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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
April 20, 1998
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COMMISSION FILE NUMBER 1-9319 COMMISSION FILE NUMBER 1-9320
PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
DELAWARE DELAWARE
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(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
94-0358820 94-2878485
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(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
1950 STEMMONS FREEWAY, SUITE 6001 1950 STEMMONS FREEWAY, SUITE 6001
DALLAS, TEXAS 75207 DALLAS, TEXAS 75207
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(Address of principal executive offices) (Zip Code) (Address of principal executive offices) (Zip Code)
(214) 863-1000 (214) 863-1000
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(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
- ------------------------------------------------------ -------------------------------------------------------------
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PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
ITEM 5. OTHER EVENTS
MERGERS AND ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997
Wyndham Merger
On January 5, 1998, pursuant to the Agreement and Plan of Merger dated as
of April 14, 1997, as thereafter amended, (the "Wyndham Merger Agreement")
between Patriot American Hospitality, Inc. ("Patriot"), Wyndham International,
Inc. ("Wyndham International") and Wyndham Hotel Corporation ("Old Wyndham"),
Old Wyndham merged with and into Patriot, with Patriot being the surviving
corporation (the "Wyndham Merger").
Patriot, as a result of the Wyndham Merger, acquired ownership of ten
Wyndham hotels and 14 Clubhouse hotels and leased such hotels to Wyndham
International. The 13 hotel leases assumed by Patriot were sub-leased to Wyndham
International. Old Wyndham's remaining 52 management and franchise contracts
(excluding 16 hotels that Old Wyndham managed that are owned by Patriot), the
Wyndham and ClubHouse proprietary brand names, and the Wyndham hotel management
company were transferred to corporate subsidiaries of Patriot (collectively, the
"New Non-Controlled Subsidiaries"). Patriot owns a 99% non-voting interest and
Wyndham International owns the 1% controlling voting interest in each of the New
Non-Controlled Subsidiaries. Therefore, the operating results of the New
Non-Controlled Subsidiaries will be combined with those of Wyndham International
for financial reporting purposes. Patriot will account for its investment in the
New Non-Controlled Subsidiaries using the equity method of accounting. The total
purchase consideration for the Wyndham Merger of approximately $982 million
consisted of 21,594,137 Paired Shares and 4,860,876 shares of Series A
Convertible Preferred Stock of Patriot (which are convertible on a one-for-one
basis into Paired Shares), cash of approximately $339 million to repay debt and
pay Old Wyndham shareholders who elected to receive cash (which was financed
with funds drawn on the Companies' revolving credit facility (the "Revolving
Credit Facility"), and the assumption of approximately $59 million in debt.
WHG Transactions
On January 16, 1998, pursuant to the Agreement and Plan of Merger dated as
of September 30, 1997 (the "WHG Merger Agreement) between Patriot, Wyndham
International and WHG Casinos & Resorts Inc. ("WHG"), a subsidiary of Wyndham
International merged with and into WHG, with WHG being the surviving corporation
(the "WHG Merger"). As a result of the WHG Merger, Wyndham International
acquired the 570-room Condado Plaza Hotel & Casino, a 50% interest in the
partnership that owns the 389-room El San Juan Hotel & Casino and a 23.3%
interest in the partnership that owns the 751-room El Conquistador Resort &
Country Club (the "El Conquistador"), all of which are located in Puerto Rico.
In addition, Wyndham International acquired a 62% interest in Williams
Hospitality Group, Inc., the management company for the three hotels and the Las
Casitas Village at the El Conquistador. A total of 5,004,690 Paired Shares were
issued in connection with the WHG Merger and approximately $21.3 million of debt
was assumed, resulting in total purchase consideration of approximately $159.4
million.
Effective March 1, 1998, Patriot acquired from unaffiliated third parties a
40% interest in the El San Juan Hotel & Casino, an aggregate 68.62% equity
interest in the El Conquistador and a 38% interest in Williams Hospitality
Group, Inc. for approximately $31 million in cash and issuance of 1,818,182
Paired Shares valued at approximately $49 million (collectively, these
transactions and the WHG Merger are referred to herein as the "WHG
Transactions"). Wyndham International owns the controlling general partner
interest in the partnerships that own the El San Juan Hotel & Casino and the El
Conquistador. Wyndham International also holds voting control of Williams
Hospitality Group, Inc. Therefore, the operating results of these entities will
be combined with those of Wyndham International for financial reporting
purposes. Patriot will account for its investment in these entities using the
equity method of accounting.
Buena Vista Acquisition
On January 14, 1998, Patriot, through the Patriot Partnership, acquired an
aggregate 95% equity interest in the Buena Vista Palace Hotel in Orlando,
Florida for an aggregate purchase price of approximately $148 million, including
the assumption of approximately $50.3 million of indebtedness (the "Buena Vista
Acquisition"). As part of the agreement, Patriot was also granted an option to
acquire the remaining 5% equity interest in the hotel. In addition, a
participating note that also encumbers the hotel and which Wyndham International
had acquired in 1997
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was modified to reflect an outstanding principal balance of $23.8 million
(Wyndham International's acquisition price). The Patriot Partnership leased the
hotel to Wyndham International pursuant to a three-year Participating Lease
agreement. The hotel is being managed by a third party Operator.
PENDING TRANSACTIONS
CHCI Merger
Patriot, Wyndham International and CHC International, Inc. ("CHCI") entered
into an Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI
Merger Agreement"), providing, subject to regulatory approvals, for the merger
of the hospitality-related businesses of CHCI with and into Wyndham
International with Wyndham International being the surviving company (the "CHCI
Merger"). Subject to regulatory approvals, CHCI's gaming operations will be
transferred to a new legal entity prior to the CHCI Merger and such operations
will not be a part of the transaction. It is anticipated that the CHCI Merger
will be consummated in the second quarter of 1998. As a result of the CHCI
Merger, Wyndham International, through its subsidiaries, will acquire the
remaining 50% investment interest in GAH-II, L.P. (Wyndham International
currently owns 50%), the remaining 17 leases and 16 of the associated management
contracts related to the Patriot hotels leased by CHC Lease Partners, 12
third-party management contracts, two third-party lease contracts, the Grand Bay
and Registry Hotels & Resorts proprietary brand names and certain other
hospitality management assets. Wyndham International has also agreed to provide
CHCI with a $7 million line of credit until such time as the CHCI Merger is
completed.
By operation of the CHCI Merger, each issued and outstanding share of
common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain
stock option rights will be converted into the right to receive shares of Series
A Redeemable Convertible Preferred Stock, par value $0.01 per share of Wyndham
International (the "Wyndham International Series A Preferred Stock") and shares
of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share,
of Wyndham International (the "Wyndham International Series B Preferred Stock").
The formula for determining the exchange ratio of CHCI Shares for Wyndham
International Series A Preferred Stock and Wyndham International Series B
Preferred Stock is based on issuing an aggregate of approximately 4,396,000
shares of Wyndham International preferred stock (based on an aggregate purchase
value of approximately $102.2 million and a market price per paired share of
$23.25), subject to reduction if certain specified events occur and subject to
increase representing adjustments for dividends paid on paired shares of Patriot
and Wyndham International common stock after September 30, 1997. Generally, the
aggregate number of shares of Wyndham International preferred stock that each
shareholder shall have the right to receive pursuant to the CHCI Merger shall
consist of, to the extent possible, an equal number of Wyndham International
Series A Preferred Stock and Wyndham International Series B Preferred Stock.
Interstate Merger
On December 2, 1997, Patriot and Wyndham International entered into an
Agreement and Plan of Merger (the "Interstate Merger Agreement") pursuant to
which Interstate Hotels Company ("Interstate") would merge with and into Patriot
with Patriot being the surviving corporation (the "Interstate Merger"). Pursuant
to the Interstate Merger Agreement, stockholders of Interstate could elect to
convert each of their shares of Interstate common stock into the right to
receive either (i) $37.50 in cash, subject to proration in certain circumstances
(the "Interstate Cash Consideration"), or (ii) a number of Paired Shares based
on an exchange ratio of Paired Shares for each share of Interstate common stock
not exchanged for cash (the "Interstate Exchange Ratio"). Such elections by
stockholders of Interstate were to be prorated to ensure that 40% of the
outstanding shares of Interstate common stock was converted into the right to
receive Interstate Cash Consideration and that the remaining 60% of the
outstanding shares of Interstate common stock was converted into the right to
receive Paired Shares at the Interstate Exchange Ratio, subject to adjustment in
certain circumstances for the exercise of dissenters' rights. The special
meetings of the stockholders of Patriot, Wyndham International and Interstate at
which approval of the Interstate Merger was to be sought were originally
scheduled for March 30, 1998.
On March 23, 1998, Patriot and Interstate jointly announced that the
measurement period to determine the exchange ratio in connection with the
Interstate Merger concluded on March 20, 1998 and that the Interstate Exchange
Ratio had been set at 1.341 Paired Shares for each Interstate share.
On March 23, 1998 Patriot also announced that Interstate shareholders
receiving Paired Shares in the Interstate Merger would receive Patriot's regular
quarterly dividend of 32 cents per Paired Share for the first quarter of 1998.
Patriot currently anticipates that this dividend will be paid following the
consummation of the Interstate Merger. Additionally, Patriot announced that
Interstate shareholders receiving Paired Shares in the Interstate Merger would
also participate with all other Patriot shareholders in a special distribution
of accumulated earnings and profits from Patriot's recent acquisition of
Wyndham Hotel Corporation. This special distribution, currently estimated to
total approximately 30 cents per Paired Share, is also currently anticipated to
be paid following the consummation of the Interstate Merger. The record and
payment dates for these distributions have not yet been set, but are currently
anticipated to be established to allow Interstate shareholders receiving Paired
Shares in the Interstate Merger to receive both payments.
On March 26, 1998, Marriott International, Inc. ("Marriott") sued
Interstate in the United States District Court for the District of Maryland (the
"Marriott Litigation") seeking an injunction against the Interstate Merger. By
agreement of the parties the complaint was dismissed without prejudice during
settlement discussions until March 30, 1998. On March 30, 1998, Marriott
re-filed its complaint and sought a temporary restraining order and preliminary
injunction. In its complaint Marriott asserted certain rights with respect to 29
hotels owned and/or operated by certain affiliates and subsidiaries of
Interstate under direct franchise agreements with Marriott, as well as certain
rights concerning any transfer of control of those Interstate-related
franchisees. The alleged rights asserted by Marriott included, among others, a
right of first refusal over 19 of the hotels, rights of consent allegedly
prohibiting Interstate from engaging in any transaction that constitutes a
transfer of the franchise agreement or a change in control of the franchisees
without Marriott's prior written consent, rights of non-competition allegedly
prohibiting Interstate from owning, operating, or being connected or associated
with a company that owns the trade name of a chain of hotels which competes with
Marriott without Marriott's consent, as well as a right of first refusal to
acquire all of the equity interests in Interstate. In December 1997, Patriot and
Marriott had entered into a non-binding letter agreement regarding these matters
(please see the press release of Patriot dated March 30, 1998 and attached
hereto as Exhibit 99.1).
On March 30, 1998, Patriot, Wyndham International and Interstate each
elected to convene and then adjourn their respective stockholders meetings to
April 2, 1998 at 1:00 pm (CST) so as to permit additional time to negotiate with
Marriott.
Also on March 30, 1998, Patriot and Wyndham International filed a complaint
in the District Court of Dallas County, Texas against Marriott alleging that
Marriott had tortiously interfered with the Interstate Merger Agreement and
was tortiously interfering with potential new business relationships and
contractual opportunities.
On March 31, Marriott filed an Amended Verified Complaint which, among
other things, added allegations and sought injunctive relief for alleged
violations of the Lanham Act allegedly to be caused by any transfer by
Interstate, without the consent of Marriott, of rights to use certain marks
registered by Marriott.
On April 2, 1998, the United States District Court for the District of
Maryland denied Marriott's motion for a temporary restraining order to block the
Interstate Merger and for preliminary injunctive relief. Marriott appealed the
denial and the emergency judge sitting for the United States Court of Appeals
for the Fourth Circuit instructed the parties not to close the Interstate Merger
before noon on Friday, April 3, 1998, to permit the appeals court to consider a
request by Marriott for a temporary injunction pending expedited appeal of the
District Court decision denying injunctive relief. Also on April 2, 1998, the
stockholders of both Patriot and Interstate voted to approve the proposed
Interstate Merger. For additional information, please see the press release of
Patriot dated April 2, 1998 and attached hereto as Exhibit 99.2 and the press
release of Patriot dated April 2, 1998 and attached hereto as Exhibit 99.3.
On April 3, 1998, the emergency judge sitting for the United States
District Court of Appeals for the Fourth Circuit issued a temporary injunction
to preserve the status quo prohibiting Patriot and Interstate from consummating
the Interstate Merger pending a hearing on Marriott's appeal by a three judge
panel of the Fourth Circuit. Interstate requested an immediate hearing of
Marriott's appeal of the District Court's order. On April 6, 1998, the Fourth
Circuit Court of Appeals scheduled a hearing for Wednesday, April 8, 1998 at
2:30 p.m. to Marriott's appeal of the District Court's order. For additional
information, please see the press release of Patriot dated April 2, 1998 and
attached hereto as Exhibit 99.4 and the press release of Patriot dated April 6,
1998 and attached hereto as Exhibit 99.5.
On April 8, 1998, the United States Court of Appeals for the Fourth Circuit
issued a preliminary injunction enjoining Interstate from transferring control,
directly or indirectly, in the 29 Marriott-franchised hotels which were the
subject of the Marriott Litigation and remanded the case to the District Court
for reconsideration and expedited resolution. On April 8, 1998, Interstate also
announced that it would permit its shareholders who had previously made cash
elections to request the return of that portion of their shares which would not
be exchanged for cash upon completion of the Interstate Merger.
The April 2, 1998 order of the District Court had included an order that
Marriott join Patriot to the Marriott Litigation as a necessary party. On April
14, 1998, Marriott moved for leave to file a second amended complaint which,
among other things, added Patriot and Wyndham International as additional
defendants in the Marriott Litigation. On April 15, 1998, the District Court
entered an order granting Marriott leave to file the Amended Complaint, thereby
joining Patriot and Wyndham International as defendants in the litigation.
Patriot currently expects to file its answer to that complaint no later than
April 23, 1998.
On April 15, 1998, Patriot and Interstate announced that the United States
District Court for the District of Maryland had scheduled April 28, 1998 to
commence trial on the Marriott Litigation. Although the trial may actually
commence a few days later than April 28, 1998, Patriot and Wyndham International
currently anticipate that the trial will conclude by May 15, 1998.
Also, on April 15, 1998, Patriot and Interstate agreed that, upon written
request to the exchange agent, Interstate shareholders will also have the option
to revoke their cash elections and request the return of all of their Interstate
shares. However, to the extent that Interstate shareholders request the return
of shares that would have been entitled to be exchanged for cash upon
consummation of the Interstate Merger, such shares may not subsequently be
resubmitted for cash and will instead be exchanged for 1.341 Paired Shares upon
consummation of the Interstate Merger. Further, the revocation of cash elections
will not alter the number of shares to be exchanged for cash by those
shareholders who choose not to revoke their cash elections. By virtue of such
revocations, the total cash consideration in the Interstate Merger will be
reduced pro rata such that shareholders who retain their cash elections will not
have a greater number of shares exchanged for cash.
Representatives of Patriot, Wyndham International and Marriott have engaged
in negotiations seeking to resolve the matters and, as of the date of this
Report, Patriot and Wyndham International expect these negotiations to
continue. No assurances can be made regarding whether, or upon what terms, the
Interstate Merger will be consummated. Neither can any assurances be made
regarding the timing of any potential consummation of the Interstate Merger.
Additionally, no assurances can be made regarding the probable outcome of the
Marriott Litigation, or the impact of any potential resolution of the Marriott
Litigation upon the Interstate Merger or the financial condition or results of
operations of Patriot or Wyndham International.
FINANCING TRANSACTIONS
Patriot has received a commitment from The Chase Manhattan Bank and Chase
Securities, Inc. and PaineWebber Real Estate Securities, Inc. to increase
Patriot's existing credit facilities by $1.45 billion from the current $1.25
billion. Patriot's existing credit facilities will be amended and restated to
reflect a total credit facility
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of $2.7 billion. The new credit facility will be comprised of the $900 million
revolving credit facility and the $350 million term loan currently in place as
well as a series of term loans totaling $1.45 billion with varying maturities up
to five years. Interest will be based on Patriot's leverage ratio and may vary
from 1.50% to 2.50% over LIBOR. The credit facilities will be secured by stock
and partnership interests in the assets of Patriot. The additional financing
will be primarily utilized to fund the Interstate Merger.
FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements of Businesses Acquired or to be Acquired
The index to the financial information for Wyndham Hotel Corporation, WHG
Resorts & Casinos Inc. (including financial statements for its significant
non-consolidated affiliates, Posadas de San Juan Associates, WKA El Con
Associates and El Conquistador Partnership L.P.), CHC International, Inc.
Hospitality Division and Interstate Hotels Company is included on page F-1 of
this report.
Pro Forma Financial Information
The index to the separate and combined pro forma financial information for
Patriot American Hospitality, Inc. and Wyndham International, Inc. is included
on page F-1 of this report.
Exhibits
Exhibit
Number Description
------ ----------------------------------
23.1 Consent of Coopers & Lybrand L.L.P. Dallas, Texas
23.2 Consent of Ernst & Young LLP
23.3 Consent of Price Waterhouse LLP
23.4 Consent of Coopers & Lybrand L.L.P. Pittsburgh, Pennsylvania
99.1 Press Release dated March 30, 1998 - Patriot American
Hospitality, Inc., Wyndham International, Inc. and Interstate
Hotels Company Adjourn Shareholders' Meetings on Merger
99.2 Press Release dated April 2, 1998 - Patriot American
Hospitality, Inc. and Interstate Merger Cleared by Court to
Proceed as Planned
99.3 Press Release dated April 2, 1998 - Patriot American/Interstate
Merger Receives Shareholder Approval
99.4 Press Release dated April 3, 1998 - Patriot American
Hospitality, Inc., Wyndham International, Inc. and Interstate
Hotels Company Update Status of Legal Proceedings Regarding
Merger of Patriot and Interstate
99.5 Press Release dated April 6, 1998 - Patriot American
Hospitality, Inc. and Interstate Hotels Company Announce
Scheduling of Court Hearing
99.6 Press Release dated April 8, 1998 - Patriot American, Wyndham
International and Interstate Hotels Update Status of Legal
Proceedings Regarding Merger of Patriot and Interstate
99.7 Press Release dated April 15, 1998 - Patriot American
Hospitality, Wyndham International and Interstate Hotels Company
Announce Setting of Trial Date for Marriott Litigation; Patriot
and Interstate Provide Interstate Shareholders Option to Revoke
Cash Elections
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrants have duly caused the report to be signed on their behalf by the
undersigned thereunto duly authorized.
DATED: April 20, 1998
PATRIOT AMERICAN HOSPITALITY, INC.
