- 19,238
Restricted cash (O).. -- -- 80,864 (H) (39,320)(O) -- -- -- 41,544
Accounts receivable.. 13,075 163 -- -- -- -- -- 13,238
Goodwill............. -- -- 103,121 (P) 4,888 (P) -- 4,735 (P) 7,269 (P) 120,013
Deferred expenses,
net................. 9,656 -- -- 4,194 (Q) -- -- -- 13,850
Prepaid expenses and
other assets........ 13,087 771 -- 2,838 2,051 1,852 (1,082) 19,517
Deferred income
taxes............... -- 227 -- -- -- -- -- 227
----------- -------- --------- --------- --------- -------- -------- -----------
Total assets........ $ 1,177,401 $ 26,497 $ 181,570 $ 423,099 $ 154,739 $ 15,021 $ 34,098 $ 2,012,425
=========== ======== ========= ========= ========= ======== ======== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowings under a
line of credit
facility and
mortgage notes...... $ 584,294 $ -- $ -- $ 137,056 (R) $ 45,000 $ -- $ -- $ 766,350
Accounts payable and
accrued expenses.... 12,013 5,541 12,339 (S) 2,437 (S) 2,838 (S) 344 (S) -- 35,512
Note payable......... -- 2,900 (2,900)(I) -- -- -- -- --
Due to unconsolidated
subsidiaries........ 6,314 -- -- -- -- -- -- 6,314
Minority interest in
the Patriot
Partnerships........ 118,151 -- -- 37,260 (T) 49,458(T) 66,626 (T) -- 271,495
Minority interest in
consolidated
subsidiaries........ 15,767 -- -- 12,223 (U) -- -- -- 27,990
Shareholders' equity:
Preferred stock..... -- -- -- -- -- 6 (Y) 38 (Z) 44
Common stock........ -- 116 459 (V) 750 (W) 51 (X) -- -- 1,376
Paid-in capital..... 460,029 18,384 171,228 (V) 240,045 (W) 57,392 (X) 13,854 (Y) 88,302 (Z) 1,049,234
Unearned stock
compensation, net.. (16,397) -- -- -- -- -- -- (16,397)
Retained earnings... (2,770) (444) 444 (V) (6,672)(W) -- (65,809)(Y) (54,242)(Z) (129,493)
----------- -------- --------- --------- --------- -------- -------- -----------
Total shareholders'
equity............. 440,862 18,056 172,131 234,123 57,443 (51,949) 34,098 904,764
----------- -------- --------- --------- --------- -------- -------- -----------
Total liabilities
and shareholders'
equity............. $ 1,177,401 $ 26,497 $ 181,570 $ 423,099 $ 154,739 $ 15,021 $ 34,098 $ 2,012,425
=========== ======== ========= ========= ========= ======== ======== ===========
</TABLE>
See notes on following page.
F-63
<PAGE>
PATRIOT REIT AND PATRIOT OPERATING COMPANY NOTES TO PRO FORMA CONDENSED
COMBINED BALANCE SHEET AS OF JUNE 30, 1997:
(A) Represents the historical consolidated financial position of Old Patriot
REIT as of June 30, 1997.
(B) Represents the historical combined financial position of Cal Jockey and
Bay Meadows as of June 30, 1997 (prior to the Cal Jockey Merger).
(C) Represents adjustments to the historical combined financial position of
Old Patriot REIT, Cal Jockey and Bay Meadows assuming the Cal Jockey
Merger and the related transactions and the PaineWebber Land Sale had been
consummated as of June 30, 1997.
(D) Represents adjustments to the Patriot Companies' pro forma financial
position assuming (i) Patriot REIT had acquired the Recent Acquisitions
(excluding the Park Shore Hotel); (ii) Patriot Operating Company had
completed the Grand Heritage Acquisition and had acquired PAH RSI Lessee;
(iii) the mortgage notes to affiliates of CHC Lease Partners had been
funded; (iv) the Patriot Companies' Old Line of Credit was replaced with
the Revolving Credit Facility and the Term Loan; (v) Patriot REIT acquired
the Participating Note; and (vi) the Offering of 10,580,000 paired shares
of common stock was completed as of June 30, 1997.
(E) Represents adjustments to the Patriot Companies' pro forma financial
position assuming the ten CHC Hotels had been acquired as of June 30,
1997.
(F) Represents adjustments to the Patriot Companies' pro forma financial
position assuming that the GAH Acquisition had occurred and Patriot REIT
had acquired certain Participating Leases held by CHC Lease Partners as of
June 30, 1997.
(G) Represents adjustments to the Patriot Companies' pro forma financial
position assuming the CHCI Merger had been consummated as of June 30,
1997.
(H) Represents adjustments for the purchase method of accounting whereby the
Racecourse facility and related leasehold improvements owned by Cal Jockey
and Bay Meadows are adjusted to estimated fair market value after the sale
of substantially all of the Cal Jockey land to an affiliate of PaineWebber
for $80,864.
(I) Represents the elimination of the note payable between Cal Jockey and Old
Patriot REIT issued in connection with the Cal Jockey Merger.
(J) Represents the following adjustments:
<TABLE>
<S> <C>
To reflect the funding of the mortgage notes to affiliates of
CHC Lease Partners............................................. $82,625
To reflect the acquisition of the Participating Note............ 23,750
To reflect the elimination of the note receivable and accrued
interest between Patriot REIT and PAH RSI Lessee which relates
to certain assets, trade names and right to receive certain
royalty fees which were acquired by Patriot Operating Company.. (9,533)
-------
$96,842
=======
</TABLE>
(K) Represents the elimination of the principal balance of the mortgage notes
held by Patriot REIT encumbering four of the CHC Hotels.
(L) Represents the estimated value of the management contracts and trade names
acquired in the acquisition of Grand Heritage Hotels, Inc., PAH RSI
Lessee, the GAH Acquisition and in the CHCI Merger.
(M) Represents the following adjustments:
<TABLE>
<S> <C>
To reflect cash payments made in the acquisition of certain of
the Recent Acquisitions...................................... $ (5,974)
To reflect the remaining net proceeds from the Offering....... 13,312
To reflect cash balances acquired in the Grand Heritage Acqui-
sition....................................................... 177
--------
$ 7,515
========
</TABLE>
(N) Represents cash paid for working capital balances related to the GAH hotel
leases and management contracts.
(O) The restricted cash balance represents the cash proceeds from the
PaineWebber Land Sale (in the 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 were purchased
with PaineWebber Land Sale proceeds are suitable hotel properties that
qualify as a tax-deferred, like-kind exchange.
(P) Represents the purchase consideration in excess of the fair market value
of the net assets. In the case of Cal Jockey and Bay Meadows, management
primarily attributes this amount to the paired share structure that,
subsequent to the Cal Jockey Merger, enables Patriot REIT and Patriot
Operating Company to be a fully integrated owner and operator of hotels.
The paired share tax treatment is no longer available under the Internal
Revenue Code of 1986, as amended (the "Code"); however, Cal Jockey and Bay
Meadows are one of only four publicly-held companies in existence for
which this structure has been "grandfathered."
(Q) Represents adjustments to reflect deferred loan costs associated with the
closing of the Revolving Credit Facility, net of the write-off of $2,910
of unamortized deferred loan costs associated with the Old Line of Credit.
(R) Represents the following adjustments:
<TABLE>
<S> <C>
To reflect replacement of the Old Line of Credit with the
Revolving Credit Facility and funds drawn on the Revolving
Line of Credit related to the acquisition of the Recent
Acquisitions (excluding the Park Shore Hotel)................. $135,389
To reflect mortgage debt assumed or acquired in the acquisition
of the Recent Acquisitions.................................... 104,667
To reflect the funds drawn to acquire the Participating Note... 21,375
</TABLE>
F-64
<PAGE>
<TABLE>
<S> <C>
To reflect the funding of the Paine Webber Mortgage
Financing................................................... 103,000
To reflect application of net proceeds from the Offering to
reduce amounts outstanding under the Revolving Credit
Facility.................................................... (227,375)
---------
$ 137,056
=========
</TABLE>
(S) Represents adjustment in the amount of $12,339 for accrued Cal Jockey
Merger costs including legal and accounting fees, printing and various
other professional fees incurred in connection with the Cal Jockey Merger
and the related transactions. Other amounts represent adjustments for
accounts payable and accrued expenses assumed or incurred in connection
with the acquisition of hotel properties, the Grand Heritage Acquisition
and the GAH Acquisition.
(T) Represents adjustments to reflect:
<TABLE>
<S> <C>
The issuance of 614,046 OP Units of the Patriot Partnerships in
connection with the acquisition of the Met-Doubletree Hotels.. $ 15,000
The issuance of 931,972 Class A preferred OP Units of the
Patriot Operating Company Partnership in connection with the
Grand Heritage Acquisition.................................... 22,260
---------
$ 37,260
=========
To reflect the issuance of 2,174,773 OP Units of the Patriot
Partnerships in connection with the acquisition of the CHC
Hotels........................................................ $ 49,458
=========
To reflect the issuance of 2,388,932 OP Units of the Patriot
Operating Company Partnership and the Patriot REIT Partnership
and 476,682 preferred OP Units of the Patriot Operating
Company Partnership:
In connection with the GAH Acquisition........................ $ 13,860
In connection with the acquisition of the Participating Leases
for eight hotels............................................. 52,766
---------
$ 66,626
=========
</TABLE>
(U) Represents cash and property contributions of the minority interest
partners in the consolidated subsidiaries which were formed to acquire
eight of the Recent Acquisition hotel properties.
(V) Represents the exchange of shares of Old Patriot REIT Common Stock for
paired shares of Patriot REIT Common Stock and Patriot Operating Company
Common Stock. Pursuant to the Cal Jockey Merger Agreement, Old Patriot
REIT stockholders were entitled to receive, for each share of Old Patriot
REIT Common Stock held by them at the effective time of the Cal Jockey
Merger, 0.51895 shares of Patriot REIT Common Stock and 0.51895 shares of
Patriot Operating Company Common Stock, which shares are paired and
transferable only as a single unit. At June 30, 1997, Old Patriot REIT had
44,311,225 shares of Old Patriot REIT Common Stock outstanding which were
assumed to be exchanged for approximately 22,995,310 paired shares of
Patriot REIT Common Stock and Patriot Operating Company Common Stock,
resulting in an increase in common stock of approximately $459, which has
been offset by a corresponding adjustment to paid-in capital.
