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PROSPECTUS SUPPLEMENT
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(TO PROSPECTUS DATED JANUARY 21, 1998)
32,760 SHARES OF COMMON STOCK
PATRIOT AMERICAN HOSPITALITY, INC.
32,760 SHARES OF COMMON STOCK
WYNDHAM INTERNATIONAL, INC.
Patriot American Hospitality, Inc. (collectively with its subsidiaries, the
"Corporation") hereby offers 32,760 shares of its common stock, $.01 par value
(the "Corporation Common Stock") to the holders (the "Holders") of an aggregate
of 32,760 units of limited partnership interest (the "Realty Partnership Units")
in Patriot American Hospitality Partnership, L.P. (the "Realty Partnership") and
Wyndham International, Inc. (collectively with its subsidiaries, the "Operating
Company") hereby offers 32,760 shares of its common stock, $.01 par value (the
"Operating Company Common Stock") to the Holders who also hold an aggregate of
32,760 units of limited partnership interest (the "Operating Partnership Units")
in Patriot American Hospitality Operating Partnership, L.P. (the "Operating
Partnership"). Each share of Corporation Common Stock is paired with a share of
Operating Common Stock (as paired, the "Paired Shares") and the Paired Shares
trade as a single unit.
Pursuant to the partnership agreement of the Realty Partnership (the
"Realty Partnership Agreement"), a holder of Realty Partnership Units may tender
its Realty Partnership Units to the Realty Partnership for cash; provided,
however, that the Corporation may acquire each Realty Partnership Unit so
tendered for one share of Corporation Common Stock (subject to certain
adjustments in the event of stock dividends and stock splits). Pursuant to the
partnership agreement of the Operating Partnership (the "Operating Partnership
Agreement"), a holder of Operating Partnership Units may tender its Operating
Partnership Units to the Operating Partnership for cash; provided, however, that
the Operating Company may acquire each Operating Partnership Unit so tendered
for one share of Operating Company Common Stock (subject to certain adjustments
in the event of stock dividends and stock splits). The Realty Partnership
Agreement and the Operating Partnership Agreement further require that a Holder
redeem a like number of Realty Partnership Units and Operating Partnership
Units. The Corporation and the Operating Company have elected to issue Paired
Shares in exchange for the 32,760 Realty Partnership Units and Operating
Partnership Units.
Neither the Corporation nor the Operating Company will receive any proceeds
from the issuance of the 32,760 Paired Shares offered hereby. The Corporation
will acquire an additional 32,760 Realty Partnership Units for the Corporation
Common Stock offered hereby and the Operating Company will acquire an additional
32,760 Operating Partnership Units for the Operating Company Common Stock
offered hereby.
SEE "RISK FACTORS" ON PAGE 6 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT
IN THE PAIRED SHARES.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS
OR THE PROSPECTUS SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
___________________
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JANUARY 26, 1998
<PAGE>
PROSPECTUS
7,535,827 Shares of Common Stock
Patriot American Hospitality, Inc.
7,535,827 Shares of Common Stock
Wyndham International, Inc.
For purposes of this Prospectus, unless the context otherwise requires, (i)
the term "Corporation" includes Patriot American Hospitality, Inc., a Delaware
Corporation, PAH GP, Inc. ("PAH GP"), PAH LP, Inc. ("PAH LP"), each of which is
a Delaware corporation and a wholly-owned subsidiary of Patriot American
Hospitality, Inc., a Delaware corporation, Patriot American Hospitality
Partnership, L.P., a Virginia limited partnership (the "Realty Partnership"),
and their respective subsidiaries, (ii) the term "Operating Company" includes
Wyndham International, Inc. (formerly known as Patriot American Hospitality
Operating Company), a Delaware Corporation, and Patriot American Hospitality
Operating Partnership, L.P., a Delaware limited partnership (the "Operating
Partnership" and, together with the Realty Partnership, the "Partnerships"), and
their respective subsidiaries, (iii) the term "Companies" includes the
Corporation and the Operating Company, (iv) the term "Unit Pair" means a unit of
limited partnership interest in the Realty Partnership (a "Realty Partnership
Unit") and a unit of limited partnership interest in the Operating Partnership
(an "Operating Partnership Unit") and (v) the term "Unitholder" means either a
holder of Realty Partnership Units (a "Realty Partnership Unitholder") or a
holder of Operating Partnership Units (an "Operating Partnership Unitholder").
This prospectus (the "Prospectus") relates to the possible issuance from
time to time by the Companies of up to 7,535,827 shares of common stock
("Corporation Common Stock"), $.01 par value, of the Corporation and 7,535,827
shares of common stock ("Operating Company Common Stock"), $.01 par value, of
the Operating Company, which are "paired" and trade as units consisting of one
share of Corporation Common Stock and one share of Operating Company Common
Stock (the "Paired Common Stock"), if and to the extent that Realty Partnership
Unitholders of up to 7,535,827 Realty Partnership Units exercise their
Redemption Right (as defined below) and such Realty Partnership Units are
exchanged for shares of Corporation Common Stock or Operating Partnership
Unitholders of up to 7,535,827 Operating Partnership Units exercise their
Redemption Right and such Operating Partnership Units are exchanged for shares
of Operating Company Common Stock.
Pursuant to each of the Second Amended and Restated Agreement of Limited
Partnership of the Realty Partnership, as amended to date (the "Realty
Partnership Agreement"), and the Agreement of Limited Partnership of the
Operating Partnership, as amended to date (the "Operating Partnership Agreement"
and, together with the Realty Partnership Agreement, the "Partnership
Agreements"), and subject to certain limitations, a Realty Partnership
Unitholder or an Operating Partnership Unitholder, as the case may be, may
tender all or a portion of its Realty Partnership Units to the Realty
Partnership or its Operating Partnership Units to the Operating Partnership,
respectively, for redemption for cash equal in value to one share of Corporation
Common Stock or Operating Company Common Stock, as the case may be (subject to
certain adjustments in the case of stock splits, stock dividends or similar
distributions) (the "Redemption Right"); provided, however, that each of the
Companies may, in its sole and absolute discretion, acquire any Realty
Partnership Units and Operating Partnership Units, respectively, so tendered for
one share of Corporation Common Stock or Operating Company Common Stock, as the
case may be (subject to certain adjustments in the case of stock splits, stock
dividends or similar distributions), or for cash in the amount described above.
Each of the Partnership Agreements provides, however, that a Realty
Partnership Unitholder may not exercise its Redemption Right unless it is
entitled to exercise and simultaneously exercises its Redemption Right with
respect to an equal number of Operating Partnership Units of the same class or
series, or that an Operating Partnership Unitholder may not exercise its
Redemption Right unless is entitled to exercise and simultaneously exercises its
Redemption Right with respect to an equal number of Realty Partnership Units of
the same class or series, as the case may be, so that the Companies may elect,
upon the exercise of a Redemption Right, to deliver shares of Paired Common
Stock in redemption of such Realty Partnership Units and Operating Partnership
Units in lieu of paying cash. Furthermore, each of the Partnership Agreements
provides that neither of the Companies may elect to acquire a Unit Pair tendered
for redemption for a share of Paired Common Stock unless the other company also
so elects. If the Companies do not agree to acquire such Unit Pair for a share
of Paired Common Stock, the Unit Pair shall be redeemed by each of the Companies
for cash.
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Each of the Companies anticipates that it generally will elect to acquire
any Unit Pairs tendered for redemption by the issuance of shares of Paired
Common Stock pursuant to this Prospectus rather than paying cash. As a result,
the Companies may from time to time issue up to 7,535,827 shares of Paired
Common Stock upon the acquisition of Realty Partnership Units and Operating
Partnership Units tendered to the Realty Partnership and the Operating
Partnership, respectively, for redemption. Accordingly, the Companies are
registering the shares of Paired Common Stock to provide Realty Partnership
Unitholders and Operating Partnership Unitholders with freely tradeable
securities upon redemption. All shares of Paired Common Stock offered hereby
are being sold by the Companies.
The Unitholders and any agents, dealers or underwriters that participate
with the Unitholders in the distribution of the shares of Paired Common Stock
offered hereby may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), in which case any
commissions received by such agents, dealers or underwriters and any profit on
the resale of shares of Paired Common Stock purchased by them may be deemed
underwriting commissions or discounts under the Securities Act. See "Plan of
Distribution" for indemnification arrangements between the Companies and the
Realty Partnership Unitholders and the Operating Partnership Unitholders.
The Companies will not receive any proceeds from the issuance of any shares
of Paired Common Stock, but will acquire Unit Pairs tendered to the Realty
Partnership or the Operating Partnership, respectively, for redemption for which
the Companies elect to issue shares of Paired Common Stock. With each such
acquisition, the Corporation's and Operating Company's interest in the Realty
Partnership and the Operating Partnership, respectively, will increase.
See "Risk Factors" beginning on page 6 for certain factors relevant to an
investment in the shares of Paired Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 21, 1998
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AVAILABLE INFORMATION
The Companies have filed with the Securities and Exchange Commission (the
"SEC" or "Commission") a Registration Statement on Form S-4, as amended by this
Post-Effective Amendment on Form S-3 (the "Registration Statement") under the
Securities Act, with respect to the Securities. This Prospectus, which
constitutes part of the Registration Statement, omits certain of the information
contained in the Registration Statement and the exhibits thereto on file with
the Commission pursuant to the Securities Act and the rules and regulations of
the Commission thereunder. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including exhibits thereto, may be inspected and copies obtained from
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
7 World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such material may be obtained from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Companies file information electronically with
the Commission, and the Commission maintains a Web Site that contains reports,
proxy and information statements and other information regarding registrants
(including the Companies) that file electronically with the Commission. The
address of the Commission's Web Site is (http://www.sec.gov).
The Companies are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports and proxy statements and other information
with the Commission. Such reports, proxy statements and other information can be
inspected and copied at the locations described above. Copies of such materials
can be obtained by mail from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. In addition, reports, proxy and information statements and
other information concerning the Companies can be inspected at the offices of
the New York Stock Exchange (the "NYSE"), 20 Broad Street, New York, New York
10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference:
Corporation and Operating Company
1. Current Reports on Form 8-K of the Corporation and the Operating Company
dated (i) July 1, 1997 (Nos. 001-09319, 001-09320 filed July 11, 1997), (ii)
July 15, 1997 (Nos. 001-09319, 001-09320 filed July 21, 1997), (iii) July 22,
1997 (Nos. 001-09319, 001-09320 filed July 22, 1997), (iv) September 17, 1997
(Nos. 001-09319, 001-09320 filed September 17, 1997), (v) September 30, 1997, as
amended (Nos. 001-09319, 001-09320 filed October 14, 1997 and October 28, 1997),
(vi) September 30, 1997 (Nos. 001-09319, 001-09320 filed November 12, 1997),
(vii) December 2, 1997 (Nos. 001-09319, 001-09320 filed December 4, 1997);
(viii) December 10, 1997 (Nos. 001-09319, 001-09320 filed December 10, 1997)
and (ix) January 5, 1998, (Nos. 001-09319, 001-09320 filed January 13, 1998);
2. Quarterly Report on Form 10-Q of the Corporation and the Operating
Company (Nos. 001-09319, 001-09320) for the fiscal quarter ended June 30, 1997;
3. Quarterly Report on Form 10-Q of the Corporation and the Operating
Company (Nos. 001-09319, 001-09320) for the fiscal quarter ended September 30,
1997; and
4. The description of the paired shares of Corporation Common Stock and
Operating Company Common Stock contained or incorporated by reference in the
Corporation's and the Operating Company's Registration Statement on Form 8-A
(Nos. 001-09319, 001-09320), including any amendments thereto.
California Jockey Club and Bay Meadows Operating Company
1. Annual Report on Form 10-K of California Jockey Club and Bay Meadows
Operating Company (Nos. 001-09319, 001-09320) for the fiscal year ended December
31, 1996;
2. Current Reports on Form 8-K of California Jockey Club and Bay Meadows
Operating Company dated (i) February 24, 1997 (Nos. 001-09319, 001-09320 filed
March 3, 1997) and (ii) May 28, 1997 (Nos. 001-09319, 001-09320 filed June 5,
1997);
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3. Quarterly Report on Form 10-Q of California Jockey Club and Bay Meadows
Operating Company (Nos. 001-09319, 001-09320) for the fiscal quarter ended March
31, 1997; and
4. Quarterly Report on Form 10-Q/A of California Jockey Club and Bay
Meadows Operating Company (Nos. 001-09319, 001-09320) for the fiscal quarter
ended March 31, 1997 (filed May 16, 1997).
Patriot American Hospitality, Inc. (Patriot)
1. Annual Report on Form 10-K of Patriot American Hospitality, Inc., (No.
001-13898) for the fiscal year ended December 31, 1996;
2. Current Reports on Form 8-K of Patriot American Hospitality, Inc.,
dated: (i) April 2, 1996, as amended (No. 001-13898 filed April 17, 1996 and
June 14, 1996) reporting the acquisition of certain assets, (ii) December 5,
1996 (No. 001-13898 filed December 5, 1996) reporting the acquisition of certain
assets, (iii) January 16, 1997, as amended (No. 001-13898 filed January 31,
1997, February 21, 1997, April 8, 1997, April 9, 1997 and May 19, 1997),
reporting the consummation of the acquisition of Carefree Resorts Corporation
and Resorts Limited Partnership and certain other assets, (iv) February 24, 1997
(No. 001-13898 filed March 3, 1997) reporting the execution of a merger
agreement between Patriot and California Jockey Club and (v) April 14, 1997, as
amended (No. 001-13898 filed April 17, 1997 and April 18, 1997), reporting the
execution of a merger agreement between Patriot and Wyndham Hotel Corporation
and the related stock purchase agreement and the execution of agreements with
partnerships affiliated with members of the Trammell Crow family providing for
the acquisition by the Corporation of 11 full-service Wyndham-branded hotels;
and
3. Quarterly Report on Form 10-Q of Patriot American Hospitality, Inc. (No.
001-13898) as of and for the fiscal quarter ended March 31, 1997.
Wyndham Hotel Corporation (Wyndham)
1. Annual Report on Form 10-K of Wyndham Hotel Corporation (No. 001-11723
filed March 27, 1997) for the fiscal year ended December 31, 1996;
2. Current Reports on Form 8-K of Wyndham Hotel Corporation dated (i) April
14, 1997 (No. 001-11723 filed April 23, 1997) and (ii) July 31, 1997, as
amended (No. 001-11723 filed August 15, 1997 and September 18, 1997);
3. Quarterly Report on Form 10-Q of Wyndham Hotel Corporation
(No. 001-11723) for the fiscal quarter ended March 31, 1997;
4. Quarterly Report on Form 10-Q/A of Wyndham Hotel Corporation (No. 001-
11723) for the fiscal quarter ended March 31, 1997 (filed June 2, 1997);
5. Quarterly Report on Form 10-Q of Wyndham Hotel Corporation
(No. 001-11723) for the fiscal quarter ended June 30, 1997;
6. Quarterly Report on Form 10-Q/A of Wyndham Hotel Corporation
(No. 001-11723) for the fiscal quarter ended June 30, 1997 (filed August 29,
1997);
7. Quarterly Report on Form 10-Q of Wyndham Hotel Corporation
(No. 001-11723) for the fiscal quarter ended September 30, 1997; and
8. Proxy Statement of Wyndham Hotel Corporation (No. 001-11723) for the
Annual Meeting of Stockholders held April 28, 1997 (filed March 27, 1997).
All other documents filed with the Commission by the Corporation or the
Operating Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this Prospectus and prior to the termination of
the offering of the Securities are to be incorporated herein by reference and
such documents shall be deemed to be a part hereof from the date of filing of
such documents. Any statement contained in this Prospectus or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document that also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents. Written requests
should be mailed to 1950 Stemmons Freeway, Suite 6100, Dallas, TX 75207,
Attention: Shareholder Relations (Telephone No. 214-863-1000).
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This Prospectus and the documents incorporated herein by reference contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Companies' actual results could differ materially from those
set forth in the forward-looking statements. Certain factors that might cause
such a difference are discussed in the section entitled "Risk Factors" below.
RISK FACTORS
Unitholders should carefully consider the following information in
conjunction with the other information contained in this Prospectus in
considering whether to exercise their Redemption Right.
Real Estate Investment Trust Tax Risks
Dependence on Qualification as a Real Estate Investment Trust
The Corporation will operate in a manner designed to permit it to qualify as
a real estate investment trust (a "REIT") under the Internal Revenue Code of
1986, as amended (the "Code"), but no assurance can be given that the
Corporation will be able to continue to operate in a manner so as to qualify or
remain so qualified. Qualification as a REIT involves the application of highly
technical and complex provisions of the Code, for which there are only limited
judicial or administrative interpretations. The complexity of these provisions
is greater in the case of a REIT that owns hotels and leases them to an
operating company with which its stock is paired. Qualification as a REIT also
involves the determination of various factual matters and circumstances not
entirely within the Corporation's control. In addition, the Corporation's
ability to qualify as a REIT is dependent upon its continued exemption from the
anti-pairing rules of Section 269B(a)(3) of the Code. Section 269B(a)(3) of the
Code would ordinarily prevent a corporation from qualifying as a REIT if its
stock is paired with the stock of a corporation whose activities are
inconsistent with REIT status, such as the Operating Company. The
"grandfathering" rules governing Section 269B generally provide, however, that
Section 269B(a)(3) does not apply to a paired REIT if the REIT and its paired
operating company were paired on June 30, 1983. There are, however, no judicial
or administrative authorities interpreting this "grandfathering" rule. Moreover,
if for any reason the Corporation had failed to qualify as a REIT in 1983, the
benefit of the "grandfathering" rule would not be available to it, in which case
the Corporation would not qualify as a REIT for any taxable year. On November 5,
1997, Representative William Archer, Chairman of the Ways and Means Committee of
the House of Representatives, publicly announced that he plans to review this
"grandfathering" rule. While Repesentative Archer stated that he does not plan
to eliminate the "grandfathering" rule, no assurance can be given that new
legislation, new regulations, administrative interpretations or court decisions
will not change the tax laws with respect to qualification as a REIT (including
the "grandfathering" rules of Section 269B) or the federal income taxes of such
qualification.