By: /s/ Anne L. Raymond
----------------------------------------------------
Anne L. Raymond
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Lawrence S. Jones
----------------------------------------------------
Lawrence S. Jones
Executive Vice President and Treasurer
(Principal Accounting Officer)
WYNDHAM INTERNATIONAL, INC.
By: /s/ Lawrence S. Jones
----------------------------------------------------
Lawrence S. Jones
Executive Vice President and Treasurer
(Principal Accounting and Financial Officer)
5
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PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
INDEX TO FINANCIAL INFORMATION
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Page
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PRO FORMA FINANCIAL INFORMATION
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Combined Patriot American Hospitality, Inc. and Wyndham International, Inc.:
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1997 (unaudited)........................................................................... F-7
Pro Forma Condensed Combined Balance Sheet as of December 31, 1997 (unaudited)............................ F-10
Patriot American Hospitality Inc.:
Pro Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1997 (unaudited)........................................................................... F-13
Wyndham International, Inc.:
Pro Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1997 (unaudited)........................................................................... F-16
HISTORICAL FINANCIAL INFORMATION
Wyndham Hotel Corporation:
Report of Independent Accountants--Coopers & Lybrand L.L.P. .............................................. F-19
Consolidated Balance Sheets as of December 31, 1996 and 1997.............................................. F-20
Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997.................... F-21
Consolidated Statements of Partners' Capital and Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997........................................................................ F-22
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................ F-23
Notes to Consolidated Financial Statements................................................................ F-24
WHG Resorts & Casinos Inc.
Report of Independent Auditors - Ernst & Young LLP........................................................ F-46
Consolidated Balance Sheets at June 30, 1997 and 1996 and December 31, 1997 (unaudited)................... F-47
Consolidated Statements of Operations for the years ended June 30, 1997, 1996
and 1995 and the six months ended December 31, 1997 and 1996 (unaudited)............................... F-48
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 and the six
months ended December 31, 1997 and 1996 (unaudited)..................................................... F-49
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, 1996 and 1995 and the
six months ended December 31, 1997 (unaudited).......................................................... F-50
Notes to Consolidated Financial Statements................................................................ F-51
Financial Statement Schedule II - Valuation and Qualifying Accounts for the years ended
June 30, 1997, 1996 and 1995............................................................................ F-64
Posadas de San Juan Associates, a significant non-consolidated affiliate of WHG:
Report of Independent Auditors - Ernst & Young LLP........................................................ F-65
Balance Sheets at June 30, 1997 and 1996 and December 31, 1997 (unaudited)................................ F-66
Statements of Operations and Deficit for the years ended June 30, 1997, 1996 and 1995 and the six
months ended December 31, 1997 and 1996 (unaudited).................................................... F-67
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 and the six months ended
December 31, 1997 and 1996 (unaudited).................................................................. F-68
Notes to Financial Statements............................................................................. F-69
Financial Statement Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1997,
1996 and 1995........................................................................................... F-74
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F-1
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PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
INDEX TO FINANCIAL INFORMATION - Continued
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Page
HISTORICAL FINANCIAL INFORMATION - Continued ----
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WKA El Con Associates, a significant non-consolidated affiliate of WHG:
Report of Independent Auditors - Ernst & Young LLP...................................................... F-75
Balance Sheets at June 30, 1997 and 1996 and December 31, 1997 (unaudited).............................. F-76
Statements of Operations and Deficit for the years ended June 30, 1997, 1996 and 1995 and the
six months ended December 31, 1997 and 1996 (unaudited)............................................... F-77
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 and the
six months ended December 31, 1997 and 1996 (unaudited)............................................... F-78
Notes to Financial Statements........................................................................... F-79
El Conquistador Partnership L.P., a significant non-consolidated affiliate of WHG:
Report of Independent Auditors - Ernst & Young LLP...................................................... F-82
Balance Sheets at March 31, 1997 and 1996 and December 31, 1997 (unaudited)............................. F-83
Statements of Operations and Deficiency in Partners' Capital for the years ended March 31, 1997,
1996 and 1995 and the nine months ended December 31, 1997 and 1996 (unaudited)........................ F-84
Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995 and the nine
months ended December 31, 1997 and 1996 (unaudited)................................................... F-85
Notes to Financial Statements........................................................................... F-86
CHC International, Inc. - Hospitality Division:
Report of Independent Certified Public Accountants -- Price Waterhouse, LLP................................ F-93
Balance Sheets as of November 30, 1996 and 1997 and December 31, 1997 (unaudited).......................... F-94
Statements of Operations for the years ended November 30, 1995, 1996 and 1997 and the three
months ended February 28, 1997 (unaudited)............................................................... F-95
Statements of Changes in Stockholders' Equity (Deficit) for the years ended
November 30, 1995, 1996 and 1997 and the three months ended February 28, 1997 (unaudited)................ F-96
Statements of Cash Flows for the years ended November 30, 1995, 1996 and 1997 and the three
months ended February 28, 1997 (unaudited)............................................................... F-97
Notes to Financial Statements.............................................................................. F-99
Interstate Hotels Company:
Report of Independent Accountants -- Coopers & Lybrand L.L.P. ............................................. F-122
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-123
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997................. F-124
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997......................................................................... F-125
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................. F-126
Notes to Consolidated Financial Statements................................................................. F-127
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F-2
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PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
BACKGROUND
On July 1, 1997, the Virginia corporation formerly known as Patriot
American Hospitality, Inc. ("Old Patriot"), merged with and into California
Jockey Club ("Cal Jockey"), with Cal Jockey being the surviving legal entity
(the "Cal Jockey Merger"). Cal Jockey's shares of common stock are paired and
trade together with the shares of common stock of Bay Meadows Operating Company
("Bay Meadows") as a single unit pursuant to a stock pairing arrangement. In
connection with the Cal Jockey Merger, Cal Jockey changed its name to Patriot
American Hospitality, Inc. ("Patriot") and Bay Meadows changed its name to
Patriot American Hospitality Operating Company ("Patriot Operating Company"). On
January 5, 1998, as a result of the merger of Wyndham Hotel Corporation with and
into Patriot (as discussed below), Patriot Operating Company changed its name to
"Wyndham International, Inc." and is referred to herein, collectively with its
subsidiaries, as "Wyndham International." The term "Companies" as used herein
includes Patriot, Wyndham International and their respective subsidiaries.
The Cal Jockey Merger was accounted for as a reverse acquisition whereby
Cal Jockey was considered to be the acquired company for accounting purposes.
Consequently, the historical financial information of Old Patriot became the
historical financial information for Patriot. For accounting purposes, Wyndham
International commenced its operations concurrent with the closing of the Cal
Jockey Merger on July 1, 1997.
By operation of the Cal Jockey Merger, each issued and outstanding share of
common stock, no par value per share of Old Patriot ("Old Patriot Common Stock")
was converted into 0.51895 shares of common stock, par value $0.01 per share of
Patriot ("Patriot Common Stock") and 0.51895 shares of common stock, par value
$0.01 per share of Wyndham International ("Wyndham International Common Stock"),
which shares are paired and transferable only as a single unit (collectively,
shares of Patriot Common Stock and shares of Wyndham International Common Stock
are referred to herein as the "Paired Shares"). Each paired share of Cal Jockey
and Bay Meadows common stock remained outstanding and represented the same
number of paired shares of Patriot Common Stock and Wyndham International Common
Stock.
In connection with the Cal Jockey Merger, Bay Meadows formed an Patriot
American Hospitality Operating Partnership, L.P. (the "OpCo Partnership") into
which Bay Meadows contributed its assets in exchange for units of limited
partnership interest ("OP Units") of the OpCo Partnership, and Cal Jockey
contributed certain of its assets to Patriot American Hospitality Partnership,
L.P. (the "Patriot Partnership") in exchange for OP Units of the Patriot
Partnership. Collectively, the OpCo Partnership and the Patriot Partnership are
referred to herein as the "Operating Partnerships." Subsequent to completion of
the Cal Jockey Merger and the transactions contemplated by the Cal Jockey Merger
agreement, substantially all of the operations of Patriot and Wyndham
International have been conducted through the Operating Partnerships and their
subsidiaries.
Patriot leases each of its hotels, except the six hotels, which are
separately owned through special purpose entities, to Wyndham International or
to other third party lessees (the "Lessees") that are responsible for operating
the hotels. The hotels are generally leased for periods ranging from one to
twelve years pursuant to separate participating leases providing for the payment
of the greater of base or participating rent, plus certain additional charges,
as applicable (the "Participating Leases"). The Lessees, in turn, have entered
into separate agreements with hotel management entities (the "Operators") to
manage the hotels.
MERGERS AND ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997
Wyndham Merger
On January 5, 1998, pursuant to the Agreement and Plan of Merger dated as
of April 14, 1997, as thereafter amended, (the "Wyndham Merger Agreement")
between Patriot, Wyndham International and Wyndham Hotel Corporation ("Old
Wyndham"), Old Wyndham merged with and into Patriot, with Patriot being the
surviving corporation (the "Wyndham Merger").
F-3
<PAGE>
Patriot, as a result of the Wyndham Merger, acquired ownership of ten
Wyndham hotels and 14 Clubhouse hotels and leased such hotels to Wyndham
International. The 13 hotel leases assumed by Patriot were sub-leased to Wyndham
International. Old Wyndham's remaining 52 management and franchise contracts
(excluding 16 hotels that Old Wyndham managed that are owned by Patriot), the
Wyndham and ClubHouse proprietary brand names, and the Wyndham hotel management
company were transferred to corporate subsidiaries of Patriot (collectively, the
"New Non-Controlled Subsidiaries"). Patriot owns a 99% non-voting interest and
Wyndham International owns the 1% controlling voting interest in each of the New
Non-Controlled Subsidiaries. Therefore, the operating results of the New
Non-Controlled Subsidiaries will be combined with those of Wyndham International
for financial reporting purposes. Patriot will account for its investment in the
New Non-Controlled Subsidiaries using the equity method of accounting. The total
purchase consideration for the Wyndham Merger of approximately $982,000
consisted of 21,594,137 Paired Shares and 4,860,876 shares of Series A
Convertible Preferred Stock of Patriot (which are convertible on a one-for-one
basis into Paired Shares), cash of approximately $339,000 to repay debt and pay
Old Wyndham shareholders who elected to receive cash (which was financed with
funds drawn on the Companies' revolving credit facility (the "Revolving Credit
Facility"), and the assumption of approximately $59,063 in debt.
WHG Transactions
On January 16, 1998, pursuant to the Agreement and Plan of Merger dated as
of September 30, 1997 (the "WHG Merger Agreement) between Patriot, Wyndham
International and WHG Casinos & Resorts Inc. ("WHG"), a subsidiary of Wyndham
International merged with and into WHG, with WHG being the surviving corporation
(the "WHG Merger"). As a result of the WHG Merger, Wyndham International
acquired the 570-room Condado Plaza Hotel & Casino, a 50% interest in the
partnership that owns the 389-room El San Juan Hotel & Casino and a 23.3%
interest in the partnership that owns the 751-room El Conquistador Resort &
Country Club (the "El Conquistador"), all of which are located in Puerto Rico.
In addition, Wyndham International acquired a 62% interest in Williams
Hospitality Group, Inc., the management company for the three hotels and the Las
Casitas Village at the El Conquistador. A total of 5,004,690 Paired Shares were
issued in connection with the WHG Merger and approximately $21,327 of debt was
assumed, resulting in total purchase consideration of approximately $159,363.
Effective March 1, 1998, Patriot acquired from unaffiliated third parties a
40% interest in the El San Juan Hotel & Casino, an aggregate 68.62% equity
interest in the El Conquistador and a 38% interest in Williams Hospitality
Group, Inc. for approximately $31,000 in cash and issuance of 1,818,182 Paired
Shares valued at approximately $49,227 (collectively, these transactions and the
WHG Merger are referred to herein as the "WHG Transactions"). Wyndham
International owns the controlling general partner interest in the partnerships
that own the El San Juan Hotel & Casino and the El Conquistador. Wyndham
International also holds voting control of Williams Hospitality Group, Inc.
Therefore, the operating results and financial position of these entities will
be combined with those of Wyndham International for financial reporting
purposes. As a result, approximately $183,453 of debt related to the
partnerships that own the El San Juan Hotel & Casino and the El Conquistador has
also been reflected in the Companies' pro forma combined balance sheet. Patriot
will account for its investment in these entities using the equity method of
accounting.
Buena Vista Acquisition
On January 14, 1998, Patriot, through the Patriot Partnership, acquired an
aggregate 95% equity interest in the Buena Vista Palace Hotel in Orlando,
Florida for an aggregate purchase price of approximately $148,002, including the
assumption of approximately $50,324 of indebtedness and the issuance of 51,290
OP Units of the Operating Partnerships (the "Buena Vista Acquisition"). As part
of the agreement, Patriot was also granted an option to acquire the remaining 5%
equity interest in the hotel. In addition, a participating note that also
encumbers the hotel and which Wyndham International had acquired in 1997 (the
"Participating Note") was modified to reflect an outstanding principal balance
of $23,750 (Wyndham International's acquisition price). The Patriot Partnership
leased the hotel to Wyndham International pursuant to a three-year Participating
Lease agreement. The hotel is being managed by a third-party Operator.
PENDING TRANSACTIONS
CHCI Merger
Patriot, Wyndham International and CHCI entered into an Agreement and Plan
of Merger dated as of September 30, 1997 (the "CHCI Merger Agreement"),
providing, subject to regulatory approvals, for the merger of the
hospitality-related businesses of CHCI with and into Wyndham International with
Wyndham International being the surviving company (the "CHCI Merger"). Subject
to regulatory approvals, CHCI's gaming operations will be
F-4
<PAGE>
transferred to a new legal entity prior to the CHCI Merger and such operations
will not be a part of the transaction. It is anticipated that the CHCI Merger
will be consummated in the second quarter of 1998. As a result of the CHCI
Merger, Wyndham International, through its subsidiaries, will acquire the
remaining 50% investment interest in GAH, the remaining 17 leases and 16 of the
associated management contracts related to the Patriot hotels leased by CHC
Lease Partners, 12 third-party management contracts, 2 third-party lease
contracts, the Grand Bay and Registry Hotels & Resorts proprietary brand names
and certain other hospitality management assets. Wyndham International has also
agreed to provide CHCI with a $7,000 line of credit until such time as the CHCI
Merger is completed.
By operation of the CHCI Merger, each issued and outstanding share of
common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain
stock option rights will be converted into the right to receive shares of Series
A Redeemable Convertible Preferred Stock, par value $0.01 per share of Wyndham
International (the "Wyndham International Series A Preferred Stock") and shares
of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share,
of Wyndham International (the "Wyndham International Series B Preferred Stock").
The formula for determining the exchange ratio of CHCI Shares for Wyndham
International Series A Preferred Stock and Wyndham International Series B
Preferred Stock is based on issuing an aggregate of approximately 4,396,000
shares of Wyndham International preferred stock (based on an aggregate purchase
value of approximately $102,200 and a market price per paired share of $23.25),
subject to reduction if certain specified events occur and subject to increase
representing adjustments for dividends paid on paired shares of Patriot and
Wyndham International common stock after September 30, 1997. Generally, the
aggregate number of shares of Wyndham International preferred stock that each
shareholder shall have the right to receive pursuant to the CHCI Merger shall
consist of, to the extent possible, an equal number of Wyndham International
Series A Preferred Stock and Wyndham International Series B Preferred Stock.
Interstate Merger
On December 2, 1997, Patriot, Wyndham International and Interstate Hotels
Company ("Interstate") entered into an Agreement and Plan of Merger (the
"Interstate Merger Agreement") providing for the merger of Interstate with and
into Patriot (the "Interstate Merger") with Patriot being the surviving company.
Pursuant to the Interstate Merger Agreement, stockholders of Interstate will
have the right to elect to convert each of their shares of Interstate common
stock into the right to receive either (i) $37.50 in cash, subject to proration
in certain circumstances (the "Interstate Cash Consideration"), or (ii) a number
of Paired Shares of Patriot and Wyndham International common stock based on an
exchange ratio of 1.341 Paired Shares for each share of Interstate common stock
not exchanged for cash (the "Interstate Exchange Ratio"). After the elections
are made by stockholders of Interstate, proration will be used to ensure that
40% of the outstanding shares of Interstate common stock will be converted into
the right to receive Interstate Cash Consideration and that the remaining 60% of
the outstanding shares of Interstate common stock will be converted into the
right to receive Paired Shares at the Interstate Exchange Ratio, subject to
adjustment in certain circumstances for the exercise of dissenters' rights.
Financing Transactions
Patriot has received a commitment from The Chase Manhattan Bank and Chase
Securities, Inc. and PaineWebber Real Estate Securities, Inc. to increase
Patriot's existing credit facilities by $1,450,000 from the current $1,250,000.
Patriot's existing credit facilities will be amended and restated to reflect a
total credit facility of $2,700,000. The new credit facility will be comprised
of the $900,000 revolving credit facility and the $350,000 term loan currently
in place as well as a series of term loans totaling $1,450,000 with varying
maturities up to five years. Interest will be based on Patriot's leverage ratio
and may vary from 1.50% to 2.50% over LIBOR. The credit facilities will be
secured by stock and partnership interests in the assets of Patriot. The
additional financing will be primarily utilized to fund the Interstate Merger.
SUMMARY
As of April 10, 1998, Patriot owned interests in 136 hotels and resorts,
leased 14 hotels and held an approximate 91.7% ownership interest in the Patriot
Partnership. Wyndham International held an approximate 90.3% ownership interest
in the OpCo Partnership.
The unaudited Pro Forma Financial Statements as of December 31, 1997
reflect a 90.2% ownership interest in the Patriot Partnership and a 91.2%
ownership interest in the OpCo Partnership, which represents the estimated
ownership interests subsequent to consummation of the CHCI Merger and the
Interstate Merger.
F-5
<PAGE>
As of April 10, 1998, 31 of Patriot's hotels are leased to independent
Lessees, and 113 hotels are leased to Wyndham International, including 13 hotels
leased from third-party owners. As a result of the CHCI Merger and the
Interstate Merger, Wyndham International will acquire the leases for 17 Patriot
hotels currently leased to CHC Lease Partners, 41 Interstate owned hotels to be
acquired by Patriot and 89 leased hotels, as well as approximately 83 third-
party management contracts.
The following unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1997 of Patriot and Wyndham
International are derived from the individual unaudited Pro Forma Condensed
Consolidated Statements of Operations of Patriot and Wyndham International which
are located elsewhere in this Joint Current Report. Such pro forma information
is based in part upon:
(i) the Separate and Combined Statements of Operations of Patriot and Wyndham
International filed with the Companies' Joint Annual Report on Form 10-K
for the year ended December 31, 1997;
(ii) the historical financial statements of CHC International, Inc. Hospitality
Division, Wyndham Hotel Corporation, Interstate Hotels Company, WHG Resorts
& Casinos, Inc., Posadas de San Juan Associates, WKA El Con Associates, and
El Conquistador Partnership, L.P. included in this Joint Current Report;
and
The following unaudited Pro Forma Condensed Combined Statements of
Operations assume that the acquisition of 45 hotels, the mergers and other
acquisition of hotel management related assets, and the various financing
transactions completed by the Companies during 1997 had occurred as of January
1, 1997. In addition, the Pro Forma Condensed Combined Statements of Operations
assume the following transactions completed during 1998 or to be completed
during 1998 had occurred as of January 1, 1997:
(i) the Wyndham Merger and the related transactions were consummated on terms
set forth in the Wyndham Merger Agreement;
(ii) the WHG Transactions were completed;
(iii) Patriot completed the Buena Vista Acquisition and the Participating Note
held by Wyndham International was modified;
(iv) the CHCI Merger was consummated on terms set forth in the CHCI Merger
Agreement; and
(v) the Interstate Merger was consummated on terms set forth in the Interstate
Merger Agreement.