Pursuant to the Cal Jockey Merger Agreement, Old Patriot REIT stockholders
received 0.51895 shares of Patriot REIT Common Stock and 0.51895 shares of
Patriot Operating Company Common Stock for each share of Old Patriot REIT
Common Stock. The estimated value of the Cal Jockey and Bay Meadows paired
shares, based on the closing price of Old Patriot REIT's Common Stock on
October 30, 1996, of $17.125 (adjusted for the stock splits and Cal Jockey
Merger conversion of shares), is $33.00 per paired share. Based on 5,763,257
paired shares of Cal Jockey common stock and Bay Meadows common stock
outstanding, the total purchase consideration is approximately $190,187. The
adjustments to shareholders' equity eliminate the historical equity accounts
of Cal Jockey and Bay Meadows which total $18,056 and record equity based on
the number of paired shares of Cal Jockey common stock and Bay Meadows
common stock that remained outstanding after the Cal Jockey Merger at $33.00
per paired share.
(W) Represents the following adjustments to Shareholders' Equity:
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ -------- --------
<S> <C> <C> <C>
Pursuant to the Offering....................... $212 $240,583 $ --
Write-off of unamortized deferred loan costs... -- -- (2,910)
Write-off the estimated cost to acquire three
Participating Leases in the Grand Heritage Ac-
quisition..................................... -- -- (3,762)
Pursuant to the 1.927-for-1 stock split........ 538 (538) --
---- -------- -------
$750 $240,045 $(6,672)
==== ======== =======
</TABLE>
The Patriot Companies completed the Offering of 10,580,000 Paired Shares
with a combined par value of $0.02 per Paired Share, resulting in net
proceeds of approximately $240,795.
In connection with the replacement of the Old Line of Credit with the
Revolving Credit Facility, Patriot REIT will write-off unamortized deferred
loan costs related to the Old Line of Credit. This amount will be reported
as an extraordinary item in Patriot REIT's results of operations and has
been reflected as an adjustment to retained earnings for purposes of pro
forma balance sheet presentation.
In connection with the Grand Heritage Acquisition, Patriot Operating Company
acquired three Participating Leases related to three hotels that Patriot
REIT had leased to Grand Heritage Leasing, L.L.C. The cost of acquiring
these leases will be reflected as a one-time
F-65
<PAGE>
charge to operating expense in the Patriot Operating Company results of
operations and has been reflected as an adjustment to retained earnings for
pro forma presentation purposes.
The reclassification entry of $538 pursuant to the July 1997 1.927-for-1
stock split effected in the form of a stock dividend, represents the
reclassification of the par value (at $0.02 per paired share) of the common
stock issued in connection with the stock split.
(X) Represents adjustments to reflect the issuance of 2,534,656 Paired Shares
in connection with the acquisition of the ten CHC Hotels. The amounts
include adjustments to reflect the acquisition of the remaining
approximate 50% interest in the Omni Inner Harbor Hotel for 830,713 Paired
Shares.
(Y) 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 approxi-
mately 596,129 shares of Series A Preferred
Stock and Series B Preferred Stock of Pa-
triot Operating Company in connection with
the CHCI Merger and related
transactions................................ $ 6 $13,854 $(13,043)
Write-off the estimated cost to acquire eight
Participating Leases related to hotels
leased by Patriot REIT to CHC Lease Part-
ners........................................ -- -- (52,766)
---- ------- --------
$ 6 $13,854 $(65,809)
==== ======= ========
</TABLE>
The adjustment to retained earnings in the amount of $13,043 represents the
estimated cost of acquiring certain management contracts related to hotels
owned by Patriot REIT. The adjustment to retained earnings in the amount of
$52,766 represents the estimated cost of acquiring eight leaseholds related
to Participating Lease agreements for eight hotels leased by CHC Lease
Partners. The cost of acquiring these management contracts and leaseholds
will be recorded as an operating expense in Patriot Operating Company's and
Patriot REIT's respective 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 and the GAH Acquisition on the
Patriot Companies, this one-time 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.
(Z) Represents the following adjustments to Shareholders' Equity:
<TABLE>
<CAPTION>
PREFERRED PAID-IN RETAINED
STOCK CAPITAL EARNINGS
--------- ------- --------
<S> <C> <C> <C>
Pursuant to issuance of approximately a to-
tal of approximately 3,799,571 shares of
Series A Preferred Stock and Series B Pre-
ferred Stock of Patriot Operating Company
in connection with the CHCI Merger........ $ 38 $88,302 $ --
Write-off the estimated cost to acquire 17
Participating Leases related to hotels
leased by Patriot REIT to CHC Lease Part-
ners and related
transactions.............................. -- -- (52,766)
Write-off unamortized lease inducement
costs related to the 25 Participating
Leases.................................... -- -- (1,476)
---- ------- --------
$ 38 $88,302 $(54,242)
==== ======= ========
</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 and the GAH
Acquisition on Patriot Operating Company, this one-time 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-66
<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 -- 46,731 (J) 7,753(J) 3,013 (J) 64,877 (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 90,585 24,827 3,013 162,578
------- ------- ------- ------- ------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 38,968 (1,216) 10,073 14,875 (3,168) 59,532
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) 11,787 14,875 (3,168) 67,091
Income tax provision.... -- -- -- -- (170)(N) (170)
------- ------- ------- ------- ------- --------
Income (loss) before mi-
nority interests....... 44,813 (1,216) 11,787 14,875 (3,338) 66,921
Minority interest in
Patriot REIT
Partnership........... (6,767) -- 448 (O) -- (4,291)(O) (10,610)
Minority interest in
consolidated
subsidiaries.......... (55) -- (1,777)(P) -- -- (1,832)
------- ------- ------- ------- ------- --------
Net income (loss)
applicable to common
shareholders........... $37,991 $(1,216) $10,458 $14,875 $(7,629) $ 54,479 (R)
======= ======= ======= ======= ======= ========
Net income (loss) per
common share (Q)....... $ 1.06 $ (0.11) $ 0.74 (R)
======= ======= ========
</TABLE>
See notes on following page.
F-67
<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 Patriot REIT (formerly
known as 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);
(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) 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
Patriot REIT Partnership by NorthCoast Lessee.................. 48
Related to interest earned from notes receivable from an
unconsolidated 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 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
expenses 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
company and the continued growth of Patriot REIT............... 150
Related to the annual amortization of unearned stock
compensation 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 and the
CHC Hotels)..................................................... 37,569
Interest expense related to the Subscription Notes payable to
Patriot Operating Company....................................... 4,712
Interest expense related to amortization of deferred loan costs.. 4,397
Interest expense related to amortization of capitalized
interest........................................................ 53
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
Hotels.......................................................... 3,013
-------
$64,877
=======
</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 10 CHC Hotels.
F-68
<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 and the
CHC Hotels).................................................. $30,603
Reduction of depreciation expense related to the Racecourse
facility..................................................... (93)
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...................... 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 and the CHCI Merger is approximately 16.3%.
(P) Represents the minority interest related to the partnerships with an
affiliate of Doubletree Hotels Corporation and the limited liability
companies which own the Snavely Portfolio hotels assuming such entities
had been formed and the 15 hotels owned by such entities had been
acquired at January 1, 1996.
(Q) Pro forma earnings per share is computed based on 73,516 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 $0.79 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 $66,452, net income
would decrease to $53,161 and net income per common share would decrease
to $0.72.
F-69
<PAGE>
PATRIOT REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(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............... $71,986 $ -- $25,975 (E) $19,465(E) $ (78) $117,348
Rental of Racecourse
facility and land..... -- 2,017 785 (F) -- -- 2,802
Interest and other
income................ 1,132 1,715 (41)(G) -- -- 2,806
------- ------ ------- ------- ------- --------
Total revenue.......... 73,118 3,732 26,719 19,465 (78) 122,956
------- ------ ------- ------- ------- --------
Expenses:
Ground lease expense... 683 -- 1,982 (H) 139 -- 2,804
General and
administrative........ 5,081 2,657 (2,661)(I) -- -- 5,077
Interest expense....... 17,328 -- 9,948 (J) 3,896(J) 1,522 (J) 32,694 (Q)
Real estate and
personal property
taxes and casualty
insurance............. 6,966 -- 2,770 (K) 2,348(K) -- 12,084
Depreciation and
amortization.......... 18,006 478 8,566 (L) 5,138(L) -- 32,188
------- ------ ------- ------- ------- --------
Total expenses......... 48,064 3,135 20,605 11,521 1,522 84,847
------- ------ ------- ------- ------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 25,054 597 6,114 7,944 (1,600) 38,109
Equity in earnings of
unconsolidated
subsidiaries.......... 3,093 -- -- -- -- 3,093
------- ------ ------- ------- ------- --------
Income (loss) before
income tax provision
and minority
interests.............. 28,147 597 6,114 7,944 (1,600) 41,202
Income tax provision... -- -- -- -- (85)(M) (85)
------- ------ ------- ------- ------- --------
Income (loss) before
minority interests..... 28,147 597 6,114 7,944 (1,685) 41,117
Minority interest in
Patriot REIT
Partnership........... (4,534) -- 537 (N) -- (2,544)(N) (6,541)
Minority interest in
consolidated
subsidiaries.......... (447) -- (540)(O) -- -- (987)
------- ------ ------- ------- ------- --------
Net income (loss)
applicable to common
shareholders........... $23,166 $ 597 $ 6,111 $ 7,944 $(4,229) $ 33,589 (Q)
======= ====== ======= ======= ======= ========
Net income (loss) per
common share (P)....... $ 0.52 $ 0.05 $ 0.45 (Q)
======= ====== ========
</TABLE>
See notes on following page.
F-70
<PAGE>
NOTES TO PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997:
(A) Represents Old Patriot REIT's historical results of operations for the
six months ended June 30, 1997.
(B) Represents the historical results of operations of Patriot REIT (formerly
known as Cal Jockey) for the six months ended June 30, 1997.
(C) Represents adjustments to 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);
(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.
(D) Represents adjustments 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) 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.................................................. $ 52
Related to interest earned on the mortgage notes receivable
from affiliates of CHC Lease Partners......................... (14)
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......................... (79)
--------
$ (41)
========
</TABLE>
(H) Represents ground lease payments pursuant to the ground lease agreement
with an affiliate of PaineWebber.
(I) Represents elimination of approximately $2,092 of non-recurring legal
fees and Cal Jockey Merger related costs and adjustment to the
amortization of unearned stock compensation computed on a straight-line
basis over the 3 to 5-year vesting periods of $569.