If the Corporation fails to qualify as a REIT, the Corporation will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at corporate rates. In addition, unless entitled to relief
under certain statutory provisions and subject to the discussion above regarding
the impact if the Corporation failed to qualify as a REIT in 1983, the
Corporation also will be disqualified from re-electing REIT status for the four
taxable years following the year during which qualification is lost. Failure to
qualify as a REIT would reduce the net earnings of the Corporation available for
distribution to stockholders because of the additional tax liability to the
Corporation for the year or years involved. In addition, distributions would no
longer be required to be made. To the extent that distributions to stockholders
would have been made in anticipation of the Corporation's qualifying as a REIT,
the Corporation might be required to borrow funds or to liquidate certain of its
investments to pay the applicable tax. The failure to qualify as a REIT would
also constitute a default under certain debt obligations of the Corporation.
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Potential Reallocation of Income
Due to the paired share structure, the Corporation, the Operating Company,
the Realty Partnership, the Operating Partnership, and their respective
subsidiary entities are and will be controlled by the same interests. As a
result, the Internal Revenue Service (the "IRS") could, pursuant to Section 482
of the Code, seek to distribute, apportion or allocate gross income, deductions,
credits or allowances between or among them if it determines that such
distribution, apportionment or allocation is necessary in order to prevent
evasion of taxes or to clearly reflect income. The Companies believe that all
material transactions between the Corporation and the Operating Company, and
among them and/or their subsidiary entities, have been and will continue to be
negotiated and structured with the intention of achieving an arm's-length
result. There can be no assurance, however, that the IRS will not challenge the
terms of such transactions, or that such challenge would not be successful.
Adverse Effects of REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Corporation will be generally required
each year to distribute to its stockholders at least 95% of its taxable income
(excluding any net capital gain). In addition, if the Corporation disposes of
assets acquired from a taxable C corporation during the ten-year period
following such acquisition, the Corporation will be required to distribute at
least 95% of the amount of built-in gain attributable to such assets (determined
as of the date of the acquisition of the assets) that the Corporation recognizes
in the subsequent disposition, less the amount of any tax paid with respect to
such recognized built-in gain. See "Certain Federal Income Tax Considerations--
REIT Qualification--Built-In Gain Tax." The Corporation will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income for that year, (ii) 95% of its capital gain net income for
that year, and (iii) 100% of its undistributed income from prior years.
The Corporation intends to make distributions to its stockholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
The Corporation's income will consist primarily of its share of the income of
the Realty Partnership, and the Corporation's cash available for distribution
will consist primarily of its share of cash distributions from the Realty
Partnership. Differences in timing between the recognition of taxable income and
the receipt of cash available for distribution and the seasonality of the hotel
industry could require the Corporation to borrow funds on a short-term basis to
meet the 95% distribution requirement and to avoid the nondeductible excise tax.
Distributions by the Companies will be determined by their respective Board
of Directors and depend on a number of factors, including the amount of cash
available for distribution and the financial condition of the Companies, any
decision by either Board of Directors to reinvest funds rather than to
distribute such funds, capital expenditures, the annual distribution
requirements under the REIT provisions of the Code (in the case of the
Corporation) and such other factors as either Board of Directors deems relevant.
For federal income tax purposes, distributions paid to stockholders may consist
of ordinary income, capital gains (in the case of the Corporation), nontaxable
return of capital, or a combination thereof. The Companies will provide
stockholders with annual statements as to the taxability of distributions.
Accumulated Earnings and Profits
On January 5, 1998, the Corporation consummated its acquisition by merger
(the "Wyndham Acquisition") of Wyndham Hotel Corporation ("Wyndham") through
which the Corporation acquired Wyndham's portfolio of owned and leased
hotels and management and franchise agreements for certain of Wyndham's hotels.
See "The Companies--The Corporation."
On December 2, 1997, the Corporation and the Operating Company entered into
an Agreement and Plan of Merger (the "Interstate Merger Agreement") with
Interstate Hotels Corporation ("Interstate"), pursuant to which Interstate will
merge with and into the Corporation, with the Corporation being the surviving
company (the "Interstate Merger"). Upon consummation of the Interstate Merger,
all of the hotels which are currently owned or leased by Interstate will be
owned or leased by the Corporation and leased or subleased to the Operating
Company.
To maintain its qualification as a REIT subsequent to the Wyndham
Acquisition, the Corporation is required to distribute with respect to the
Corporation's taxable year ending December 31, 1998 the earnings and profits of
Wyndham at the time of the Wyndham Acquisition (as determined for federal income
tax purposes). In addition, to maintain its qualification as a REIT following
the Interstate Merger, the Corporation will be required to distribute the
current and accumulated earnings and profits of Interstate at the time of the
Interstate Merger (as determined for federal income tax purposes). Any such
distributions will be taken into account by the Corporation's U.S. Stockholders
(as hereinafter defined) as ordinary income to the extent they are made out of
current or accumulated earnings and profits, and will not be eligible for the
dividends received deduction generally available for corporations. See "Certain
Federal Income Tax Considerations--Federal Income Taxation of Holders of Paired
Shares."
If the IRS were to determine that Wyndham's or Interstate's actual earnings and
profits exceeded the amount distributed, the Corporation could be disqualified
as a REIT.
Failure to Manage Rapid Growth and Integrate Operations; New Businesses
The Corporation is currently experiencing a period of rapid growth. The
Companies are or will be responsible for the management and operation of several
new businesses, including direct hotel management, branding and franchising and
thoroughbred racing, which were previously not part of the operations of the
Corporation's predecessor, Patriot American Hospitality, Inc., a Virginia
corporation ("Patriot"). In addition, the Companies may acquire other new
businesses in the future. The integration of departments, systems and procedures
presents a significant management challenge, and the failure to integrate new
acquisitions into existing management and operating structures could have a
material adverse effect on the results of operations and financial condition of
the Corporation and the Operating Company.
Substantial Debt Obligations; No Limits on Indebtedness; Variable Rate Debt
The Companies have obtained an unsecured revolving line of credit that
expires on July 18, 2000 (the "Revolving Credit Facility") and a term loan that
expires on January 31, 1999 (the "Term Loan") from certain lenders. As of
January 7, 1998 the Companies' combined debt was approximately $793.4 million
and the Companies' ratio of combined debt to total market capitalization was
approximately 32.71%. The Companies also may borrow additional amounts from the
same or other lenders in the future, may assume debt in connection with
acquisitions, or may issue corporate debt securities in public or private
offerings. The Companies' organizational documents do not limit the amount of
indebtedness the Companies may incur. Further, substantially all of the
Companies' combined debt bears interest at a variable rate. Economic conditions
could result in higher interest rates, which could increase debt service
requirements on variable rate debt and could adversely affect the Companies'
ability to make distributions.
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There can be no assurance that the Companies will be able to meet their debt
service obligations and, to the extent that they cannot, the Companies risk the
loss of some or all of their assets, including the hotels. Adverse economic
conditions could cause the terms on which borrowings become available to be
unfavorable. In such circumstances, if the Corporation or the Operating Company
is in need of funds to repay indebtedness in accordance with its terms or
otherwise, it could be required to liquidate one or more investments in
properties at times which may not permit realization of the maximum return on
such investments.
The foregoing risks associated with debt obligations of the Companies may
inhibit the ability of the Companies to raise capital in both the public and
private markets.
Lack of Experience in Hotel Management Business
The Corporation leases certain existing hotels and intends to lease other
existing hotels and a significant portion of its newly-acquired hotels to the
Operating Company. Although certain executives of the Corporation have hotel
management experience, the Operating Company has no prior experience in the
hotel management business. The future success of the Operating Company and its
ability to operate hotels as well as manage future growth depend in large part
on its ability to attract and retain key executive officers and other highly
qualified personnel, especially in the area of hotel operations. There can be no
assurance that the Operating Company will be able to attract and retain
qualified personnel and the inability to do so could have a material adverse
effect on the results of operations and financial condition of the Companies.
Potential Conflicts of Interest Between The Corporation and the Operating
Company
The Corporation and the Operating Company are separate corporate entities
with separate Boards of Directors and executive officers. Although the companies
have several of the same directors, a majority of the directors and officers of
each of the Corporation and the Operating Company do not serve as directors or
officers of the other company. In addition, the Corporation and the Operating
Company generally have different employees, separate creditors and are subject
to different state law licensing and regulatory requirements. Since the
consummation of the Wyndham Acquisition on January 5, 1998, the companies have
also had separate Chairmen of the Board and Chief Executive Officers. As a
result, the interests of the Corporation Board and the Operating Company Board
may conflict, and such conflicts may possibly rise to disputes between the
companies. The Corporation and the Operating Company have entered into the
Cooperation Agreement, dated December 18, 1997, between the Corporation and the
Operating Company (the "Cooperation Agreement"), which the Companies believe
will help decrease the possibility of disagreements. There can be no assurance,
however, that such disagreements will not arise. In addition, there can be no
assurance that the interests of the officers and/or directors of one company who
also serve as officers and/or directors of the other company will not conflict
with their interests as officers and/or directors of such other company or that
their actions as officers and/or directors of one company will not adversely
affect the interests of the other company. Any such disagreements or conflicts
could have a material adverse affect on the results of operations of the
Corporation and the Operating Company.
Dependence on Lessees and Payments under the Participating Leases
The Corporation leases substantially all of its existing hotels to the
Operating Company and to lessees (the "Lessees") pursuant to separate
participating leases (the "Participating Leases"). The Corporation's ability to
make distributions to stockholders depends primarily upon the ability of the
Operating Company or the Lessees to make rent payments under the Participating
Leases (which is dependent primarily on the Operating Company's and the Lessees'
ability to generate sufficient revenues from those hotels which are leased to
them). A failure or delay to make such payments may be caused by reductions in
revenue from such hotels or in the net operating income of the Operating Company
or the Lessees or otherwise. Any failure or delay by the Operating Company or
the Lessees in making rent payments may adversely affect the Corporation's
ability to make distributions to stockholders.
Lack of Control Over Operations of Certain Hotels Leased or Managed by Third
Parties
The Companies are dependent on the ability of the Operating Company, the
Lessees and the hotel management entities that manage the hotels (the
"Operators") to manage the operations of hotels that are leased or operated by
them. Under the terms of the Participating Leases, the Companies have the
authority to review annual budgets for the hotels which are leased to the
Lessees and to approve certain items. However, the Companies are unable to
directly implement strategic business decisions with respect to the setting of
room rates, repositioning of a franchise, redevelopment of food and beverage
operations and certain similar decisions with respect to such hotels.
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Hotel Industry Risks
Operating Risks
The primary businesses of the Companies are buying, selling, leasing and
managing hotels, which are subject to operating risks common to the hotel
industry. These risks include, among other things, (i) competition for guests
from other hotels, a number of which may have greater marketing and financial
resources and experience than the Companies and the Lessees, (ii) increases in
operating costs due to inflation and other factors, which increases may not have
been offset in past years, and may not be offset in future years by increased
room rates, (iii) dependence on business and commercial travelers and tourism,
which business may fluctuate and be seasonal, (iv) increases in energy costs and
other expenses of travel, which may deter travelers and (v) adverse effects of
general and local economic conditions. These factors could adversely affect the
ability of the Lessees and the Operating Company to generate revenues and to
make lease payments and therefore the Corporation's ability to make
distributions to stockholders.
The Companies are also subject to the risk that in connection with the
acquisition of hotels and hotel operating companies it may not be possible to
transfer certain operating licenses, such as food and beverage licenses, to the
Lessees, the Operators or the Operating Company, or to obtain new licenses in a
timely manner in the event such licenses cannot be transferred. Although hotels
can provide alcoholic beverages under interim licenses or licenses obtained
prior to the acquisition of these hotels, there can be no assurance that these
licenses will remain in effect until the Corporation or the Operating Company
obtains new licenses or that new licenses will be obtained. The failure to have
alcoholic beverages licenses or other operating licenses could adversely affect
the ability of the affected Lessees, Operators or the Operating Company to
generate revenues and make lease payments to the Corporation.
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels, in general, have an ongoing need for renovations and other capital
improvements, particularly in older structures, including periodic replacement
or refurbishment of furniture, fixtures and equipment ("F, F & E"). Under the
terms of the Participating Leases, the Corporation is obligated to establish a
reserve to pay the cost of certain capital expenditures at its hotels and pay
for periodic replacement or refurbishment of F, F & E. If capital expenditures
exceed the Corporation's expectations, the additional cost could have an adverse
effect on the Corporation's cash available for distribution. In addition, the
Corporation may acquire hotels where significant renovation is either required
or desirable. Renovation of hotels involves certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
other hotels.
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Competition for Hotel Acquisition Opportunities
The Companies may be competing for investment opportunities with entities
that have substantially greater financial resources. These entities may
generally be able to accept more risk than the Companies can prudently manage,
including risks with respect to the creditworthiness of a hotel operator or the
geographic proximity of its investments. Competition may generally reduce the
number of suitable investment opportunities offered to the Companies and
increase the bargaining power of property owners seeking to sell.
Additionally, the Companies' ability to acquire additional hotels could be
negatively impacted by the paired share ownership structure because hotel
management companies, franchisees and others who historically approached Patriot
with acquisition opportunities in hopes of establishing lessee or management
relationships may not do so in the future out of concern that the Corporation
will rely primarily on the Operating Company to lease and/or manage the acquired
properties. Such persons may instead provide such acquisition opportunities to
hotel companies that will allow them to manage the properties following the
sale. This could have a negative impact on the Companies' acquisition activities
in the future.
Seasonality
The hotel industry is seasonal in nature. Revenues at certain hotels are
greater in the first and second quarters of a calendar year and at other hotels
in the second and third quarters of a calendar year. Seasonal variations in
revenue at hotels may cause quarterly fluctuations in the operating revenues of
the Operating Company and the lease revenues of the Corporation.
Real Estate Investment Risks
General Risks
The Companies' investments will be subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Corporation's real estate investments and the Companies' income and
ability to make distributions to its stockholders will be dependent upon the
ability of the Lessees, the Operators and the Operating Company to operate the
Corporation's hotels in a manner sufficient to maintain or increase revenues and
to generate sufficient income in excess of operating expenses to make rent
payments under their leases with the Corporation. Income from the Corporation's
hotels may be adversely affected by changes in national economic conditions,
changes in local market conditions due to changes in general or local economic
conditions and neighborhood characteristics, changes in interest rates and in
the availability, cost and terms of mortgage funds, the impact of present or
future environmental legislation and compliance with environmental laws, the
ongoing need for capital improvements, particularly in older structures, changes
in real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, adverse changes in zoning laws, civil
unrest, acts of God, including earthquakes and other natural disasters (which
may result in uninsured losses), acts of war and other factors which are beyond
the control of the Companies.
Value and Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the
Corporation to vary its portfolio in response to changes in economic and other
conditions will therefore be limited. If the Corporation must sell an
investment, there can be no assurance that the Corporation will be able to
dispose of it in the time period it desires or that the sales price of any
investment will recoup or exceed the amount of the Corporation's investment.
Property Taxes
The Companies' hotels and racing facilities are subject to real property
taxes. The real property taxes on hotel properties as well as the racing
facilities in which the Corporation invests may increase or decrease as property
tax rates change and as the value of the properties are assessed or reassessed
by taxing authorities. If property taxes increase, the Companies' ability to
make distributions to its stockholders could be adversely affected.
Consents of Ground Lessor Required for Sale of Certain Hotels
Certain of the Corporation's hotels and the land upon which the Bay Meadows
Racecourse, which is located in San Mateo, California and is operated by the
Operating Company (the "Racecourse"), is situated are subject to
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ground leases with third party lessors. In addition, the Corporation may acquire
hotels in the future that are subject to ground leases. Any proposed sale of a
property that is subject to a ground lease by the Corporation or any proposed
assignment of the Corporation's leasehold interest in the ground lease may
require the consent of third party lessors. As a result, the Corporation may not
be able to sell, assign, transfer or convey its interest in any such property in
the future absent the consent of such third parties, even if such transaction
may be in the best interests of the stockholders.
Environmental Matters
The operating costs of the Companies may be affected by the obligation to
pay for the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of complying with future legislation. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under, or
in such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. In addition, the presence of hazardous or toxic substances, or
the failure to remediate such property properly, may adversely affect the
owner's ability to borrow by using such real property as collateral. Persons who
arrange for the transportation, disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is or ever was owned or operated by such person. Certain environmental laws and
common law principles could be used to impose liability for releases of
hazardous materials, including asbestos-containing materials ("ACMs"), into the
environment, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released ACMs or
other hazardous materials. Environmental laws may also impose restrictions on
the manner in which a property may be used or transferred or in which businesses
may be operated, and these restrictions may require expenditures. In connection
with the ownership and operation of any of the Corporation's hotels, the
Companies, the Lessees or the Operators may be potentially liable for any such
costs. The cost of defending against claims of liability or remediating
contaminated property and the cost of complying with environmental laws could
materially adversely affect the Corporation's results of operations and
financial condition. Phase I environmental site assessments ("ESAs") have been
conducted at all of the Corporation's hotels and the Racecourse by qualified
independent environmental engineers. The purpose of Phase I ESAs is to identify
potential sources of contamination for which any of the Corporation's hotels or
the Racecourse may be responsible and to assess the status of environmental
regulatory compliance. The ESAs have not revealed any environmental liability or
compliance concerns that the Corporation believes would have a material adverse
effect on its business, assets, results of operations or liquidity, nor is the
Corporation aware of any such liability or concerns. Nevertheless, it is
possible that these ESAs did not reveal all environmental liabilities or
compliance concerns or that material environmental liabilities or compliance
concerns exist of which the Corporation is currently unaware. The Corporation
has not been notified by any governmental authority, and has no other knowledge
of, any material noncompliance, liability or claim relating to hazardous or
toxic substances or other environmental substances in connection with any of the
hotels or the Racecourse.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accomodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that the Companies are not
in compliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. If the Companies were required to make
modifications to comply with the ADA, the ability of the Companies to make
expected distributions to their stockholders could be adversely affected.