In management's opinion, all material adjustments necessary to reflect the
effects of these transactions have been made. The following unaudited Pro Forma
Condensed Combined Statements of Operations are not necessarily indicative of
what the actual results of operations of Patriot and Wyndham International would
have been assuming such transactions had been completed as of the beginning of
the period presented, nor do they purport to represent the results of operations
for future periods.
F-6
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
WYNDHAM
PATRIOT INTERNATIONAL ELIMINATION PRO FORMA
PRO FORMA PRO FORMA ENTRIES TOTAL
-------------- --------------- -------------- ---------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Participating lease revenue....................... $512,720 $ -- $(494,937)(A) $ 17,783
Hotel revenue..................................... -- 2,068,917 -- 2,068,917
Racecourse facility, land and hotel lease revenue. 112,608 48,882 (112,274)(B) 49,216
Management fee and service fee income............. -- 115,140 -- 115,140
Interest and other income......................... 3,057 15,222 (17,893)(C) 386
-------- ---------- --------- ----------
Total revenue................................. 628,385 2,248,161 (625,104) 2,251,442
-------- ---------- --------- ----------
Expenses:
Departmental costs -- hotel operations............ -- 838,913 -- 838,913
Racing facility operations........................ -- 44,527 (5,260)(B) 39,267
Direct operating costs of management company and
service department............................... -- 90,012 -- 90,012
General and administrative........................ 9,951 190,339 (24)(C) 200,266
Ground and hotel lease expense.................... 115,288 107,695 (107,014)(B) 115,969
Repair and maintenance............................ -- 91,482 -- 91,482
Utilities......................................... -- 79,696 -- 79,696
Interest expense.................................. 268,464 30,195 (17,869)(C) 280,790 (E)
Real estate and personal property taxes and
casualty insurance............................... 62,591 7,865 -- 70,456
Marketing......................................... -- 162,421 -- 162,421
Management fees................................... -- 20,321 -- 20,321
Depreciation and amortization..................... 181,850 70,811 -- 252,661
Participating lease payments...................... -- 494,937 (494,937)(A) --
-------- ---------- --------- ----------
Total expenses................................ 638,144 2,229,214 (625,104) 2,242,254
-------- ---------- --------- ----------
Income (loss) before equity in earnings of
unconsolidated subsidiaries, income tax provision
and minority interests............................ (9,759) 18,947 -- 9,188
Equity in earnings of unconsolidated
subsidiaries..................................... 7,820 -- (3,763)(D) 4,057
-------- ---------- --------- ----------
Income (loss) before income tax provision and
minority interests................................ (1,939) 18,947 (3,763) 13,245
Income tax provision.............................. (825) (11,187) -- (12,012)
-------- ---------- --------- ----------
Income (loss) before minority interests............ (2,764) 7,760 (3,763) 1,233
Minority interest in the Operating Partnerships... (3,324) (353) -- (3,677)
Minority interest in consolidated subsidiaries.... (9,796) (3,763) 3,763 (D) (9,796)
-------- ---------- --------- ----------
Net income (loss) applicable to common
shareholders...................................... $(15,884) $ 3,644 $ -- $ (12,240)(E)
======== ========== ========= ==========
Basic net (loss)income per Paired Share (F)........ $ (0.12) $ 0.03 $ (0.09)(E)
======== ========== ==========
Diluted net (loss)income per Paired Share (F)...... $ (0.12) $ 0.03 $ (0.09)
======== ========== ==========
</TABLE>
See notes on following page.
F-7
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(A) Represents elimination of participating lease revenue and expense related
to the hotels leased by Patriot to Wyndham International.
(B) Represents elimination of rental income and expense related to the
Racecourse facility, land and hotels leased by Patriot to Wyndham
International.
(C) In connection with the Cal Jockey Merger, the Wyndham Merger and the WHG
Transactions, Patriot (including the Patriot Partnership) subscribed for
shares of Wyndham International Common Stock or OP Units of the OpCo
Partnership and Wyndham International has subscribed for shares of Patriot
Common Stock in order to effect the exchange of Paired Shares or pairs of
OP Units of the Operating Partnerships in consummation of the transactions.
These subscriptions for shares of common stock and OP Units were funded
through the issuance of promissory notes (the "Subscription Notes") payable
to Wyndham International or Patriot, as the case may be. The Subscription
Notes accrue interest at rates ranging from LIBOR plus 1% to a fixed rate
of 8.7% per annum and mature on various dates through January 2001. The pro
forma elimination entry consists of
<TABLE>
<CAPTION>
<S> <C>
Interest income and expense related to the Subscription Notes...................... $14,890
Interest income and expense related to the participating note held by
Wyndham International related to the Buena Vista Palace Hotel..................... 1,809
Interest income and expense related to a note receivable issued
to Old Patriot in connection with the sale of certain assets to PAH RSI, L.L.C.,
which assets were acquired by Wyndham International............................... 1,170
Other intercompany income and expense items........................................ 24
-------
$17,893
=======
</TABLE>
(D) Represents elimination of Patriot's equity in the earnings of certain non-
controlled subsidiaries that were formed in connection with the Wyndham
Merger and will be formed in connection with the Interstate Merger. These
entities are controlled by Wyndham International, and as a result, the
operating results of these entities have been combined with those of
Wyndham International for pro forma financial reporting purposes.
(E) The pro forma amounts presented assume an average interest rate of 7.6176%
per annum (representing LIBOR plus 2.0%) on the amounts outstanding under
the Revolving Credit Facility. Pro forma interest expense, under the new
series of term loans to be issued in connection with the Interstate Merger,
assume an average interest rate of 8% per annum. An increase of 0.25% in
the interest rate on all variable rate debt outstanding would increase pro
forma combined interest expense to $287,715 and increase combined net loss
to $18,747. Basic net loss per Paired Share would be $0.14
(F) The Companies have adopted Statement of Financial Accounting Standards No.
128 "Earnings Per Share" ("Statement 128") for the year ended December 31,
1997. Pro forma earnings per share disclosures have been calculated in
accordance with requirements of Statement 128. Pro forma basic earnings per
Paired Share is computed based on 129,389 weighted average common Paired
Shares outstanding for the period. Shares of common stock granted to
officers and employees of Patriot and Wyndham International are included in
the computation only after the shares become fully vested. Pro forma
diluted earnings per Paired Share is computed based on 141,044 weighted
average common Paired Shares and common Paired Share equivalents
outstanding for the period if dilutive. Diluted combined earnings per share
includes dilutive common stock equivalents and options to purchase common
stock which were outstanding during the period. The number of shares
outstanding related to the options has been calculated by application of
the "treasury stock" method. The number of shares used for the calculation
also includes adjustments to reflect the impact of the conversion of shares
of Patriot and Wyndham International preferred stock into Paired Shares.
F-8
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited Pro Forma Condensed Combined Balance Sheet assumes
the following transactions have occurred as of December 31, 1997:
(i) the Wyndham Merger was consummated on the terms set forth in the Wyndham
Merger Agreement;
(ii) the WHG Transactions were completed;
(iii) Patriot acquired the Buena Vista Palace Hotel and leased such hotel to
Wyndham International;
(iv) the CHCI Merger was consummated on the terms set forth in the CHCI Merger
Agreement; and
(v) the Interstate Merger was consummated on the terms set forth in the
Interstate Merger Agreement.
In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.
The following unaudited Pro Forma Condensed Combined Balance Sheet is
derived from Patriot's and Wyndham International's Combined Balance Sheet as of
December 31, 1997 and should be read in conjunction with the financial
statements filed with the Companies' Joint Annual Report on Form 10-K for the
year ended December 31, 1997).
The unaudited Pro Forma Condensed Combined Balance Sheet reflects
adjustments for the purchase method of accounting whereby the assets and
liabilities owned by Old Wyndham, CHCI, WHG and Interstate are adjusted to
estimated fair market value and Old Wyndham's, CHCI's, WHG's and Interstate's
respective historical shareholders' equity is eliminated. The following Pro
Forma Condensed Combined Balance Sheet is not necessarily indicative of what the
actual financial position would have been assuming such transactions had been
completed as of December 31, 1997, nor does it purport to represent the future
financial position of Patriot and Wyndham International.
F-9
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMPANIES' BUENA
COMBINED WYNDHAM WHG INTERSTATE CHCI VISTA
HISTORICAL MERGER TRANSACTIONS MERGER MERGER ACQUISITION PRO FORMA
(A) (B) (C) (D) (E) (F) TOTAL
------------ ------- ------------ ---------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Net investment in real estate and
related improvements and land held
for development......................$2,044,649 $ 460,288 $405,644 $1,900,499 $ -- $156,155 $4,967,235
Cash and cash equivalents............. 47,436 5,777 24,831 31,988 -- 3,379 113,411
Restricted cash....................... -- 721 -- 3,823 -- -- 4,544
Accounts receivable................... 54,693 23,035 16,678 40,827 -- 3,991 139,224
Investment in unconsolidated
subsidiaries......................... 11,802 4,028 -- 41,297 -- -- 57,127
Mortgage notes and other receivables
from unconsolidated subsidiaries..... 76,419 37,058 -- -- -- -- 113,477
Other notes and receivables........... 12,983 4,092 -- -- -- (8,664)(G) 8,411
Inventories........................... 10,450 -- -- -- -- 495 10,945
Management contract and leasehold
costs................................ 20,879 72,049 -- 130,331 22,911 -- 246,170
Trade names and franchise costs....... 11,166 85,550 -- -- 5,000 -- 101,716
Deferred expenses, net................ 21,417 17,101 4,117 39,146 -- -- 81,781
Deferred acquisition costs............ 52,500 -- -- -- -- (15,086)(H) 37,414
Goodwill, net......................... 126,007 266,976(I) 21,943(I) 113,970(I) 7,269(I) -- 536,165
Other assets.......................... 16,463 34,234 12,540 13,837 394 838 78,306
Income taxes receivable............... 989 1,844 -- 2,104 -- -- 4,937
---------- ---------- -------- ---------- ------- -------- ----------
Total assets.......................$2,507,853 $1,012,753 $485,753 $2,317,822 $35,574 $141,108 $6,500,863
========== ========== ======== ========== ======= ======== ==========
See notes on page F-12.
</TABLE>
F-10
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET-CONTINUED
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COMPANIES' BUENA
COMBINED WYNDHAM WHG INTERSTATE CHCI VISTA
HISTORICAL MERGER TRANSACTIONS MERGER MERGER ACQUISITION PRO FORMA
(A) (B) (C) (D) (E) (F) TOTAL
---------- ---------- ------------- -------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under credit facility and
mortgage notes......................$1,112,337 $ 398,063 $235,780 (J) $1,441,132 (K) $ -- $125,324 $3,312,636
Accounts payable and accrued expenses. 73,273 45,507 36,020 80,411 -- 3,980 239,191
Dividends and distributions payable... 27,636 -- -- -- -- -- 27,636
Sales taxes payable................... 5,616 -- -- -- -- 429 6,045
Deposits.............................. 12,423 2,477 14,557 -- -- 2,164 31,621
Deferred gain......................... -- 11,326 -- -- -- -- 11,326
Due to unconsolidated subsidiaries.... 7,255 -- -- -- -- -- 7,255
Deferred income tax liability......... 9,550 6,507 2,192 27,961 -- -- 46,210
Minority interest in the Operating
Partnerships......................... 220,177 -- -- -- -- 1,421 221,598
Minority interest in other
consolidated subsidiaries............ 49,694 2,480 9,941 17,177 -- 7,790 87,082
Shareholders' equity:
Preferred stock....................... -- 49 (L) -- -- 44 (R) -- 93
Common stock.......................... 1,466 432 (L) 136 (P) 570 (Q) -- -- 2,604
Paid-in capital....................... 1,070,973 588,144 (L) 187,127 (P) 750,571 (Q) 102,156 (R) -- 2,698,971
Unearned stock compensation, net...... (13,116) -- -- -- -- -- (13,116)
Notes receivable from stockholders.... -- (17,389)(M) -- -- -- -- (17,389)
Receivable from affiliates............ -- (1,228)(N) -- -- -- -- (1,228)
Distributions in excess of retained
earnings............................. (69,431) (23,615)(O) -- -- (66,626)(S) -- (159,672)
---------- -------- -------- ---------- ------- -------- ---------
Total shareholders' equity......... 989,892 546,393 187,263 751,141 35,574 -- 2,510,263
---------- -------- -------- ---------- ------- -------- ---------
Total liabilities and
shareholders'
equity...........................$2,507,853 $1,012,753 $485,753 $2,317,822 $35,574 $141,108 $6,500,863
========== ========== ======== ========== ======= ======== ==========
</TABLE>
See notes on following page.
F-11
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(A) Represents the historical combined financial position of Patriot and
Wyndham International as of December 31, 1997.
(B) Represents adjustments to the Companies' combined financial position
assuming the Wyndham Merger and the related transactions had been
consummated as of December 31, 1997.
(C) Represents adjustments to the Companies' combined financial position
assuming the WHG Merger had been consummated and Patriot's acquisition of
equity interests in certain WHG affiliated entities had occurred as of
December 31, 1997.
(D) Represents adjustments to the Companies' combined financial position
assuming the Interstate Merger had been consummated as of December 31,
1997.
(E) Represents adjustments to the Companies' combined financial position
assuming the CHCI Merger had been consummated as of December 31, 1997.
(F) Represents adjustments to the Companies' combined financial position
assuming Patriot had acquired the Buena Vista Palace Hotel and Wyndham
International's Participating Note encumbering the hotel had been modified
as of December 31, 1997.
(G) Represents the elimination of the Participating Note balance related to the
Buena Vista Palace Hotel as of December 31, 1997.
(H) Represents the elimination of Wyndham International's cost to acquire the
Participating Note in excess of the outstanding balance of the note prior
to its modification.
(I) Represents the purchase consideration in excess of the fair market value of
the net assets acquired.
(J) The balance of $235,780 represents the debt assumed in connection with the
WHG Merger of approximately $21,327, approximately $31,000 of additional
funding under the Revolving Credit Facility related to Patriot's
acquisition of certain partners interest in the partnerships that own the
El San Juan Hotel & Casino and the El Conquistador Hotel & Casino and
approximately $183,453 of debt related to these partnerships which are now
consolidated with the Companies' financial statements as a result of
Wyndham International acquiring a controlling interest in these
partnerships.
(K) The balance of $1,441,132 represents debt assumed in connection with the
Interstate Merger of approximately $800,124, of which approximately
$666,850 will be retired, and approximately $1,307,858 of additional
funding under a series of new term loans.
(L) Represents adjustments to record the exchange of Old Wyndham Common Stock
for 21,594,137 Paired Shares and 4,860,876 shares of Series A Convertible
Preferred Stock of Patriot.
(M) Represents shareholder notes purchased by Old Wyndham in connection with
its initial public offering. Such shareholder notes were acquired by
Patriot in connection with the Wyndham Merger.
(N) Represents deferred management fees owed by an affiliate of Old Wyndham
that are deferred until certain operating criteria, as defined per the
management and loan agreement, are met. Such deferred management fees were
acquired by Patriot in connection with the Wyndham Merger.
(O) Represents mortgage prepayment penalties incurred from refinancing of Old
Wyndham debt.
(P) Represents adjustments to record the issuance of 6,822,872 Paired Shares in
connection with the WHG Transactions.
(Q) Represents adjustments to record the exchange of Interstate Common Stock
for approximately 28,503,000 Paired Shares.
(R) Represents adjustments to record the exchange of CHCI Shares for an
aggregate of approximately 4,396,000 shares of Wyndham International Series
A Preferred Stock and Wyndham International Series B Preferred Stock.
(S) Represents an adjustment for the write-off of the estimated cost to acquire
the Participating Leases related to hotels leased by Patriot to CHC Lease
Partners. In connection with the CHCI Merger, Wyndham International will
acquire the remaining 17 Participating Leases held by CHC Lease Partners.
The cost of acquiring these leases will be recorded as an operating expense
in Wyndham International's results of operations. However, because the
intent of the pro forma financial statements is to reflect, among other
things, the expected continuing impact of the CHCI Merger on Wyndham
International, this adjustment has been excluded from the pro forma
statement of operations and has been reflected as an adjustment to retained
earnings for pro forma presentation purposes.
F-12
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PATRIOT 1997 WYNDHAM INTERSTATE OTHER
HISTORICAL TRANSACTIONS MERGER MERGER ADJUSTMENTS PRO FORMA
(A) (B) (C) (D) (E) TOTAL
---------- ------------ ---------- ------------ ------------ ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Participating lease revenue....... $177,659 $105,825 (F) $ 38,389 (F) $163,588 (F) $27,259 (F) $512,720
Racecourse facility, land and
hotel lease revenue............. 2,792 2,802 (G) 23,134 (H) 83,880 (H) -- 112,608
Interest and other income......... 5,103 (2,046) -- -- -- 3,057
-------- -------- -------- -------- ------- --------
Total revenue.................. 185,554 106,581 61,523 247,468 27,259 628,385
-------- -------- -------- -------- ------- --------
Expenses:
General and administrative........ 11,157 (1,406)(I) 200 -- -- 9,951
Ground and hotel lease expense.... 4,117 1,707 (J) 19,336 (K) 84,974 (K) 5,154 115,288
Interest expense.................. 51,000 48,802 (L) 33,500 (L) 120,360 (L) 14,802 (L) 268,464 (W)
Real estate and personal property
taxes and casualty insurance..... 17,958 10,579 8,060 23,294 2,700 62,591
Cost of acquiring leaseholds...... 54,499 (54,499)(M) -- -- -- --
Depreciation and amortization..... 49,069 35,841 (N) 19,019 (N) 72,119 (N) 5,802 (N) 181,850
-------- -------- -------- -------- ------- --------
Total expenses............... 187,800 41,024 80,115 300,747 28,458 638,144
-------- -------- -------- -------- ------- --------
Income (loss) before equity in
earnings of unconsolidated
subsidiaries, income tax
provision, minority interests
and extraordinary item........... (2,246) 65,557 (18,592) (53,279) (1,199) (9,759)
Equity in earnings(losses) of
unconsolidated subsidiaries...... 6,015 -- (5,039)(O) 8,830 (P) (1,986)(Q) 7,820
-------- -------- -------- -------- ------- --------
Income (loss) before income tax
provision, minority interests
and extraordinary item........... 3,769 65,557 (23,631) (44,449) (3,185) (1,939)
Income tax provision.............. -- (125)(R) -- (700)(R) -- (825)
-------- -------- -------- -------- ------- --------
Income (loss) before minority
interests and extraordinary item. 3,769 65,432 (23,631) (45,149) (3,185) (2,764)
Minority interest in Patriot
Partnership...................... (1,713) (7,449)(S) 10,393 (S) (4,867)(S) 312 (S) (3,324)
Minority interest in consolidated
subsidiaries..................... (1,674) (652)(T) -- (7,470)(U) -- (9,796)
-------- -------- -------- -------- ------- --------
Income (loss) before
extraordinary item............... 382 57,331 (13,238) (57,486) (2,873) (15,884)
Extraordinary loss from early
extinguishment of debt........... (2,534) 2,534 (L) -- -- -- --
-------- -------- -------- -------- ------- --------
Net income (loss)................. $ (2,152) $ 59,865 $(13,238) $(57,486) $(2,873) $(15,884)(W)
======== ======== ======== ======== ======= ========
Basic net income (loss)
per share (V):
Income before extraordinary item.. $ 0.01
Extraordinary item................ (0.05)
--------
Net loss per common share......... $ (0.04) $ (0.12)(W)
======== ========
Diluted net loss per share (V).... $ (0.04) $ (0.12)
======== ========
</TABLE>
See notes on following page.