(J) Interest expense consists of the following components:
<TABLE>
<S> <C>
Historical interest expense...................................... $17,328
Interest expense related to the 23 hotels acquired by Patriot
REIT since January 1, 1997 (excluding the Park Shore Hotel and
the CHC Hotels)................................................. 5,367
Interest expense related to the Subscription Notes payable to
Patriot Operating Company....................................... 2,356
Interest expense related to amortization of deferred loan costs.. 2,199
Interest expense related to amortization of capitalized
interest........................................................ 26
Interest expense related to four of the CHC Hotels encumbered by
mortgage loans held by Patriot REIT............................. 3,896
Interest expense related to the acquisition of the 10 CHC
Hotels.......................................................... 1,522
-------
$32,694
=======
</TABLE>
(K) Represents real estate and personal property taxes and casualty insurance
to be paid by Patriot REIT related to the 23 hotels acquired since
January 1, 1997 (except for the Park Shore Hotel) and the 10 CHC Hotels.
(L) Represents the following adjustments to depreciation and amortization:
<TABLE>
<S> <C>
Depreciation related to 23 hotels acquired by Patriot REIT
since January 1, 1997 (excluding the Park Shore Hotel and the
CHC Hotels).................................................. $ 7,433
Reduction of depreciation expense related to the Racecourse
facility..................................................... (59)
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...................... 1,192
-------
$ 8,566
=======
Depreciation related to the CHC Hotels........................ $ 5,138
=======
</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 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.
F-71
<PAGE>
(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 and the CHCI Merger is approximately 16.3%.
(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 the hotels in the Snavely Portfolio
assuming such entities had been formed and the 15 hotels owned by such
entities had been acquired as of January 1, 1996.
(P) Pro forma earnings per share is computed based on 74,045 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 44,783 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 six months ended
June 30, 1997 would be $0.49 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.
(Q) If the interest rate on the Revolving Credit Facility increased by 0.25%,
interest expense would increase to approximately $33,483, net income would
decrease to $32,928 and net income per common share would decrease to
$0.44.
F-72
<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
income................ 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--
hotel operations...... -- 124,924 112,873 -- 3,995 -- 241,792
Racecourse facility
operations............ 45,658 693 (H) -- -- -- -- 46,351
Management company,
service department and
development costs..... -- 1,595 -- 4,882 4,666 -- 11,143
General and
administrative........ 4,381 28,264 (I) 28,568 (J) 1,056(J) 9,431 (J) -- 71,700
Ground lease expense... -- 733 -- -- -- -- 733
Repair and
maintenance........... -- 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
amortization.......... 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
personal property
taxes and casualty
insurance............. 398 -- -- -- -- -- 398
------- -------- -------- ------ ------- ------- --------
Total expenses......... 52,757 298,193 296,363 6,073 22,249 (2,211) 673,424
------- -------- -------- ------ ------- ------- --------
Income (loss) before in-
come 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
Company Partnership... -- 1,123 (O) -- -- -- 3,314 (O) 4,437
------- -------- -------- ------ ------- ------- --------
Net income (loss) appli-
cable to common share-
holders................ $ 455 $ (8,104) $(11,748) $1,211 $(2,961) $ (828) $(21,975)
======= ======== ======== ====== ======= ======= ========
Net income per common
share (P).............. $ 0.04 $ (0.30)
======= ========
</TABLE>
See notes on following page.
F-73
<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 23 of Patriot REIT's hotel properties had been leased
to Patriot Operating Company as of January 1, 1996. These hotel properties
include 10 of the Recent Acquisitions (the four hotels in the Snavely
Portfolio, the four Met-Doubletree Hotels, the Ambassador West Hotel and
the Union Station Hotel), the eight hotels previously leased to PAH RSI
Lessee, the Mayfair Suites Hotel, the Tutwiler Hotel, the Holiday Inn
Redmont Hotel, the Doubletree Hotel at Allen Center and the Doubletree
Hotel in Tulsa, Oklahoma.
(C) Represents 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>
(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 Merg-
er............................................................ (861)
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 Operating Company.... 300
Represents expense related to the annual amortization of un-
earned 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-74
<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 and the CHCI Merger is approximately 16.8%.
(P) Pro forma earnings per share is computed based on 73,516 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 $0.32 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 OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CHC HOTELS CHCI
BAY 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........... $ -- $ 80,223 $103,839 $ -- $ 2,778 $ -- $186,840
Other hotel revenues... -- 72,621 51,731 -- 2,502 -- 126,854
Racecourse facility
revenue............... 22,538 -- -- -- -- -- 22,538
Management fee and
service fee income.... -- 1,603 -- 4,831 4,732 (3,300)(F) 7,866
Interest and other
income................ 525 3,748 (G) 685 10 396 -- 5,364
------- -------- -------- ------ ------- ------- --------
Total revenue.......... 23,063 158,195 156,255 4,841 10,408 (3,300) 349,462
------- -------- -------- ------ ------- ------- --------
Expenses:
Departmental costs--
hotel operations...... -- 66,229 59,080 -- 2,175 -- 127,484
Racecourse facility
operations............ 19,664 618 (H) -- -- -- -- 20,282
Management company,
service department and
development costs..... -- 1,088 -- 2,978 2,573 -- 6,639
General and
administrative........ 3,486 12,726 (I) 14,689 (J) 619(J) 6,512 (J) (1,700)(K) 36,332
Ground lease expense... -- 433 13 -- -- -- 446
Repair and
maintenance........... -- 8,994 6,888 -- -- -- 15,882
Utilities.............. -- 5,974 6,913 -- -- -- 12,887
Marketing.............. 497 11,225 14,907 -- -- -- 26,629
Management fees........ -- 5,566 3,734 -- -- (3,300)(F) 6,000
Depreciation and
amortization.......... 358 754 (L) -- 78 399 3,524 (L) 5,113
Participating lease
payments.............. -- 44,964 (M) 50,730 (M) -- -- -- 95,694
Interest expense....... 27 585 -- 11 1,413 (1,413)(N) 623
Real estate and
personal property
taxes and casualty
insurance............. 220 -- -- -- -- -- 220
------- -------- -------- ------ ------- ------- --------
Total expenses......... 24,252 159,156 156,954 3,686 13,072 (2,889) 354,231
------- -------- -------- ------ ------- ------- --------
Income (loss) before
income tax provision
and minority
Interests.............. (1,189) (961) (699) 1,155 (2,664) (411) (4,769)
Income tax (provision)
benefit............... 472 -- -- -- (53)(O) (197)(O) 222
------- -------- -------- ------ ------- ------- --------
Income (loss) before
minority interest...... (717) (961) (699) 1,155 (2,717) (608) (4,547)
Minority interest in
Patriot Operating
Company Partnership... -- 215 (P) -- -- -- 549 (P) 764
------- -------- -------- ------ ------- ------- --------
Net income (loss)
applicable to common
shareholders........... $ (717) $ (746) $ (699) $1,155 $(2,717) $ (59) $ (3,783)
======= ======== ======== ====== ======= ======= ========
Net income (loss) per
common share (Q)....... $ (0.06) $ (0.05)
======= ========
</TABLE>
See notes on following page.
F-76
<PAGE>
NOTES TO PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997:
(A) Represents the historical results of operations of Patriot Operating
Company (formerly known as Bay Meadows) for the six months ended June 30,
1997.
(B) Represents adjustments to Patriot Operating Company's results of
operations assuming 23 of Patriot REIT's hotel properties had been leased
to Patriot Operating Company as of January 1, 1996. These hotel properties
include 10 of the Recent Acquisitions (the four hotels in the Snavely
Portfolio, the four Met-Doubletree Hotels, the Ambassador West Hotel and
the Union Station Hotel), the eight hotels previously leased to PAH RSI
Lessee, the Mayfair Suites Hotel, the Tutwiler Hotel, the Holiday Inn
Redmont Hotel, the Doubletree Hotel at Allen Center and the Doubletree
Hotel in Tulsa, Oklahoma.
(C) Represents the combined results of operations for the six months ended
June 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 six months ended June
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 six months ended May 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 and other income related to PAH RSI Lessee.............. $ 885
Interest income related to the Subscription Notes receivable from
Patriot REIT.................................................... 2,356
Interest income related to the Participating Note................ 507
-------
$ 3,748
=======
</TABLE>
(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>
Represent expense related to the hotels recently acquired...... $12,365
Represents general liability insurance expense................. 559
Related to elimination of costs related to the Cal Jockey Merg-
er............................................................ (1,792)
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 Operating Company.... 150
Represents expense related to the annual amortization of un-
earned stock compensation computed on a straight-line basis
over the 3 to 5-year vesting periods.......................... 1,444
-------
$12,726
=======
</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 elimination of approximately $1,700 of non-recurring legal fees
and CHCI Merger related costs.
(L) Represents the following adjustments to depreciation and amortization:
<TABLE>
<S> <C>
Adjustment to increase depreciation related to F, F & E.......... $ 142
Adjustment to reflect amortization of goodwill................... 158
Adjustment to reflect amortization of trade names................ 63
Adjustment to reflect amortization of management contract costs.. 391
-------
$ 754
=======
Adjustment to increase depreciation related to F, F & E.......... $ 21
Adjustment to reflect amortization of goodwill................... 300
Adjustment to reflect amortization of trade names................ 125
Adjustment to reflect amortization of management contract costs.. 3,078
-------
$ 3,524
=======
</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.
F-77
<PAGE>
(M) 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.
(N) Represents the elimination of interest expense related to debt which
Patriot Operating Company will not assume in connection with the CHCI
Merger.
(O) Represents an adjustment to the estimated federal and state tax liability
as a result of the pro forma adjustment to Patriot Operating Company for
the six months ended June 30, 1997.
(P) 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 and the CHCI Merger is approximately 16.8%.
(Q) Pro forma earnings per share is computed based on 74,045 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 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 six months ended
June 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-78
<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 Lessee which leases 11 hotels (excluding the
Park Shore Hotel), Doubletree Lessee which leases four hotels, Crow Hotel
Lessee, Inc. which leases two hotels, and 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 six months ended June
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 six
months ended June 30, 1997. In management's opinion, all adjustments necessary
to reflect the effects of these transactions have been made.
The unaudited Pro Forma Condensed Combined Statements of Operations are not
necessarily indicative of what the actual results of operations of the
Combined Lessees would have been assuming such transactions had been completed
as of the beginning of the periods presented, nor do they purport to represent
the results of operations for future periods. Further, the unaudited Pro Forma
Condensed Combined Statement of Operations for the interim period ended June
30, 1997 is not necessarily indicative of the results of operations for the
full year.