Uninsured and Underinsured Losses
Each of the Participating Leases specifies comprehensive insurance to be
maintained on each of the applicable leased hotels, including liability, fire
and extended coverage. The Corporation believes such specified coverage is of
the type and amount customarily obtained for or by an owner of hotels. Leases
for subsequently acquired hotels (including those leased to the Operating
Company) will contain similar provisions. However, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes and floods, that
may be uninsurable or not economically insurable. The Board of Directors and
management of each of the Companies will use their discretion in determining
amounts, coverage limits and deductibility provisions of insurance, with a view
to maintaining appropriate insurance coverage on the investments of the
Corporation or the Operating Company, as the case may be, at a reasonable cost
and on suitable terms. This may result in insurance coverage that, in the event
of a substantial loss, would not be sufficient to pay the full current market
value or current replacement cost of the lost investment of the Corporation or
the Operating Company, as the case may be. Inflation, changes in building codes
and ordinances, environmental considerations, and other factors also might make
it infeasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the insurance
proceeds received by the Corporation or the Operating Company might not be
adequate to restore its economic position with respect to such property.
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Acquisition and Development Risks
The Companies currently intend to pursue acquisitions of additional hotels
and hotel operating companies and, under appropriate circumstances, may pursue
development opportunities. Acquisitions entail risks that such acquired hotels
or hotel operating companies will fail to perform in accordance with
expectations and that estimates of the cost of improvements necessary to market,
acquire and operate properties will prove inaccurate as well as general risks
associated with any new real estate or operating company acquisition. In
addition, hotel development is subject to numerous risks, including risks of
construction delays or cost overruns that may increase project costs, new
project commencement risks such as receipt of zoning, occupancy and other
required governmental approvals and permits and the incurrence of development
costs in connection with projects that are not pursued to completion. The fact
that the Corporation generally must distribute 95% of its ordinary taxable
income in order to maintain its qualification as a REIT may limit the
Corporation's ability to rely upon lease income from its hotels or subsequently
acquired properties to finance acquisitions or new developments. As a result, if
debt or equity financing were not available on acceptable terms, further
acquisitions or development activities might be curtailed or the Corporation's
cash available for distribution might be adversely affected.
Dependence on Management Contracts
Management contracts are acquired, terminated, renegotiated or converted to
franchise agreements in the ordinary course of the Companies' business. While,
as of January 6, 1998, the average remaining term of the Companies' management
contracts was approximately 13 years, these management contracts generally may
be terminated by the owner of the hotel property if the hotel manager fails to
meet certain performance standards, if the property is sold to a third party, if
the property owner defaults on indebtedness encumbering the property and/or upon
a foreclosure of the property. Other grounds for termination of the Companies'
upscale hotel management contracts include a hotel owner's election to close a
hotel and certain business combinations involving the Companies in which the
Companies' name or current management team does not survive.
There can be no assurance that the Companies will be able to replace
terminated management contracts, or that the terms of renegotiated or converted
contracts will be as favorable as the terms that existed before such
renegotiation or conversion. The Companies also will be subject to the risk of
deterioration in the financial condition of a hotel owner and such owner's
ability to pay management fees to the Companies. In addition, in certain
circumstances, the Companies may be required to make loans to or capital
investments or advances in hotel properties in connection with management
contracts. A material deterioration in the operating results of one or more of
these hotel properties and/or a loss of the related management contracts could
adversely affect the value of the Companies' investment in such hotel
properties.
Risks of Operating Hotels Under Franchise or Brand Affiliations
Certain of the Corporation's hotels are operated under franchise or brand
affiliations. In addition, hotels in which the Corporation subsequently invests
may be operated pursuant to franchise or brand affiliations. The continuation of
the franchise licenses relating to the franchised hotels (the "Franchise
Licenses") is subject to specified operating standards and other terms and
conditions. The continued use of a brand is generally contingent upon the
continuation of the management agreement related to that hotel with the branded
Operator. Franchisors typically inspect licensed properties periodically to
confirm adherence to operating standards. Action on the part of any of the
Companies, the Lessees or the Operators could result in a breach of such
standards or other terms and conditions of the Franchise Licenses and could
result in the loss or cancellation of a Franchise License. It is possible that a
franchisor could condition the continuation of a Franchise License on the
completion of capital improvements which the Corporation's Board of Directors
determines are too expensive or otherwise unwarranted in light of general
economic conditions or the operating results or prospects of the affected hotel.
In that event, the Corporation's Board of Directors may elect to allow the
Franchise License to lapse which could under certain circumstance result in the
Corporation incurring significant costs for terminating such Franchise License.
In any case, if a franchise or brand affiliation is terminated, the Corporation
and the Lessee may seek to obtain a suitable replacement franchise or brand
affiliation, or to operate the hotel independent of a franchise or brand
affiliation. The loss of a franchise or brand affiliation could have a material
adverse effect upon the operations or the underlying value of the hotel covered
by the franchise or brand affiliation because of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the franchisor or brand owner.
Horse Racing Industry Risks
The Operating Company is engaged in the business of conducting and offering
pari-mutuel wagering in thoroughbred horse racing at the Racecourse. Such
operations are contingent upon the continued governmental acceptance of such
operations as forms of legalized gambling. As a form of gambling, pari-mutuel
wagering is subject to extensive licensing and regulatory control by the
California Horse Racing Board (the "CHRB") and other California authorities.
These regulatory authorities have broad powers with respect to the licensing of
gaming operations, and may revoke, suspend, condition or limit the gaming
operations of the Operating Company. The CHRB also has the discretion to limit
the number of days and dates on which the Operating Company may conduct live
horse racing. No assurance can be given as to how many, or which, horse racing
days the CHRB will allocate to the Operating Company in the future, nor can
there by any assurance that an issued license will not be modified or revoked.
Any change in CHRB regulations or how many, or which, horse racing days are
allocated to the Operating Company could have a material adverse effect on the
Operating Company's financial condition and results of operations.
On July 1, 1997, the Corporation (formerly known as California Jockey Club,
"Cal Jockey") merged (the "Cal Jockey Merger") with Patriot, with the
Corporation being the surviving corporation. Prior to the Cal Jockey Merger, the
Operating Company (then known as Bay Meadows Operating Company, "Bay Meadows")
was licensed by the CHRB for its 1997 horse racing season to hold a split
thoroughbred horse racing meet at the Racecourse and to accept pari-mutuel
wagers. Although the Operating Company has retained certain members of Bay
Meadows' former management and personnel to continue to manage these horse
racing operations, there can be no assurance that the Operating Company will be
able to continue to employ said management and personnel. Failure to retain such
management and personnel could have a material adverse effect on the results of
operations and financial condition of the Operating Company.
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THE COMPANIES
The Corporation
The Corporation is a self-administered REIT under the Code. The Corporation
owns interests in a portfolio of hotels which are diversified by franchise or
brand affiliation and serve primarily major U.S. business centers, including
Atlanta, Boston, Chicago, Cleveland, Dallas, Denver, Houston, Miami, San
Francisco and Seattle. In addition to hotels catering primarily to business
travelers, the Corporation's portfolio also includes world-class resort hotels
in Scottsdale and Tucson, Arizona; Carmel, California; and Telluride, Colorado
and prominent hotels in major tourist destinations, including Fort Lauderdale,
Florida; New Orleans, San Antonio and San Diego. The Corporation also leases
approximately 174 acres of land in San Mateo, California upon which the
Racecourse is situated.
On July 1, 1997, the Corporation (formerly known as Cal Jockey) and Patriot
consummated the Cal Jockey Merger, with the Corporation being the surviving
corporation. Upon completion of the Cal Jockey Merger, the Corporation and the
Operating Company were the surviving entities, each with a limited partnership
subsidiary which holds substantially all of its assets and conducts
substantially all of its operations. As a result of the Cal Jockey Merger, the
Corporation became one of two hotel REITs with the paired share ownership
structure.
On December 2, 1997, the Corporation and the Operating Company entered into
the Interstate Merger Agreement, pursuant to which Interstate will merge with
and into the Corporation, with the Corporation being the surviving company. Upon
consummation of the Interstate Merger, all of the hotels which are currently
owned or leased by Interstate will be owned or leased by the Corporation and
leased or subleased to the Operating Company.
In connection with the Interstate Merger, the Corporation has entered into a
non-binding letter of intent with Marriott International, Inc. ("Marriott
International"), pursuant to which over the next two years the Corporation will
terminate franchise agreements with Marriott International related to certain
hotels owned by Interstate and convert such hotels to the Wyndham brand. In
return, the Operating Company expects to enter into management agreements with
Marriott International with respect to certain other Marriott hotels currently
owned by Interstate which will be owned by the Corporation and leased to the
Operating Company following the Interstate Merger. These management agreements
will be terminable upon termination of such franchise agreements.
On January 5, 1998, the Corporation and Wyndham consummated the
Wyndham Acquisition, with the Corporation being the surviving company. Upon
consummation of the Wyndham Acquisition, Patriot American Hospitality Operating
Company changed its name to "Wyndham International, Inc."
Pursuant to the Wyndham Acquisition, the Corporation acquired Wyndham's
portfolio of owned and leased hotels, management and franchise agreements for
Wyndham's managed and franchised properties throughout North America, management
and franchise agreements for properties which are currently closed for
renovation or construction or are in the process of being converted to the
Wyndham brand, and Wyndham's proprietary brand names, including Wyndham/SM/,
Wyndham Garden(R) and Wyndham Hotels and Resorts/SM/. In connection with the
Wyndham Acquisition, the Corporation also acquired from partnerships affiliated
with members of the Trammell Crow family certain full-service Wyndham-branded
hotels.
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As part of their ongoing businesses, the Companies continually engage in
discussions with public and private real estate entities, including, without
limitation, current lessees of the Companies' hotels, regarding possible
portfolio or single asset acquisitions, as well as the acquisition of hotel
leasing and management operations. No assurances can be made that the Companies
will acquire any such acquisition opportunities.
The Corporation conducts substantially all of its operations through the
Realty Partnership, which owns, directly and through its subsidiaries, the
Corporation's interests in each of its hotels. Through PAH GP and PAH LP, the
Corporation holds the sole general partnership interest and a limited
partnership interest, respectively, in the Realty Partnership.
Since 1983, the shares of Corporation Common Stock have been paired and have
traded together with the shares of Operating Company Common Stock as a single
unit pursuant to a stock pairing agreement. The terms of the stock pairing
agreement are set forth in the Pairing Agreement, dated as of February 17, 1983
and amended from time to time thereafter, by and between the Corporation and the
Operating Company (the "Pairing Agreement"). Since the Cal Jockey Merger, the
Paired Common Stock has been listed on the NYSE under the symbol "PAH."
The Corporation's principal executive offices are located at 1950 Stemmons
Freeway, Suite 6100, Dallas, Texas 75207 and its telephone number at that
location is (214) 863-1000.
The Operating Company
The Corporation leases certain of its hotels to the Operating Company. The
Operating Company is also engaged in the business of conducting and offering
pari-mutuel wagering on thoroughbred horse racing at the Racecourse. As
described above, shares of Operating Company Common Stock are paired and trade
together with the shares of Corporation Common Stock as a single unit on the
NYSE pursuant to the Pairing Agreement. The Operating Company conducts
substantially all of its operations through the Operating Partnership, which
owns, directly and through its subsidiaries, the Operating Company's assets.
The Operating Company holds the sole general partnership interest and a limited
partnership interest in the Operating Partnership.
The Operating Company's principal executive offices are located at 1950
Stemmons Freeway, Suite 6100, Dallas, Texas 75207 and its telephone number at
that location is (214) 863-1000.
DESCRIPTION OF CAPITAL STOCK
The rights of stockholders of the Corporation and the Operating Company are
governed by the Amended and Restated Certificate of Incorporation of the
Corporation (the "Corporation Charter") and the Amended and Restated Certificate
of Incorporation of the Operating Company (the "Operating Company Charter" and,
together with the Corporation Charter, the "Charters") and the Amended and
Restated Bylaws of the Corporation (the "Corporation Bylaws") and the Amended
and Restated Bylaws of the Operating Company (the "Operating Company Bylaws"
and, together with the Corporation Bylaws, the "Bylaws"). The rights of such
stockholders are also governed by the terms of the Pairing Agreement and the
Cooperation Agreement. The following discussion summarizes certain of the key
terms of the Charters, the Bylaws, the Pairing Agreement and the Cooperation
Agreement. This summary does not purport to be complete and is subject to and
qualified in its entirety by reference to the Pairing Agreement,
the Cooperation Agreement, the Charters and the Bylaws.
Under the Charters, each of the Corporation and the Operating Company have
the authority to issue 650,000,000 shares of Corporation Common Stock and
Operating Company Common Stock, respectively, 100,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"), and 750,000,000 shares
of excess stock, par value $.01 per share (the "Excess Stock").
Issuances of shares of Corporation Common Stock, Operating Company Common
Stock and other equity securities of the Corporation and the Operating Company
are subject to the terms and conditions of the Pairing Agreement and the
Cooperation Agreement.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including elections of directors. Except as
otherwise required by law, by the terms of Patriot Series A Preferred Stock (see
discussion below), by the Charters with respect to Excess Stock or provided in
any resolution adopted by either of the Corporation Board or the Operating
Company Board with respect to any series of Preferred Stock, the holders of
Paired Common Stock exclusively possess all voting power. The Charters do not
provide for cumulative voting in the election of directors. Subject to the terms
of the Patriot Series A Preferred Stock and any preferential rights of any
outstanding series of Preferred Stock and the rights of holders of Excess Stock,
the holders of shares of Paired Common Stock are entitled to such dividends as
may be declared from time to time by the Corporation Board and the Operating
Company Board from funds available for such purpose, and upon liquidation are
entitled to receive pro rata all assets of the Corporation and the Operating
Company available for distribution to such holders. All shares of Paired Common
Stock will, when issued, be fully paid and nonassessable, and the holders
thereof will not have preemptive rights.
Holders of Paired Common Stock have no conversion, sinking fund or
redemption rights, or preemptive rights to subscribe for any securities of the
Corporation or the Operating Company.
Each of the Corporation and the Operating Company intends to furnish its
stockholders with annual reports containing audited consolidated financial
statements and an opinion thereon expressed by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
Pursuant to the Delaware General Corporation Law (the "DGCL"), a merger or
consolidation involving either of the Corporation or the Operating Company
requires the approval of a majority of the outstanding shares of the constituent
corporation to the transaction entitled to vote on such a matter.
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Preferred Stock
Each of the Corporation Board and the Operating Company Board is
authorized, subject to the provisions of the Cooperation Agreement (see
discussion below), to provide for the issuance of shares of Preferred Stock in
one or more series, to establish the number of shares in each series and to fix
the designation, powers, preferences and rights of each such series and the
qualifications, limitations or restrictions thereof. Because each of the
Corporation Board and the Operating Company Board has the power to establish the
preferences and rights of each class or series of Preferred Stock, each such
Board of Directors may afford the holders of any series or class of Preferred
Stock preferences, powers and rights, voting or otherwise, senior to the rights
of holders of shares of Corporation Common Stock or Operating Company Common
Stock, respectively. The issuance of shares of Preferred Stock could have the
effect of delaying or preventing a change in control of the Corporation or the
Operating Company.
Patriot Series A Preferred Stock
In connection with the Wyndham Acquisition, the Corporation issued
4,860,876 shares of Patriot Series A Preferred Stock to CF Securities, L.P., the
principal shareholder of Wyndham prior to the Wyndham Acquisition, in accordance
with the provisions of the Certificate of Designation for the Patriot Series A
Preferred Stock (the "Certificate of Designation"). The Patriot Series A
Preferred Stock is a series designated out of the Preferred Stock of the
Corporation. The following is a summary of certain provisions of the Patriot
Series A Preferred Stock. This summary does not purport to be complete and is
subject to, and qualified in its entirety by, the provisions of the Corporation
Charter and the Certificate of Designation.
Each share of Patriot Series A Preferred Stock is entitled to dividends
when, as and if declared and paid on the shares of Paired Common Stock in an
amount equal to the sum of the dividends paid on a share of Paired Common Stock.
Dividends on the Patriot Series A Preferred Stock will rank pari passu with
dividends on the shares of Paired Common Stock.
The Patriot Series A Preferred Stock is entitled to one vote per share,
voting together as a class with the shares of the Corporation Common Stock, on
any matter submitted for a vote of the stockholders of the Corporation. The
Patriot Series A Preferred Stock is convertible at any time into shares of
Paired Common Stock on a one-for-one basis by the holders thereof, subject to
the Ownership Limit provisions set forth in the Charters. In addition, the
Patriot Series A Preferred Stock is mandatorily convertible at any time and in
any amount upon notice by the Corporation, provided that the amount so converted
will not cause a violation of the Ownership Limit provisions set forth in the
Charters.
Upon a liquidation, dissolution or winding up of the Corporation, each
holder of Patriot Series A Preferred Stock is entitled to receive, on a per
share basis, (i) the Dissolution Preference (as defined below) and (ii) a
ratable share, together with the holders of Corporation Common Stock, in the
assets of the Corporation available for distribution on the Corporation Common
Stock. The term "Dissolution Preference" means, as applicable, either (A) if the
Operating Company has previously been or is simultaneously liquidated, dissolved
or wound up, a preference equal to the amount per share of Operating Company
Common Stock which was or will be received by the holders of Operating Company
Common Stock upon the liquidation, dissolution or winding up of the Operating
Company or (B) if the Operating Company has not previously been or is not
simultaneously liquidated, dissolved or wound up, a preference per share equal
to an amount determined by an independent investment banker selected by the
Corporation Board (with the agreement of the majority holder of the Patriot
Series A Preferred Stock, if there is one at such time) to be equal to the then
current value of a share of Operating Company Common Stock, without regard to
the paired share structure of the Companies. If the Operating Company has been
previously liquidated, dissolved or wound up, then any Dissolution Preference
will accrue interest at the applicable federal rate from the date the
liquidating distributions were made on the Operating Company Common Stock unless
and until paid.