F-13
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(A) Represents Patriot's historical results of operations for the year ended
December 31, 1997.
(B) Represents adjustments to Patriot's results of operations assuming that the
acquisition of 45 hotels, mergers and other acquisitions and the various
financing transactions completed by the Companies during 1997 had occurred
as of January 1, 1997.
(C) Represents adjustments to Patriot's results of operations assuming the
Wyndham Merger and the related transactions had been consummated as of
January 1, 1997.
(D) Represents adjustments to Patriot's results of operations assuming the
Interstate Merger and the related transactions had been consummated as of
January 1, 1997.
(E) Represents adjustments for other transactions, including the Buena Vista
Acquisition, the WHG Merger and the CHCI Merger.
(F) Represents adjustments to participating lease revenue assuming the hotels
owned by Patriot and its subsidiaries (excluding the six hotels which are
not leased to Lessees and excluding the Park Shore Hotel) had been leased
to the Lessees or Wyndham International as of January 1, 1997.
(G) Represents adjustments to Racecourse facility rental revenue as a result of
(i) the new lease agreement between Patriot and Wyndham International
subsequent to the Cal Jockey Merger and (ii) rental income related to the
land lease with Borders, Inc.
(H) Represents hotel lease revenue for those hotels which are leased by Patriot
from third-party owners and then sub-leased to Wyndham International.
(I) Represents adjustment to the amortization of unearned stock compensation
computed on the straight-line method over the 3 to 5-year vesting periods
of $1,971 (primarily to allocate a portion of the costs to Wyndham
International), net of estimated incremental general and administrative
expense of $565.
(J) Represents ground lease payments pursuant to the ground lease agreement
with an affiliate of PaineWebber of $1,625 and pro forma ground lease
payments to be made with respect to certain of the hotels of $82.
(K) Represents hotel lease expense related to the hotels leased by Patriot from
third-party owners, which Patriot sub-leases to Wyndham International.
(L) Interest expense consists of the following components:
<TABLE>
<CAPTION>
1997 Wyndham Interstate Other
Transactions Merger Merger Adjustments
------------ ------- ---------- -----------
<S> <C> <C> <C> <C>
Related to acquisition of hotels or investment
interests in hotels............................ $33,943 $ -- $ -- $12,779
Related to debt assumed or refinanced in
connection with mergers........................ -- 31,316 114,884 --
Related to Subscription Notes payable to
Wyndham International.......................... 1,026 2,021 -- 214
Related to Participating Note payable to
Wyndham International.......................... -- -- -- 1,809
Related to amortization of deferred loan costs.. 13,696 163 5,476 --
Related to amortization of capitalized interest
expense........................................ 137 -- -- --
------- ------- -------- -------
$48,802 $33,500 $120,360 $14,802
======= ======= ======== =======
</TABLE>
Amortization of deferred loan costs is computed using the straight-line
method (which approximates the interest method) over the term of the
related loans. As a result of the closing of the Revolving Credit Facility,
deferred loan costs totaling approximately $2,910 related to the Old Line
of Credit were written off. This amount, net of the minority interest
share, was reported as an extraordinary item in Patriot's historical
results of operations and has been eliminated for pro forma presentation
purposes. In addition, as a result of the increase in Patriot's existing
credit facilities, additional deferred loan costs totaling approximately
$25,875 have been included in the Borrowings under the credit facility and
mortgage notes in the pro forma financial statements.
F-14
<PAGE>
(M) The costs incurred in connection with Patriot's acquisition of eight
leasehold interests from CHC Lease Partners in 1997 were expensed as
incurred. Because these costs are non-recurring, they have been eliminated
for pro forma presentation purposes.
(N) Represents the following adjustments to depreciation and amortization:
<TABLE>
<CAPTION>
1997 Wyndham Interstate Other
Transactions Merger Merger Adjustments
------------ -------- ---------- -----------
<S> <C> <C> <C> <C>
Related to acquisition of hotels or investment
interests in hotels............................ $34,894 $19,019 $72,119 $5,802
Related to amortization of goodwill............. 947 -- -- --
------- ------- ------- ------
$35,841 $19,019 $72,119 $5,802
======= ======= ======= ======
</TABLE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for hotel buildings and
improvements, 7 years for the Racecourse facility and 5 to 7 years for
furniture, fixtures and equipment ("FF&E"). These estimated useful lives
are based on management's knowledge of the properties and the industry in
general. Amortization of goodwill related to the Cal Jockey Merger is
computed using the straight-line method over a 40-year estimated useful
life. Because the paired share structure is "grandfathered" under the Code,
management believes the life of the paired share structure is perpetual.
Under generally accepted accounting principles, however, the maximum
amortization period is 40 years for intangible assets.
(O) Represents equity in losses of the New Non-Controlled Subsidiaries which
own the Wyndham trade names and franchise related assets, the management
and franchising contracts and the hotel management company and which are
controlled by Wyndham International.
(P) Represents Patriot's share of the earnings of the Interstate Non-Controlled
Subsidiaries which will own the management contracts and hotel management
business and will be controlled by Wyndham International following the
Interstate Merger.
(Q) Represents equity in losses of the partnerships that own the El San Juan
Hotel & Casino and the El Conquistador and the WHG management company.
These entities are controlled by Wyndham International.
(R) Represents an adjustment for estimated state income tax liabilities.
(S) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage subsequent to the assumed transactions of
approximately 9.8%.
(T) Represents the minority interest related to partnerships and limited
liability companies that own certain of the hotels assuming such entities
had been formed and the 16 hotels owned by such entities had been acquired
at January 1, 1997.
(U) Represents the minority interest in income of consolidated entities which
will be acquired by Patriot in connection with the Interstate Merger.
(V) The Companies have adopted Statement of Financial Accounting Standards No.
128 "Earnings Per Share" ("Statement 128") for the year ended December 31,
1997. Pro forma earnings per share disclosures have been calculated in
accordance with requirements of Statement 128. Patriot's pro forma basic
earnings per share is computed based on 129,389 weighted average common
shares outstanding for the period. Shares of common stock granted to
officers and employees of Patriot are included in the computation only
after the shares become fully vested. Pro forma diluted earnings per share
is computed based on 141,044 weighted average common shares and common
share equivalents outstanding for the period if dilutive. Diluted earnings
per share includes dilutive common stock equivalents and options to
purchase common stock which were outstanding during the period. The number
of shares outstanding related to the options has been calculated by
application of the "treasury stock" method. The number of shares used for
the calculation also includes adjustments to reflect the impact of the
conversion of shares of Patriot and Wyndham International preferred stock
into paired shares of common stock.
(W) If the interest rate on all the variable rate debt increased by 0.25%, pro
forma interest expense would increase to approximately $275,454, pro forma
net loss would increase to $22,456 and basic net loss per common share
would increase to $0.17.
F-15
<PAGE>
WYNDHAM INTERNATIONAL, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
WYNDHAM
INTERNATIONAL 1997 WYNDHAM WHG
HISTORICAL TRANSACTIONS MERGER MERGER
(A) (B) (C) (D)
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Room revenue............................ $ 95,095 $306,555 $146,859 $ 90,461
Other hotel revenue..................... 72,632 203,549 55,356 125,713
Racecourse facility revenue............. 26,344 22,538 -- --
Management fee and service fee income... 7,088 10,586 46,461 6,018
Interest and other income............... 2,975 1,757 3,782 2,807
-------- -------- -------- --------
Total revenue....................... 204,134 544,985 252,458 224,999
-------- -------- -------- --------
Expenses:
Departmental costs -- hotel operations.. 84,758 209,306 72,456 114,082
Racecourse facility operations.......... 24,245 20,282 (H) -- --
Direct operating costs of management
company and service department......... 1,216 3,605 39,892 4,150
General and administrative.............. 6,001 50,975 18,523 22,013
Ground and hotel lease expense.......... -- 681 23,134 (I) --
Repair and maintenance.................. 7,821 26,833 8,899 8,086
Utilities............................... 7,144 22,173 7,871 4,805
Marketing............................... 15,437 42,158 14,672 14,176
Management fees......................... 1,941 12,577 (4,663)(J) 1,809
Real estate and personal property taxes
and casualty insurance................. 23 241 -- 5,285
Depreciation and amortization........... 3,616 7,883 (K) 17,995 (K) 15,685 (K)
Participating lease payments............ 50,626 161,390 (L) 38,389 (L) --
Interest expense........................ 933 202 -- 29,060 (M)
-------- -------- -------- --------
Total expenses...................... 203,761 558,306 237,168 219,151
-------- -------- -------- --------
Income (loss) before income tax provision
and minority interests.................. 373 (13,321) 15,290 5,848
Income tax provision.................... (481) 3,249 (N) (3,937)(N) (4,368)(N)
-------- -------- -------- --------
Income (loss) before minority interest... (108) (10,072) 11,353 1,480
Minority interest in OpCo Partnership... 29 1,282 (O) (2,159)(O) 318 (O)
Minority interest in other consolidated
subsidiaries........................... 59 1,438 (P) 5,039 (Q) 28
-------- -------- -------- --------
Net income (loss)........................ $ (20) $ (7,352) $ 14,233 $ 1,826
======== ======== ======== ========
Basic earnings (loss)
per common share (S).................... $ --
========
Diluted earnings (loss)
per common share (S).................... $ --
========
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
CHCI INTERSTATE BUENA VISTA
MERGER MERGER ACQUISITION PRO FORMA
(E) (F) (G) TOTAL
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Room revenue............................ $117,619 $514,713 $42,587 $1,313,889
Other hotel revenue..................... 61,135 209,010 27,633 755,028
Racecourse facility revenue............. -- -- -- 48,882
Management fee and service fee income... 2,227 42,760 -- 115,140
Interest and other income............... 2,144 1,757 -- 15,222
-------- -------- ------- ----------
Total revenue....................... 183,125 768,240 70,220 2,248,161
-------- -------- ------- ----------
Expenses:
Departmental costs -- hotel operations.. 68,975 260,495 28,841 838,913
Racecourse facility operations.......... -- -- -- 44,527
Direct operating costs of management
company and service department......... 19,884 21,265 -- 90,012
General and administrative.............. 18,304 70,077 4,446 190,339
Ground and hotel lease expense.......... -- 83,880 (I) -- 107,695
Repair and maintenance.................. 6,449 30,374 3,020 91,482
Utilities............................... 6,964 28,338 2,401 79,696
Marketing............................... 13,715 58,260 4,003 162,421
Management fees......................... 2,571 5,524 562 20,321
Real estate and personal property taxes
and casualty insurance................. -- 2,316 -- 7,865
Depreciation and amortization........... 5,195 (K) 20,437 (K) -- 70,811
Participating lease payments............ 53,685 (L) 163,588 (L) 27,259 (L) 494,937
Interest expense........................ -- -- -- 30,195
-------- -------- ------- ---------
Total expenses...................... 195,742 744,554 70,532 2,229,214
-------- -------- ------- ---------
Income (loss) before income tax provision
and minority interests.................. (12,617) 23,686 (312) 18,947
Income tax provision.................... 4,341 (N) (9,991)(N) -- (11,187)
-------- -------- ------- ---------
Income (loss) before minority interest... (8,276) 13,695 (312) 7,760
Minority interest in OpCo Partnership... 591 (O) (448)(O) 34 (O) (353)
Minority interest in other consolidated
subsidiaries........................... (1,497)(P) (8,830)(R) -- (3,763)
-------- -------- ------- ---------
Net income (loss)........................ $ (9,182) $ 4,417 $ (278) $ 3,644
======== ======== ======= =========
Basic earnings (loss)
per common share (S).................... $ 0.03
=========
Diluted earnings (loss)
per common share (S).................... $ 0.03
=========
</TABLE>
See notes on following page.
F-16
<PAGE>
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(A) Represents the historical results of operations of Wyndham International
for the six months ended December 31, 1997.
(B) Represents adjustments to Wyndham International's results of operations
assuming that Patriot's acquisition of 45 hotels, the mergers and other
acquisitions and the various financing transactions completed by the
Companies during 1997 had occurred as of January 1, 1997 and assuming 55 of
Patriot's hotels had been leased to Wyndham International as of January 1,
1997.
(C) Represents adjustments to Wyndham International's results of operations for
the hotel leases and management contracts acquired as a result of the
Wyndham Merger assuming such leases and management contracts had been
acquired as of January 1, 1997.
(D) Represents adjustments to Wyndham International's results of operations for
the hotel investments and management operations acquired by Wyndham
International as a result of the WHG Merger assuming such investments had
been acquired as of January 1, 1997.
(E) Represents adjustments to Wyndham International's results of operations for
the hotel leases and management contracts acquired by Wyndham International
as a result of the CHCI Merger assuming such leases and management
contracts had been acquired as of January 1, 1997.
(F) Represents adjustments to Wyndham International's results of operations for
the hotel leases and management contracts acquired as a result of the
Interstate Merger, assuming such leases and management contracts had been
acquired as of January 1, 1997.
(G) Represents adjustments to Wyndham International's results of operations for
the Buena Vista Acquisition, assuming Patriot had leased such hotel to
Wyndham International as of January 1, 1997.
(H) Represents adjustment to Racecourse facility operating expenses as a result
of the new lease agreement between Patriot and Wyndham International
subsequent to the Cal Jockey Merger and the related transactions.
(I) Represents hotel lease expense related to the hotels Old Wyndham and
Interstate leased from third-party owners at December 31, 1997. Subsequent
to the Wyndham Merger and Interstate Merger, these hotels will be sub-
leased by Patriot to Wyndham International.
(J) Represents the elimination of management fees for the Patriot hotels
previously managed by Old Wyndham which are managed by a subsidiary
controlled by Wyndham International subsequent to the Wyndham Merger.
(K) Represents the following adjustments to depreciation and amortization:
<TABLE>
<CAPTION>
1997 Wyndham WHG CHCI Interstate
Transactions Merger Merger Merger Merger
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Depreciation related to buildings and
improvements......................... $ -- $ -- $ 9,570 $ -- $ --
Depreciation related to FF&E.......... 3,818 2,333 5,018 -- --
Amortization of goodwill.............. 876 8,072 1,097 363 5,699
Amortization of trade names........... 303 2,444 -- 250 --
Amortization of management contract
costs................................ 2,886 5,146 -- 4,582 14,738
------------ ------------- ------------ ------------ ------------
$ 7,883 $ 17,995 $ 15,685 $ 5,195 $ 20,437
============ ============= ============ ============ ============
</TABLE>
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for buildings and improvements and 5
to 7 years for FF&E. Amortization of goodwill related to the Cal Jockey
Merger is computed using the straight-line method over a 40-year estimated
useful life. Amortization of goodwill related to the acquisition of the
management operations of Grand Heritage Hotels, Inc., GAH, CHCI, Old
Wyndham, WHG and Interstate is computed using the straight-line method over
estimated useful lives of 20 to 35 years. Amortization of trade names is
computed using the straight-line method over estimated useful
F-17
<PAGE>
lives of 20 to 35 years. Amortization of management contract costs is
computed using the straight-line method over the estimated remaining term
of the contracts.
(L) Represents pro forma lease payments from Wyndham International to Patriot
calculated based upon the historical revenue of the hotels for the year
ended December 31, 1997.
(M) Represents pro forma interest expense on debt and capital lease obligations
related to the Condado Plaza Hotel, the El San Juan Hotel & Casino and the
El Conquistador. As a result of the WHG Transactions, Wyndham International
acquired a controlling interest in the partnerships that own the El San
Juan Hotel & Casino and the El Conquistador. As a result, the results of
operations of these partnerships are included in Wyndham International's
consolidated operating results. These debt and capital lease obligations
bear interest at rates ranging from LIBOR plus 0.9% (estimated as 6.5176%)
to 12.0% per annum.
(N) Represents an adjustment to the estimated federal and state tax liability
as a result of the pro forma adjustments to the operating results of
Wyndham International for the year ended December 31, 1997.
(O) Represents the adjustment to minority interest to reflect the estimated
minority interest percentage in the OpCo Partnership subsequent to the
assumed transactions of approximately 8.8%.
(P) Represents adjustments for the minority interest in GAH and the acquisition
of such minority interest upon consummation of the CHCI Merger.
(Q) Represents adjustment for the minority interest in the New Non-Controlled
Subsidiaries held by Patriot.
(R) Represents adjustment for the minority interest in the non-controlled
subsidiaries related to the Interstate Merger which is held by Patriot.
(S) The Companies have adopted Statement of Financial Accounting Standards No.
128 "Earnings Per Share" ("Statement 128") for the year ended December 31,
1997. Pro forma earnings per share disclosures have been calculated in
accordance with requirements of Statement 128. Pro forma basic earnings per
share is computed based on 129,389 weighted average common shares
outstanding for the period. Shares of common stock granted to officers and
employees of Wyndham International are included in the computation only
after the shares become fully vested. Pro forma diluted earnings per share
is computed based on 141,044 weighted average common shares and common
share equivalents outstanding for the period. Diluted earnings per share
includes dilutive common stock equivalents and options to purchase common
stock which were outstanding during the period. The number of shares
outstanding related to the options has been calculated by application of
the "treasury stock" method. The number of shares used for the calculation
also includes adjustments to reflect the impact of the conversion of shares
of Patriot and Wyndham International preferred stock into paired shares of
common stock.