F-79
<PAGE>
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Room............................................... $ 88,410 $46,264
Food and beverage.................................. 36,878 19,146
Telephone and other................................ 7,837 3,919
--------- -------
Total revenue................................... 133,125 69,329
--------- -------
Expenses:
Departmental costs and expenses.................... 54,564 28,001
General and administrative......................... 11,597 6,161
Ground lease expense............................... 2,496 903
Repair and maintenance............................. 6,670 3,355
Utilities.......................................... 5,435 2,524
Marketing.......................................... 9,169 4,847
Insurance.......................................... 998 72
Participating lease payments(A).................... 41,749 21,654
--------- -------
Total expenses.................................. 132,678 67,517
--------- -------
Income (loss) before lessee income (expense)........ 447 1,812
--------- -------
Dividend and interest income(B)..................... 142 1,039
Management fees(C).................................. (3,479) (2,010)
Lessee general and administrative(D)................ (577) (382)
--------- -------
(3,914) (1,353)
--------- -------
Net income (loss)................................... $ (3,467) $ 459
========= =======
</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-80
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
INTRODUCTION TO
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
On April 14, 1997, Old Patriot REIT and Wyndham entered into the Merger
Agreement and Old Patriot REIT and CF Securities, the principal stockholder of
Wyndham, entered into the Stock Purchase Agreement. On July 24, 1997,
subsequent to the consummation of the Cal Jockey Merger, Patriot REIT ratified
the Merger Agreement pursuant to a Ratification Agreement between Patriot REIT
and Wyndham. On July 24, 1997, Patriot Operating Company also ratified the
Merger Agreement pursuant to a Ratification Agreement among Patriot Operating
Company, Wyndham, Patriot REIT and CF Securities. Pursuant to the Merger
Agreement, Wyndham will merge with and into Patriot REIT, with Patriot REIT
being the surviving legal entity. 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."
Pursuant to the Merger Agreement, subject to certain adjustments and the
right of Wyndham stockholders to elect to receive cash as described below,
Wyndham stockholders will be entitled to receive, for each share of Wyndham
Common Stock held by them at the effective time of the Merger, 1.372 shares of
Patriot REIT Common Stock and 1.372 shares of Wyndham International Common
Stock (subject to certain REIT qualification requirements and the Excess Share
Provisions), which shares will be paired and transferable only as a single
unit. In the event, however, that 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. In the event that 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 Wyndham International Common Stock.
In lieu of receiving Paired Shares, Wyndham stockholders have the right to
elect to receive Cash Consideration in an amount per share equal to the
Exchange Ratio (as it may be adjusted) multiplied by the average closing price
of a Paired Share over the five trading days immediately preceding the closing
of the Merger, 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. 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 elected to receive cash, 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. Under such circumstances, CF Securities may
receive a combination of Paired Shares and 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.
As of June 30, 1997, Wyndham owned 10 hotels and leased 13 hotels with an
aggregate of 4,877 guest rooms, had management and franchise agreements for 67
managed and franchised properties throughout North America, and had management
and franchise agreements for 16 properties which were closed for renovation or
F-81
<PAGE>
construction or were in the process of being converted to the Wyndham brand,
including WyndhamSM, Wyndham Garden(R) and Wyndham Hotels and ResortsSM. The
67 managed properties include eight properties which are owned by Homegate
Hospitality, Inc.
On July 31, 1997, Wyndham acquired through merger Kansas City-based
ClubHouse, a privately-held hospitality company with a portfolio of 17 hotels
operating in the mid-scale segment of the lodging industry. 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" brandname, 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 53
management and franchise contracts, 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 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 execution of the Merger Agreement, the Patriot REIT
Partnership also entered into agreements with the Crow Family Entities
providing for the acquisition by Patriot REIT of 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. 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 10 hotels with 2,851 rooms expected to
be acquired subject to the Crow Assets Acquisition which represent
approximately $308,633 of the total purchase price. Subsequent to the Crow
Assets Acquisition, Patriot REIT will lease the 10 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 Merger and the
Related Transactions and the Crow Assets Acquisition are collectively referred
to herein as the "Wyndham Transactions."
The Merger and the Crow Assets Acquisition are to be consummated
concurrently and are subject to various conditions, including approval of the
Merger by the stockholders of Patriot REIT, Patriot Operating Company and
Wyndham.
F-82
<PAGE>
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 six months ended June 30, 1997 assume the Merger and
the Crow Assets Acquisition had occurred on January 1, 1996. The pro forma
information is also presented as if the following Recent Transactions had
occurred on 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 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);
(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 REIT 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
six months ended June 30, 1997 included elsewhere in this Joint Proxy
Statement/Prospectus; (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 and the Quarterly Report on Form 10-Q for the six months ended June
30, 1997; and (iii) the Combined Crow Family Hotel Partnerships financial
statements for the year ended December 31, 1996 and the six months ended June
30, 1997 included elsewhere in this Joint Proxy Statement/Prospectus. 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 six months ended June
30, 1997. The following pro forma financial information is also 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 and the Joint Quarterly
Report on Form 10-Q for the six months ended June 30, 1997;
(ii) the Consolidated Statements of Operations of Old Patriot REIT filed
with the Old Patriot REIT Annual Report on Form 10-K for the year ended
December 31, 1996 and the Joint Quarterly Report on Form 10-Q for the six
months ended June 30, 1997;
F-83
<PAGE>
(iii) the historical financial statements of certain hotels acquired by
Old Patriot REIT filed in Old Patriot REIT's Current Reports on Form 8-K
dated April 2, 1996, as amended, December 5, 1996 and January 16, 1997, as
amended;
(iv) the historical financial statements of certain hotels and businesses
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;
(v) the Pro Forma Condensed Combined Statements of Operations of the
Combined Lessees which are located elsewhere in this Joint Proxy
Statement/Prospectus; and
(vi) the historical financial statements of ClubHouse and certain
additional entities filed in Wyndham's Current Report on Form 8-K/A dated
September 18, 1997, as amended.
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 the beginning of the periods presented, nor do they purport to
represent the results of operations for future periods. Further, the unaudited
Pro Forma Condensed Combined Statement of Operations for the interim period
ended June 30, 1997 is not necessarily indicative of the results of operations
for the full year.
F-84
<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,
development 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........ 117,679 1,393 (5,882)(C) 113,190
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 29,055 -- 122,830
Participating lease
payments............... -- 247,218 (247,218)(A) --
-------- --------- --------- ----------
Total expenses.......... 269,917 1,012,491 (270,514) 1,011,894
-------- --------- --------- ----------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income tax
provision and minority
interests............... 30,542 (22,395) -- 8,147
Equity in earnings of
unconsolidated
subsidiaries........... 3,243 -- 4,679 (D) 7,922
-------- --------- --------- ----------
Income (loss) before
income tax provision and
minority interests...... 33,785 (22,395) 4,679 16,069
Income tax (provision)
benefit................ (345) 7,532 -- 7,187
-------- --------- --------- ----------
Income (loss) before
minority interests...... 33,440 (14,863) 4,679 23,256
Minority interests in
the Patriot
Partnerships........... (3,887) 1,314 -- (2,573)
Minority interest in
consolidated
subsidiaries .......... (1,832) 4,679 (4,679)(D) (1,832)
-------- --------- --------- ----------
Net income (loss)
applicable to common
shareholders............ $ 27,721 $ (8,870) $ -- $ 18,851 (E)
======== ========= ========= ==========
Net income (loss) per
common Paired Share(F).. $ 0.28 $ (0.09) $ 0.19 (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
2,356 shares of Wyndham Common Stock are purchased for cash ("Cash
Option"), based on total funds available of $100,000, an estimated market
price per Paired Share of $30.93 (based upon the average closing price of
the Patriot Companies' Paired Shares on the NYSE for the 20 trading days
prior to October 21, 1997) and an Exchange Ratio equal to 1.372 Paired
Shares for each share of Wyndham Common Stock; (ii) assuming no Wyndham
stockholders elect to receive cash ("All Stock"); and (iii) assuming an
average interest rate ranging from 7.183% to 7.233% per annum on the
incremental borrowings related to the Revolving Credit Facility and the
Term Loan (representing LIBOR plus 1.7% and 1.75%, respectively) on
outstanding debt obligations of approximately $1,451,830 for Cash Option
and $1,351,830 for All Stock.
F-85
<PAGE>
<TABLE>
<CAPTION>
CASH ALL
OPTION STOCK
------- -------
<S> <C> <C>
Decrease in interest expense as a result of reduced
borrowings............................................. $ -- $(7,183)
======= =======
Income before minority interests in the Patriot
Partnerships and income tax provision (after minority
interest in consolidated subsidiaries and other
partnerships).......................................... $14,237 $21,420
Income tax provision.................................... 7,187 7,187
Minority interests in the Patriot Partnerships.......... (2,573) (3,372)
------- -------
Net income applicable to common shareholders............ $18,851 $25,235
======= =======
Net income per common Paired Share...................... $ 0.19 $ 0.25
======= =======
Estimated minority interest percentage in the Patriot
Partnerships subsequent to the Wyndham Transactions:
Patriot REIT Partnership.............................. 12.3% 12.0%
======= =======
Patriot Operating Company Partnership................. 12.9% 12.6%
======= =======
Weighted average number of common Paired Shares and
common Paired Share equivalents outstanding............ 99,579 102,811
======= =======
</TABLE>
The Exchange Ratio is subject to adjustment in the event that the Patriot
Average Closing Price of the Paired Shares is less than $21.86 per Paired
Share. If the Patriot Average Closing Price is less than $21.86 per Paired
Share, but greater than or equal to $20.87 per Paired Share, the 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 Patriot Average Closing Price. However, if
the Patriot Average Closing Price is less than $20.87 per Paired Share,
there will be no further adjustments to the Exchange Ratio; but in such
circumstances Wyndham has the right, waivable by it, to terminate the Merger
Agreement. As a result, the maximum Exchange Ratio would be 1.438 Paired
Shares for each share of Wyndham Common Stock (the "Maximum Exchange
Ratio"). On a pro forma basis, the effect of the Maximum Exchange Ratio,
assuming Cash Option, would be de minimis. On a pro forma basis, the effect
of the Maximum Exchange Ratio assuming All Stock would result in a decrease
in the estimated minority interest percentages in the Patriot Partnerships
subsequent to the Wyndham Transactions by 0.2%, resulting in net income of
$25,293 and net income per common Paired Share of $0.25.