Excess Stock
Upon the violation of certain transfer restrictions contained in the
Charters, shares of any class or series of outstanding capital stock of the
Corporation and the Operating Company (collectively, "Equity Stock") will
automatically be converted into an equal number of shares of Excess Stock of the
Corporation or the Operating Company, as the case may be, and transferred to a
trust (a "Trust"). See "Restrictions on Transfer of Capital Stock." Such shares
of Excess Stock held in trust shall remain outstanding shares of stock of the
Corporation and the Operating Company and shall be held by the trustee of the
Trust (the "Trustee") for the benefit of a charitable beneficiary (a
"Beneficiary"). The Trustee and the Beneficiary shall be designated pursuant to
the terms of the Pairing Agreement. Each share of Excess Stock shall entitle the
holder to the number of votes the holder would have if such share of Excess
Stock was a share of Equity Stock of the same class or series from which such
Excess Stock was converted, on all matters submitted to a vote at any meeting of
stockholders. The Trustee, as record holder of the Excess Stock, shall be
entitled to vote all shares of Excess Stock. Each share of Excess Stock shall be
entitled to the same dividends and distributions (as to timing and amount) as
may be declared by the Corporation Board or the Operating Company Board, as the
case may be, as shares of the class or series of Equity Stock from which such
Excess Stock was converted. The Trustee of the Trust, as record holder of the
shares of the Excess Stock, shall be entitled to receive all dividends and
distributions and shall hold such dividends and distributions in trust for the
benefit of the Beneficiary of the Trust. Upon the sale of the shares of Excess
Stock to either a permitted transferee under the Charters (a "Permitted
Transferee") or to the Corporation or the Operating Company, as the case may be,
such shares of Excess Stock will be automatically converted into an equal number
of shares of Equity Stock of the same class or series from which such Excess
Stock was converted. Pursuant to the Pairing Agreement, the conversion of Equity
Stock of the Corporation or the Operating Company into Excess Stock, or the
conversion of Excess Stock of the Corporation or the Operating Company into
Equity Stock, requires conversion of the corresponding share of the Corporation
or the Operating Company, as the case may be.
The Pairing Agreement
Under the Pairing Agreement, shares of Corporation Common Stock and
Operating Company Common Stock shall not be transferrable or transferred on the
books of such company unless a simultaneous transfer is made by the same
transferor to the same transferee of an equal number of shares of common stock
of the other company. Neither the Corporation nor the Operating Company may
issue shares of Corporation Common Stock or Operating Company Common Stock, as
the case may be, unless provision has been made for the simultaneous issuance or
transfer to the same person of the same number of shares of common stock of the
other company and for the pairing of such shares. Each certificate issued for
Corporation Common Stock or Operating Company Common Stock must be issued "back-
to-back" with a certificate evidencing the same number of shares of common stock
of the other company. Each certificate must bear a conspicuous legend on its
face referring to the restrictions on ownership and transfer under the Pairing
Agreement. The Pairing Agreement provides that each of the Corporation and the
Operating Company may issue shares of capital stock of any class or series
(other than Corporation Common Stock and Operating Company Common Stock),
irrespective of whether such shares are convertible into shares of Corporation
Common Stock and Operating Company Common Stock, without making provision for
the simultaneous issuance or transfer to the same person of the same number of
shares of that same class or series of capital stock of the other company and
for the pairing of such shares.
In addition, pursuant to the Pairing Agreement, neither the Corporation nor
the Operating Company may declare a stock dividend consisting in whole or in
part of Corporation Common Stock or Operating Company Common Stock, issue any
rights or warrants to purchase any shares of Corporation Common Stock or
Operating Company Common Stock or subdivide, combine or otherwise reclassify the
shares of Corporation Common Stock or Operating Company Common Stock unless the
other company simultaneously takes the same or equivalent action.
Pursuant to the Pairing Agreement, as desired from time to time, but no
less than once each calendar year, the Corporation and the Operating Company are
required to jointly arrange for the determination of the fair market value of
the Operating Company Common Stock outstanding on such valuation date. Such
valuation may be used from time to time by the Corporation and the Operating
Company to change the allocation between the companies of the net proceeds from
any issuance of paired equity. The Pairing Agreement may be terminated by the
Board of Directors of either the Corporation or the Operating Company upon 30
days written notice to the other company that such termination has been approved
by the affirmative vote of the holders of a majority of the outstanding shares
of common stock of the company seeking to terminate the agreement. In the event
the Pairing Agreement is terminated, the Corporation and the Operating Company
have agreed to cooperate to effect a separation of the paired shares of both
companies so as to permit the separate issuance and transfer thereof.
The Cooperation Agreement
Although a paired share structure may result in stockholders of the paired
companies realizing certain economic benefits not realizable by stockholders of
companies not having a paired share structure, each paired company is a separate
corporate entity with a separate Board of Directors and different management
teams. Accordingly, the interests of the Board of Directors and management of
the paired companies may conflict and such conflicts may possibly rise to
disputes between the companies. Prior to the Cal Jockey Merger, Cal Jockey and
Bay Meadows experienced certain disagreements and disputes, some of which
resulted in litigation between the companies. The Corporation and the Operating
Company believe that these disagreements and disputes compromised the ability of
Cal Jockey and Bay Meadows to operate the companies in a manner designed to
maximize the potential economic benefits that could be realized for stockholders
of the paired companies. The Corporation and the Operating Company believe that
to increase the likelihood that the stockholders of the two companies may fully
realize the economic benefits of the paired share structure, it is in the best
interests of the companies and their respective stockholders that the risk of
potential conflicts between the two companies be minimized. Accordingly, the
Corporation and the Operating Company have entered into the Cooperation
Agreement.
Under the terms of the Cooperation Agreement, the Corporation and Operating
Company are obligated to cooperate to the fullest extent possible in the conduct
of their respective operations and to take all necessary action to preserve the
paired share structure and to maximize the economic and tax advantages
associated therewith. One of the primary objectives of the Cooperation Agreement
is to set forth the understanding of the Companies that the Corporation shall
have the sole right and power to authorize, effect and control issuances of
paired equity (including securities convertible into paired equity) of the two
companies. The Cooperation Agreement provides for a number of corporate
governance mechanisms designed to accomplish this objective and the other
objectives set forth therein. These mechanisms include (i) the establishment of
a cooperation committee that normally considers and proposes the agenda listing
the matters to be considered at any joint meeting of the Corporation Board and
the Operating Company Board, (ii) the establishment of corporate matters
categories and procedures for the consideration and reconsideration of matters
brought before the Corporation Board and the Operating Company Board, (iii) the
establishment of a hotel acquisitions committee that is to analyze, evaluate and
consider potential acquisitions by the Companies of hotel properties and related
assets, (iv) provisions that govern the sole authority of the Corporation to
authorize, effect and control issuances of paired equity (including securities
convertible into paired equity) of the two companies, and (v) the establishment
of an unpaired equity committee that will have the sole authority to authorize
and approve issuances of unpaired equity by the Operating Company. Unless
earlier terminated at any time by the mutual consent of the Corporation and the
Operating Company, the Cooperation Agreement will terminate on the date that is
12 months after the date on which the Pairing Agreement is no longer in effect.
In the event of any termination of the Cooperation Agreement neither the
Corporation nor the Operating Company (or any of its directors, officers,
employees or agents will have any liabilty or further obligation to any other
party under the Cooperation Agreement.
Transfer Agent
The transfer agent and registrar for the Paired Common Stock is American
Stock Transfer & Trust Company of New York, New York.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK
For the Corporation to qualify as a REIT under the Code, among other
things, not more than 50% in value of its outstanding capital stock may be
owned, directly or indirectly, by five or fewer individuals (defined in the Code
to include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year (in each case, other than the first such year). In
addition, the Corporation must meet certain requirements regarding the nature of
its gross income in order to qualify as a REIT. One such requirement is that at
least 75% of the Corporation's gross income for each year must consist of rents
from real property and income from certain other real property investments. The
rents received by Realty Partnership and its subsidiary partnerships from the
Lessees will not qualify as rents from real property if the Corporation owns,
actually or constructively, 10% or more of the ownership interests in any Lessee
within the meaning of Section 856(d)(2)(B) of the Code, the result of which
would be the loss of REIT status for the Corporation. See "Certain Federal
Income Tax Considerations--REIT Qualification."
In order to protect the Corporation against the risk of losing its status
as a REIT and to otherwise protect the Corporation from the consequences of a
concentration of ownership among its stockholders, the Charters provide, subject
to certain exceptions, that no single person (which includes a "group" of
persons) (other than an entity that is either a trust as described in Section
401(a) of the Code and exempt from tax under Section 501(a) of the Code or a
person that is registered under the Investment Company Act of 1940 (a "Look-
Through Entity")) may Beneficially Own or Constructively Own (as those terms are
defined below) in excess of 8.0% of the outstanding shares of any class or
series of Equity Stock of the Corporation or the Operating Company (the
"Ownership Limit"), unless the Ownership Limit is waived by the Board of
Directors of the relevant company in accordance with the Charters. Any transfer
of Equity Stock of the Corporation or the Operating Company that would (i)
result in any person or entity owning, directly or indirectly, shares of Equity
Stock of the Corporation or the Operating Company in excess of the Ownership
Limit, unless the Ownership Limit is waived by the Board of Directors of the
relevant corporation in accordance with the Charters, (ii) result in the capital
stock of the Corporation being beneficially owned (within the meaning of Section
856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section
856(a)(5) of the Code, (iii) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code or (iv) cause the Corporation
to own, actually or constructively, 10% or more of the ownership interests in a
tenant of the real property of the Corporation or a subsidiary of the
Corporation within the meaning of Section 856(d)(2)(B) of the Code, shall be
void ab initio, and the intended transferee will acquire no right or interest in
such shares of Equity Stock. For purposes of the Charters, "Beneficial
Ownership" means, with respect to any individual or entity, ownership of shares
of Equity Stock equal to the sum of (i) the shares of Equity Stock directly or
indirectly owned by such individual or entity, (ii) the number of shares of
Equity Stock treated as owned directly or indirectly by such individual or
entity through the application of the constructive ownership rules of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code, and (iii) the
number of shares of Equity Stock which such individual or entity is deemed to
beneficially own pursuant to Rule 13d-3 under the Exchange Act. The Charters
provide that pension plans described in Section 401(a) of the Code and mutual
funds registered under the Investment Company Act of 1940 are treated as Look-
Through Entities that are subject to a 9.8% "Look-Through Ownership Limit."
Pension plans and mutual funds are among the entities that are not treated as
holders of stock under the "five or fewer" requirement and the beneficial owners
of such entities will be counted as holders for this purpose. For purposes of
computing the percentage of shares of any class or series of Equity Stock of the
Corporation or the Operating Company Beneficially Owned by any person or entity,
any shares of Equity Stock of the Corporation or the Operating Company which are
deemed to be Beneficially Owned by such person or entity pursuant to Rule 13d-3
of the Exchange Act but which are not outstanding shall be deemed to be
outstanding. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially
Owned" shall have correlative meanings. Also for purposes of the Charters,
"Constructive Ownership" means ownership of shares of Equity Stock by an
individual or entity who is or would be treated as a direct or indirect owner of
such shares of Equity Stock through the application of Section 318 of the Code,
as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
Upon the occurrence of a purported transfer of shares that would result in
a violation of any of the foregoing transfer restrictions, that number of shares
that violate the transfer restrictions shall be automatically converted into an
equal number of shares of Excess Stock and transferred to a Trust for the
benefit of the Beneficiary, effective on the Trading Day (as defined below)
prior to the date of the purported transfer of such shares, and the record
holder of the shares of Equity Stock that are converted into shares of Excess
Stock (a "Prohibited Owner") shall submit such number of shares of Equity Stock
to the Corporation or the Operating Company, as the case may be, for
registration in the name of the Trustee. In the case of Equity Stock that is
paired, upon the conversion of a share of Equity Stock into a share of Excess
Stock, the corresponding paired share of that same class or series of Equity
Stock of the other company shall simultaneously be converted into a share of
Excess Stock; such shares of Excess Stock shall be paired and shall be
simultaneously transferred to a Trust. Upon the occurrence of such a conversion
of shares of any class or series of Equity Stock into an equal number of shares
of Excess Stock, such shares of Equity Stock shall be automatically retired and
canceled, without any action required by the Board of Directors of either of the
Corporation as the Operating Company, and shall thereupon be restored to the
status of authorized but unissued shares of the particular class or series of
Equity Stock from which such Excess Stock was converted and may be reissued as
that particular class or series of Equity Stock.
Shares of Equity Stock that are converted into shares of Excess Stock and
transferred to a Trust shall be held in trust for the exclusive benefit of the
Beneficiary. Shares of Excess Stock will remain issued and outstanding shares of
stock. Each share of Excess Stock shall be entitled to the same dividends and
distributions (as to both timing and amount) as may be declared by the
Corporation Board or the Operating Company Board, as the case may be, as shares
of the class or series of Equity Stock from which such Excess Stock was
converted. The Trustee, as record holder of the shares of Excess Stock, shall be
entitled to receive all dividends and distributions and shall hold all such
dividends or distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to such shares of Excess Stock shall repay to the
Trust the amount of any dividends or distributions received by it (i) that are
attributable to any shares of Equity Stock that have been converted into shares
of Excess Stock and (ii) the record date of which was on or after the date that
such shares were converted into shares of Excess Stock. The Corporation and the
Operating Company shall take all measures that they determine reasonably
necessary to recover the amount of any such dividend or distribution paid to a
Prohibited Owner, including, if necessary, withholding any portion of future
dividends or distributions payable on shares of Equity Stock beneficially owned
or constructively owned by the person who, but for the restrictions on transfer,
would constructively own or beneficially own the shares of Excess Stock and, as
soon as reasonably practicable following receipt or withholding thereof, shall
pay over to the Trust for the benefit of the Beneficiary the dividends so
received or withheld, as the case may be.
In the event of any voluntary or involuntary liquidation of, or winding up
of, or any distribution of the assets of, the Corporation or the Operating
Company, each holder of shares of Excess Stock shall be entitled to receive,
ratably with each other holder of shares of Equity Stock of the same class or
series from which the Equity Stock was converted, that portion of the assets of
the Corporation or the Operating Company, as the case may be, that is available
for distribution to the holders of such class or series of Equity Stock. The
Trust shall distribute to the Prohibited Owner the amounts received upon such
liquidation, dissolution, or winding up, or distribution; provided, however,
that the Prohibited Owner shall not be entitled to receive amounts in excess of,
in the case of a purported transfer in which the Prohibited Owner gave value for
shares of Equity Stock and which transfer resulted in the conversion of the
shares into shares of Excess Stock, the price per share, if any, such Prohibited
Owner paid for the shares of Equity Stock (which, in the case of Equity Stock
that is paired, shall equal the price paid per share multiplied by the most
recent Valuation Percentage (as defined below)) and, in the case of a non-
transfer event or transfer in which the Prohibited Owner did not give value for
such shares (e.g., if the shares were received through a gift or devise) and
which non-transfer event or transfer, as the case may be, resulted in the
conversion of the shares into shares of Excess Stock, the price per share equal
to the Market Price (as defined below) on the date of such non-transfer event or
transfer. Any remaining amount in such Trust shall be distributed to the
Beneficiary.
Each share of Excess Stock shall entitle the holder to the number of votes
the holder would have, if such share of Excess Stock was a share of Equity Stock
of the same class or series from which such Excess Stock was converted, on all
matters submitted to a vote at any meeting of stockholders. The holders of
shares of Excess Stock converted from the same class or series of Equity Stock
shall vote together with the holders of such Equity Stock as a single class on
all such matters. The Trustee, as record holder of the shares of Excess Stock,
shall be entitled to vote all shares of Excess Stock. Any vote taken by a
Prohibited Owner prior to the discovery by the Corporation or the Operating
Company, as the case may be, that the shares of Equity Stock were exchanged for
shares of Excess Stock will be rescinded as void ab initio.
The Trustee shall have the exclusive and absolute right to designate one or
more Permitted Transferees of any and all shares of Excess Stock if the
Corporation or the Operating Company or both, in the case of Excess Stock that
is paired, to exercise its or their option with respect to such shares as
described below; provided, however, that (i) the Permitted Transferee so
designated purchases for valuable consideration (whether in a public or private
sale) the shares of Excess Stock (which, in the case of Excess Stock that is
paired, shall equal the price paid per share multiplied by the most recent
Valuation Percentage) and (ii) the Permitted Transferee so designated may
acquire such shares of Excess Stock without violating any of the aforementioned
transfer restrictions and without such acquisition resulting in the exchange of
such shares of Equity Stock so acquired for shares of Excess Stock and the
transfer of such shares of Excess Stock to a Trust. Upon the designation by the
Trustee of a Permitted Transferee, the Trustee shall cause to be transferred to
the Permitted Transferee that number of shares of Excess Stock of the
Corporation or the Operating Company, as the case may be, acquired by the
Permitted Transferee. Upon such transfer of the shares of Excess Stock to the
Permitted Transferee, such shares of Excess Stock shall be automatically
converted into an equal number of shares of Equity Stock of the same class and
series from which such Excess Stock was converted. In the case of Equity Stock
that is paired, upon the conversion of a share of Excess Stock into a share of
Equity Stock of the same class or series from which such Excess Stock was
converted, the corresponding paired share of Excess Stock of the other company
shall simultaneously be converted into a share of Equity Stock of the same class
or series from which such Excess Stock was converted and such shares of Equity
Stock shall be paired. Upon the occurrence of such a conversion of shares of
Excess Stock into an equal number of shares of Equity Stock, such shares of
Excess Stock shall be automatically retired and canceled, without any action
required by the Corporation Board or the Operating Company Board, and shall
thereupon be restored to the status of authorized but unissued shares of Excess
Stock and may be reissued as such. The Trustee shall (i) cause to be recorded on
the stock transfer books of the Corporation or the Operating Company or both, in
the case of Excess Stock that is paired, that the Permitted Transferee is the
holder of record of such number of shares of Equity Stock and (ii) distribute to
the Beneficiary any and all amounts held with respect to the shares of Excess
Stock after making payment to the Prohibited Owner. If the transfer of shares of
Excess Stock to a purported Permitted Transferee shall violate any of the
aforementioned transfer restrictions including, without limitation, the
Ownership Limit or the Look-Through Ownership Limit, as the case may be, such
transfer shall be void ab initio as to that number of shares of Excess Stock
that cause the violation of any such restriction when such shares are converted
into shares of Equity Stock and the purported Permitted Transferee shall be
deemed to be a Prohibited Owner and shall acquire no rights in such shares of
Excess Stock. Such shares of Equity Stock shall be automatically re-converted
into Excess Stock and transferred to the Trust from which they were originally
sold. Such conversion and transfer to the Trust shall be effective as of the
close of trading on the Trading Day prior to the date of the transfer to the
purported Permitted Transferee and the provisions of the Charters regarding
compensation to a Prohibited Owner shall apply to such shares with respect to
any future transfer of such shares by the Trust.