F-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Wyndham Hotel Corporation:
We have audited the accompanying consolidated balance sheets of Wyndham
Hotel Corporation (the "Company") as of December 31, 1996 and 1997 and the
related consolidated statements of income, partners' capital and stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1996 and 1997 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Dallas, Texas
February 12, 1998
F-19
<PAGE>
WYNDHAM HOTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 11,517 $ 5,777
Cash, restricted........................................................ 865 721
Accounts receivable, less allowance of $941 and $2,740 at December 31,
1996 and 1997, respectively.......................................... 13,330 23,035
Due from affiliates..................................................... 12,686 14,545
Inventories............................................................. 1,430 2,217
Deferred income taxes................................................... 1,539 1,844
Other................................................................... 1,412 12,018
----------- -----------
Total current assets................................................. 42,779 60,157
Investments in hotel partnerships........................................... 1,125 4,028
Notes and other receivables from affiliates................................. 7,685 18,513
Notes receivable............................................................ 6,307 4,092
Property and equipment, net................................................. 134,176 329,359
Management contract costs, net.............................................. 7,766 9,525
Security deposits........................................................... 15,288 23,999
Deferred income taxes....................................................... 14,148 -
Other ..................................................................... 13,688 17,101
Goodwill.................................................................... - 20,726
----------- -----------
Total assets......................................................... $ 242,962 $ 487,500
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................... $ 23,556 $ 45,507
Deposits................................................................ 959 2,413
Deposits from affiliates................................................ 344 64
Current portion of long-term debt and capital lease obligations......... 510 1,722
----------- -----------
Total current liabilities............................................ 25,369 49,706
----------- -----------
Borrowings under revolving credit facility.................................. - 115,500
Long-term debt and capital lease obligations................................ 129,944 162,126
Deferred income taxes....................................................... - 6,507
Deferred gain............................................................... 12,065 11,326
----------- -----------
142,009 295,459
----------- -----------
Minority interest........................................................... - 2,480
----------- -----------
Stockholders' equity:
Common stock, par value $.01 per share, 45,000,000 shares authorized,
20,018,299 and 21,618,310 shares issued and outstanding at December 31,
1996 and 1997, respectively.......................................... 200 216
Additional paid-in capital.............................................. 84,342 133,143
Retained earnings....................................................... 11,714 25,396
Unrealized foreign exchange loss........................................ - (805)
Unrealized gain on securities available for sale........................ - 522
Receivable from affiliates.............................................. (1,223) (1,228)
Notes receivable from stockholders...................................... (19,449) (17,389)
----------- -----------
Total stockholders' equity........................................... 75,584 139,855
----------- -----------
Total liabilities and stockholders' equity........................ $ 242,962 $ 487,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-20
<PAGE>
WYNDHAM HOTEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Hotel revenues.............................................. $ 54,673 $ 104,620 $ 180,054
Management fees............................................. 7,354 8,556 9,211
Management fees - affiliates................................ 9,567 15,257 20,754
Service fees................................................ 2,192 1,428 2,196
Service fees - affiliates................................... 1,928 2,878 3,393
Reimbursements.............................................. 4,378 6,593 7,168
Reimbursements - affiliates................................. 6,458 8,384 8,402
Other....................................................... 1,340 359 13,138
---------- ---------- ----------
Total revenues........................................... 87,890 148,075 244,316
---------- ---------- ----------
Operating costs and expenses:
Hotel expenses.............................................. 37,125 77,016 137,879
Selling, general and administrative expenses................ 15,001 19,050 24,323
Equity participation compensation........................... 3,992 2,919 -
Reimbursable expenses....................................... 4,378 6,593 7,168
Reimbursable expenses - affiliates.......................... 6,458 8,384 8,402
Depreciation and amortization............................... 6,311 8,110 13,369
Merger expenses............................................. - - 13,386
---------- ---------- ----------
Total operating costs and expenses....................... 73,265 122,072 204,527
---------- ---------- ----------
Operating income................................................ 14,625 26,003 39,789
Interest income................................................. 344 1,175 1,652
Interest income - affiliates.................................... 100 716 918
Interest expense................................................ (8,465) (11,810) (16,405)
Equity in earnings of hotel partnerships........................ 1,664 870 198
Foreign currency gain........................................... 405 - -
Amortization of deferred gain................................... - 505 739
---------- ---------- ----------
Income before minority interests, income taxes and extraordinary
item..................................................... 8,673 17,459 26,891
Income (loss) attributable to minority interests................ 724 571 (433)
---------- ---------- ----------
Income before income taxes and extraordinary item............... 7,949 16,888 27,324
Income tax (provision) benefit.................................. - 8,209 (14,346)
---------- ---------- ----------
Income before extraordinary item................................ 7,949 25,097 12,978
Extraordinary item net of applicable taxes of $270 and $195 for
1996 and 1997, respectively................................. - (1,131) (298)
---------- ---------- ----------
Net income...................................................... $ 7,949 $ 23,966 $ 12,680
========== ========== ==========
Basic earnings per share:
Income before extraordinary item............................ N/A $ 1.25 $ .62
Extraordinary item.......................................... N/A (.06) (.01)
---------- ----------
Net income.................................................. N/A $ 1.19 $ .61
========== ==========
Diluted earnings per share:
Income before extraordinary item............................ N/A $ 1.25 $ .61
Extraordinary item.......................................... N/A (.06) (.01)
---------- ----------
Net income.................................................. N/A $ 1.19 $ .60
========== ==========
Weighted average number of common shares outstanding............ N/A 20,018 20,693
Weighted average number of common shares outstanding and dilutive
common shares .............................................. N/A 20,111 21,120
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-21
<PAGE>
WYNDHAM HOTEL CORPORATION
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN UNREALIZED
NOTES CURRENCY GAIN ON
RECEIVABLE RECEIVABLE TRANSLATION MARKETABLE
PARTNERS' COMMON PAID-IN RETAINED FROM FROM ADJUST- SECURI-
CAPITAL STOCK CAPITAL EARNINGS AFFILIATES STOCKHOLDERS MENT TIES TOTAL
--------- ------ --------- -------- ---------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 .......... $ 3,921 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 3,921
Capital contributions ............... 14,795 -- -- -- -- -- -- -- 14,795
Capital distributions ............... (10,931) -- -- -- -- -- -- -- (10,931)
Distributions made to withdrawing
partners............................ (2,577) -- -- -- -- -- -- -- (2,577)
Affiliate stock options ............. 2,711 -- -- -- -- -- -- -- 2,711
Equity participation compensation ... 3,992 -- -- -- -- -- -- -- 3,992
Net income .......................... 7,949 -- -- -- -- -- -- -- 7,949
Receivable from affiliates .......... -- -- -- -- (2,303) -- -- -- (2,303)
-------- ----- -------- -------- --------- --------- --------- -------- --------
Balance at December 31, 1995 ........ 19,860 -- -- -- (2,303) -- -- -- 17,557
Capital contributions ............... 4,801 -- -- -- -- -- -- -- 4,801
Capital distributions ............... (29,593) -- -- -- -- -- -- -- (29,593)
Issuance of common stock ............ (1,998) 200 78,184 -- -- (195) -- -- 76,191
Equity participation compensation ... -- -- 2,919 -- -- -- -- -- 2,919
Payment to affiliate for release of
an obligation ...................... -- -- -- (6,000) -- -- -- -- (6,000)
Deferred income taxes from
incorporation ...................... -- -- 3,239 -- -- -- -- -- 3,239
Notes receivable from stockholders .. -- -- -- -- -- (18,576) -- -- (18,576)
Receivable from affiliates .......... -- -- -- -- 1,080 -- -- -- 1,080
Accrued interest on notes receivable
from stockholders .................. -- -- -- 678 -- (678) -- -- --
Net income .......................... 6,930 -- -- 17,036 -- -- -- -- 23,966
-------- ----- -------- -------- --------- -------- --------- ------- --------
Balance at December 31, 1996 ........ -- 200 84,342 11,714 (1,223) (19,449) -- -- 75,584
Issuance of common stock ............ -- 16 48,801 -- -- -- -- -- 48,817
Notes receivable from stockholders .. -- -- -- -- -- 3,062 -- -- 3,062
Receivable from affiliates .......... -- -- -- -- (5) -- -- -- (5)
Accrued interest on notes receivable
from stockholders .................. -- -- -- 1,002 -- (1,002) -- -- --
Foreign currency translation
adjustment.......................... -- -- -- -- -- -- (805) -- (805)
Unrealized gain on marketable
securities.......................... -- -- -- -- -- -- -- 522 522
Net income .......................... -- -- -- 12,680 -- -- -- -- 12,680
-------- ----- -------- -------- --------- -------- --------- ------- --------
Balance at December 31, 1997 ........ $ -- $ 216 $133,143 $ 25,396 $ (1,228) $(17,389) $ (805) $ 522 $139,855
======== ===== ======== ======== ========= ======== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE>
WYNDHAM HOTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 7,949 $ 23,966 $ 12,680
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ........................... 6,311 7,328 11,948
Provision for bad debt .................................. 265 1,018 2,116
Deferred income taxes ................................... -- (12,958) (631)
Current income taxes .................................... -- 5,390 14,959
Amortization of deferred debt issuance costs ............ -- 782 1,421
Write-off of predecessor deferred debt issuance costs ... -- 1,401 493
Amortization of deferred gain ........................... -- (505) (875)
Equity in (earnings) loss of hotel partnerships ......... 372 -- (198)
Foreign currency translation gain ....................... (405) -- --
Equity participation compensation ....................... 3,992 2,919 --
Capitalized interest .................................... -- -- (1,315)
Non-cash termination fee income ......................... -- -- (4,000)
Income/(loss) attributable minority interests ........... 724 571 (433)
Changes to operating assets and liabilities, net of effects
from purchase of hotels:
Net withdrawals from/(deposits to) restricted cash ...... (485) 2,576 144
Accounts receivables .................................... (1,842) (4,038) (10,597)
Net change in due to/from affiliates .................... (11,165) (9,233) (1,997)
Inventories and other ................................... (3,105) (3,773) (9,912)
Accounts payable and accrued expenses ................... (63) 7,975 (5,495)
Deposits ................................................ 453 (1,796) 1,118
Security deposits ....................................... -- (13,738) (6,747)
--------- --------- ---------
Net cash provided by operating activities ............ 3,001 7,885 2,679
--------- --------- ---------
Cash flows from investing activities:
Additions/improvements to property and equipment ........... (3,556) (11,272) (35,787)
Proceeds from sale of property and equipment ............... -- 136,374 --
Investments in management contracts ........................ (4,346) (1,536) (2,744)
Advances on notes receivable ............................... (2,451) (3,857) (14,511)
Collections on notes receivable ............................ -- -- 3,742
Purchase of hotels, net of cash acquired ................... -- (33,470) (34,465)
Purchase of equity investments in hotel partnerships ....... -- (1,125) (2,705)
Acquisition of minority interests .......................... -- (5,479) --
Increase in long-term restricted cash ...................... (212) (1,661) (546)
--------- --------- ---------
Net cash provided by (used in) investing activities .. (10,565) 77,974 (87,016)
--------- --------- ---------
Cash flows from financing activities:
Partners' contributed capital .............................. 14,795 4,801 --
Partners' capital distributions ............................ (10,932) (29,593) --
Distributions made to withdrawing partners ................. (2,577) (982) --
Proceeds from borrowings under revolving credit facility ... -- -- 130,250
Repayments of revolving credit facility .................... -- -- (14,750)
Proceeds from issuance of common stock ..................... -- 69,504 --
Proceeds from long-term borrowings and issuance of debt .... 13,600 94,383 12,094
Repayments on long-term debt and lease obligations ......... (6,782) (197,726) (51,552)
Collections/(advances) on notes receivable from stockholders -- (18,889) 3,062
Other ...................................................... -- -- 296
--------- --------- ---------
Net cash provided by (used in) financing activities .. 8,104 (78,502) 79,400
--------- --------- ---------
Effect of foreign currency rate fluctuation on cash and cash
equivalents ................................................... -- -- (803)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ............... 540 7,357 (5,740)
Cash and cash equivalents at beginning of year ................. 3,620 4,160 11,517
--------- --------- ---------
Cash and cash equivalents at end of year ....................... $ 4,160 $ 11,517 $ 5,777
========= ========= =========
</TABLE>
The accompanying notes are in integral part of the consolidated financial
statements. See Note 27 for supplemental cash flows information.
F-23
<PAGE>
WYNDHAM HOTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements of Wyndham Hotel
Corporation at December 31, 1996 and 1997 and for the period since WHC's initial
public offering in May 1996 through December 31, 1996 include the accounts of
WHC, its majority-owned subsidiaries and certain equity interests in hotel
partnerships (collectively, the "Company"). Financial statements at December 31,
1995 and for the periods prior to the Company's initial public offering (January
1, 1995 through May 24, 1996) include the combined accounts of WHC and its
majority owned entities. All significant intercompany balances and transactions
have been eliminated.
The consolidated financial statements at December 31, 1997 include the
accounts of the Company which consist of the following entities:
Management entities:
Wyndham Management Corporation (a Delaware corporation)
WHCMB, Inc. (a Delaware corporation)
Waterfront Management Corporation (a Delaware corporation)
WHCMB, Toronto, Inc. (a Canada corporation)
Wyndham Hotels & Resorts Management, Ltd. (a Bermuda corporation)
Wyndham Hotels & Resorts (Aruba) N. V. (an Aruba corporation)
WHCMB Overland Park, Inc. (a Kansas corporation)
CHMB, Inc. (a Texas corporation)
MBAH, Inc. (a Texas corporation)
PSMB, Inc. (a California corporation)
GHMB, Inc. (a Texas corporation)
Hotel entities:
Wyndham Hotel Corporation (a Delaware corporation)
GHALP Corporation (a Delaware corporation)
WHC Vinings Corporation (a Delaware corporation)
WHC Development Corporation (a Delaware corporation)
WHC Franchise Corporation (a Delaware corporation)
WHC Columbus Corporation (a Delaware corporation)
Wyndham IP Corporation (a Delaware corporation)
WHC Salt Lake City Corporation (a Delaware corporation)
XERXES Limited (a Texas corporation)
WH Interest, Inc. (a Texas corporation)
WHC Caribbean Limited (a Jamaican corporation)
WHC Chicago, LLC (a Delaware corporation)
WHC Atlanta GP, LLC (a Delaware corporation)
WHC Airport Corporation (a Delaware corporation)
ClubHouse Hotels, Inc. (a Kansas Corporation)
Partnership entity:
Rose Hall Associates, L. P. (a Texas limited partnership)
The Company has a 30% investment in a hotel partnership which owns a
hotel located in Columbus, Ohio. The Company, through a subsidiary, has minority
interests in two other hotel partnerships located in Chicago, Illinois and
Pittsburgh, Pennsylvania. The Company does not have voting or operational
control over these hotel
F-24
<PAGE>
partnerships, therefore, these investments are accounted for using the equity
method in the accompanying financial statements. The Company also has a 70%
interest in a hotel partnership whose results of operations have been included
in the consolidated financial statements and the remaining 30% ownership is
reported as minority interest.
The management entities were formed to provide management and
development services to hotel property owners. As of December 31, 1997, 107
properties, located in 27 states, the District of Columbia, Ontario, Canada and
5 Caribbean islands were under management or franchise contracts. The Company
operates 27 Wyndham hotels, 55 Wyndham garden hotels, 10 Wyndham resort hotels
and 10 ClubHouse hotels. The Company provides management services to 3 non-
Wyndham brand hotels and provides construction and development services for 2
hotels under renovation or construction.
The hotel entities, which own 27 hotels and lease 14 hotels, were
formed for the purpose of acquiring, owning, leasing and operating hotels
throughout the United States, and the Caribbean. Hotel revenues are primarily
dependent upon the individual business traveler and small business groups.
The partnership entity, which is comprised of one limited partnership,
was formed for the purpose of managing and investing in a hotel entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash
For purposes of reporting cash flows, all highly liquid debt
instruments with original maturities of three months or less at the time of
purchase are considered to be cash equivalents.
As of December 31, 1997, restricted cash includes a depository account
balance of $400,000 which collaterizes a letter of credit. Management
anticipates the deposit will be reduced concurrent with reductions in the letter
of credit commitment.
Inventories
Inventories consisting of food, beverage, china, linen, glassware,
silverware, uniforms, and supplies are stated at cost which approximates market,
with cost determined using the first-in, first-out method.
Other Current Assets
Other current assets include prepaid insurance and certain other
prepaid costs. For 1997, other current assets also included a note receivable
from an affiliated entity of $4,000,000 and equity securities of $3.0 million.
The note receivable from affiliate, bearing interest at 7% per annum and payable
in May 1998, was acquired at the termination of a management contract. The note
with accrued interest was collected in January 1998. Equity securities of $3.0
million are classified as securities available for sale and are carried at
market value with the unrealized gain reported as a separate component of
stockholders' equity.
Property and Equipment
Buildings are carried at cost and depreciated over forty years using
the straight-line method. Furniture and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives,
which range from three to nine years. Assets recorded under capital leases and
leasehold improvements are amortized over the shorter of the lives of the assets
or the terms of the related leases. Normal repairs and maintenance are charged
to expense as incurred.
The Company periodically reviews the carrying value of each of its
properties and equipment to determine if circumstances exist indicating an
impairment in the carrying value or that depreciation periods should be
modified. If facts or circumstances support the possibility of impairment, the
Company will prepare a projection of
F-25
<PAGE>
the undiscounted future operating cash flows. In cases when the Company does not
expect to recover its carrying value, the Company recognizes an impairment loss.
Management of the Company does not believe that there are any factors or
circumstances indicating impairment of any of its properties and equipment.
Management Contracts
The Company has entered into management agreements which required
payment of certain costs associated with the change in the management of hotels.
These costs have been recorded as deferred management contract costs and are
being amortized on a straight-line basis over the terms of the agreements. The
Company periodically evaluates the recoverability of management contract costs
to determine whether such costs will be recovered from future operations.
Certain management agreements include repayment provisions if
termination occurs prior to the term of the agreement. During 1997, the Company
recorded $12.6 million for termination of management contracts that is included
in other revenues (net of write-off of the unamortized costs).
Goodwill
Goodwill, representing the excess of the purchase price over the fair
value of the net assets of the acquired entities, is being amortized on a
straight-line method over a period of forty years. The amortization of goodwill
recorded for 1997 was $218,000. The carrying value of goodwill will be reviewed
based on the undiscounted cash flows of the entities acquired over the remaining
amortization period. Should this review indicate that goodwill will not be
recoverable, the Company's carrying value of the goodwill will be reduced by the
estimated shortfall of undiscounted cash flows.
Other Assets
Other non-current assets consisted of the following at December 31,
1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- --------
<S> <C> <C>
Debt issuance costs ............................................... $ 8,410 $ 9,941
Repair and replacement funds for property and equipment, restricted
cash ............................................................ 2,277 3,734
Earnest money for the acquisition of hotel properties ............. 2,191 2,007
Capitalized litigation costs ...................................... 1,187 1,324
Pre-opening and organization costs ................................ 165 2,051
Non-competition agreement ......................................... -- 1,000
Other ............................................................. 292 365
-------- --------
14,522 20,422
Less accumulated amortization ..................................... (834) (3,321)
-------- --------
$ 13,688 $ 17,101
======== ========
</TABLE>
Non-competition agreement is carried at cost and amortized over five
years, the life of the agreement. Debt issuance costs are amortized over the
lives of related loan agreements.
Deposits
Deposits represent cash received from guests for future hotel
reservations at the hotel entities and cash received from the owners of certain
hotels managed by the Company for various operating expenses paid by the Company
on behalf of managed properties. Upon termination of the management contracts,
the excess, if any, of the deposits over the actual operating expenses owed to
the Company would be refunded to owners.