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 ............................................ $ -- $(7,433)
======= =======
Income before income tax provision and minority
interests in the Patriot Partnerships (after minority
interest in consolidated subsidiaries and other
partnerships).......................................... $10,950 $18,383
Income tax provision.................................... 7,187 7,187
Minority interests in the Patriot Partnerships.......... (2,169) (3,007)
------- -------
Net income applicable to common shareholders............ $15,968 $22,563
======= =======
Net income per common Paired Share...................... $ 0.16 $ 0.22
======= =======
Estimated minority interest percentage in the Patriot
Partnerships subsequent to the Wyndham Transactions:
Patriot REIT Partnership.............................. 12.3% 12.0%
======= =======
Patriot Operating Company Partnership................. 12.9% 12.6%
======= =======
Weighted average number of common Paired Shares and
common Paired Share equivalents outstanding............ 99,579 102,811
======= =======
</TABLE>
The Patriot Companies have entered into a commitment letter with PaineWebber
Real Estate and Chase which provides for a Term Loan of $500,000. The Term
Loan will be used in part to finance the Wyndham Transactions. Deferred loan
costs of approximately $6,175 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 99,579 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 $0.20 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-86
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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................. $158,130 $ -- $(141,466)(A) $ 16,664
Hotel revenue............ -- 489,480 -- 489,480
Racecourse facility
revenue, hotel and land
lease revenue........... 13,614 22,538 (13,447)(B) 22,705
Management fee, service
fee and reimbursement
income.................. -- 27,867 -- 27,867
Interest and other
income.................. 2,806 6,735 (2,965)(C) 6,576
-------- -------- --------- --------
Total revenue............ 174,550 546,620 (157,878) 563,292
-------- -------- --------- --------
Expenses:
Departmental costs--hotel
operations.............. -- 190,868 -- 190,868
Racecourse facility
operations.............. -- 20,282 (2,635)(B) 17,647
Direct operating costs of
management company,
service department,
development and
reimbursement expenses.. -- 24,537 -- 24,537
General and
administrative.......... 5,227 55,435 (24)(C) 60,638
Ground lease and hotel
lease expense........... 12,434 11,258 (10,812)(B) 12,880
Repair and maintenance... -- 23,354 -- 23,354
Utilities................ -- 27,398 -- 27,398
Interest expense......... 59,363 623 (2,941)(C) 57,045
Real estate and personal
property taxes and
casualty insurance...... 18,461 220 -- 18,681
Marketing................ -- 39,174 -- 39,174
Management fees.......... -- 6,000 -- 6,000
Depreciation and
amortization............ 47,714 14,940 -- 62,654
Participating lease
payments................ -- 141,466 (141,466)(A) --
-------- -------- --------- --------
Total expenses........... 143,199 555,555 (157,878) 540,876
-------- -------- --------- --------
Income before equity in
earnings of
unconsolidated
subsidiaries, income tax
provision and minority
interests................ 31,351 (8,935) -- 22,416
Equity in earnings of
unconsolidated
subsidiaries............ 3,520 -- (234)(D) 3,286
-------- -------- --------- --------
Income before income tax
provision and minority
interests................ 34,871 (8,935) (234) 25,702
Income tax (provision)
benefit................. (172) 4,891 -- 4,719
-------- -------- --------- --------
Income before minority
interests................ 34,699 (4,044) (234) 30,421
Minority interests in the
Patriot Partnerships.... (4,147) 552 -- (3,595)
Minority interest in
consolidated
subsidiaries............ (987) (234) 234 (D) (987)
-------- -------- --------- --------
Net income applicable to
common shareholders...... $ 29,565 $ (3,726) $ -- $ 25,839 (E)
======== ======== ========= ========
Net income per common
Paired Share(F).......... $ 0.30 $ (0.04) $ 0.26 (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 $585 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 $2,356 of interest income and expense related to the Subscription Notes
issued to Patriot Operating Company in connection with the subscription
for shares of Patriot Operating Company Common Stock and Patriot Operating
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
2,356 shares of Wyndham Common Stock are purchased pursuant to the Cash
Option (based on total funds available of $100,000, an estimated market
price per Paired Share of $30.93 (based upon the average closing price of
the Paired Shares on the NYSE for the 20 trading days prior to October 21,
1997) and an Exchange Ratio equal to
F-87
<PAGE>
1.372 Paired Shares for each share of Wyndham Common Stock); (ii) assuming
Wyndham stockholders elect to receive All Stock; and (iii) assuming an
average interest rate ranging from 7.264% to 7.314% per annum on the
incremental borrowings related to the Revolving Credit Facility and the Term
Loan (representing LIBOR plus 1.7% and 1.75%, respectively) on outstanding
debt obligations of approximately $1,451,830 for Cash Option and $1,351,830
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.................................................. $ -- $(3,632)
======= =======
Income before minority interests in the Patriot
Partnerships and income tax benefit (after minority
interest in consolidated subsidiaries and other
partnerships).......................................... $24,715 $28,347
Income tax benefit...................................... 4,719 4,719
Minority interests in the Patriot Partnerships.......... (3,595) (3,942)
------- -------
Net income applicable to common shareholders............ $25,839 $29,124
======= =======
Net income per common Paired Share...................... $ 0.26 $ 0.28
======= =======
Estimated minority interest percentage in the Patriot
Partnerships subsequent to the Wyndham Transactions:
Patriot REIT Partnership.............................. 12.3% 12.0%
======= =======
Patriot Operating Company Partnership................. 12.9% 12.6%
======= =======
Weighted average number of common Paired Shares and
common Paired Share equivalents outstanding............ 100,108 103,340
======= =======
</TABLE>
The Exchange Ratio is subject to adjustment in the event that the Patriot
Average Closing Price of the Paired Shares is less than $21.86 per Paired
Share. If the Patriot Average Closing Price is less than $21.86 per Paired
Share but greater or equal to $20.87 per Paired Share, the Wyndham 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 Patriot Average Closing Price. However, if
the Patriot Average Closing Price is less than $20.87 per paired share,
there will be no further adjustments to the Exchange Ratio; but in such
circumstances Wyndham has the right, waivable by it, to terminate the Merger
Agreement. As a result, the Maximum Exchange Ratio would be 1.438 Paired
Shares for each share of Wyndham Common Stock. On a pro forma basis, the
effect of the Maximum Exchange Ratio, assuming Cash Option, would be de
minimis. On a pro forma basis, the effect of the Maximum Exchange Ratio
assuming All Stock would result in a decrease in the estimated minority
interest percentages in the Patriot Partnerships subsequent to the Wyndham
Transactions by 0.2%, resulting in net income of $29,189 and net income per
common Paired Share of $0.27.
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 ............................................ $ -- $(3,757)
======= =======
Income before income tax benefit and minority interests
in the Patriot Partnerships (after minority interest in
consolidated subsidiaries and other partnerships)...... $23,070 $26,827
Income tax benefit...................................... 4,719 4,719
Minority interests in the Patriot Partnerships.......... (3,392) (3,975)
------- -------
Net income applicable to common shareholders............ $24,397 $27,786
======= =======
Net income per common Paired Share...................... $ 0.24 $ 0.27
======= =======
Estimated minority interest percentage in the Patriot
Partnerships subsequent to the Wyndham Transactions:
Patriot REIT Partnership.............................. 12.3% 12.0%
======= =======
Patriot Operating Company Partnership................. 12.9% 12.6%
======= =======
Weighted average number of common Paired Shares and
common Paired Share equivalents outstanding............ 100,108 103,340
======= =======
</TABLE>
The Patriot Companies have entered into a commitment letter with PaineWebber
Real Estate and Chase which provides a Term Loan of $500,000. The Term Loan
will be used in part to finance the Wyndham Transactions. Deferred loan
costs of approximately $6,175 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 100,108 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 six months ended
June 30, 1997 would be $0.27 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-88
<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 June 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 of June 30, 1997 included elsewhere in this Joint Proxy
Statement/Prospectus, which is presented as if the following transactions have
occurred as of June 30, 1997:
(i) the Cal Jockey Merger and the transactions related thereto were
consummated on terms set forth in the Cal Jockey Merger Agreement;
(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 (excluding the Park
Shore Hotel);
(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 REIT acquired the Participating Note;
(ix) the Offering of 10,580,000 Paired Shares was completed;
(x) Patriot REIT acquired the CHC Hotels and leased such hotels to
Patriot Operating Company;
(xi) Patriot Operating Company completed the GAH Acquisition; and
(xii) 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 June 30, 1997, Old Patriot REIT's Consolidated Balance
Sheet as of June 30, 1997, and Patriot REIT's and Patriot Operating Company's
Combined Balance Sheet as of June 30, 1997 and should be read in conjunction
with the financial statements filed with Wyndham's, and the Patriot Companies'
respective Quarterly Reports on Form 10-Q for the six months ended June 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 June 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-89
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 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 hotel
and resort properties
and land held for
sale................... $1,591,435 $320,357 $274,640 $181,245 (D) $2,367,677
Net investment in
Racecourse facility and
related improvements... 21,565 -- -- -- 21,565
Mortgage notes and other
receivables from
unconsolidated
subsidiaries........... 74,424 -- -- -- 74,424
Notes and other
receivables from
affiliates............. -- -- 21,185 -- 21,185
Notes receivable........ 24,613 -- 6,240 -- 30,853
Investment in
unconsolidated
subsidiaries........... 12,448 -- 3,973 -- 16,421
Cash and cash
equivalents............ 19,238 -- 24,415 -- 43,653
Restricted cash......... 41,544 -- 645 -- 42,189
Accounts receivable,
net.................... 13,238 -- 13,477 -- 26,715
Goodwill................ 120,013 -- 20,944 298,486 (E) 439,443
Deferred expenses, net.. 13,850 -- 7,266 209 (F) 21,325
Management contract
costs.................. 43,813 -- 12,664 53,518 (G) 109,995
Trade name and franchise
costs.................. 16,500 -- -- 85,550 (H) 102,050
Prepaid expenses and
other assets........... 19,517 -- 36,441 -- 55,958
Deferred income taxes... 227 -- 16,051 (15,551)(I) 727
---------- -------- -------- -------- ----------
Total assets........... $2,012,425 $320,357 $437,941 $603,457 $3,374,180
========== ======== ======== ======== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Borrowings under a line
of credit and mortgage
notes.................. $ 766,350 $320,357 $232,047 $133,076 (J) $1,451,830
Accounts payable and
accrued expenses....... 35,512 -- 37,564 -- 73,076
Deferred income tax
liability.............. -- -- 20,944 50,609 (I) 71,553
Deposits................ -- -- 1,337 -- 1,337
Deferred gain........... -- -- 11,696 (11,696)(I) --
Due to unconsolidated
subsidiaries........... 6,314 -- -- -- 6,314
Minority interests in
the Patriot
Partnerships........... 271,495 -- -- -- 271,495
Minority interest in
consolidated
subsidiaries........... 27,990 -- -- -- 27,990
Shareholders' equity:
Preferred stock........ 44 -- -- -- 44
Common stock........... 1,376 -- 217 312 (K) 1,905
Paid-in capital........ 1,049,234 -- 133,496 465,889 (L) 1,648,619
Unearned stock compen-
sation, net........... (16,397) -- -- (16,397)
Notes receivable from
stockholders.......... -- -- (16,887)(M) -- (16,887)
Receivable from affili-
ates.................. -- -- (1,331)(N) -- (1,331)
Retained earnings...... (129,493) -- 18,858 (34,733)(L) (145,368)
---------- -------- -------- -------- ----------
Total shareholders' eq-
uity.................. 904,764 -- 134,353 431,468 1,470,585
---------- -------- -------- -------- ----------
Total liabilities and
shareholders' equity.. $2,012,425 $320,357 $437,941 $603,457 $3,374,180
========== ======== ======== ======== ==========
</TABLE>
See notes on following page.