A Prohibited Owner shall be entitled to receive from the Trustee following
the sale or other disposition of such shares of Excess Stock the lesser of (i)
(a) in the case of a purported transfer in which the Prohibited Owner gave value
for shares of Equity Stock and which transfer resulted in the conversion of such
shares into shares of Excess Stock, the price per share, if any, such Prohibited
Owner paid for the shares of Equity Stock (which, in the case of Excess Stock
that is paired, shall be determined based on the Valuation Percentage) and (b)
in the case of a non-transfer event or transfer in which the Prohibited Owner
did not give value for such shares (e.g., if the shares were received through a
gift or devise) and which non-transfer event or transfer, as the case may be,
resulted in the conversion of such shares into shares of Excess Stock, the price
per share equal to the Market Price on the date of such non-transfer event or
transfer and (ii) the price per share (which, in the case of Excess Stock that
is paired, shall be determined based on the Valuation Percentage) received by
the Trustee from the sale or other disposition of such shares of Excess Stock.
Any amounts received by the Trustee in respect of such shares of Excess Stock
and in excess of such amounts to be paid the Prohibited Owner shall be
distributed to the Beneficiary.
Shares of Excess Stock shall be deemed to have been offered for sale by a
Trust to the Corporation or the Operating Company or both, in the case of Excess
Stock that is paired, or a designee of such company or companies, at a price per
share equal to the lesser of (i) the price per share (which, in the case of
Excess Stock that is paired, shall be determined based on the Valuation
Percentage) in the transaction that created such shares of Excess Stock (or, in
the case of devise, gift or non-transfer event, the Market Price at the time of
such devise, gift or non-transfer event) or (ii) the Market Price on the date
either company or both companies, in the case of Excess Stock that is paired,
accept such offer. Either company or both companies, in the case of Excess Stock
that is paired, shall have the right to accept such offer for a period of 90
days following the later of (a) the date of the non-transfer event or purported
transfer which results in such shares of Excess Stock or (b) the date on which
either company or both companies, in the case of Excess Stock that is paired,
determine in good faith that a transfer or non-transfer event resulting in
shares of Excess Stock has previously occurred, if either company or both
companies, in the case of Excess Stock that is paired, do not receive a notice
of such transfer or non-transfer event. In the case of Excess Stock that is
paired, neither the Corporation nor the Operating Company shall accept such an
offer with respect to its shares of Excess Stock without the agreement of the
other company to accept such offer with respect to the corresponding shares of
its Excess Stock.
"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days ending on such date. "Closing Price" on any
date shall mean the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the NYSE or,
if the shares of Equity Stock are not listed or admitted to trading on the NYSE,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the shares of Equity Stock are listed or admitted to trading or, if the
shares of Equity Stock are not listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
or, if such system is no longer in use, the principal other automated quotation
system that may then be in use or, if the shares of Equity Stock are not quoted
by any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the shares of Equity
Stock. In the case of Equity Stock that is paired, "Market Price" shall mean the
"Market Price" for a share of Paired Common Stock multiplied by a fraction
(expressed as a percentage) determined by dividing the value for such Equity
Stock most recently determined under the Pairing Agreement over the value of a
share of Paired Common Stock most recently determined under the Pairing
Agreement (the "Valuation Percentage"). "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of Equity Stock
are listed or admitted to trading is open for the transaction of business or, if
the shares of Equity Stock are not listed or admitted to trading on any national
securities exchange, shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
Any person or entity that acquires or attempts to acquire shares of Equity
Stock in violation of the aforementioned transfer restrictions, or any person or
entity that owned shares of Equity Stock that were transferred to a Trust, shall
immediately give written notice to the Corporation or the Operating Company or
both, in the case of Equity Stock that is paired, of such event and shall
provide such other information as the appropriate company or both companies, as
the case may be, may request to determine the effect, if any, of such violation
on Patriot's status as a REIT.
Each person or entity that is an owner, actually or constructively, of
shares of Equity Stock and each person or entity that (including the stockholder
of record) is holding shares of Equity Stock for such an owner shall provide to
the Corporation or the Operating Company or both, in the case of Equity Stock
that is paired, a written statement or affidavit stating such information as the
appropriate company or both companies, as the case may be, may request to
determine the Corporation status as a REIT and to ensure compliance with the
Ownership Limit or the Look-Through Ownership Limit, as the case may be. In
addition, every person or entity that owns of record, actually or
constructively, more than 5%, or such lower percentages as required pursuant to
regulations under the Code, of the outstanding shares of any class or series of
Equity Stock of the Corporation or the Operating Company shall, within 30 days
after January 1 of each year, provide to the Corporation or the Operating
Company or both, in the case of Equity Stock that is paired, a written
statement or affidavit stating the name and address of such owner, the number of
shares of Equity Stock owned, actually or constructively, and a description of
how such shares are held.
All certificates representing shares of Equity Stock shall bear a legend
referring to the aforementioned transfer restrictions. The transfer restrictions
will continue to apply until the Corporation Board determines that it is no
longer in the best interests of the Corporation to attempt to qualify, or to
continue to qualify, as a REIT.
The restrictions on transfer contained in the Charters could have the
effect of discouraging a takeover or other transaction in which holders of some,
or a majority, of shares of Equity Stock might receive a premium from their
shares of Equity Stock over the then prevailing Market Price or which such
holders might believe to be otherwise in their best interest.
15
<PAGE>
DESCRIPTION OF REALTY PARTNERSHIP UNITS AND OPERATING PARTNERSHIP UNITS
AND REDEMPTION OF UNIT PAIRS
General
This Prospectus, and this section in particular, provides a summary of the
material terms of the Partnership Agreements. The discussion and description of
the material terms of the Partnership Agreements are subject to and qualified in
their entirety by reference to the Partnership Agreements themselves, each of
which is on file with the Commission and is incorporated by reference herein.
Each Unitholder may, subject to certain limitations contained in the
Partnership Agreements, exercise its Redemption Right with respect to a Unit
Pair and require that the Partnerships redeem all or a portion of such
Unitholder's Unit Pairs. This Redemption Right shall be exercised pursuant to a
notice of redemption (the "Notice of Redemption") delivered to the Partnerships,
with a copy delivered to the general partner of each of the Partnerships
(collectively, the "General Partners") by the Unitholder exercising the
Redemption Right. Upon redemption, a Unitholder will receive for each Unit Pair
redeemed cash in an amount equal to the market value of one share of Paired
Common Stock (subject to certain adjustments in the case of stock splits, stock
dividends or similar distributions); provided, however, that the Companies may,
in their sole discretion, by notice to the redeeming Unitholder no less than
five business days prior to the first business day that is at least 60 business
days after the receipt by the Companies of the Notice of Redemption, elect to
acquire any Unit Pair presented to the Partnerships for redemption for one share
of Paired Common Stock (subject to certain adjustments in the case of stock
splits, stock dividends or similar distributions) or for cash in the amount
described above. Each of the Partnership Agreements provides that neither of
the Companies may elect to acquire a Unit Pair tendered for redemption for a
share of Paired Common Stock unless the other company also so elects. If the
Companies do not agree to acquire such Unit Pair for a share of Paired Common
Stock, the Unit Pair shall be redeemed by each of the Companies for cash.
Each of the Companies anticipates that it generally will elect to acquire
any Unit Pairs presented to the Partnerships for redemption by the issuance of
shares of Paired Common Stock pursuant to this Prospectus rather than by paying
cash. However, under the terms of the Partnership Agreements, no redemption can
occur if the delivery of shares of Paired Common Stock would be prohibited under
the provisions of the Corporation's Charter that protect the Corporation's
qualification as a REIT. See "Restrictions on Transfers of Capital Stock." In
this circumstance, the Companies may elect to acquire any Unit Pairs presented
for redemption for cash, in lieu of Paired Common Stock.
Tax Consequences of Redemption
The following discussion summarizes certain federal income tax
considerations that may be relevant to a Unitholder who exercises his Redemption
Right.
Separate Taxation. Notwithstanding that Unit Pairs may be tendered for
redemption only in tandem - i.e., as a unit - holders of Unit Pairs will be
---
treated for U.S. federal income tax purposes as holding an equal number of units
of limited partnership interest of the Realty Partnership and units of limited
partnership interest of the Operating Partnership. The tax treatment of
distributions to holders of Unit Pairs and of any gain or loss recognized upon a
sale or other disposition of Unit Pairs must therefore be determined separately
with respect to each unit contained within a Unit Pair. The tax basis and
holding period for each unit contained within a Unit Pair also must be
determined separately.
Tax Treatment of Exchange or Redemption of Unit Pairs. If the Companies
elect to purchase Unit Pairs tendered for redemption, the REIT will purchase the
Realty Partnership Units that comprise the tendered Unit Pairs, and the
Operating Company will purchase the Operating Partnership Units that comprise
the tendered Unit Pairs. Each of the Partnership Agreements provides that the
redeeming Unitholder, the issuing partnership and the purchasing company shall
treat the transaction between the redeeming Unitholder and such company as a
sale of the purchased units by the Unitholder to such company at the time of
such redemption. Each such sale will be fully taxable to the redeeming
Unitholder and such redeeming Unitholder will be treated as realizing for tax
purposes on each sale an amount equal to the sum of (i) the cash value or the
value of the shares of Corporation Common Stock received (in the case of the
purchase of the Realty Partnership Units that comprise the tendered Unit Pairs)
or the cash value or the value of the shares of Operating Company Common Stock
received (in the case of the purchase of the Operating Partnership Units that
comprise the tendered Unit Pairs) plus (ii) the amount of any liabilities
allocable to the redeemed units at the time of the redemption (which in the case
of Realty Partnership Units includes liabilities of the Realty Partnership only
and in the case of Operating Partnership Units includes liabilities of the
Operating
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Partnership only). The determination of the amount of gain or loss is
discussed more fully below. If the Companies do not elect to purchase a
Unitholder's Unit Pairs tendered for redemption, the Realty Partnership will
redeem the Realty Partnership Units that comprise the tendered Unit Pairs, and
the Operating Partnership will redeem the Operating Partnership Units that
comprise the tendered Unit Pairs. If a partnership redeems its units for cash
that the respective company contributes to the partnership to effect such
redemption, the redemption likely would be treated for tax purposes as a sale of
such units to such company in a fully taxable transaction, although the matter
is not free from doubt. In that event, the redeeming Unitholder would be
treated as realizing on such deemed sale an amount equal to the sum of the cash
received for such units in the exchange plus the amount of any liabilities
allocable to such units at the time of the redemption. The determination of the
amount and character of gain or loss in the event of such a sale is discussed
more fully below. See "--Tax Treatment of Disposition of Unit Pairs by a
Unitholder Generally."
If the Companies do not elect to purchase Unit Pairs tendered for redemption
and a partnership redeems units for cash that is not contributed by the
respective company to effect the redemption, the tax consequences would be the
same as described in the previous paragraph, except that if the partnership
redeems less than all of a Unitholder's units in that partnership, the
Unitholder would not be permitted to recognize any loss occurring on the
transaction and would recognize taxable gain only to the extent that the cash,
plus the amount of any liabilities allocable to the redeemed Units, exceeded the
Unitholder's adjusted basis in all of such Unitholder's units in such
partnership immediately before the redemption. The same tax consequences would
result if a company contributed cash to the respective partnership to effect a
redemption, and the form of the transaction were respected for tax purposes (so
that the redemption transaction were treated as the redemption of units by the
partnership rather than a sale of units to such company).
As noted above, if the Companies do not elect to purchase Unit Pairs
tendered for redemption, the Realty Partnership will redeem the Realty
Partnership Units that comprise the tendered Unit Pairs, and the Operating
Partnership will redeem the Operating Partnership Units that comprise the
tendered Unit Pairs. There can be no assurance that the Partnerships will fund
their respective redemptions in the same manner. For example, one of the
Partnerships could fund its redemption of its Units that comprise the tendered
Unit Pairs with cash contributed by the respective company, which as noted
likely would be taxed as if the company purchased such units directly from the
tendering Unitholder, while the other partnership might fund its redemption out
of its own funds (not contributed by the respective company), which could have
different tax consequences as described above.
Tax Treatment of Disposition of Units by a Unitholder Generally. If a unit
is disposed of in a manner that is treated as a sale of the unit, or a
Unitholder otherwise disposes of a unit, the determination of gain or loss from
the sale or other disposition will be based on the difference between the amount
considered realized for tax purposes and the tax basis in such unit. See "--
Basis of Units." Upon the sale of a unit, the "amount realized" will be
measured by the sum of the cash and fair market value of other property received
plus the amount of any liabilities allocable to the unit sold. To the extent
that the amount of cash or property received plus the allocable share of any
liabilities exceeds the Unitholder's basis for the units disposed of, such
Unitholder will recognize gain. It is possible that the amount of gain
recognized or even the tax liability resulting from such gain could exceed the
amount of cash and/or the value of any other property received upon such
disposition.
Except as described below, any gain recognized upon a sale or other
disposition of a unit will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount
realized upon the sale of a unit attributable to a Unitholder's share of
"unrealized receivables" of the issuing partnership (as defined in Section 751
of the Code) exceeds the basis attributed to those assets, such excess will be
treated as ordinary income. Unrealized receivables with respect to a particular
unit, include, to the extent not previously included in the income of the
issuing partnership, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts that would be subject to
recapture as ordinary income if the issuing partnership had sold its assets at
their fair market value at the time of the transfer of the unit.
As noted below in "Certain Federal Income Tax Considerations--Federal
Income Taxation of Holders of Paired Shares--Taxation of Taxable U.S.
Stockholders," the Taxpayer Relief Act of 1997 (the "Relief Act") alters the
taxation of capital gain income for individuals as well as estates and trusts.
This Act allows the IRS to prescribe regulations governing the application of
the new capital gains rates to sales of interests in partnerships. To date,
regulations have not yet been prescribed and it remains unclear how these new
rates will apply to sales or other dispositions of units.
Basis of Units. In general, a Unitholder who acquired units in one of the
Partnerships by contribution of property and/or money to that partnership had an
initial tax basis ("Initial Basis") in those units equal to the sum of (i) the
amount of money contributed (or deemed contributed as described below) and (ii)
the Unitholder's adjusted
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tax basis in any other property contributed in exchange for such units, and less
the amount of any money distributed (or deemed distributed, as described below)
in connection with the acquisition of such units. The Initial Basis of units
acquired by other means would have been determined under the general rules of
the Code, including the partnership provisions, governing the determination of
tax basis. Other rules, including the "disguised sale" rules discussed below,
also may affect Initial Basis. Unitholders are urged to consult their own tax
advisors regarding their Initial Basis.
A Unitholder's Initial Basis in its units in one of the Partnerships
generally is increased by (i) such Unitholder's share of that partnership's
taxable and tax-exempt income and (ii) increases in such Unitholder's allocable
share of liabilities of that partnership (including any increase in its share of
liabilities occurring in connection with the acquisition of its units).
Generally, such Unitholder's basis in its units in one of the Partnerships is
decreased (but not below zero) by (i) such Unitholder's share of that
partnership's distributions (ii) decreases in such Unitholder's allocable share
of liabilities of that partnership (including any decrease in its share of
liabilities of such partnership occurring in connection with the acquisition of
its units), (iii) such Unitholder's share of losses of that partnership and (iv)
such Unitholder's share of nondeductible expenditures of that partnership that
are not chargeable to capital account.
Initial Basis of Operating Partnership Units Issued in Connection with the
Merger. In connection with the Merger, the Realty Partnership distributed to
its Unitholders (other than the Corporation) an Operating Partnership Unit for
each Realty Partnership Unit held by each such Unitholder. The Companies
believe that the Operating Partnership Units so distributed were subject to
special rules applicable to distributions of "marketable securities" under
Section 731(c) of the Code. As a result, the Companies believe that a Realty
Partnership Unitholder's initial basis in any Operating Partnership Units
distributed to it in connection with the Merger generally would equal the sum of
(i) the adjusted basis of such Operating Partnership Unit to the Realty
Partnership immediately before such distribution, but not in excess of the
adjusted basis of the Realty Partnership Unitholder's interest in the Realty
Partnership plus (ii) the amount of gain recognized by the Realty Partnership
Unitholder upon the distribution of such Operating Partnership Units to it
(calculated as the excess of (a) the then fair market value of the Operating
Partnership Units distributed to the Realty Partnership Unitholder over (b) the
Realty Partnership Unitholder's tax basis in his Realty Partnership Units
immediately prior to the distribution). The Realty Partnership Unitholder's
adjusted tax basis in his Realty Partnership Units at the time of such
distribution would be reduced by the amount described in clause (i) of the
preceding sentence. The operation of these rules should provide a Realty
Partnership Unitholder with an Initial Basis in the Operating Partnership Units
so distributed equal to the price paid by the Realty Partnership for such
Operating Partnership Units.