F-26
<PAGE>
Income Taxes
Since the Company's initial public offering in May 1996, federal income
taxes have been provided in accordance with Statement of Financial Accounting
Standard No. 109 ("SFAS 109"). Under the liability method of SFAS 109, deferred
taxes are determined based on the difference between the financial statements
and tax bases of assets and liabilities using enacted tax rates in effect in the
years the differences are expected to reverse. See Note 17 for the components of
deferred tax assets and income tax benefit.
For periods prior to the Company's initial public offering, each of the
combined companies was either a partnership, an S corporation or a nontaxable
Bermuda corporation, and consequently, was not subject to federal income taxes.
Thus, taxable income or loss was allocated directly to the taxable income of the
individual partners and stockholders. The Company's tax returns and the amount
of allocable income or loss are subject to examination by federal and state
taxing authorities. If such examinations result in changes to income or loss,
the tax liability of the partners and stockholders could be changed accordingly.
Revenue Recognition
Hotel revenue, management fees, service fees, reimbursements and other
income are recognized when earned.
Advertising Costs
The Company participates in various advertising and marketing programs
with a related party. All costs are expensed in the period incurred. The Company
recognized advertising expenses of $7.6 million and $13.4 million for the years
ended December 31, 1996 and 1997, respectively.
Foreign Currency Translation
Financial statements of foreign subsidiaries not maintained using U.S.
dollars are remeasured into the U.S. dollar functional currency for
consolidation and reporting purposes. Assets and liabilities of non-U.S.
operations are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date. Revenues and expenses of non-U.S. operations are
translated at the weighted average exchange rate during the year. Resulting
translation adjustments are reflected in stockholders' equity. Realized foreign
currency gains and losses are included in results of operation.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amount of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash investments. The
Company maintains cash and cash equivalents in accounts with major financial
institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. Management believes credit risk related to these deposits is
minimal.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation with no effect to previously reported net income.
F-27
<PAGE>
Self Insurance
The Company is self insured for various levels of general liability,
workers' compensation and employee medical coverage. Accrued expenses include
the estimated cost from unpaid incurred claims.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), Earnings Per Share ("EPS") beginning with the Company's fourth
quarter of 1997. SFAS 128 requires basic EPS to be computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period and diluted EPS to reflect the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. All prior period EPS data
has been restated to conform to the provision of this statement. See Note 5 for
the computation and reconciliation of the numerators and the denominators of the
basic and diluted per-share computation.
Earnings per share data for the years ended December 31, 1995 relates
to periods prior to the Company's formation and therefore is not presented.
Stock-Based Compensation Plans
The Company sponsors a stock-based incentive compensation plan. Under
the plan, stock options are granted to certain employees. The Company applies
Accounting Principles Board Opinion 25 and related Interpretations in accounting
for the plan. No compensation costs are recognized for options granted at the
market price at grant date. The Company recognizes compensation expense for
options granted at a lower than market price. In 1997, the Company recognized
such expense in the amount of $83,000. In 1995, Financial Accounting Standard
Board issued SFAS 123 "Accounting for Stock-Based Compensation" which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the plan. Adoption of the cost recognition provisions of
SFAS 123 is optional and the Company decided not to elect the provisions in SFAS
123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS 123 are presented in Note 19.
Pending Adoption of Authoritative Statement
In June 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company plans to adopt SFAS 130 for the year ended December 31, 1998.
In June 1997, the FASB also issued SFAS No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
specifies revised guidelines for determining an entity's operating segments and
the type and level of financial information to be disclosed. SFAS 131 changes
current practice by establishing a new framework on which to base segment
reporting, including the determining of a segment and the financial information
to be disclosed for each segment, referred to as the "management" approach. The
management approach requires that management identify "operating segments" based
on the way that management disaggregates the entity for making internal
operating decisions. SFAS 131 is effective for fiscal years beginning after
December 31, 1997, and requires restatement of information for earlier periods.
Management is determining the segments to be disclosed and intends to adopt the
statement for the year ended December 31, 1998.
F-28
<PAGE>
3. ACQUISITIONS:
In January 1997, the Company entered into a lease agreement relating to
the Wyndham hotel property in Salt Lake City. The lease qualifies as an
operating lease. The lease required the Company to make deposits totaling $10.0
million with the lessor. The deposits were funded with cash borrowed under the
revolving credit facility. The minimum rent under the lease is $4.4 million per
year. Beginning January 1998 through the end of the term of the lease,
additional rent ranging from 5% to 8% of the excess total hotel sales, as
defined, will be paid.
On July 31, 1997, the Company acquired Kansas City-based ClubHouse
Hotels, Inc., ("ClubHouse") a privately held chain of 17 hotels operating in the
mid-scale segment of the lodging industry. The acquisition added 2,456 rooms, or
approximately 10% to the Company's current portfolio of hotels open or under
construction. In connection with the acquisition of ClubHouse, the Company
acquired direct or indirect ownership of 13 ClubHouse hotels, ownership of
partial interests in three additional managed ClubHouse hotels, ownership of the
ClubHouse Inns brand name and one license for a franchised ClubHouse hotel. The
terms of the merger and related transactions were reached following arms-length
negotiations among the parties involved. Total consideration paid by the Company
in connection with the merger and related transactions included (1) the issuance
of 1,599,448 shares of common stock of the Company pursuant to the merger (with
the total number of shares issuable subject to a working capital adjustment to
be made in the future), (2) the assumption of approximately $23.5 million of
debt and (3) the payment of approximately $55.6 million in cash. The cash
portion of the purchase price was borrowed under the Company's revolving credit
facility with Bankers Trust Company, as agent for a group of financial
institutions.
In connection with the acquisition of ClubHouse, the Company amended
the revolving credit facility to (i) increase the aggregate amount of the credit
facility by $50 million to a total of $150.0 million, (ii) make certain
revisions to the method of calculating the borrowing base, (iii) amend certain
financial covenants, (iv) permit the Company to make certain debt and equity
investments and (v) make certain other amendments.
On September 26, 1997, the Company elected to fund a cash shortfall
related to renovation costs and assumed a 67.5% interest in a hotel partnership,
as the owner of the hotel partnership failed to fund the shortfall. The Company
contributed and converted its outstanding note receivable and accrued interest
thereon to equity totaling $5.9 million. In the fourth quarter of 1997, the
Company funded an additional cash shortfall totaling $919,000 and increased the
ownership interest to 70.0%.
In October 1997, the Company acquired the remaining 95% interest in a
138 room ClubHouse hotel for cash consideration of $6.4 million. The Company
acquired the initial 5% interest in the hotel property at the merger with
ClubHouse in July 1997.
In November 1997, the Company entered into a capital lease agreement
with a hotel partnership for a 155-room hotel in Virginia. The Company paid cash
of $2.6 million including the purchase of the previous partners' notes totaling
$2.2 million.
In December 1997, the Company acquired a hotel property located in
Atlanta for $16.1 million. Cash used to fund this acquisition was borrowed under
the revolving credit facility. The hotel property is currently under
construction and renovation.
4. MERGER WITH PATRIOT AMERICAN HOSPITALITY, INC.:
On April 14, 1997, the Company entered into a merger agreement with
Patriot American Hospitality, Inc. ("Patriot"), (as amended, the "Patriot Merger
Agreement"). Pursuant to the Patriot Merger Agreement, on January 5, 1998, the
Company merged with and into the successor to Patriot ("New Patriot REIT")
following Patriot's merger with and into California Jockey Club (the "Cal-Jockey
Merger"), with New Patriot REIT being the surviving company (the "Patriot
Merger"). Patriot also entered into a related stock purchase agreement with the
principal stockholder of the Company (the "Stock Purchase Agreement"), to
acquire all of such stockholder's shares of the Company's common stock (the
"Stock Purchase.") The Cal-Jockey Merger was completed on July 1, 1997. As a
F-29
<PAGE>
result of the Patriot Merger and the Stock Purchase, New Patriot REIT acquired
all of the outstanding shares of common stock of the Company. Pursuant to the
Patriot Merger Agreement and the Stock Purchase Agreement, each outstanding
share of common stock of the Company ("Wyndham Common Stock") generally was
converted into 1.372 shares (the "Patriot Exchange Ratio") of common stock of
each of New Patriot REIT and Patriot American Hospitality Operating Company
("New Patriot Operating Company"), which shares are paired and transferable and
trade together only as a single unit (the "Paired Shares"). In lieu of receiving
Paired Shares, certain stockholders elected to receive cash in an amount per
share equal to the Patriot Exchange Ratio multiplied by the average of the
closing prices of the Paired Shares on the five trading days immediately
preceding the closing of the Patriot Merger, totaling $101.0 million (including
a $1.0 million dividend payment). In connection with the Patriot Merger, New
Patriot REIT assumed the Company's existing indebtedness, which was
approximately $277.6 million as of December 31, 1997.
On April 14, 1997, an action styled Kwalbrun v. James D. Carreker, et.
al., was filed in the Delaware Court of Chancery in and for New Castle County,
purportedly as a class action on behalf of the Company's stockholders, against
the Company and the members of the Board of Directors of the Company. The
complaint also purported to name Patriot as a defendant. The complaint alleges
that the Company's Board of Directors breached its fiduciary duties owed to the
Company's public stockholders in connection with the Board of Director's
approval of the Patriot Merger. In particular, the complaint alleges that the
Patriot Merger was negotiated at the expense of the Company's public
stockholders, and that the Company's Board of Directors permitted Patriot to
negotiate on more favorable terms the Crow Acquisition with members of the
Trammell Crow family. The complaint seeks to enjoin, preliminarily and
permanently, consummation of the Patriot Merger under the terms presently
proposed and also seeks unspecified damages. Wyndham and the individual
defendants filed a motion to dismiss the complaint and a motion to stay
discovery on July 24, 1997. The parties subsequently entered into a memorandum
of understanding setting forth terms of a settlement. The settlement is subject
to, among other things, approval of the Delaware Court of Chancery. Pursuant to
the proposed settlement, defendants made certain supplemental disclosure,
provided an updated fairness opinion and agreed to certain amendments to the
merger agreement. Defendants agreed to pay plaintiff's fees and expenses
aggregating no more than $350,000.
5. EARNINGS PER SHARE:
Computation of basic and diluted earnings per share in accordance with
SFAS 128 are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------- -------------------------
BASIC DILUTED BASIC DILUTED
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Income before extraordinary item.......... $ 25,097 $ 25,097 $ 12,978 $ 12,978
Extraordinary item.........................
(1,131) (1,131) (298) (298)
---------- ---------- ---------- ---------
Income available to common stockholders.... $ 23,966 $ 23,966 $ 12,680 $ 12,680
========== ========== ========== =========
Weighted average number of common shares
outstanding.............................. 20,018 20,018 20,693 20,693
========== ==========
Effect of dilutive securities:
Common stock equivalents................ 4 8
Dilutive stock options.................. 89 419
---------- ---------
20,111 21,120
========== =========
Earnings per share:
Income before extraordinary item $ 1.25 $ 1.25 $ .62 $ .61
Extraordinary item...................... (.06) (.06) (.01) (.01)
---------- ---------- ---------- ---------
Net income.............................. $ 1.19 $ 1.19 $ .61 $ .60
========== ========== ========== =========
</TABLE>
For the effect of Statement of Financial Accounting Standard No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") on earnings per
share, see Note 19, "Stock-Based Compensation Plans."
F-30
<PAGE>
6. NOTES AND OTHER RECEIVABLES FROM AFFILIATES:
As of December 31, 1996 and 1997, notes and other receivables from
affiliates consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Promissory notes bearing interest at 9% per annum, payable in 2005...... $ 6,431 $ 2,789
Promissory note bearing interest at prime plus 2% (8.5% at December 31,
1997) per annum, payable in 2000..................................... 1,254 1,277
Promissory note bearing interest at LIBOR plus 2.75% per annum (7.73% at
December 31, 1997), payable at the earlier of May 9, 2004 or the
termination of the management agreement.............................. - 10,000
Promissory note bearing interest at 10% per annum, payable in 2012...... - 2,035
Advances to a managed hotel bearing interest at 18% per annum, payable
as the permanent financing is available.............................. - 1,939
Advances to a managed hotel bearing interest at 14.5% per annum, payable
as the related hotel's cash flows permit, matures in February
2009................................................................. - 473
--------- ---------
$ 7,685 $ 18,513
========= =========
</TABLE>
The promissory notes represent loans made to affiliated entities to
acquire hotels which then have executed management agreements with the Company.
The loans are collateralized by the partnership interests in the respective
entities. Interest income of $716,000 and $993,000 was earned for the years
ended December 31, 1996 and 1997, respectively.
7. NOTES RECEIVABLE:
As of December 31, 1996 and 1997, notes receivable consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- ------
<S> <C> <C>
Promissory note bearing interest at 13.5% per annum, payable in
2011, converted to equity in 1997 .................................... $4,329 $ --
Promissory note, non interest bearing, payable in installments based on
the hotel's excess gross operating profit and excess gross operating
profit and excess proceeds from capital transactions, as defined in
the management agreement, matures in December 2005 ................... 1,878 1,942
Promissory note bearing interest at 6.5% per annum, interest payable
monthly, principal payable in 2007 ................................... -- 2,150
Promissory note bearing interest at 9.5% per annum, payable 2001 ........ 100 --
------ ------
$6,307 $4,092
====== ======
</TABLE>
The promissory notes represent loans made to entities to renovate
hotels or to cover working capital deficits. The entities then have executed
management agreements with the Company.
The $4.3 million outstanding note receivable at December 31, 1996 was
converted to an investment in 1997 as the Company continued to fund the cash
shortfalls on the related hotel. See Note 3.
F-31
<PAGE>
8. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Land........................................... $ 16,078 $ 31,945
Buildings and improvements..................... 111,698 259,567
Furniture, fixture and equipment............... 36,801 75,780
Work in progress............................... 3,513 20,226
Leasehold improvements......................... 205 3,596
--------- ---------
168,295 391,114
Less accumulated depreciation.................. (34,119) (61,755)
--------- ---------
$ 134,176 $ 329,359
========= =========
</TABLE>
Interest has been capitalized for hotel properties under construction
and renovation. Capitalized interest is determined using interest recognized on
borrowings for construction and renovation that has explicit interest rates. In
1997, such interest totaling $1,315,000 was capitalized and included in
buildings and improvements. No interest was capitalized for 1996.
Property and equipment totaling $73,999,000 were collateralized for the
underlying mortgage debt and other lines of credit of $38,889,000. The Company's
$100 million senior subordinated notes and the outstanding balance of the
revolving credit facility are guaranteed by substantially all of the assets of
Company's subsidiaries.
9. MANAGEMENT SERVICES AND RELATED REVENUES:
The Company has entered into management agreements for hotels. The
owners of certain hotels the Company manages are affiliates related by common
ownership or control. Management fees earned for hotels owned by affiliates in
1995, 1996 and 1997 were $9,567,000, $15,257,000 and $20,754,000, respectively.
Wyndham has paid various operating expenses on behalf of managed
properties. As of December 31, 1995, 1996 and 1997, accounts receivable from
hotels owned by affiliates were $3,002,000, $5,582,000 and $4,936,000,
respectively.
The Company provides centralized accounting services such as accounts
payable, payroll and financial statement preparation for certain managed hotels.
The Company charges an accounting fee to these hotels for such services. Design
fees are additional service fees paid to the Company for the development, and
design and construction of new hotels as well as for the refurbishment of
existing hotels. In addition, the Company receives purchasing fees based on a
percentage of cost of goods ordered for purchasing various items.
Reimbursements represent revenues recognized for the reimbursement of
expenses associated with providing sales and marketing, centralized
reservations, partnership accounting and other support services. Included in
reimbursable expenses are advertising and promotional expenses of $4,905,000,
$6,217,000 and $6,637,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
10. SECURITY DEPOSITS:
Security deposits represent cash payments made by the Company related
to various leases of real estate and equipment. At December 31, 1997, security
deposits consisted primarily of $23.6 million in deposits related to leased
properties.
F-32
<PAGE>
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses at December 31, 1996 and 1997
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Accounts payable............................. $ 5,719 $ 6,103
Due to medical benefit trusts................ 2,756 -
Managed hotels' insurance liabilities........ 3,602 7,197
Taxes........................................ 2,799 4,423
Payroll and related costs.................... 5,284 7,769
Accrued interest............................. 1,390 1,941
Accrued merger expenses and settlements...... - 12,456
Accrued advertising.......................... 395 1,149
Other........................................ 1,611 4,469
---------- ----------
$ 23,556 $ 45,507
========== ==========
</TABLE>
12. BORROWINGS UNDER REVOLVING CREDIT FACILITY:
The Company, at its initial public offering in May 1996, entered into a
$100 million revolving credit facility (the "Revolving Credit Facility") with a
financial institution. The Revolving Credit Facility was amended to $150 million
along with certain other covenant amendments in connection with the ClubHouse
acquisition. See Note 3 for the ClubHouse merger. The Revolving Credit Facility
is a direct obligation of the Company and is fully and unconditionally
guaranteed by each of the Company's subsidiaries. At December 31, 1997,
approximately $115.5 million aggregate principal amount was outstanding at an
average interest rate of 7.8%. The outstanding balance was borrowed mainly for
the acquisition of hotel properties. The Revolving Credit Facility will mature
in May 2000. On January 5, 1998, upon the merger with Patriot, Patriot repaid
all of the outstanding balance on the Revolving Credit Facility. See Note 4 for
the Patriot Merger.
F-33
<PAGE>
13. LONG-TERM DEBT:
Long-term debt at December 31, 1996 and 1997 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Senior subordinated notes, interest payable semi-annually at 10.5%,
principal maturing May 15, 2006, redeemable after May 15, 2001 at
prices ranging from 105.25% to 100.00% of the principal............ $ 100,000 $ 100,000
Industrial revenue bond indebtedness, collaterized by a first lien
mortgage, interest payable monthly to trustee at 5.72%, maturing
October 1, 2025, refinanced in February 1997, the refinanced debt
with maturity in 2023 bears interest at prevailing revenue bond
rate (4.15% plus 2% letter of credit fee at December 31, 1997) 9,675 9,675
payable monthly ...................................................
Four mortgage notes, each bearing interest at 8.7%, four hotel
properties are pledged as collateral, each mortgage note is also
cross-collateralized by the other three affiliated hotel entities
(related through common ownership), principal and interest payable - 20,030
monthly, all notes maturing October, 2005..........................
Mortgage note, bearing interest at 7.95%, a hotel property is pledged
as collateral, the mortgage note is cross collaterized by the
assets of certain affiliated hotel entities and the assets of the
hotel property are subject to similar cross collateralization on
mortgage notes of these affiliates (related through common
ownership), principal and interest payable monthly, maturing - 3,229
October 2005.......................................................