F-90
<PAGE>
- --------
(A) Represents the Pro Forma Condensed Combined Balance Sheet of Patriot REIT
and Patriot Operating Company as of June 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 June 30, 1997.
(C) Represents Wyndham's pro forma financial position as of June 30, 1997,
assuming the ClubHouse acquisition had occurred at June 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 45 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 $6,175 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. Subsequent to Wyndham's
acquisition of ClubHouse, 21,618 shares of Wyndham Common Stock were
outstanding. The pro forma balances assume approximately 2,356 shares of
Wyndham Common Stock are purchased for cash pursuant to the Cash Option
(based on total funds available of $100,000; an estimated market price per
Paired Share of approximately $30.93, based on the average closing price
of the Paired Shares on the NYSE for the 20 trading days prior to October
21, 1997; and the Exchange Ratio equal to 1.372 Paired Shares for each
share of Wyndham Common Stock). The remaining 19,262 shares of Wyndham
Common Stock were assumed to be exchanged for approximately 26,428 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 $152,571 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 2,356 shares of Wyndham Common Stock were assumed to
be purchased for cash (based on total funds available of $100,000; an
estimated market price per Paired Share of approximately $30.93, based on
the average closing price of the Paired Shares on the NYSE for the 20
trading days prior to October 21, 1997; and an Exchange Ratio equal to
1.372 Paired Shares for each share of Wyndham Common Stock). The total
purchase consideration for the Merger is approximately $688,011 (based
upon 19,262 shares of Wyndham Common Stock assumed to be exchanged for
approximately 26,428 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 2,356 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............................................ 2,356 --
======== ========
Cash paid for shares of Wyndham Common Stock (assumed
to be financed through the Revolving Credit Facility
or other similar financing sources)................. $100,000 $ --
Number of Paired Shares issued pursuant to the
Merger.............................................. 26,428 29,660
======== ========
Purchase consideration for shares.................... $588,011 $659,938
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................ (133,496) (133,496)
-------- --------
Adjustment to paid-in capital........................ 465,889 537,752
-------- --------
Mortgage prepayment penalties incurred from
refinancing of Wyndham debt......................... (15,875) (15,875)
Elimination of historical retained earnings.......... (18,858) (18,858)
-------- --------
Adjustment to retained earnings...................... (34,733) (34,733)
Adjustment to common stock........................... 312 376
-------- --------
Adjustment to shareholders' equity.................. $431,468 $503,395
======== ========
</TABLE>
F-91
<PAGE>
The Exchange Ratio is subject to adjustment in the event that the Patriot
Average Closing Price of the Paired Shares is less than $21.86 per Paired
Share. If the Patriot Average Closing Price is less than $21.86 per Paired
Share but greater than or equal to $20.87 per Paired Share, the 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 Patriot Average Closing Price. However, if
the Patriot Average Closing Price is less than $20.87 per Paired Share,
there will be no further adjustments to the Exchange Ratio; but in such
circumstances Wyndham has the right, waivable by it, to terminate the Merger
Agreement. As a result, the Maximum Exchange Ratio would be 1.438 Paired
Shares for each share of Wyndham Common Stock. On a pro forma basis, the
effect of the Maximum Exchange Ratio would decrease total consideration to
approximately $648,784.
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-92
<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....... 64,877 23,172 (F) 18,342 (F) 11,288 (F) 117,679
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......... 162,578 40,413 55,638 11,288 269,917
-------- ------- --------- ------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 59,532 (6,178) (13,889) (8,923) 30,542
Equity in earnings
(losses) of
unconsolidated
subsidiaries.......... 7,559 -- 363 (4,679)(H) 3,243
-------- ------- --------- ------- --------
Income (loss) before
income tax provision
and minority
interests.............. 67,091 (6,178) (13,526) (13,602) 33,785
Income tax provision... (170) -- -- (175)(I) (345)
-------- ------- --------- ------- --------
Income (loss) before mi-
nority interests....... 66,921 (6,178) (13,526) (13,777) 33,440
Minority interest in
the Patriot REIT Part-
nership............... (10,610) 760 1,664 4,299 (J) (3,887)
Minority interest in
consolidated subsidi-
aries................. (1,832) -- -- -- (1,832)
-------- ------- --------- ------- --------
Net income (loss)
applicable to common
shareholders .......... $ 54,479 $(5,418) $ (11,862) $(9,478) $ 27,721 (K)
======== ======= ========= ======= ========
Net income per common
share(L)............... $ 0.74 $ 0.28 (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 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 REIT 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 193.
(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-93
<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 7.183%
(representing LIBOR plus 1.7%) and 7.233% per annum (representing LIBOR
plus 1.75%), respectively. An increase of 0.25% in the interest rate would
increase pro forma interest expense to $120,966, decrease net income
applicable to common shareholders to $24,838 and decrease net income per
common share to $0.25, based on 99,579 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 12.3%. The estimated minority interest percentage prior to
the Wyndham Transactions is approximately 16.3%.
(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 $7,183, net income would be $34,136 and net income per common
share would be $0.33, based on 102,811 weighted average number of common
shares and common share equivalents outstanding.
(L) Pro forma earnings per share is computed based on 99,579 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 $0.29 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-94
<PAGE>
PATRIOT REIT
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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............... $117,348 $23,461 $ 17,321 $ -- $158,130
Racecourse facility,
hotel and land lease
revenue .............. 2,802 -- 9,630 1,182 (D) 13,614
Interest and other
income................ 2,806 -- -- -- 2,806
-------- ------- -------- ------- --------
Total revenue.......... 122,956 23,461 26,951 1,182 174,550
-------- ------- -------- ------- --------
Expenses:
Ground lease and hotel
lease expense......... 2,804 -- 9,630 (E) -- 12,434
General and
administrative........ 5,077 50 (F) 100 (E) -- 5,227
Interest expense....... 32,694 11,716 (F) 10,492 (F) 4,461 (F) 59,363
Real estate and
personal property
taxes and casualty
insurance............. 12,084 2,077 4,300 -- 18,461
Depreciation and
amortization.......... 32,188 6,016 (G) 9,510 (G) -- 47,714
-------- ------- -------- ------- --------
Total expenses......... 84,847 19,859 34,032 4,461 143,199
-------- ------- -------- ------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 38,109 3,602 (7,081) (3,279) 31,351
Equity in earnings
(losses) of
unconsolidated
subsidiaries.......... 3,093 -- 193 234 (H) 3,520
-------- ------- -------- ------- --------
Income (loss) before
income tax provision
and minority
interests.............. 41,202 3,602 (6,888) (3,045) 34,871
Income tax provision... (85) -- -- (87) (I) (172)
-------- ------- -------- ------- --------
Income (loss) before mi-
nority interests....... 41,117 3,602 (6,888) (3,132) 34,699
Minority interest in
the Patriot REIT
Partnership........... (6,541) (443) 847 1,990 (J) (4,147)
Minority interest in
consolidated subsidi-
aries................. (987) -- -- -- (987)
-------- ------- -------- ------- --------
Net income (loss)
applicable to common
shareholders........... $ 33,589 $ 3,159 $ (6,041) $(1,142) $ 29,565 (K)
======== ======= ======== ======= ========
Net income (loss) per
common share(L)........ $ 0.45 $ 0.30 (K)
======== ========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Patriot REIT for the six
months ended June 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 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 REIT acquired
eight leases from CHC Lease Partners and re-leased such hotels to Patriot
Operating Company. See page 196.
(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 six months ended June 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-95
<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 7.264%
(representing LIBOR plus 1.7%) and 7.341% per annum (representing LIBOR plus
1.75%), respectively. An increase of 0.25% in the interest rate would
increase pro forma interest expense to $61,008, decrease net income
applicable to common shareholders to $27,930 and decrease net income per
common share to $0.28, based on 100,108 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 12.3%. The estimated minority interest percentage prior to
the Wyndham Transactions is approximately 16.3%.
(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 $3,632, net income would be $32,863 and net income per common
share would be $0.32, based on 103,340 weighted average number of common
shares and common share equivalents outstanding.
(L) Pro forma earnings per share is computed based on 100,108 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 six months ended
June 30, 1997 would be $0.31 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-96
<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 revenues.... 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,
development and
reimbursement
expenses............... 11,143 -- 32,666 -- -- 43,809
General and
administrative......... 71,700 10,495 18,276 3,305 101 (G) 103,877
Ground lease and hotel
lease expense ......... 733 -- -- -- 11,769 (F) 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 (E) -- 926 (E) (6,275)(E) 9,469
Depreciation and
amortization........... 10,348 -- 13,016 (H) -- 5,691 (H) 29,055
Participating lease
payments............... 172,119 (I) 34,235 (I) 31,845 (I) 9,019 (I) -- 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 11,286 1,012,491
-------- -------- -------- ------- -------- ---------
Income (loss) before
income tax provision and
minority interests...... (25,652) (3,938) 25,354 (598) (17,561) (22,395)
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) (5,092) (14,863)
Minority interest in the
Patriot Operating
Company Partnership.... 4,437 508 (K) (2,732)(K) 77 (K) (976) (K) 1,314
Minority interest in
consolidated
subsidiaries........... -- -- -- -- 4,679 (L) 4,679
-------- -------- -------- ------- -------- ---------
Net income (loss)
applicable to common
shareholders............ $(21,975) $ (3,430) $ 18,445 $ (521) $ (1,389) $ (8,870)
======== ======== ======== ======= ======== =========
Net income (loss) per
common share(M)......... $ (0.30) $ (0.09)
======== =========
</TABLE>
See notes on following page.
- --------
(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 Paine Webber 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 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 REIT 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 199.