Potential Application of the Disguised Sale Regulations to a Redemption of
Unit Pairs. There is a risk that a redemption by the issuing partnership of
units issued in exchange for a contribution of property to that partnership may
cause the original transfer of property to that partnership in exchange for
units to be treated as a "disguised sale" of property. Section 707 of the Code
and the Treasury Regulations thereunder (the "Disguised Sale Regulations")
generally provide that, unless one of the prescribed exceptions is applicable, a
partner's contribution of property to a partnership and a simultaneous or
subsequent transfer of money or other consideration (which may include the
assumption of or taking subject to a liability) from the partnership to the
partner will be presumed to be a sale, in whole or in part, of such property by
the partner to the partnership. Further, the Disguised Sale Regulations provide
generally that, in the absence of an applicable exception, if money or other
consideration is transferred by a partnership to a partner within two years of
the partner's contribution of property, the transactions are presumed to be a
sale of the contributed property unless the facts and circumstances clearly
establish that the transfers do not constitute a sale. In addition, the
Disguised Sale Regulations require that any such transfer of money or other
consideration within the two year period must be reported to the IRS. The
Disguised Sale Regulations also provide that if two years have passed between
the transfer of money or other consideration and the contribution of property,
the transactions will be presumed not to be a sale unless the facts and
circumstances clearly establish that the transfers constitute a sale.
Accordingly, if a unit is redeemed by the issuing partnership from a
Unitholder who holds units that were issued in exchange for a contribution of
property to that partnership, the IRS could contend that the Disguised Sale
Regulations apply because the Unitholder will thus receive cash subsequent to a
previous contribution of property to such partnership. In that event, the IRS
could contend that the contribution was taxable as a disguised sale under the
Disguised Sale Regulations. Any gain recognized thereby may be eligible for
installment reporting under Section 453 of the Code, subject to certain
limitations. In addition, in such event, the Disguised Sale Regulations might
apply to cause a portion of the proceeds received by a redeeming Unitholder to
be characterized as original issue discount on a deferred obligation which would
be taxable as interest income in accordance with the provisions of Section 1272
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of the Code. Each Unitholder is advised to consult its own tax advisors to
determine whether redemption of its units could be subject to the Disguised Sale
Regulations.
Relative Values of Corporation Common Stock and Operating Company Common
Stock. As discussed above, if the Companies elect to purchase Unit Pairs
tendered for a redemption in exchange for shares of Corporation Common Stock and
shares of Operating Company Common Stock, the amount of gain or loss recognized
by the Unitholder with respect to the Realty Partnership Units that comprise the
tendered Unit Pairs will depend in part on the then value of the shares of
Corporation Common Stock received, and the amount of gain or loss recognized
with respect to the Operating Partnership Units that comprise the tendered Unit
Pairs will depend in part on the then value of the shares of Operating Company
Common Stock received. Under the terms of the Pairing Agreement, the
Corporation and the Operating Company are obligated to agree on the relative
values of a share of Corporation Common Stock and a share of Operating Company
Common Stock that comprise a Paired Share. As of the date of this Registration
Statement, the Companies previously had agreed that the value of a share of
Operating Company Common Stock represents 5% of the value of a Paired Share.
There can be no assurance, however, that these relative values will not have
changed at the time a Unitholder tenders Unit Pairs or that the IRS will not
challenge this valuation.
Comparison of Ownership of Units and Paired Common Stock
The nature of any investment in Paired Common Stock of the Companies is
generally economically equivalent to an investment in Units in the Partnerships.
There are, however, some differences between ownership of Units and ownership of
Paired Common Stock, some of which may be material to investors. The
information below highlights a number of significant differences between the
Partnerships and the Companies relating to, among other things, form of
organization, policies and restrictions, management structure, compensation and
fees, investor rights and federal income taxation and compares certain legal
rights associated with ownership of Units and Paired Common Stock. These
comparisons are intended to assist Unitholders in understanding how their
investment will be changed if they exercise their Redemption Right and their
Unit Pairs are acquired by the Companies for shares of Paired Common Stock.
This discussion is summary in nature and does not constitute a complete
discussion of these matters, and holders of Unit Pairs should carefully review
the balance of this Prospectus and the registration statement of which this
Prospectus is a part for additional important information about the Companies.
Form of Organization and Assets Owned. The Realty Partnership is organized
as a Virginia limited partnership. A substantial amount of the Corporation's
operations are conducted through the Realty Partnership. The Operating
Partnership is organized as a Delaware limited partnership. A substantial
amount of the Operating Company's operations are conducted through the Operating
Partnership.
The Corporation is organized under the laws of the State of Delaware. The
Corporation, through PAH LP and PAH GP, maintains both a limited partner
interest and the sole general partner interest, respectively, in the Realty
Partnership, which gives the Corporation an indirect investment in the assets
owned by the Realty Partnership. As of January 6, 1998, the Corporation,
through PAH LP and PAH GP, held an approximate 89.6% economic interest in the
Realty Partnership, and such interest will increase as Realty Partnership Units
are redeemed for cash or acquired by the Corporation.
The Operating Company is organized under the laws of the State of Delaware.
The Operating Company maintains both a limited partner interest and a general
partner interest in the Operating Partnership, which gives the Operating Company
an indirect investment in the properties and other assets owned by the Operating
Partnership. As of January 6, 1998, the Operating Company held an approximate
86.9% economic interest in the Operating Partnership, and such interest will
increase as Operating Partnership Units are redeemed for cash or acquired by the
Operating Company.
Length of Investment. Each of the Partnerships has a stated termination
date of December 31, 2050, although each may be terminated earlier under certain
circumstances. Each of the Companies has a perpetual term and intends to
continue its operations for an indefinite time period.
Nature of Investment and Distribution Rights. Realty Partnership Units and
Operating Partnership Units constitute equity interests entitling each
Unitholder to his pro rata share of cash distributions made to the Unitholders
of the Partnerships. Each of the Corporation and the Operating Company is
entitled to receive its pro rata share of distributions made by the Realty
Partnership and the Operating Partnership, respectively, with respect to its
interest therein.
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Shares of Paired Common Stock constitute an equity interest in the
Companies. Each stockholder will be entitled to his pro rata share of any
dividends or distributions paid with respect to shares of Paired Common Stock.
The dividends payable to the stockholders are not fixed in amount and are only
paid if, when and as declared by the Board of Directors of each Company. To
qualify as a REIT, the Corporation must distribute at least 95% of its taxable
income (excluding capital gains), and any taxable income (including capital
gains) not distributed will be subject to corporate income tax.
As partnerships, the Realty Partnership and Operating Partnership are not
subject to federal income taxation. In determining their federal income tax,
partners of each of the Partnerships, including Unitholders, must take into
account their allocable share of partnership income, gain, deduction and loss
(regardless of whether distributed), and otherwise are subject to the rules
governing the taxation of partnerships and partners. By contrast, Unitholders
who receive shares of Paired Common Stock upon exercise of their Redemption
Right will be taxed on such investment in accordance with the rules governing
REITs. See "Certain Federal Income Tax Considerations."
Issuance of Additional Equity. The Realty Partnership is authorized to
issue Realty Partnership Units and other partnership interests to its partners
or to other persons for such consideration and on such terms and conditions as
PAH GP, as general partner, in its sole discretion, may deem appropriate. The
Operating Partnership is authorized to issue Operating Partnership Units and
other partnership interests to its partners or to other persons for such
consideration and on such terms and conditions as the Operating Company, as
general partner, in its sole discretion, may deem appropriate.
Pursuant to the Operating Company Charter, the Corporation Board has the
sole authority to authorize, effect and control issues of paired equity
(including securities convertible into paired equity). In addition, the
Operating Company only has the right to engage in an issuance of unpaired equity
upon the affirmative vote of a majority of an upaired equity committee (which
committee is determined in accordance with the provisions of the Cooperation
Agreement). The Corporation has the right to engage in an issuance of unpaired
equity upon the affirmative vote of a majority of the members of the Corporation
Board. As long as each of the Realty Partnership and the Operating Partnership
is in existence, the proceeds of all equity capital raised by the Corporation or
the Operating Company will be contributed to the Realty Partnership and the
Operating Partnership, respectively, in exchange for Realty Partnership Units or
Operating Partnership Units or other interests in the respective Partnerships.
Liquidity. Subject to certain exceptions, pursuant to the Partnership
Agreements, a Unitholder may transfer all or any portion of its Realty
Partnership Units or Operating Partnership Units, as the case may be, with or
without the consent of the respective General Partners. However, each of the
General Partners, in its sole and absolute discretion, may or may not consent to
the admission as a Unitholder of any transferee of Realty Partnership Units or
Operating Partnership Units, as the case may be. If the general partner of the
Realty Partnership or the Operating Partnership, as the case may be, does not
consent to the admission of a permitted transferee, the transferee shall be
considered an assignee of an economic interest in the respective partnership but
will not be a Unitholder for any other purpose; as such, the assignee will not
be permitted to vote on any affairs or issues on which a Unitholder may vote.
The Paired Common Stock is listed on the NYSE. The breadth and strength of
this market will depend, among other things, upon the number of shares
outstanding, the Companies' financial results and prospects, the general
interest in the Companies' and other real estate investments and the Companies'
dividend yield compared to that of other debt and equity securities.
Purpose and Permitted Investments. The purpose of the Realty Partnership
includes the conduct of any business that may be lawfully conducted by a limited
partnership organized under the laws of the Commonwealth of Virginia, except
that the Realty Partnership Agreement requires the business of the Realty
Partnership to be conducted in such a manner that will permit the Corporation to
qualify as a REIT for federal income tax purposes. The Realty Partnership may,
subject to the foregoing limitation, invest or enter into partnerships, joint
ventures or similar arrangements and may own interests in any other entity. The
purpose of the Operating Partnership includes the conduct of any business that
may be lawfully conducted by a limited partnership organized under the laws of
the State of Delaware. The Operating Partnership may invest or enter into
partnerships, joint ventures or similar arrangements and may own interests in
any other entity.
Under the Charters, each of the Corporation and the Operating Company may
engage in any lawful activity permitted under the DGCL.
Borrowing Policies. The Realty Partnership has no restrictions on
borrowings, and PAH GP, its general partner, which is controlled by the
Corporation, has full power and authority to borrow money on behalf of the
Realty
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Partnership. The Operating Partnership has no restrictions on borrowings
and the Operating Company, its general partner, has full power and authority to
borrow money on behalf of the Operating Partnership.
Neither of the Companies is restricted under its governing instruments from
incurring borrowings. The agreements evidencing the Revolving Credit Facility
and the Term Loan contain certain restrictive covenants including, without
limitation, covenants with respect to indebtedness, certain investments, merger
or other consolidation, liquidation or dissolution and the sale of assets.
Other Investment Restrictions. Other than restrictions precluding
investments by the Realty Partnership that would adversely affect the
qualification of the Corporation as a REIT, there are certain restrictions upon
the authority of the Partnerships to enter into certain transactions, including,
among others, making investments, lending funds of the Partnerships, or
reinvesting the Partnerships' cash flow and net sale or refinancing proceeds.
Other than restrictions precluding investments by the Corporation and the
Operating Company that would adversely affect the qualification of the
Corporation as a REIT, the Charters and the Bylaws do not impose any
restrictions upon the types of investments made by the Companies.
Management Control. All management powers over the business and affairs of
the Realty Partnership and the Operating Partnership are vested in the
respective General Partners and no Unitholder has any right to participate in or
exercise control or management power over the business and affairs of the
Partnerships. The Partnership Agreements provide that the respective General
Partners of each of the Partnerships shall be reimbursed for all expenses
incurred by it relating to the management and business of the Partnerships.
The Board of Directors of each of the Companies has exclusive control over
such company's business and affairs subject only to the restrictions in such
company's certificate of incorporation and bylaws. The Board of Directors of
each of the Companies is classified into three classes. At each annual meeting
of the stockholders, the successors of the class of directors whose terms expire
at that meeting will be elected. The policies adopted by the Board of Directors
of each of the Companies may be altered or eliminated without advice of the
stockholders. Accordingly, except for their vote in the elections of directors,
stockholders have no control over the ordinary business policies of the
Companies.
Management Liability and Indemnification. The Partnership Agreements
generally provide that the General Partners will incur no liability to their
respective Partnerships or any Unitholder for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if such
general partner acted in good faith. In addition, neither of the General
Partners is responsible for any misconduct or negligence on the part of its
agents provided such general partner appointed such agents in good faith. The
Partnership Agreements also provide for indemnification of each of the
respective General Partners, its affiliates, and such other persons as such
general partner may from time to time designate, against any and all losses,
claims, damages, liabilities, joint or several expenses (including reasonable
legal fees and expenses), judgments, fines, settlements and other amounts
arising from any and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, that relate to the operations of such
partnership in which such person may be involved.
Each of the Companies' Charters, in conjunction with the DGCL, eliminates a
director's personal liability to the Corporation or the Operating Company, as
the case may be, or their respective stockholders for breach of fiduciary duty,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or the Operating Company, as the case may be, or their respective
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL or (iv) for any transaction from which the director derived an improper
personal benefit.
The DGCL permits, but does not require, a company to indemnify its
directors, officers, employees or agents and expressly provides that the
indemnification provided for under the DGCL shall not be deemed exclusive of any
indemnification right under any bylaw, vote of stockholders or disinterested
directors, or otherwise. The DGCL permits indemnification against expenses and
certain other liabilities arising out of legal actions brought or threatened
against such persons for their conduct on behalf of the company, provided that
each such person acted in good faith and in a manner that he reasonably believed
was in or not opposed to the company's best interests and in the case of a
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The DGCL does not allow indemnification of directors in the case of
an action by or in the right of the company (including stockholder derivative
suits) unless the directors successfully defend the action or indemnification is
ordered by the court. The Bylaws
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provide for indemnification to the fullest extent authorized by the DGCL and,
therefore, these statutory indemnification rights are available to the
directors, officers, employees and agents of the Corporation and the Operating
Company.
Anti-takeover Provisions. Except in limited circumstances, the General
Partners have exclusive management power over the business and affairs of their
respective Partnerships. The General Partners may not be removed by the
Unitholders of their respective Partnerships with or without cause.
The Charters and the Bylaws and the DGCL contain a number of provisions that
may have the effect of delaying or discouraging an unsolicited proposal for the
acquisition of each of the Companies or the removal of incumbent management of
each of the Companies.
Voting Rights. Under each of the Partnership Agreements, the Unitholders do
not have voting rights relating to the operation and management of the
respective Partnerships, except in connection with matters, as described more
fully below, involving certain amendments to the respective Partnership
Agreements.
Holders of shares of Paired Common Stock have the right to vote on, among
other things, certain amendments to the Charters, a merger or sale of
substantially all of the assets of the Corporation or the Operating Company, as
the case may be, and the dissolution of the Corporation or the Operating
Company, as the case may be, and the holders of Patriot Series A Preferred Stock
have the right to vote together as a class with the holders of the Corporation
Commmon Stock on all such matters with respect to the Corporation. Under the
DGCL and the Charters, the sale of all or substantially all of the assets of the
Corporation or the Operating Company, as the case may be, or any merger or
consolidation of the Corporation or the Operating Company requires the approval
of the Board of Directors and holders of a majority of the outstanding shares of
common stock of the respective company. Similarly, under the DGCL, the Board of
Directors of each of the Companies must obtain approval of holders of a majority
of all outstanding shares entitled to vote of the company in question in order
to dissolve such company. Each of the Companies is managed and controlled by a
Board of Directors consisting of three classes having staggered terms of office.
Each class is to be elected by the stockholders at annual meetings of the
respective company. Each share of Paired Common Stock has one vote relative to
each of the Companies, and each share of Patriot Series A Preferred Stock has
one vote with respect to matters involving the Corporation. The Charters permit
the Board of Directors of each of the Companies to classify and issue preferred
stock in one or more series having voting power which may differ from that of
the Paired Common Stock.
Amendment of the Partnership Agreements or the Companies' Charters.
Generally, each of the Partnership Agreements may be amended by the General
Partners of the respective Partnerships without the consent of the Unitholders,
except that certain amendments which alter or change the distribution rights or
redemption rights of a Unitholder shall require the consent of the Unitholders
holding more than a majority in interest of Realty Partnership Units or
Operating Partnership Units, as the case may be.
The Charters provide that, with the exception of certain provisions
concerning business combinations with interested stockholders which require the
approval of a greater proportion, each of the Charters may be amended in the
manner prescribed by the DGCL, which requires the approval of the Board of
Directors and the approval of the stockholders by the affirmative vote of a
majority of the outstanding shares entitled to vote on such amendment.
Compensation, Fees and Distributions. The General Partners are not entitled
to receive any compensation for their services as general partner of their
respective Partnerships. As a partner in their respective Partnerships,
however, the General Partners have the same right to allocations and
distributions as other partners of the Partnerships. In addition, each of the
Partnerships will reimburse its respective general partner for administrative
expenses incurred relating to the ongoing operation of such general partner and
certain other expenses arising in connection with its role as general partner.
The directors and officers of each of the Companies receive compensation for
their services.
Liability of Investors. Under the Realty Partnership Agreement and
applicable Virginia law, the liability of the limited partners for the Realty
Partnership's debts and obligations is generally limited to the amount of their
investment in the Realty Partnership. Under the Operating Partnership Agreement
and applicable Delaware law, the liability of the limited partners for the
Operating Partnership's debts and obligations is generally limited to the amount
of their investment in the Operating Partnership.
Under the DGCL, stockholders generally are not personally liable for the
debts or obligations of the Companies.
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REGISTRATION RIGHTS
The registration of the shares of Paired Common Stock pursuant to the
Registration Statement, of which this Prospectus is a part, will discharge the
Corporation's obligations under the terms of each Registration Rights Agreement
it has entered into prior to July 1, 1997 with certain Realty Partnership
Unitholders (collectively, the "Registration Rights Agreements"). The following
summary does not purport to be complete and is qualified in its entirety by
reference to each individual Registration Rights Agreement.