Note payable, bearing interest at LIBOR rate plus 2.75% (reviewed
every 90 days), such rate at December 31, 1997 was 8.66%, a hotel
property and related management contracts are pledged as
collateral, maturing December 2003 ................................ - 3,325
Line of credit, bearing an average interest rate of 8.62%, a hotel
property and related management contracts are pledged as
collateral, maturing March 1998.................................... - 250
Construction line of credit, bearing an average interest rate of
8.61%, a hotel property and related management contracts are
pledged as collateral, beginning April 1998, principal and interest
will be payable in 84 monthly installments based on a 15-year
amortization table................................................. - 2,380
---------- ----------
109,675 138,889
Current portion of long-term debt..................................... - 1,067
---------- ----------
Long-term debt, excluding current portion............................. $ 109,675 $ 137,822
========== ==========
</TABLE>
Maturity of long-term debt in each of the next five years are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998............................................................................. $ 1,067
1999............................................................................. 954
2000............................................................................. 1,019
2001............................................................................. 1,089
2002............................................................................. 1,171
Thereafter....................................................................... 133,589
----------
$ 138,889
==========
</TABLE>
The indentures of the $100.0 million senior subordinated notes and the
Revolving Credit Facility contain covenants restricting the Company's ability to
incur indebtedness, pay dividends and otherwise limiting the Company's
activities. The Indenture of the Revolving Credit Facility, which contains the
most restrictive covenants, requires the Company to maintain a minimum net worth
of $55.0 million; maintain annually increasing consolidated fixed charge
coverage ratios (before and after capital expenditures) as defined in the
covenants, and
F-34
<PAGE>
maintain annually decreasing consolidated debt to consolidated earnings before
interest, taxes, depreciation and amortization (before and after capital
expenditures) ratios as defined in the covenants. On January 5, 1998, upon the
consummation of the Patriot Merger, Patriot paid $116.6 million (including
accrued interest of $1.5 million) for the redemption of $98.5 million of the
outstanding senior subordinated notes.
14. LEASES:
The Company leases various types of property including land and
buildings of hotel properties, office facilities and equipment under agreements
ranging from 1 to 30 years. Leased capital assets included in property and
equipment at December 31, 1996 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Property................................... $ 14,530 $ 18,845
Equipment.................................. 3,734 4,466
---------- ----------
18,264 23,311
Accumulated amortization................... (7,132) (8,053)
---------- ----------
$ 11,132 $ 15,258
========== ==========
</TABLE>
The Company incurred rental expense totaling $1,199,000, $10,319,000
and $21,211,000, respectively, in 1995, 1996 and 1997.
The future minimum lease payments required under the capital leases
(together with the present value of net minimum lease payments) and future
minimum lease payments required under operating leases that have an initial term
or remaining non-cancelable lease term in excess of one year at December 31,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
----------- -----------
<S> <C> <C>
Year ending December 31:
1998.......................................... $ 3,091 $ 15,832
1999.......................................... 3,137 15,832
2000.......................................... 3,169 15,832
2001.......................................... 3,123 15,082
2002.......................................... 3,081 15,082
Thereafter.................................... 38,459 155,858
---------- ----------
Total minimum lease payments..................... 54,060 $ 233,518
==========
Less imputed interest............................ (29,101)
----------
Present value of net minimum lease payment....... 24,959
Less current portion............................. (655)
----------
Long term portion of net minimum lease payments.. $ 24,304
==========
</TABLE>
Under certain lease agreements, the Company is required to pay
contingent rent based on a percentage of the operating income or hotel revenues
of related hotels as defined in the lease agreements. For fiscal years 1995,
1996 and 1997, the Company incurred contingent rent totaling $59,000, $515,000
and $808,000, respectively.
A capital lease agreement provides for a reserve for capital
expenditures equal to 4% of the gross income of the respective hotel. At the end
of the lease term, the Company is required to refund to the lessor the excess of
amounts reserved over actual capital expenditures. At December 31, 1996 and 1997
the reserved amount exceeded expenditures by $974,000 and $999,000,
respectively.
F-35
<PAGE>
15. MERGER EXPENSES:
During the year ended December 31, 1997, the Company incurred expenses
relating to the Patriot Merger totaling $13.4 million. These expenses were
incurred for legal services, investment banker fees and certain other
professional services. Total investment banker fees included in the merger
expenses were $7.8 million.
16. Deferred Gain:
The deferred gain represents the gain resulting from the sale of the
land, buildings, furnishings and equipment of GHALP Leases to Hospitality
Properties Trust in a sale and lease back transaction on May 2, 1996. The gain
is being amortized over the initial term of the GHALP Leases of 17 years.
17. INCOME TAXES:
The Company's provision for income taxes is comprised of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Current:
Federal....................................... $ 3,453 $ 12,104
State......................................... 516 2,679
---------- ----------
Total current expense...................... 3,969 14,783
---------- ----------
Deferred:
Federal....................................... 472 (8)
State......................................... 38 (623)
---------- ----------
Total deferred expense..................... 510 (631)
---------- ----------
Total income tax expense................ $ 4,479 $ 14,152
========== ==========
</TABLE>
A reconciliation of the statutory federal income tax rate and the
effective tax rate to income before income taxes and extraordinary items as
included in the consolidated statements of income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1997
--------- --------
<S> <C> <C>
Federal.......................................... 35.0% 35.0%
State............................................ 3.0 (3.7)
Tax reduction due to FICA tax credit............. (2.3) (1.2)
Merger expenses.................................. - 17.5
Other............................................ 3.4 5.1
------- -------
Total current expenses...................... 39.1% 52.7%
======= =======
</TABLE>
F-36
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Other current assets............................. $ 674 $ 2,743
Land............................................. 99 428
Depreciation and amortization.................... 800 -
Management contracts............................. 7,439 7,478
Other current liabilities........................ 754 -
Long-term lease.................................. 7,632 7,691
Deferred gain.................................... 4,557 4,447
Other non-current deferred assets................ - 428
--------- ---------
Total deferred tax assets..................... 21,955 23,215
--------- ---------
Deferred tax liabilities:
Other non-current liabilities.................... (522) (873)
Depreciation and amortization.................... - (20,334)
Security deposits................................ (5,746) (6,671)
--------- ---------
Total deferred tax liabilities................ (6,268) (27,878)
--------- ---------
Net deferred tax asset (liability)............ $ 15,687 $ (4,663)
========= =========
</TABLE>
On May 24, 1996, the Company, previously a non-taxable entity, became a
taxable entity. Upon the conversion of a non-taxable to a taxable entity, the
Company recognized a deferred tax asset of approximately $16.2 million, of which
$3.2 million was recognized in retained earnings and $13.0 million was
recognized in continuing operations as a tax benefit. The book income for the
period from May 24, 1996 through December 31, 1996 was approximately $11.5
million.
18. STOCKHOLDERS' EQUITY:
In connection with the initial public offering, the Company authorized
Common Stock of 45,000,000 shares, $.01 par value per share. The Company's
Certificate of Incorporation ("Certificate") authorized 5,000,000 shares of
preferred stock ("Preferred Stock"), none of which is outstanding. The Board of
Directors (the "Board") has the authority, without any further vote or action by
the stockholders, to issue Preferred Stock in one or more series and to fix the
number of shares, designations, and relative rights. In the event of voluntary
or involuntary liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities subject to prior distribution rights of any
Preferred Stock then outstanding. The Company has no present intention to issue
shares of Preferred Stock.
At December 31, 1997, 21,618,310 shares of the Company's common stock
were issued and outstanding. Holders of the Common Stock have no preemptive or
conversion rights and the Common Stock is not subject to further calls or
assessment by the Company. There are no redemption or sinking fund provisions
with respect to the Common Stock. On January 5, 1998, upon the consummation of
Patriot Merger, the Company's outstanding common stock was converted into
Patriot's common stock in accordance with the ratio specified in the merger
agreement.
19. STOCK-BASED COMPENSATION PLANS:
The Company sponsors the "Wyndham Hotel Corporation 1996 Long Term
Incentive Plan" (the "Plan'), which is a stock-based incentive compensation plan
as described below. The Company applies Accounting Principles Board Opinion 25
("APB Opinion 25") and related Interpretations in accounting for the Plan. In
1995, the FASB issued FASB Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") which, if
F-37
<PAGE>
fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plan. Adoption of the cost recognition provisions of
SFAS 123 is optional and the Company has decided not to elect these provisions
of SFAS 123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS 123 in 1996 and 1997 are required by SFAS 123 and
are presented below.
Under the Plan, the Company is authorized to issue shares of Common
Stock or cash pursuant to "Awards" granted in the form of incentive stock
options qualified under Section 422 of the Internal Revenue Code of 1986, as
amended, non-qualified stock options, restricted shares, stock appreciation
rights, and performance units. Awards may be granted to key executives and other
key employees of the Company, including officers of the Company and its
subsidiaries.
According to the Plan, Awards may be granted with respect to a maximum
of 2,133,811 shares of Common Stock. No participant may be granted, in any year,
Awards with respect to more than 500,000 shares of Common Stock. The
Compensation Committee administers the Plan and has broad discretion in
selecting Plan participants and determining the vesting period and other terms
applicable to Awards granted under the Plan.
In 1996 and 1997, the Company granted nonqualified stock options
totaling 820,700 and 401,477, respectively, under the Plan.
A summary of the status of the Company's stock options as of December
31, 1997 and the changes since the Company's initial public offering through
December 31, 1997 is summarized below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS OPTIONS
---------- ----------
<S> <C> <C>
Outstanding at initial public offering................... - $ -
Granted.................................................. 820,700 $ 16.09
Exercised................................................ - $ -
Forfeited................................................ (128,000) $ (16.00)
Expired.................................................. - $ -
----------
Outstanding at December 31, 1996......................... 692,700 $ 16.11
Granted.................................................. 401,477 $ 24.67
Exercised................................................ - -
Forfeited................................................ (53,600) $ (19.23)
Expired.................................................. - -
----------
Outstanding at December 31, 1997......................... 1,040,577 $ 19.25
==========
Exercisable at December 31, 1996 and 1997................ - -
Weighted-average fair value for 1996..................... $ 6.86
Weighted-average fair value for 1997..................... $ 10.16
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Expected term.................................................. 5 5
Expected volatility............................................ 36.54% 34.67%
Expected dividend yield........................................ - -
Risk-free interest rate........................................ 6.40% 6.26%
</TABLE>
F-38
<PAGE>
Options outstanding as of December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS REMAINING TERM EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------- ----------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$16.00 to $29.99 1,015,500 8.63 $ 18.81 - -
$32.84 to $43.75 25,077 9.91 37.41 - -
---------------- ----------- ----- --------
$16.00 to $43.75 1,040,577 8.66 $ 19.25 - -
</TABLE>
Had the compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1997 would approximate the pro forma amounts below
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------------- ----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
SFAS 123 charge............................ $ - $ 577 $ - $ 1,541
APB 25 charge.............................. $ - $ - $ 83 $ -
Net income................................. $ 23,966 $ 23,615 $ 12,838 $ 11,380
Net income per common share (basic EPS).... $ 1.19 $ 1.18 $ .62 $ .54
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
20. RECEIVABLES FROM AFFILIATES:
Management fees for one managed hotel, owned by an affiliate of the
Company, are deferred until certain operating criteria, as defined in the
partnership's management agreement and loan agreement, are met. As of December
31, 1996 and 1997, the deferred balances, a receivable from an affiliate
included in partners' capital, were $1,223,000 and $1,228,000, respectively.
These management fees will be collected upon meeting the operating criteria as
defined in the agreement.
In addition, included in partners' capital at December 31, 1995 were
receivables from affiliates that include certain partner capital contributions
and accrued interest of $1,080,000.
21. TERMINATION OF MANAGEMENT AGREEMENTS:
On July 25, 1997, the Company agreed to the termination of its
management relationship with Homegate Hospitality, Inc. ("Homegate") which
operates extended-stay hotels. The termination was effective October 31, 1997 as
a result of the pending merger of Homegate with another company in the lodging
industry. The Company received cash of $8.0 million and a note receivable of
$4.0 million in exchange for the termination.
During 1997, two other management agreements were also terminated and
the Company received fees totaling $712,000 on the termination.
22. EXTRAORDINARY ITEMS:
Extraordinary items for 1996 and 1997 of $1,131,000 and $298,000
consisted of the write-off of the unamortized debt issuance costs on the debt
repaid at the Company's initial public offering for 1996 and in the ClubHouse
merger for 1997, net of applicable taxes.
F-39
<PAGE>
23. COMMITMENTS AND CONTINGENCIES:
Litigation has been initiated against the Company pertaining to the
right to use the Wyndham name for hotel service in the New York metropolitan
area. On January 29, 1996, a temporary restraining order was issued by the
Supreme Court of the State of New York, which, pending the outcome of the
trial, prevented the Company from using the Wyndham name in the New York area.
The plaintiffs sought to prevent the Company from operating Wyndham brand
hotels or advertising the Wyndham name in connection with the operation of a
Wyndham brand hotel within a 50 mile radius of plaintiff's hotel in Manhattan
operated under the "Wyndham" name. Among other things, the temporary
restraining order prevented the Company from using the mark "Wyndham" in
connection with its operation of a hotel in the vicinity of LaGuardia Airport.
A decision was rendered on December 31, 1997 wherein the Company was
enjoined from the use of the mark "Wyndham" in the Borough of Manhattan, New
York County. The scope of the injunction permits the use by the Company of the
"Wyndham" mark anywhere in New York State other than the Borough of Manhattan,
subject to compliance with certain disclaimer procedures. In particular, the
decision enables the Company to immediately brand the hotel operated by the
Company in the vicinity of LaGuardia Airport. The Company is evaluating an
appeal of all of or part of the decision. The cost of $1,221,000 at December
31, 1997 for defending the trademark has been capitalized and is being
amortized over 17 years.
The Company received a Notice of Intent to make Sales and Use Tax audit
changes from the Tampa Region of the Florida Department of Revenue for the
period from July 31, 1990 through June 30, 1995. The audit assessed additional
taxes of $584,000, penalty of $224,000 and interest of $201,000 for a total
assessment of $1,009,000. The previous owners (an affiliate) have agreed to
indemnify the Company with respect to any additional sales and use tax paid by
the Company for the audit period. Management, after review and consultation
with legal counsel, believes the Company has meritorious defenses to this
matter and that any potential liability in excess of the $189,000 initially
recorded would not materially effect the Company's consolidated financial
statements.
On April 14, 1997, an action styled Kwalbrun v. James D. Carreker, et.
Al., was filed in the Delaware Court of Chancery in and for New Castle County,
purportedly as a class action on behalf of the Company's stockholders, against
the Company and the member of the Board of Directors of the Company. The
Complaint also purported to name Patriot as a defendant. The complaint alleges
that the Company's Board of Directors breached its fiduciary duties owed to the
Company's public stockholders in connection with the Board of Director's
approval of the Patriot Merger. In particular, the complaint alleges that the
Patriot Merger was negotiated at the expense of the Company's public
stockholders, and that the Company's Board of Directors permitted Patriot to
negotiate on more favorable terms the Crow Acquisition with member of the
Trammell Crow family. The complaint seeks to enjoin, preliminarily and
unspecified damages. Wyndham and the individual defendants filed a motion to
dismiss the complaint and a motion to stay discovery on July 24, 1997. The
parties subsequently entered into a memorandum of understanding setting forth
terms of a settlement. The settlement is subject to, among other things,
approval of the Delaware Court of Chancery. Pursuant to the proposed settlement,
defendants made certain supplemental disclosure, provided an updated fairness
opinion and agreed to certain amendments to the merger agreement. Defendants
agreed to pay plaintiff's fees and expenses aggregating no more than $350,000.
The Company has pending several other claims incurred in the normal
course of business which, in the opinion of management, based on the advice of
legal counsel, will not have a material effect on the consolidated financial
statements.
Pursuant to the terms of a management agreement of a hotel in which the
Company has a 30% ownership, the Company has committed to fund up to $2.5
million for the renovation of the hotel property. The loan will bear an interest
rate at 10% and will be collaterized by the outstanding partnership interest of
owners. Interest will be due monthly and principal is payable in installment
beginning January 1998 pending the operating income of the hotel. At December
31, 1997, $2.0 million of such amount has been advanced. The Company also
guarantees $2,340,000 in indebtedness of this hotel.
F-40
<PAGE>
Pursuant to the terms of a management agreement with an affiliate-owned
hotel under construction, the Company has undertaken certain commitments to
provide furniture, fixtures and equipment for the hotel at a fixed price
totaling $6.0 million. As of December 31, 1997, the Company has satisfied such
commitments totaling $4.9 million. The Company has also guaranteed to fund up to
$230,000 in working capital per year for three years on a hotel in the event
that the hotel generates inadequate cash flow and the Company has guaranteed
$875,000 of its indebtedness. The Company has not to date been required to make
any capital contribution under the guarantee.
Pursuant to the terms of a management agreement of a hotel owned by an
affiliate, the Company has guaranteed to fund up to $600,000 of working
capital per year to the extent the entity experiences operating deficits, with
a maximum required contribution of $2.3 million over the term of the guarantee
extending from 1995 to 2000. The Company has not to date been required to make
any capital contribution under the guarantee.
The Company is subject to environmental regulations related to the
ownership, management, development and acquisition of real estate (hotels). The
cost of complying with the environmental regulations was not material to the
Company's consolidated statements of income for the years ended December 31,
1995, 1996 and 1997. The Company is not aware of any environmental condition on
any of its properties which is likely to have a material adverse effect on the
Company's financial statements.
24. EMPLOYEE BENEFIT PLANS:
The Company sponsors 401(k) retirement savings plans. Employees who are
over 21 years of age and have completed one year of service are eligible to
participate in the plans. The Company matches employee contributions up to 4% of
an employee's salary. The aggregate expense under the plans amounted to
approximately $202,000, $229,000 and $277,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
Wyndham maintains a self-insured group health plan through a Voluntary
Employee Benefit Association ("VEBA"). This plan is funded to the limits
provided in the Internal Revenue Code, and liabilities have been recorded for
estimated incurred but unreported claims. Aggregate and stop loss insurance
exists at amounts which limit exposure to the Company. The Company has
recognized expenses related to the plan of $832,000, $1,504,000 and $2,821,000
for the years ended December 31, 1995, 1996 and 1997, respectively.
In prior years, certain management employees were partners in an equity
participation plan, Wyndham Employees, Ltd. ("WEL"). The Company accounted for
WEL in a manner similar to a formula unit incentive plan. For financial
reporting purposes, the Company recognized compensation expense under WEL and
the Senior Executive Officer equity participation of $3,992,000 and $2,919,000
for the years ended December 31, 1995 and 1996, respectively. The primary
component of such expense was fixed at the Company's initial public offering
price, and the Company did not incur additional expense for periods subsequent
to the initial public offering. In February 1997, WEL was terminated upon the
distribution of 646,696 shares of the Company's Common Stock held by WEL to its
participants.
25. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company has estimated the fair value of its financial instruments
at December 31, 1997 as required by Statement of Financial Accounting Standards
No. 107. The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
values. Long-term debt had a fair value of $112,135,000 and $117,250,000 at
December 31, 1996 and 1997, respectively, based on the quoted market prices. The
carrying values of fixed rate debt are reasonable estimates of their fair values
based on their discounted cash flows at discount rates currently available to
the Company for debt with similar terms and remaining maturity at December 31,
1996.