(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
F-97
<PAGE>
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 at
the beginning of the period presented. 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 at the beginning of the period presented.
(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 at the beginning of the period
presented.
(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 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.
(G) Represents incremental general and administrative expenses expected to be
incurred by Wyndham International of $200 and the elimination of certain
other expenses of $99.
(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 12.9%. The estimated minority interest percentage prior to
the Wyndham Transactions is approximately 16.8%.
(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 99,579 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-98
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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........... $186,840 $38,791 $73,004 $8,923 $ -- $307,558
Other hotel revenue.... 126,854 24,698 24,979 5,391 -- 181,922
Racecourse facility
revenue............... 22,538 -- -- -- -- 22,538
Management fee, service
fee and reimbursement
income................ 7,866 -- 22,793 -- (2,792)(E) 27,867
Interest and other
income................ 5,364 -- 1,371 -- -- 6,735
-------- ------- ------- ------ ------- --------
Total revenue.......... 349,462 63,489 122,147 14,314 (2,792) 546,620
-------- ------- ------- ------ ------- --------
Expenses:
Departmental costs--
hotel, club and spa
operations............ 127,484 25,096 33,059 5,229 -- 190,868
Racecourse facility
operations............ 20,282 -- -- -- -- 20,282
Direct operating costs
of management company,
service department,
development and
reimbursement
expenses.............. 6,639 -- 17,898 -- -- 24,537
General and
administrative........ 36,332 6,582 10,800 1,594 127 (G) 55,435
Ground lease and hotel
lease expense......... 446 -- -- -- 10,812 (F) 11,258
Repair and
maintenance........... 15,882 2,620 4,258 594 -- 23,354
Utilities.............. 12,887 2,408 11,559 544 -- 27,398
Marketing.............. 26,629 4,599 7,040 906 -- 39,174
Management fees........ 6,000 2,329 (E) -- 463 (E) (2,792)(E) 6,000
Depreciation and
amortization.......... 5,113 -- 7,663 (H) -- 2,164 (H) 14,940
Participating lease
payments.............. 95,694 23,461 (I) 17,321 (I) 4,990 (I) -- 141,466
Interest expense....... 623 -- -- -- -- 623
Real estate and
personal property
taxes and casuality
insurance ............ 220 -- -- -- -- 220
-------- ------- ------- ------ ------- --------
Total expenses......... 354,231 67,095 109,598 14,320 10,311 555,555
-------- ------- ------- ------ ------- --------
Income (loss) before
income tax provision
and minority
interests.............. (4,769) (3,606) 12,549 (6) (13,103) (8,935)
Income tax (provision)
benefit............... 222 -- (6,943)(J) -- 11,612 4,891
-------- ------- ------- ------ ------- --------
Income (loss) before mi-
nority interests....... (4,547) (3,606) 5,606 (6) (1,491) (4,044)
Minority interest in
the Patriot Operating
Company Partnership... 764 465 (K) (723)(K) 1 (K) 45 (K) 552
Minority interest in
consolidated
subsidiaries.......... -- -- -- -- (234)(L) (234)
-------- ------- ------- ------ ------- --------
Net income (loss)
applicable to common
shareholders........... $ (3,783) $(3,141) $ 4,883 $ (5) $(1,680) $ (3,726)
======== ======= ======= ====== ======= ========
Net income per common
share(M)............... $ (0.05) $ (0.04)
======== ========
</TABLE>
See notes on following page.
F-99
<PAGE>
- --------
(A) Represents the pro forma results of operations of Patriot Operating
Company for the six months ended June 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 Paine Webber 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 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 REIT 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 202.
(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. The pro forma results of operations for
the Crow Assets Acquisition reflects the results of operations for ten
hotels for the six months ended June 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 June 30, 1997 adjusted for certain
transactions, including the acquisition of ClubHouse and all hotels and
management contracts acquired during the first six months of 1997, as if
such transactions had occurred at the beginning of the period presented.
(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 at the beginning of the period
presented.
(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 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.
(G) Represents incremental general and administrative expenses expected to be
incurred by Wyndham International of $200 and the elimination of certain
other expenses of $73.
(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 12.9%. The estimated minority interest percentage prior to
the Wyndham Transactions is approximately 16.8%.
(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 100,108 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 six months ended
June 30, 1997 would be a net loss of $0.04 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-100
<PAGE>
COMBINED LESSEES
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Patriot REIT leases each of its hotels, 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 Non-Controlled
Subsidiaries, to Lessees. 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 six
months ended June 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 six months ended June 30, 1997 and
the Pro Forma Statement of Operations of the Combined Lessees located
elsewhere in this Joint Proxy Statement/Prospectus. 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 the beginning of the periods presented, nor do they purport to represent
the results of operations for future periods. Further, the unaudited Pro Forma
Condensed Combined Statement of Operations for the interim period ended June
30, 1997 is not necessarily indicative of the results of operations for the
full year.
F-101
<PAGE>
COMBINED LESSEES
ADJUSTED FOR THE WYNDHAM TRANSACTIONS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Room................................................... $72,182 $37,341
Food and beverage...................................... 28,499 14,702
Telephone and other.................................... 5,906 2,972
------- -------
Total revenue....................................... 106,587 55,015
------- -------
Expenses:
Departmental costs and expenses........................ 44,615 22,772
General and administrative............................. 8,626 4,640
Ground lease expense................................... 2,496 903
Repair and maintenance................................. 5,526 2,761
Utilities.............................................. 4,380 1,980
Marketing.............................................. 7,431 3,941
Insurance.............................................. 763 72
Participating lease payments(A)........................ 32,730 16,664
------- -------
Total expenses...................................... 106,567 53,733
------- -------
Income before lessee income (expense)................... 20 1,282
------- -------
Dividend and interest income(B)......................... 142 1,039
Management fees(C)...................................... (2,553) (1,547)
Lessee general and administrative(D).................... (478) (309)
------- -------
(2,889) (817)
------- -------
Net income (loss)....................................... $(2,869) $ 465
======= =======
</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-102
<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
entered into 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. 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, 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
generally will be converted into the right to receive 0.784 Paired Shares;
provided, however, that in the event that (i) 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
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.
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
six months ended June 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 six months ended
F-103
<PAGE>
June 30, 1997 included elsewhere in this Joint Proxy Statement/Prospectus and
(ii) the Consolidated Statements of Operations of WHG filed with WHG's Annual
Report on Form 10-K for the year ended June 30, 1997. As a result of the WHG
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 the
beginning of the periods presented, nor do they purport to represent the
results of operations for future periods. Further, the unaudited Pro Forma
Condensed Combined Statement of Operations for the interim period ended June
30, 1997 is not necessarily indicative of the results of operations for the
full year.
F-104
<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,
development 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....... 117,679 4,866 (5,882)(E) 116,663
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 40,573 -- 134,348
Participating lease
payments.............. -- 247,218 (247,218)(C) --
-------- ---------- --------- ----------
Total expenses......... 269,917 1,074,980 (270,514) 1,074,383
-------- ---------- --------- ----------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income
tax provision and
minority interests..... 30,542 (14,908) -- 15,634
Equity in earnings of
unconsolidated
subsidiaries.......... 3,243 (3,407) 4,679 (F) 4,515
-------- ---------- --------- ----------
Income (loss) before
income tax provision
and minority
interests.............. 33,785 (18,315) 4,679 20,149
Income tax (provision)
benefit............... (345) 4,647 -- 4,302
-------- ---------- --------- ----------
Income (loss) before
minority interests..... 33,440 (13,668) 4,679 24,451
Minority interests in
the Patriot
Partnerships.......... (3,729) 1,574 -- (2,155)
Minority interest in
consolidated
subsidiaries ......... (1,832) 975 (4,679)(F) (5,536)
-------- ---------- --------- ----------
Net income (loss)
applicable to common
shareholders........... $ 27,879 $ (11,119) $ -- $ 16,760
======== ========== ========= ==========
Net income (loss) per
common Paired
Share(G)............... $ 0.27 $ (0.11) $ 0.16
======== ========== ==========
</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 219. Minority interest in
the Patriot REIT Partnership has been decreased by $158 to reflect the
decrease in the estimated minority interest percentage subsequent to the
WHG Merger to approximately 11.8%. The estimated minority interest
percentage prior to the WHG Merger is approximately 12.3%.
(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 as adjusted for the Wyndham Transactions. See page 223.
(C) Represents elimination of participating lease revenue and expense related
to the 61 hotel properties leased by Patriot REIT to Wyndham
International.
(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 104,583 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 $0.17 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-105
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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................. $158,130 $ -- $(141,466)(C) $ 16,664
Hotel revenue............ -- 520,027 -- 520,027
Racecourse facility
revenue, hotel and land
lease revenue........... 13,614 22,538 (13,447)(D) 22,705
Management fee, service
fee and reimbursement
income.................. -- 36,900 -- 36,900
Interest and other
income.................. 2,806 7,978 (2,965)(E) 7,819
-------- -------- --------- --------
Total revenue............ 174,550 587,443 (157,878) 604,115
-------- -------- --------- --------
Expenses:
Departmental costs--hotel
operations.............. -- 208,119 -- 208,119
Racecourse facility
operations.............. -- 20,282 (2,635)(D) 17,647
Direct operating costs of
management company,
service department,
development and
reimbursement expenses.. -- 26,620 -- 26,620
General and
administrative.......... 5,227 59,281 (24)(E) 64,484
Ground lease and hotel
lease expense........... 12,434 11,258 (10,812)(D) 12,880
Repair and maintenance... -- 23,354 -- 23,354
Utilities................ -- 27,398 -- 27,398
Interest expense......... 59,363 2,214 (2,941)(E) 58,636
Real estate and personal
property taxes and
casualty insurance...... 18,461 220 -- 18,681
Marketing................ -- 40,691 -- 40,691
Management fees.......... -- 6,000 -- 6,000
Depreciation and
amortization............ 47,714 20,823 -- 68,537
Participating lease
payments................ -- 141,466 (141,466)(C) --
-------- -------- --------- --------
Total expenses........... 143,199 587,726 (157,878) 573,047
-------- -------- --------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries, income tax
provision and minority
interests................ 31,351 (283) -- 31,068
Equity in earnings of
unconsolidated
subsidiaries............ 3,520 1,576 (234)(F) 4,862
-------- -------- --------- --------
Income before income tax
provision and minority
interests................ 34,871 1,293 (234) 35,930
Income tax (provision)
benefit................. (172) 2,718 -- 2,546
-------- -------- --------- --------
Income before minority
interests................ 34,699 4,011 (234) 38,476
Minority interests in the
Patriot Partnerships.... (3,978) (129) -- (4,107)
Minority interest in
consolidated
subsidiaries............ (987) (2,972) 234 (F) (3,725)
-------- -------- --------- --------
Net income applicable to
common shareholders...... $ 29,734 $ 910 $ -- $ 30,644
======== ======== ========= ========
Net income per common
Paired Share(G).......... $ 0.28 $ 0.01 $ 0.29
======== ======== ========
</TABLE>
- --------
(A) Patriot REIT Pro Forma balances are derived from the pro forma results of
operations of Patriot REIT for the six months ended June 30, 1997 as
adjusted for the Wyndham Transactions. See page 221. Minority interest in
the Patriot REIT Partnership has been decreased by $169 to reflect the
decrease in the estimated minority interest percentage subsequent to the
WHG Merger to approximately 11.8%. The estimated minority interest
percentage prior to the WHG Merger is approximately 12.3%.