Pursuant to the Registration Rights Agreements, the Corporation has agreed
to pay all expenses of effecting the registration of the Corporation Common
Stock (other than brokerage and underwriting commissions and taxes of any kind
and other than for any legal, accounting and other expenses incurred by a Realty
Partnership Unitholder thereunder). The Corporation also has agreed to
indemnify each Realty Partnership Unitholder under the Registration Rights
Agreements and its officers, directors and other affiliated persons and any
person who controls any holder against certain losses, claims, damages and
expenses arising under the securities laws in connection with the registration
statement or this Prospectus, subject to certain limitations. In addition,
certain of the Realty Partnership Unitholders under the Registration Rights
Agreements have agreed to indemnify the Corporation and its respective
directors, officers and any person who controls the Corporation against all
losses, claims, damages and expenses arising under the securities laws insofar
as such loss, claim, damage or expense relates to written information furnished
to the Corporation by such Realty Partnership Unitholders for use in the
registration statement or Prospectus or an amendment or supplement thereto or
the failure by such Realty Partnership Unitholders to deliver or cause to be
delivered this Prospectus or any amendment or supplement thereto to any
purchaser of shares covered by the registration statement from such holder
through no fault of the Corporation.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain provisions that currently
govern United States federal income tax treatment of the Corporation and its
U.S. Stockholders (as defined below in "--Federal Income Taxation of Holders of
Paired Shares--Taxation of Taxable U.S. Stockholders") as well as certain other
tax considerations for U.S. holders of Paired Common Stock (also referred to
herein as "Paired Shares"). The following discussion is based upon current
provisions of the Code, existing, temporary and final regulations thereunder and
current administrative rulings and court decisions, all of which are subject to
change, possibly on a retroactive basis. No attempt has been made to comment on
all United States federal income tax consequences that may be relevant to
stockholders of the Companies. The tax discussion set forth below is included
for general information only. It is not intended to be, nor should it be
construed to be, legal or tax advice to any particular stockholder of the
Companies. References to the "Corporation" in this section regarding certain
Federal Income Tax Considerations include only Patriot American Hospitality,
Inc. and references herein to the "Operating Company" include only Wyndham
International, Inc. unless the context otherwise requires.
THE FOLLOWING DISCUSSION MAY NOT APPLY TO PARTICULAR CATEGORIES OF HOLDERS
OF SHARES OF CORPORATION COMMON STOCK OR OPERATING COMPANY COMMON STOCK SUBJECT
TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS INSURANCE COMPANIES, FINANCIAL
INSTITUTIONS, BROKER-DEALERS, TAX-EXEMPT ORGANIZATIONS, NON-U.S. STOCKHOLDERS
AND HOLDERS WHOSE SHARES WERE ACQUIRED PURSUANT TO THE EXERCISE OF AN EMPLOYEE
STOCK OPTION OR OTHERWISE AS COMPENSATION. STOCKHOLDERS OF THE COMPANIES ARE
URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THEIR SPECIFIC TAX
CONSEQUENCES, INCLUDING ANY STATE, LOCAL OR OTHER TAX CONSEQUENCES.
REIT Qualification
General
If certain detailed conditions imposed by the provisions of the Code are
met, entities such as the Corporation that invest primarily in real estate and
that otherwise would be treated for federal income tax purposes as corporations
generally are not taxed at the corporate level on their "real estate investment
trust taxable income" that is currently distributed to stockholders. This
treatment substantially eliminates the "double taxation" on earnings (i.e., at
both the corporate and stockholder levels) that ordinarily results from the use
of corporations.
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The Corporation has been and will continue to be operated in a manner
intended to allow it to qualify as a REIT. The Corporation in the future
intends to operate in a manner so that the Corporation will continue to qualify
as a REIT. If the Corporation fails to qualify as a REIT in any taxable year,
the Corporation will be subject to federal income taxation as if it were a
domestic corporation, and the Corporation's stockholders will be taxed in the
same manner as stockholders of ordinary corporations. In this event, the
Corporation could be subject to potentially significant tax liabilities, and the
amount of cash available for distribution to stockholders would be reduced and
possibly eliminated. Unless entitled to relief under certain Code provisions,
and subject to the discussion below regarding Section 269B(a)(3) of the Code,
the Corporation also would be disqualified from re-electing REIT status for the
four taxable years following the year during which qualification was lost.
Failure of the Corporation's predecessor, Patriot, to have qualified as a REIT
also could cause the Corporation to be disqualified as a REIT and/or subject the
Corporation to significant tax liabilities.
Goodwin, Procter & Hoar, LLP, special tax counsel to the Corporation, has
rendered an opinion to the Corporation to the effect that commencing with the
taxable year ending December 31, 1983, the Corporation has been organized and
operated in conformity with the requirements for qualification and taxation as a
REIT under the Code, and the Corporation's proposed method of operation will
enable it to continue to meet the requirements for qualification and taxation as
a REIT under the Code. Investors should be aware, however, that opinions of
counsel are not binding upon the IRS or any court. Goodwin, Procter & Hoar
LLP's opinion is based on various assumptions and is conditioned upon certain
representations made by the Corporation as to factual matters, including
representations regarding the nature of the Corporation's properties, and the
future conduct of the Corporation's business. Any inaccuracy in such
assumptions and representations could adversely affect this opinion.
Qualification and taxation as a REIT depends upon the Corporation's having met
and continuing to meet, through actual annual operating results, the
distribution levels, stock ownership, and other various qualification tests
imposed under the Code. Goodwin, Procter & Hoar LLP has not reviewed and will
not review the Corporation's compliance with those tests on a continuing basis.
Moreover, qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations and the determination of various factual matters
and circumstances not entirely within the Corporation's control. The complexity
of these provisions is greater in the case of a REIT that owns hotels and leases
them to a corporation with which its stock is paired. See "Risk Factors--Real
Estate Investment Trust Tax Risks." Accordingly, no assurance can be given that
the Corporation will satisfy such tests on a continuing basis.
Paired Shares
Section 269B(a)(3) of the Code provides that if the shares of a REIT and a
non-REIT are paired, then the REIT and the non-REIT shall be treated as one
entity for purposes of determining whether either company qualifies as a REIT.
If Section 269B(a)(3) applied to the Corporation and the Operating Company, then
the Corporation then would not be eligible to be taxed as a REIT. Section
269B(a)(3) does not apply, however, if the shares of the REIT and the non-REIT
were paired on June 30, 1983 and the REIT was taxable as a REIT on June 30,
1983. As a result of this "grandfathering" rule, Section 269B(a)(3) does not
apply to the Corporation. There are, however, no judicial or administrative
authorities interpreting this "grandfathering" rule and this interpretation, as
well as the opinion of Goodwin, Procter & Hoar LLP regarding the Corporation's
qualification as a REIT, is based solely on the literal language of the statute.
Moreover, if for any reason the Corporation failed to qualify as a REIT in 1983,
the benefit of the "grandfathering" rule would not be available to the
Corporation, and the Corporation would not qualify as a REIT for any taxable
year. See "Risk Factors -- Real Estate Investment Trust Tax Risks -- Dependence
on Qualification as a Real Estate Investments Trust."
Potential Reallocation of Income
Due to the paired share structure, the Companies, and their respective
subsidiary entities are controlled by the same interests. As a result, the IRS
could, pursuant to Section 482 of the Code, seek to distribute, apportion or
allocate gross income, deductions, credits or allowances between or among them
if it determines that such distribution, apportionment or allocation is
necessary in order to prevent evasion of taxes or to clearly reflect income.
The Corporation and the Operating Company believe that all material transactions
between the Corporation and the Operating Company, and among them and/or their
subsidiary entities, will be negotiated and structured with the intention of
achieving an arm's-length result. The Corporation and the Operating Company
believe that all material transactions between them have been similarly
negotiated and structured with the intention of achieving an arm's-length
result. If true, the potential application of Section 482 of the Code should
not have a material effect on the Corporation and the Operating Company. There
can be no assurance, however, that the IRS will not challenge the terms of such
transactions, or that such challenge would not be successful.
Built-In Gain Tax
If the Corporation recognizes gain on the disposition of an asset acquired
from Interstate during the ten-year period beginning on the date of the
Interstate Merger then to the extent of the asset's "built-in gain" (i.e., the
excess of the fair market value of such asset at the time of the Interstate
Merger over its then tax basis), the Corporation will be subject to tax on such
gain at the highest regular corporate rate applicable, pursuant to Treasury
Regulations not yet promulgated. The Corporation would be required to distribute
95% of the excess of the amount of recognized built-in gain over the amount of
tax paid in order to maintain the Corporation's qualification as a REIT. The
foregoing assumes that the Corporation makes an election pursuant to IRS Notice
88-19 with respect to the Interstate Merger. The Corporation will make the
election pursuant to the IRS Notice 88-19 with respect to the Interstate Merger
if such election is available. The built-in gain taxes also will apply to any
assets of Wyndham that are sold during the ten-year period following the Wyndham
Acquisition.
Classification of the Realty Partnership as a Publicly Traded Partnership
Section 7704 of the Code treats certain "publicly traded partnerships" as
corporations. If the Realty Partnership were taxed as a corporation under these
rules, the Corporation would be disqualified as a REIT. A partnership is a
publicly traded partnership if interests in such partnership are either traded
on an established securities market or are "readily tradable on a secondary
market (or the substantial equivalent thereof)." Interests in the Realty
Partnership have not and will not be traded on an established securities market.
Currently, the Realty Partnership relies on restrictions on transfers and
redemptions recently included in its partnership agreement in order to avoid
being taxed as a corporation under Section 7704 of the Code. Prior to such
amendments, the Realty Partnership relied on an exemption from the publicly
traded partnership rules based on the nature of its income as well as a safe
harbor based on the number of its partners. There can be no assurance that
efforts to avoid taxation as a corporation under these provisions have been or
will be successful.
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Sale of Land by the Corporation
The sale of certain land to an affiliate of PaineWebber Incorporated (the
"PaineWebber Land Sale") was structured to qualify as a tax-deferred like-kind
exchange. There can be no assurances, however, that such transaction will
qualify as a tax-deferred like-kind exchange. If and to the extent the sale
did not qualify as a tax-deferred like-kind exchange, any capital gain
recognized by the Corporation will be taxed to the Corporation at applicable
capital gains rates unless distributed to stockholders. To the extent that the
gain does not qualify for capital gains treatment, the gain will be combined
with the Corporation's other taxable income, 95% of which must be distributed
each year in order to maintain the Corporation's status as a REIT.
Notwithstanding the foregoing, in the event that the property in the PaineWebber
Land Sale constituted "dealer property," then the sale could not in any event
have qualified as a like-kind exchange, the gain likely would be subject to a
100% tax, and the amount of gain would constitute nonqualifying income would
have disqualified the Corporation as a REIT in 1997. Although the Corporation
believes that the PaineWebber Land Sale did not constitute a sale of dealer
property, whether or not such sale constituted a sale of dealer property is a
factual determination not susceptible of legal opinion, and the Corporation did
not receive opinions from counsel on such determination. As a result, the
opinion rendered by Goodwin, Procter & Hoar LLP regarding the Corporation's
qualification as a REIT necessarily relies on representations from the
Corporation to the effect that the sale did not constitute the sale of dealer
property.
Effects of Compliance with REIT Requirements
Operating income derived from hotels or a racetrack does not constitute
qualifying income under the REIT requirements. Accordingly, all of the
Corporation's hotels, other than hotels held by taxable entities in which the
Corporation does not hold voting control, have been leased to lessees and the
Corporation will continue to lease such hotels after the filing of this
Prospectus. Similarly, the Corporation has subleased the land underlying the
Racecourse and leased the related improvements to the Operating Company. Rent
derived from such leases will be qualifying income under the REIT requirements,
provided several requirements are satisfied. Among other requirements, a lease
may not have the effect of giving the Corporation a share of the net income of
the lessee, and the amount of personal property leased under the lease must not
exceed a defined, low level. The Corporation also may not provide services,
other than customary services and de minimus non-customary services, to lessees
or their subtenants. In addition, all leases must also qualify as "true" leases
for federal income tax purposes (as opposed to service contracts, joint ventures
or other types of arrangements). There are, however, no controlling Treasury
Regulations, published rulings, or judicial decisions that discuss whether
leases similar to the Companies leases constitute "true" leases. Therefore,
there can be no complete assurance that the IRS will not successfully assert a
contrary position.
Payments under a lease will not constitute qualifying income for purposes of
the REIT requirements if the Corporation owns, directly or indirectly, 10% or
more of the ownership interests in the relevant Lessee. Constructive ownership
rules apply, such that, for instance, the Corporation is deemed to own the
assets of stockholders who own 10% or more in value of the stock of the
Corporation. The Charters are therefore designed to prevent a stockholder of
the Corporation from owning Corporation stock or Operating Company stock that
would cause the Corporation to own, actually or constructively, 10% or more of
the ownership interests in a Lessee (including the Operating Company and the
Operating Partnership). Thus, the Corporation should never own, actually or
constructively, 10% or more of a Lessee. However, because the relevant
constructive ownership rules are broad and it is not possible to monitor
continually direct and indirect transfers of Paired Shares, and because the
charter provisions referred to above may not be effective, no absolute assurance
can be given that such transfers, or other events of which the Corporation has
no knowledge, will not cause the Corporation to own constructively 10% or more
of one or more Lessees at some future date.
The REIT asset tests also limit the value of the non-real estate assets held
by the Corporation. Although the Corporation will hold substantial non-real
estate assets, including non-voting stock in certain corporate subsidiaries that
will hold the management assets required from Interstate and Wyndham, the
Corporation does not believe that the value of such assets will exceed the
applicable limits. There can be no assurance, however, that the IRS will not
challenge these valuations.
In addition to the considerations discussed above, the REIT requirements
will impose a number of other restrictions on the operations of the Corporation.
For example, net income from sales of property sold to customers in the ordinary
course of business (other than inventory acquired by reason of certain
foreclosures) is subject to a 100% tax unless eligible for a certain safe
harbor. Minimum distribution requirements also generally require the
Corporation to distribute each year at least 95% of its taxable income for the
year (excluding any net capital gain). In addition, certain asset tests limit
the Corporation's ability to acquire non-real estate assets.
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Taxation of the Operating Company; Corporate Subsidiaries
As a C corporation under the Code, the Operating Company is subject to
United States federal income tax on its taxable income at corporate rates.
Certain corporate subsidiaries of the Realty Partnership that are controlled by
the Operating Company also will be subject to federal income tax.
State and Local Taxation
The Companies and their stockholders or partners may be subject to state and
local taxes in various jurisdictions, including those in which it or they
transact business, own property or reside. The state and local tax treatment of
such entities or persons may not conform to the federal income tax consequences
discussed above. Consequently, the Corporation, the Operating Company and their
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws on the ownership of Paired Shares.
Federal Income Taxation of Holders of Paired Shares
Separate Taxation
Notwithstanding that Paired Shares may only be transferred as a unit,
holders of Paired Shares will be treated for United States federal income tax
purposes as holding equal numbers of shares of Corporation Common Stock and of
Operating Company Common Stock. The tax treatment of distributions to
stockholders and of any gain or loss upon sale or other disposition of the
Paired Shares (as well as the amount of gain or loss) must therefore be
determined separately with respect to each share of Corporation Common Stock and
each share of Operating Company Common Stock contained within each Paired Share.
The tax basis and holding period for each share of Corporation Common Stock and
each share of Operating Company Common Stock also must be determined separately.
See "--Tax Consequences of Redemption." Upon a taxable sale of a Paired Share,
the amount realized should be allocated between the Corporation Common Stock and
the Operating Company Common Stock based on their then-relative values.
Taxation of Taxable U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of Paired Shares
that for United States federal income tax purposes (A) is (i) a citizen or
resident of the United States, (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate, the income of which is subject to United
States federal income taxation regardless of its source or (iv) a trust, if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust and (B) is not an
entity that has a special status under the Code (such as a tax-exempt
organization or a dealer in securities).
As long as the Corporation qualifies as a REIT, distributions made to the
Corporation's taxable U.S. Stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. For
purposes of determining whether distributions on Corporation Common Stock are
out of current accumulated earnings and profits, the earnings and profits of the
Corporation will be allocated first to the Corporation's outstanding preferred
stock (if any) and then allocated to the Corporation's Common Stock. Subject to
the discussion below regarding changes to the capital gains tax rates,
distributions that are designated as capital gain dividends will be taxed as
capital gains
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(to the extent they do not exceed the Corporation's actual net capital gain for
the taxable year) without regard to the period for which the stockholder has
held his or her Corporation Common Stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's Corporation Common Stock, but rather will
reduce the adjusted basis of such stock. To the extent that such distributions
in excess of current and accumulated earnings and profits exceed the adjusted
basis of a stockholder's Corporation Common Stock, such distributions will be
included in income as long-term capital gain (or, in the case of individuals,
trusts and estates, mid-term capital gain if the Corporation Common Stock has
been held for more than 12 months but not more than 18 months or in the case of
all tax payers short-term capital gain if the Corporation Common Stock has been
held for one year or less) assuming shares are a capital asset in the hands of
the stockholder. In addition, any distribution declared by the Corporation in
October, November or December of any year and payable to a stockholder of record
on a specified date in any such month shall be treated as both paid by the
Corporation and received by the stockholder on December 31 of such year,
provided that the distribution is actually paid by the Corporation during
January of the following calendar year.
Distributions from the Operating Company up to the amount of the Operating
Company's current or accumulated earnings and profits (less any earnings and
profits allocable to distributions on any preferred stock of the Operating
Company) will be taken into account by U.S. Stockholders as ordinary income and
generally will be eligible for the dividends-received deduction for corporations
(subject to certain limitations). Distributions in excess of the Operating
Company's current and accumulated earnings and profits will not be taxable to a
stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's Operating Company Common Stock, but rather will reduce the
adjusted basis of such Operating Company Common Stock. To the extent that such
distributions exceed the adjusted basis of a stockholder's Operating Company
Common Stock they will be included in income as long-term capital gain (or, in
the case of individuals, trusts and estates, mid-term capital gain if the
Operating Company Common Stock has been held for more than one year but not
more than 18 months or in the case of all tax payers short-term capital gain if
the Operating Company Common Stock has been held for one year or less) assuming
the shares are a capital asset in the hands of the stockholder.
The Corporation may elect to retain and pay income tax on its net long-term
capital gains recognized during the taxable year. For taxable years beginning
December 31, 1997, if the Corporation so elects for a taxable year, its
stockholders would include in income as capital gain their proportionate share
of such portion of the Corporation's net capital gains as the Corporation may
designate. Such retained capital gains may be further designated by the
Corporation as 20% rate gain, unrecaptured Section 1250 gain, or 28% rate gain,
as discussed below. Stockholders must account for their share of such retained
capital gains in accordance with such further designation; if no such further
designation is made, the retained capital gains are treated as 28% rate gain. A
stockholder would be deemed to have paid its share of the tax paid by the
Corporation, which would be credited or refunded to the stockholder. The
stockholder's basis in its shares of Corporation Common Stock would be increased
by the amount of undistributed capital gains (less the capital gains tax paid by
the Corporation) included in the stockholder's capital gains.