(B) Wyndham International Pro Forma balances are derived from the pro forma
results of operations of Patriot Operating Company for the six months
ended June 30, 1997 as adjusted for the Wyndham Transactions. See page
225.
(C) Represents elimination of participating lease revenue and expense related
to the 61 hotel properties leased by Patriot REIT to Wyndham
International.
(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 $585 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 $2,356 of interest income and expense related to the Subscription Notes
issued to Patriot Operating Company in connection with the subscription
for shares of Patriot Operating Company Common Stock and Patriot Operating
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 105,169 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 six months ended
June 30, 1997 would be $0.31 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-106
<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 June 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 June 30, 1997 included elsewhere
in this Joint Proxy Statement/Prospectus.
Such pro forma information is based in part upon WHG's Consolidated Balance
Sheet as of June 30, 1997, Old Patriot REIT's Consolidated Balance Sheet as of
June 30, 1997, Wyndham's Consolidated Balance Sheet as of June 30, 1997, and
Patriot REIT's and Patriot Operating Company's Combined Balance Sheet as of
June 30, 1997 and should be read in conjunction with the financial statements
filed with Wyndham's, and the Patriot Companies' respective Quarterly Reports
on Form 10-Q for the six months ended June 30, 1997 and WHG's Annual Report on
Form 10-K for the year ended June 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 June 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-107
<PAGE>
PATRIOT REIT AND WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 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 hotel
and resort properties
and land held for
sale................... $2,367,677 $ 48,956 $ 31,735 (C) $2,448,368
Net investment in
Racecourse facility and
related improvements... 21,565 -- -- 21,565
Mortgage notes and other
receivables from
unconsolidated
subsidiaries........... 74,424 1,105 40,106 (D) 115,635
Notes and other
receivables from
affiliates............. 21,185 -- -- 21,185
Notes receivable........ 30,853 -- -- 30,853
Investment in
unconsolidated
subsidiaries........... 16,421 30,603 (22,211)(E) 24,813
Cash and cash
equivalents............ 43,653 17,886 -- 61,539
Restricted cash......... 42,189 -- -- 42,189
Accounts receivable,
net.................... 26,715 3,477 -- 30,192
Goodwill................ 439,443 8,710 10,378 (F) 458,531
Deferred expenses, net.. 21,325 -- -- 21,325
Management contract
costs.................. 109,995 -- 43,567 (G) 153,562
Trade name and franchise
costs.................. 102,050 -- -- 102,050
Prepaid expenses and
other assets........... 55,958 6,736 -- 62,694
Deferred income taxes... 727 -- -- 727
---------- -------- -------- ----------
Total assets........... $3,374,180 $117,473 $103,575 $3,595,228
========== ======== ======== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Borrowings under a line
of credit and mortgage
notes.................. $1,451,830 $ 23,549 $ -- $1,475,379
Notes and other
liabilities............ -- 5,532 -- 5,532
Accounts payable and
accrued expenses....... 73,076 10,440 -- 83,516
Deferred income tax
liability.............. 71,553 2,638 -- 74,191
Deposits................ 1,337 -- -- 1,337
Deferred gain........... -- -- -- --
Due to unconsolidated
subsidiaries........... 6,314 -- -- 6,314
Minority interests in
the Patriot
Partnerships........... 271,495 -- -- 271,495
Minority interest in
consolidated
subsidiaries........... 27,990 19,990 -- 47,980
Shareholders' equity:
Preferred stock........ 44 -- -- 44
Common stock........... 1,905 61 39 (H) 2,005
Paid-in capital........ 1,648,619 14,296 144,503 (I) 1,807,418
Unearned stock compen-
sation, net........... (16,397) -- (16,397)
Notes receivable from
stockholders.......... (16,887) -- -- (16,887)
Receivable from affili-
ates.................. (1,331) -- -- (1,331)
Retained earnings...... (145,368) 40,967 (40,967)(I) (145,368)
---------- -------- -------- ----------
Total shareholders' eq-
uity.................. 1,470,585 55,324 103,575 1,629,484
---------- -------- -------- ----------
Total liabilities and
shareholders' equity.. $3,374,180 $117,473 $103,575 $3,595,228
========== ======== ======== ==========
</TABLE>
See notes on following page.
F-108
<PAGE>
- --------
(A) Reflects the Pro Forma Condensed Combined Balance Sheet of Patriot REIT
and Patriot Operating Company as of June 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 216.
(B) Represents the Consolidated Balance Sheet of WHG as of June 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
subsidiaries at estimated fair market value.................. $ 17,895
Reclassify receivables from/advances to WHG unconsolidated
subsidiaries................................................. (40,106)
--------
$(22,211)
========
</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 June 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.
Subsequent to June 30, 1997, WHG issued 300 shares of Series B Convertible
Preferred Stock. 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 common stock for Paired Shares issued............ (39)
Book value of WHG common stock................................. (61)
Book value of WHG paid-in capital.............................. (14,296)
--------
Adjustment to paid-in capital................................. 144,503
Elimination of WHG historical retained earnings................ (40,967)
Adjustment to common stock..................................... (39)
--------
Adjustment to shareholders' equity............................ $103,575
========
</TABLE>
F-109
<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 revenues... 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,
development 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.......... 29,055 5,549 5,969 (C) 40,573
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......... 1,012,491 56,520 5,969 1,079,980
---------- ------- ------- ----------
Income (loss) before
equity earnings of
unconsolidated
subsidiaries........... (22,395) 13,456 (5,969) (14,908)
Equity in earnings of
unconsolidated
subsidiaries........... -- (2,896) (511)(D) (3,407)
---------- ------- ------- ----------
Income (loss) before
income tax provision
and minority
interests.............. (22,395) 10,560 (6,480) (18,315)
Income tax (provision)
benefit............... 7,532 (2,152) (733)(E) 4,647
---------- ------- ------- ----------
Income (loss) before mi-
nority interests....... (14,863) 8,408 (7,213) (13,668)
Minority interest in
the Patriot Operating
Company Partnership... 1,314 -- 260 (F) 1,574
Minority interest in
consolidated
subsidiaries.......... 4,679 (3,704) -- 975
---------- ------- ------- ----------
Net income (loss)
applicable to common
shareholders........... $ (8,870) $ 4,704 $(6,953) $ (11,119)
========== ======= ======= ==========
Net income (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 223.
(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
12.4%. The estimated minority interest percentage prior to the WHG Merger
is approximately 12.9%.
(G) Pro forma earnings per share subsequent to the WHG Merger is computed
based on 104,583 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-110
<PAGE>
WYNDHAM INTERNATIONAL
ADJUSTED FOR THE WHG MERGER
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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............. $307,558 $14,468 $ -- $322,026
Other hotel revenue...... 181,922 16,079 -- 198,001
Racecourse facility
revenue................. 22,538 -- -- 22,538
Management fee, service
fee and reimbursement
income.................. 27,867 9,033 -- 36,900
Interest and other
income.................. 6,735 1,243 -- 7,978
-------- ------- ------- --------
Total revenue............ 546,620 40,823 -- 587,443
-------- ------- ------- --------
Expenses:
Departmental costs--
hotel, club and spa
operations.............. 190,868 17,251 -- 208,119
Racecourse facility
operations.............. 20,282 -- -- 20,282
Direct operating costs of
management company,
service department,
development and
reimbursement expenses.. 24,537 2,083 -- 26,620
General and
administrative.......... 55,435 3,846 -- 59,281
Ground lease and hotel
lease expense........... 11,258 -- -- 11,258
Repair and maintenance... 23,354 -- -- 23,354
Utilities................ 27,398 -- -- 27,398
Marketing................ 39,174 1,517 -- 40,691
Management fees.......... 6,000 -- -- 6,000
Depreciation and
amortization............ 14,940 2,898 2,985 (C) 20,823
Participating lease
payments................ 141,466 -- -- 141,466
Interest expense......... 623 1,591 -- 2,214
Real estate and personal
property taxes and
casualty insurance ..... 220 -- -- 220
-------- ------- ------- --------
Total expenses........... 555,555 29,186 2,985 587,726
-------- ------- ------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries............ (8,935) 11,637 (2,985) (283)
Equity in earnings of
unconsolidated
subsidiaries............ -- 1,832 (256)(D) 1,576
-------- ------- ------- --------
Income (loss) before
income tax provision and
minority interests....... (8,935) 13,469 (3,241) 1,293
Income tax (provision)
benefit................. 4,891 (3,173) 1,000 (E) 2,718
-------- ------- ------- --------
Income (loss) before mi-
nority interests......... (4,044) 10,296 (2,241) 4,011
Minority interest in the
Patriot Operating
Company Partnership..... 552 -- (681)(F) (129)
Minority interest in
consolidated
subsidiaries............ (234) (2,738) -- (2,972)
-------- ------- ------- --------
Net income (loss)
applicable to common
shareholders............. $ (3,726) $ 7,558 $(2,922) $ 910
======== ======= ======= ========
Net income per common
share(G)................. $ (0.04) $ 0.01
======== ========
</TABLE>
- --------
(A) Represents the pro forma results of operations of Wyndham International
for the six months ended June 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 GHCI Merger; and (iii) the Wyndham Transactions. See page 225.
(B) Represents the historical consolidated results of operations of WHG for
the six months ended June 30, 1997 (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 by the asset
values are adjusted to their estimated fair market value. The adjustment
represents increases in depreciation expense of $454, amortization of
goodwill of $259 and amortization of management contracts of $2,272.
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. Represents adjustments to WHG's depreciation and
amortization to reflect amortization of goodwill and management contract
costs. 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-111
<PAGE>
EXHIBIT 23.1
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) 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 September 30, 1997.
ERNST & YOUNG LLP
San Juan, Puerto Rico
November 6, 1997