Taxable distributions from the Corporation or the Operating Company and gain
or loss from the disposition of shares of Corporation Common Stock and Operating
Company Common Stock will not be treated as passive activity income and,
therefore, stockholders generally will not be able to apply any passive activity
losses (such as losses from certain types of limited partnerships in which the
stockholder is a limited partner) against such income. In addition, taxable
distributions from the Corporation or the Operating Company generally will be
treated as investment income for purposes of the investment interest deduction
limitations. Capital gain dividends, capital gains (other than short-term
capital gains) from the disposition of Paired Shares and actual or deemed
distributions from either company treated as such, including capital gains
(other than short-term capital gains) recognized on account of nontaxable
distributions in excess of a stockholder's basis or any deemed capital gain
distributions to a Corporation stockholder on account of retained capital gains
of the Corporation, will be treated as investment income for purposes of the
investment interest deduction limitations only if and to the extent the
stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates to the extent of the election. The Corporation and the
Operating Company will notify stockholders after the close of their taxable
years as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital, and (in the case of the
Corporation) capital gain. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses of the Corporation
or of the Operating Company.
The Relief Act alters the taxation of capital gain income. Under the Relief
Act, individuals, trusts and estates that hold certain investments for more than
18 months may be taxed at a maximum long-term capital gain rate of 20% on the
sale or exchange of those investments. Individuals, trusts and estates that hold
certain assets for more than one year but not more than 18 months may be taxed
at a maximum mid-term capital gain rate of 28% on the sale or exchange of those
investments. The Relief Act also provides a maximum rate of 25% for
"unrecaptured Section 1250 gain" for individuals, trusts and estates, special
rules for "qualified 5-year gain," as well as other changes to prior law. The
Relief Act allows the IRS to prescribe regulations on how the Relief Act's new
capital gain rates will apply to sales of capital assets by (or interests in)
"pass-thru entities," which include REITs such as the Corporation. IRS Notice
97-64 sets forth guidance on that issue pending the release of regulations and
provides, among other things, that a REIT may designate a capital gains dividend
as a 20% rate gain distribution, an unrecaptured Section 1250 gain distribution,
or a 28% rate gain distribution. Absent any such designation, a capital gains
dividend will be treated as a 28% rate gain distribution. In general, the
Notice provides that a REIT must determine the maximum amounts which may be
designated in each class of capital gain dividends as if the REIT were an
individual whose ordinary income is subject to a marginal tax rate of at least
28 percent. Similar rules will apply in the case of designated retained capital
gains (see above discussion). The Corporation will notify stockholders after the
close of the Corporation's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital,
and capital gain (and, with respect to capital gain dividends, the portions
constituting 20% rate gain distributions, unrecaptured Section 1250 gain
distributions, and 28% rate gain distributions), as well as the amounts of any
designated retained capital gains (including the amounts thereof constituting
20% rate gain, unrecaptured Section 1250 gain, and 28% rate gain) and the
Corporation's taxes with respect to any designated retained capital gains. Final
regulations when issued may alter the rules of the temporary regulations. In
addition, the IRS has not prescribed regulations regarding the application of
the new rates to sale of interests in REITs such as the Corporation, and it
remains unclear how the new rules will affect such sales (if at all). Investors
are urged to consult their own tax advisors with respect to the new rules
contained in the Relief Act.
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Taxation of Stockholders on the Disposition of Paired Shares
Subject to the discussion above regarding the Relief Act, in general, and
assuming the taxpayer has the same holding period for the Corporation Common
Stock and the Operating Company Common Stock that comprise his or her Paired
Share, any gain or loss realized upon a taxable disposition of Paired Shares by
a stockholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the Paired Shares have been held for more than one year,
(or, in the case of individuals, trusts and estates, mid-term capital gain or
loss if the Paired Shares have been held for more than one year but not more
than 18 months, and long-term capital gain or loss if the Paired Shares have
been held for more than 18 months) and otherwise as short-term capital gain or
loss. In addition, any loss upon a sale or exchange of Corporation Common Stock
by a stockholder who has held such stock for six months or less (after applying
certain holding period rules), will be treated as a long-term capital loss to
the extent of distributions from the Corporation or undistributed capital gains
required to be treated by such stockholder as long-term capital gain. All or a
portion of any loss realized upon a taxable disposition of Paired Shares may be
disallowed if other Paired Shares are purchased within 30 days before or after
the disposition.
Information Reporting Requirements and Backup Withholding
The Corporation and the Operating Company will each report to their U.S.
Stockholders and the IRS the amount of distributions paid during each calendar
year, and the amount of tax withheld, if any. Under the backup withholding
rules, a stockholder may be subject to backup withholding at the rate of 31%
with respect to distributions paid unless such holder (i) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact or (ii) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with the
applicable requirements of the backup withholding rules. A stockholder who does
not provide the Corporation and the Operating Company with his, her or its
correct taxpayer identification number also may be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against
the stockholder's income tax liability. In addition, the Corporation may be
required to withhold a portion of capital gain distributions to any stockholders
who fail to certify their non-foreign status to the Corporation.
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. They are, however, subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, amounts distributed by the Corporation to Exempt
Organizations generally should not constitute UBTI, nor should dividends paid by
the Operating Company generally constitute UBTI. However, if an Exempt
Organization finances its acquisition of Paired Shares with debt, a portion of
its income from the Corporation and the Operating Company will constitute UBTI
pursuant to the "debt-financed property" rules. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17), and (20), respectively, of Code section 501(c)
are subject to different UBTI rules, which generally will require them to
characterize distributions from the Corporation and the Operating Company as
UBTI.
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PLAN OF DISTRIBUTION
The Companies will not receive any proceeds from the issuance of any shares
of Paired Common Stock, but will acquire Unit Pairs tendered to the Partnerships
for redemption for which they elect to issue shares of Paired Common Stock, the
Operating Company doing so directly and the Corporation doing so through PAH LP
and PAH GP.
The Companies will pay substantially all the expenses incurred by the
Unitholders and the Companies incident to the offering and sale of the shares of
Paired Common Stock registered hereby, but excluding any underwriting discounts,
commissions, and transfer taxes.
The Companies have agreed to indemnify the Unitholders against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters, including the legality of the securities and federal
income tax considerations, have been passed upon for the Corporation and the
Operating Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts, as
corporate, securities and tax counsel. Gilbert G. Menna, an officer of PAH GP,
Inc., a wholly-owned subsidiary of the Corporation, is the sole shareholder of
Gilbert G. Menna, P.C., which is a partner in Goodwin, Procter & Hoar LLP.
Joseph L. Johnson III, an officer of PAH GP, is a partner in Goodwin, Procter &
Hoar LLP. Kathryn I. Murtagh, an officer of the Corporation, the Operating
Company and PAH GP is a partner in Goodwin, Procter & Hoar LLP.
EXPERTS
The Separate and Combined Financial Statements of Cal Jockey and Bay Meadows
and its subsidiary as of December 31, 1996 and 1995, and for each of the three
years in the period ended December 31, 1996, incorporated by reference in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report with respect thereto (which expresses an unqualified
opinion and includes an explanatory paragraph relating to a proposed merger and
certain disagreements between Cal Jockey and Bay Meadows) and are incorporated
by reference herein. The combined financial statements of the Partnerships of
Acquired Hotels as of December 31, 1996 and 1995 and for each of the two years
in the period ended December 31, 1996, incorporated in this Prospectus by
reference from the report on Form 8-K/A No. 1 dated September 30, 1997 of
Patriot American Hospitality, Inc. and Patriot American Hospitality Operating
Company have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference. Each of the
above referenced financial statements are incorporated herein by reference in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The (a) Consolidated Financial Statements of Patriot as of December 31, 1996
and 1995 and for the year ended December 31, 1996 and the period October 2, 1995
(inception of operations) through December 31, 1995 and the related financial
statement schedules, (b) the Combined Financial Statements of the Initial Hotels
as of December 31, 1994 and for the year ended December 31, 1994 and the period
January 1, 1995 through October 1, 1995, and (c) the Financial Statements of
NorthCoast Hotels, L.L.C. as of December 31, 1996 and the period April 2, 1996
(inception of operations) through December 31, 1996 appearing in Patriot's 1996
Annual Report on Form 10-K (and with respect to the Consolidated Financial
Statements of Patriot referred to above also appearing in the Joint Current
Report on Form 8-K of Patriot American Hospitality Inc. and Patriot American
Hospitality Operating Company dated July 1, 1997), have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon included
therein and
29
<PAGE>
incorporated herein by reference. With respect to the Combined Financial
Statements of the Initial Hotels, such report is based in part on the reports of
Coopers & Lybrand L.L.P., independent accountants, as set forth in their
respective reports for Certain of the Initial Hotels and Troy Hotel Investors.
The (a) Financial Statements of Buckhead Hospitality Joint Venture as of
December 31, 1995 and for the year then ended, (b) the Combined Financial
Statements of Gateway Hotel Limited Partnership and Wenatchee Hotel Limited
Partnership as of December 31, 1995 and for the year then ended, and (c) the
individual Statements of Direct Revenue and Direct Operating Expenses for the
Plaza Park Suites Hotel and the Roosevelt Hotel for the year ended December 31,
1995, appearing in Patriot's Current Report on Form 8-K, dated April 2, 1996, as
amended (filed April 17, 1996 and June 14, 1996), have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon included
therein and incorporated herein by reference. The (a) Statement of Direct
Revenue and Direct Operating Expenses of the Mayfair Suites Hotel for the year
ended December 31, 1995, (b) Statement of Direct Revenue and Direct Operating
Expenses of Marriott Windwatch Hotel for the year ended December 29, 1995, and
(c) the Financial Statements of Concorde O'Hare Limited Partnership as of
December 29, 1995 and for the year then ended appearing in Patriot's Current
Report on Form 8-K, dated December 5, 1996 (filed December 5, 1996), have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and incorporated herein by reference. The (a)
Consolidated Financial Statements of Resorts Limited Partnership as of and for
the years ended December 31, 1996 and 1995, (b) the Financial Statements of CV
Ranch Limited Partnership as of and for the years ended December 31, 1996 and
1995, and (c) the Financial Statements of Telluride Resort and Spa Limited
Partnership as of and for the years ended December 31, 1996 and 1995, appearing
in Patriot's Current Report on Form 8-K, dated January 16, 1997, as amended
(filed January 31, 1997, February 21, 1997, April 8, 1997, April 9, 1997, and
May 19, 1997) have been audited by Ernst & Young LLP, independent auditors, as
set forth in their reports thereon included therein and incorporated herein by
reference. The (a) Consolidated Financial Statements of GAH-II, L.P. as of
December 31, 1996 and 1995 and for the years then ended, (b) the Financial
Statements of G.B.H. Joint Venture (d/b/a Grand Bay Hotel) as of December 31,
1996 and 1995 and for the years then ended, (c) the Financial Statements of
River House Associates (d/b/a Sheraton Gateway Hotel) as of December 31, 1996
and 1995 and for the years then ended, and (d) the Financial Statements of W-L
Tampa, Ltd. (the Sheraton Grand Hotel) as of December 31, 1996 and 1995 and for
the years then ended, appearing in the Joint Current Report on Form 8-K of
Patriot American Hospitality, Inc. and Patriot American Hospitality Operating
Company dated September 30, 1997, as amended (filed October 14, 1997 and October
28, 1997), have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon included therein and incorporated herein by
reference. The (a) Consolidated Financial Statements of ClubHouse Hotels, Inc.
as of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, (b) the Combined Financial Statements of ClubHouse
Acquisition Hotels as of December 31, 1996 and 1995 and for the years then
ended, and (c) the Financial Statements of Valdosta C.I. Associates, L.P. as of
December 31, 1994 and for the year then ended, appearing in Wyndham's Current
Report on Form 8-K, dated July 31, 1997, as amended (filed August 15, 1997 and
September 18, 1997), have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon included therein and
incorporated herein by reference. The (a) Consolidated Financial Statements of
WHG Resorts & Casinos Inc. as of June 30, 1997 and 1996, and for each of the
three years in the period ended June 30, 1997 and the related financial
statement schedule, (b) Financial Statements of Posadas de San Juan Associates
as of June 30, 1997 and 1996, and for each of the three years in the period
ended June 30, 1997 and the related financial statement schedule, (c) Financial
Statements of WKA El Con Associates as of June 30, 1997 and 1996, and for each
of the three years in the period ended June 30, 1997, and (d) Financial
Statements of El Conquistador Partnership L.P. as of March 31, 1997 and 1996,
and for each of the three years in the period ended March 31, 1997, appearing in
the Joint Current Reports on Form 8-K of Patriot American Hospitality, Inc. and
Patriot American Hospitality Operating Company dated September 30, 1997 (filed
November 12, 1997) and December 10, 1997 (filed December 10, 1997) have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and incorporated herein by reference. Each of
the above referenced financial statements are incorporated herein by reference
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
The Financial Statements of Certain of the Initial Hotels as of December 31,
1994 and for the period from January 1, 1995 to October 1, 1995 and for the year
ended December 31, 1994, the Financial Statements of Troy Hotel Investors as of
October 1, 1995 and for the period January 1, 1995 to October 1, 1995 and Troy
Park Associates as of December 29, 1994 and for the period January 1, 1994
through December 29, 1994 included in Patriot's 1996 Annual Report on Form 10-K,
the statement of Direct Revenue and Direct Operating Expenses for the Holiday
Inn--Miami Airport for the year ended August 31, 1996 included in Patriot's
Current Report on Form 8-K dated December 5, 1996, the Consolidated Financial
Statements of Wyndham Hotel Corporation as of December 31, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996, included in the
Report on Form 10-K dated March 26, 1997 of Wyndham Hotel Corporation, the
Combined Financial Statements of Snavely Hotels as of December 31, 1996 and for
the year then ended, the Combined Financial Statements of Minneapolis Hotels as
of December 31, 1996 and for the year then ended, and the combined statement of
Direct Revenue and Direct Operating Expenses for the Met Life Hotels for the
year ended December 31, 1996, included in the Report on Form 8-K dated September
17, 1997, and the Financial Statements of SCP Inc. as of December 31, 1996 and
for the year then ended, included in the Report on Form 8-K/A No. 1 dated
September 30, 1997, the financial statements of Royal Palace Hotel Associates as
of December 31, 1995 and 1996 and for the years then ended, included in the
Joint Current Report on Form 8-K dated December 10, 1997, incorporated by
reference in this Prospectus, and the consolidated financial statements of
Interstate Hotels Company as of December 31, 1995 and 1996 and for each of the
three years in the period ended December 31, 1996 included in the Report on Form
8-K dated December 10, 1997, and the financial statements of Sheraton City
Centre as of December 31, 1996 and for the year then ended and the Statement of
Direct Revenues and Direct Operating Expenses for the Wyndham Emerald Plaza for
the year ended December 31, 1996, included in the Current Report on Form 8-K
dated January 5, 1998, which is incorporated by reference herein have been
audited by Coopers & Lybrand, L.L.P., independent accountants, as set forth in
their reports thereon. Each of the above-referenced financial statements have
been incorporated by reference herein in reliance upon the authority of said
firm as experts in accounting and auditing.
The Financial Statements of Historic Hotel Partners of Birmingham Limited
Partnership as of December 31, 1994 and 1995 and for the years then ended, the
Financial Statements of Historic Hotel Partners of Chicago, Limited Partnership
as of December 31, 1996 and for the year then ended, and the Financial
Statements of Historic Hotel Partners of Nashville, Limited Partnership as of
December 31, 1996 and for the year then ended incorporated by reference in this
Prospectus, have been audited by Pannell Kerr Forster PC, independent auditors,
as set forth in their reports thereon. Each of the above-referenced financial
statements have been incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The CHC Lease Partners financial statements as of December 31, 1996 and 1995
and for the year ended December 31, 1996 and the period inception (October 2,
1995) through December 31, 1995, incorporated by reference in this Prospectus,
by reference to the Current Report on Form 8-K dated July 1, 1997, and the CHC
International, Inc. Hospitality Division financial statements as of November 30,
1996 and 1995 and for the years then ended, incorporated by reference in this
Prospectus, by reference to the Current Report on Form 8-K dated September 30,
1997, as amended, and the Joint Current Report on Form 8-K dated December 10,
1997 have been so incorporated in reliance on the reports of Price Waterhouse
LLP, independent certified public accountants, given on the authority of said
firm as experts in auditing and accounting.
30
<PAGE>
The Combined Financial Statements of the Crow Family Hotel Partnerships
incorporated by reference in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving such
reports.
The Financial Statements of each of Wichita C.I. Associates III, L.P.,
Topeka C.I. Associates, L.P., Albuquerque C.I. Associates, L.P. and C.I.
Nashville, Inc. as of December 31, 1995 and 1994 and for the two years in the
period ended December 31, 1995, incorporated by reference in this Prospectus
have been audited by Mayer Hoffman McCann L.C., independent auditors, as
stated in their report with respect thereto and incorporated herein by
reference.
31
<PAGE>
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No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Companies or any other
person. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Companies since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered Securities to which it
relates.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement....................................................... S-1
PROSPECTUS
Available Information....................................................... 4
Incorporation of Certain
Documents by Reference.................................................... 4
Risk Factors................................................................ 6
The Companies............................................................... 13
Description of Capital Stock................................................ 14
Restrictions on Transfers of Capital Stock.................................. 15
Description of Realty Partnership Units and
Operating Partnership Units and Redemption
of Unit Pairs.............................................................. 16
Registration Rights......................................................... 23
Certain Federal Income Tax Considerations................................... 23
Plan of Distribution........................................................ 29
Legal Matters............................................................... 29
Experts..................................................................... 29
</TABLE>
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32,760 Shares of
Common Stock
Patriot American
Hospitality, Inc.
32,760 Shares of
Common Stock
Wyndham International, Inc.
---------------------
PROSPECTUS SUPPLEMENT
---------------------
January 26, 1998
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