26. TRANSACTIONS WITH RELATED PARTIES:
The following discussion of certain relationships and transactions
includes (i) hotel management and related fees paid to the Company by certain
affiliates, (ii) capital contributions, loans and other payments made by
F-41
<PAGE>
the Company to certain affiliates in connection with the Company's entry into
hotel management contracts with related parties, (iii) transactions between the
Company and Mr. and Mrs. Trammell Crow (together with various descendants of Mr.
and Mrs. Crow and various corporations and entities beneficially owned or
controlled by such person, the "Crow Family Members"), four senior officers of
the Company (the "Senior Executive Officers") and (iv) loans made to the Senior
Executive Officers of the Company that the Company purchased in connection with
its formation.
During 1995 and 1996, the Senior Executive Officers incurred
indebtedness to Wyndham Finance Limited Partnership ("WFLP"), a partnership
owned by Crow Family Members. In addition, Wyndham Employees Ltd. ("WEL"), in
which certain executive officers of the Company have an interest, incurred
indebtedness to WFLP. Notes representing such loans were purchased by the
Company in May of 1996 in connection with its formation for a cash payment to
WFLP in the amount of $18,576,000 which is equivalent to the aggregate
outstanding principal and accrued interest severally owing by the Senior
Executive Officers and WEL to WFLP. Such promissory notes, which are made
payable to the Company, accrue interest at 6% per annum and are fully secured by
the pledge of shares of Common Stock held by the note obligors. The outstanding
principal and accrued interest (compounded quarterly) is payable in a single
lump sum in May 2001. The aggregate principal amounts of such loans, including
interest, purchased by the Company in connection with its formation, are as
follows (in thousands):
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
James D. Carreker........................ $ 5,135 $ 5,443
Leslie V. Bentley........................ $ 1,890 $ 2,003
Anne L. Raymond.......................... $ 4,625 $ 4,903
Stanley M. Koonce, Jr.................... $ 1,926 $ 2,041
Eric Danziger*........................... $ 2,829 $ 2,999
WEL...................................... $ 3,044 $ -
--------------
* Resigned in 1996, the full outstanding amount was collected in
January 1998.
During 1995 and 1996, the Company made cash advances in the aggregate
amounts of $1,381,000 and $329,000, respectively, to the Hotel Partnerships in
which Bedrock has an ownership interest. The advances were used to pay certain
renovations costs for Wyndham Garden hotels that were redeveloped by Bedrock.
The advances are repaid through Bedrock's redevelopment fund. No such advances
were made during 1997 and no amounts were outstanding at December 31, 1997.
During 1995, 1996 and 1997, the Company made payments in the aggregate
amounts of $1,740,000, $1,742,000 and $2,452,000, respectively, to Wyndham
Travel Management Ltd., an entity owned by Lucy Billingsley (the daughter of
Trammell Crow), for travel services provided to the Company.
During 1995, the Company made payments in the aggregate amount of
$830,000 to Caribbean Hotel Management Company ("CHMC"), which is owned by Crow
Family Members. The Company's payment obligations under the agreement were
released and discharged in connection with the formation of the Company in
exchange for a cash payment paid by the Company to CHMC.
During 1995, 1996 and 1997, the Company made payments in the aggregate
amounts of $875,000, $850,000 and $946,000, respectively, as lease payments for
its corporate office space to Tower 2001 Limited Partnership and IM Joint
Venture, entities in which Crow Family Members have an ownership interest. The
Company's lease on its corporate office space expired in May 1997 and the
Company's corporate offices were relocated to another building leased from an
entity affiliated with members of the Crow Family.
During 1995, the owners of hotels owned or leased by the Company made
contributions to a loss prevention fund in the amounts of $624,000, which funds
were deposited to WFLP pending the use of such contributions by the loss
prevention fund. The contributions were used to cover a portion of the
deductible on insurance policies for such hotels in connection with insured
claims made against the hotels.
F-42
<PAGE>
In 1995, the Company made payments in connection with entering into a
management contract for the Wyndham Anatole Hotel (the "Anatole Hotel"), in
which Crow Family Members have an ownership interest. The amount of such payment
was $523,000 and the purpose was to pay costs associated with converting the
property to the Wyndham brand. In 1997, the Company entered into a construction
loan agreement with the Anatole Hotel. Under the agreement, the Company made a
loan in the amount of $10.0 million for the construction costs of the hotel.
During 1995, 1996 and 1997, the Company made payments in the aggregate
amounts of $321,000, $332,000, and $304,000, respectively, to GHMB, Inc., an
entity owned by a Senior Executive Officer for the operation of liquor
concessions at a Wyndham Garden hotel.
During 1995, 1996 and 1997, the Company received payments in the
aggregate amount of $73,000, $514,000 and $545,000, respectively, from
Convention Center Boulevard Hotel Limited, Waterfront Hotel Associates, S.E. and
WHC-LG Hotel Associates, L.P., Hotel Partnerships in which Crow Family Members
and some or all of the Senior Executive Officers have an interest. The payments
were received as construction and renovation fees for the Wyndham Riverfront and
Wyndham San Juan Hotels and for the Company's La Guardia Airport hotel.
Pursuant to the terms of its management agreement relating to the
Wyndham Hotel at Los Angeles Airport (the "LAX"), Wyndham agreed to loan
$4,560,000 to be applied to costs of refurbishment of the LAX. The refurbishment
loan is evidenced by a promissory note (the "Note Receivable"), which has been
partially funded in the amount of $4,237,000 as of December 31, 1997. The
Company's obligation to make the remaining advances under the refurbishment loan
is secured by a letter of credit, which, in turn, is collateralized by $400,000
as of December 31, 1997 in cash. Prior to the formation of the Company, WHC LAX
Associates, L.P. ("WHC LAX"), a limited partnership owned by Crow Family Members
and the Senior Executive Officers, paid to Wyndham $4,560,000 in return for
Wyndham's agreement to pay to WHC LAX all payments that Wyndham receives under
the Note Receivable. Wyndham also agreed that, insofar as the WHC LAX's
$4,560,000 payment to the Company exceeds advances that Wyndham is obligated to
make, but has not yet made, under the Note Receivable, it would pay to WHC LAX
interest at a variable rate that has ranged from 5.25% to 5.81% per annum on the
unfunded amounts. As of December 31, 1997, the Company has accrued such interest
in the amount of $49,000.
In 1996, the Company entered into a five year service agreement with
ISIS 2000, an entity owned by Crow Family Members and the Senior Executive
Officers, whereby ISIS 2000 will provide centralized reservations and property
management services to all Wyndham brand hotels. The services will be provided
for a fee comprised of an initial link-up charge plus a per reservation fee and
a per hotel charge for the property management system. The service fee incurred
by the Company totaling $772,000 and $2,522,000 in 1996 and 1997, respectively.
The Company has entered into an asset management agreement with ISIS 2000
providing for human resource, finance, accounting, payroll, legal and tax
services. In addition, the Company has guaranteed operating leases on behalf of
ISIS 2000 in the approximate amount of $1,853,000 million as of December 31,
1997.
In 1995, 1996 and 1997, the Company made payments to Trammell
Crow Company in the amount of $387,000, $937,000 and $294,000, respectively, for
contract labor (including related costs) provided to the Company for management
information services.
The Company has made insurance premium payments to Wynright Insurance
("Wynright"), an entity owned by Crow Family Members and the Senior Executive
Officers, with respect to certain insurance policies maintained for the benefit
of the Company and hotels owned or leased by the Company. Such payments totaled
$593,000 and $730,000 in 1996 and 1997, respectively. The Company also will
enter into an asset management agreement with Wynright providing for human
resource, finance, accounting, payroll, legal and tax services.
In 1996, a subsidiary of the Company entered into a master management
agreement with Homegate, an affiliated entity, which provides for the Company to
manage up to 60 extended-stay hotel properties and to provide Homegate with
other services. The Company and Homegate agreed that Homegate would pay Wyndham
or an affiliate a one-time fee of $25,000 for Wyndham's provision of design
services in developing the initial prototype, certain other fees for the
provision of software and other services, and a commission of 5% of the
aggregate
F-43
<PAGE>
purchase price of all items that Homegate purchases through Wyndham's purchasing
department. Homegate also would reimburse Wyndham for up to $100,000 for the
costs incurred in developing Homegate's payroll and accounts payable software
and for developing a marketing database, which costs would be reimbursed ratably
upon the signing of the first 10 management contracts On October 31, 1997, the
management agreement with Homegate was terminated and the Company received cash
of $8.0 million and a promissory note in the amount of $4.0 million in exchange
for the termination. The promissory note was collected on January 9, 1998.
In May 1994, the Company entered into an Investment Agreement and an
Option Agreement (collectively, the "Bedrock Agreements") with Bedrock pursuant
to which, as amended, Bedrock agreed to provide up to $335 million in equity and
debt capital (the "Investment Program") to acquire hotels or hotel management
companies and to make hotel related investments that are approved by both the
Company and Bedrock. Approximately $196 million of debt and equity capital had
been invested pursuant to the Investment Program as of December 31, 1996.
Although the commitments of certain of the participants in the Investment
Program expire in mid-1997, the Company will be entitled to manage any
Investment Program hotel for a term of 15 years. Pursuant to the terms of the
Investment Agreement, Bedrock is not required to invest a minimum amount of
capital through the Investment Program, and Wyndham had not invested in any of
the 17 hotels acquired pursuant to the Investment Program. Pursuant to the
Investment Agreement, as amended, the Company and Bedrock have agreed that the
Company will be permitted to manage any hotel with 250 or fewer rooms that is
sourced by Bedrock. Subject to certain limitations, certain Crow Family Members
have the right to co-invest with Bedrock in the Investment Program. The Company
also has certain limited rights to co-invest with Bedrock in the Investment
Program; provided, however, that once the Company elects to co-invest in
Investment Program projects, it must co-invest in each subsequent project or it
would forfeit additional rights to co-invest. The Company had executed
management contracts with Bedrock for 15 at December 31, 1995 and 17 at December
31, 1996 and 1997 Wyndham brand hotels, respectively, through the Investment
Program.
27. SUPPLEMENTAL CASH FLOW INFORMATION:
The following table set forth certain cash and non-cash investing and
financing activities and other cash flow information (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Cash activities:
Interest paid.............................................. $ 8,154 $ 11,292 $ 17,237
Income taxes paid.......................................... - 3,939 15,995
Non-cash investing activities:
Acquisition of business -
Fair value of assets acquired........................... - 49,967 158,267
Liabilities assumed..................................... - 16,497 27,068
Non-cash financing activities:
Capital lease obligations incurred......................... 283 429 4,701
Common stock issued for the acquisition of hotel properties - - 48,798
</TABLE>
28. SUBSEQUENT EVENTS (UNAUDITED):
On January 5, 1998, the Patriot Merger was consummated, each share of
the Company's outstanding common stock was converted into 1.372 shares of common
stock of New Patriot REIT and Patriot American Hospitality Operating Company
(Wyndham International, Inc.), which shares are paired and transferable and
trade together only as a single unit. At the merger, Patriot repaid the
Company's outstanding senior subordinated notes and substantially all of the
outstanding balance of the revolving credit facility plus accrued interest.
F-44
<PAGE>
29. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The unaudited pro forma condensed consolidated statements of income of
the Company are presented as if the acquisition of the remaining 70% of GHALP
Leases, the acquisition of ClubHouse and certain other acquisitions had occurred
on January 1, 1996. These unaudited pro forma condensed consolidated statements
of income are presented for informational purpose only and are not necessarily
indicative of what actual results of operations of the Company would have been
assuming such transactions had been completed as of January 1, 1996, nor do they
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
---------- ----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Total revenues............................................. $ 211,673 $ 266,476
Operating income........................................... $ 37,346 45,350
Income before income taxes and extraordinary item.......... $ 20,309 31,047
Income before extraordinary item........................... $ 12,725 14,746
Earnings per share:
Basic................................................... $ .59 $ .68
Diluted................................................. $ .58 $ .67
Weighted average number of common shares outstanding....... 21,617 21,618
Weighted average number of diluted shares.................. 21,834 22,045
</TABLE>
30. QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarterly financial data for 1996 and 1997 are summarized as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
1996 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues............................... $ 26,484 $ 34,042 $ 41,415 $ 46,134
Operating income............................. 6,615 3,803 7,079 8,506
Income before extraordinary item............. 5,168 13,624 2,769 3,536
Net income................................... 5,168 12,493 2,769 3,536
Basic EPS:
Income before extraordinary item.......... N/A .68 .14 .18
Net income................................ N/A .62 .14 .18
Diluted EPS:
Income before extraordinary item.......... N/A .67 .14 .18
Net income................................ N/A .62 .14 .18
<CAPTION>
QUARTER ENDED
--------------------------------------------------
1997 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues............................... $ 52,853 $ 53,488 $ 58,915 $ 79,060
Operating income............................. 10,344 8,097 10,356 10,992
Income before extraordinary item............. 4,584 2,242 3,676 2,476
Net income................................... 4,584 2,242 3,378 2,476
Basic EPS:
Income before extraordinary item.......... .23 .11 .17 .12
Net income................................ .23 .11 .16 .12
Diluted EPS:
Income before extraordinary item.......... .22 .11 .17 .11
Net income................................ .22 .11 .16 .11
</TABLE>
Note: Earnings per share data for the first quarter of 1996 relates to period
prior to the Company's formation and therefore is note presented.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
WHG Resorts & Casinos Inc.
We have audited the accompanying consolidated balance sheets of WHG Resorts
& Casinos Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended June 30, 1997. Our audits also included the
financial statement schedule of valuation and qualifying accounts for each of
the three years in the period ended June 30, 1997. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WHG
Resorts & Casinos Inc. as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Juan, Puerto Rico
August 7, 1997, except for Note
18, as to which the date is
September 17, 1997.
F-46
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ -----------------------
1997 1997 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents............................ $ 17,555 $ 17,886 $ 6,616
Receivables, net of allowances of $649 and $475 at
June 30, 1997 and 1996, respectively, and $533 at
December 31, 1997................................... 5,241 3,477 2,534
Receivables from nonconsolidated affiliates.......... 2,640 1,105 608
Inventories.......................................... 577 590 651
Other current assets................................. 1,367 791 689
----------- ----------- -----------
Total current assets............................... 27,380 23,849 11,098
Investments in, receivables and advances to
nonconsolidated affiliates............................ 28,793 30,603 27,126
Property and equipment, net............................ 43,224 43,861 44,919
Land held as investment................................ 5,095 5,095 5,095
Excess of purchase cost over amount assigned to net
assets acquired, net of accumulated amortization of
$3,739 and $3,340 at June 30, 1997 and 1996,
respectively, and $3,934 at December 31, 1997......... 8,515 8,710 9,109
Other assets........................................... 5,176 5,355 7,387
----------- ----------- -----------
$ 118,183 $ 117,473 $ 104,734
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable..................................... $ 4,280 $ 3,760 $ 3,297
Accrued compensation and related benefits............ 2,391 2,855 2,128
Other accrued liabilities............................ 5,207 3,723 2,721
Dividend payable on preferred stock of Condado
Plaza............................................... -- -- 94
Notes payable........................................ 500 1,000 2,000
Current maturities of long-term debt................. 3,143 3,681 3,299
----------- ----------- -----------
Total current liabilities.......................... 15,521 15,019 13,539
Long-term debt, less current maturities................ 18,360 19,868 23,555
Deferred income taxes.................................. 2,192 2,638 2,291
Other noncurrent liabilities........................... 4,452 4,532 4,542
Payable to WMS Industries Inc.......................... -- 102 397
Minority interests..................................... 21,279 19,990 18,810
Preferred stock of Condado Plaza held by WMS
Industries Inc........................................ -- -- 4,100
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, 300,000 shares issued and outstanding... 3 -- --
Common stock, class A, $.01 par value, non-voting,
3,000,000 shares authorized, none issued and
outstanding......................................... -- -- --
Common stock, $.01 par value, 12,000,000 shares
authorized, 6,050,200 shares issued and outstanding
in 1997 and 1,000 shares authorized and 100 shares
outstanding in 1996................................. 61 61 1
Additional paid-in capital............................. 17,293 14,296 3,849
Retained earnings...................................... 39,022 40,967 33,650
----------- ----------- -----------
Total stockholders' equity......................... 56,379 55,324 37,500
----------- ----------- -----------
$ 118,183 $ 117,473 $ 104,734
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-47
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------------ -------------------------------
1997 1996 1997 1996 1995
--------- -------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
WHGI management fees from nonconsolidated
affiliates................................. $ 5,497 $ 4,904 $ 13,937 $ 13,372 $ 13,348
Condado Plaza hotel/casino:
Casino...................................... 13,664 10,809 23,720 22,438 24,584
Casino promotional allowances............... (4,335) (3,454) (7,721) (6,986) (6,872)
Rooms....................................... 11,342 11,161 25,629 25,477 25,210
Food and beverages.......................... 5,238 5,275 11,034 11,478 11,412
Other....................................... 1,513 1,359 3,035 2,915 3,196
--------- --------- --------- --------- ---------
27,422 25,150 55,697 55,322 57,530
--------- --------- --------- --------- ---------
Total revenues............................ 32,919 30,054 69,634 68,694 70,878
Costs and expenses:
WHGI operating expenses (excl.
depreciation).............................. 2,067 1,827 3,910 3,882 5,175
Condado Plaza operating expenses (excl.
depreciation):
Casino..................................... 6,271 5,284 11,334 12,375 13,737
Rooms...................................... 3,732 3,674 7,639 8,593 9,081
Food and beverages......................... 4,436 4,378 9,076 10,088 10,503
Other...................................... 2,257 2,430 4,968 5,281 6,463
--------- --------- --------- --------- ---------
16,696 15,766 33,017 36,337 39,784
Selling and administrative................... 5,142 4,550 9,913 9,487 12,301
Depreciation and amortization................ 3,027 2,809 5,707 5,430 5,994
--------- --------- --------- --------- ---------
Total costs and expenses.................. 26,932 24,952 52,547 55,136 63,254
--------- --------- --------- --------- ---------
Operating income............................. 5,987 5,102 17,087 13,558 7,624
Interest income, primarily from
nonconsolidated affiliates, and
other income................................ 1,564 1,091 2,334 1,830 2,548
Interest expense............................. (1,510) (1,674) (3,265) (3,689) (4,300)
Equity in loss of nonconsolidated
affiliates.................................. (2,836) (3,028) (1,196) (3,465) (7,003)
Merger costs to date......................... (2,436) -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before tax credit (provision)
and minority interests...................... 769 1,491 14,960 8,234 (1,131)
Credit (provision) for income taxes.......... (1,195) (224) (3,397) (1,645) 234
Minority interests in income................. (1,404) (1,262) (4,000) (3,636) (2,910)
Dividend on preferred stock of Condado
Plaza....................................... -- (164) (246) (516) (557)
--------- --------- --------- --------- ---------
Net income (loss)............................ $ (1,830) $ (159) $ 7,317 $ 2,437 $ (4,364)
========= ========= ========= ========= =========
Basic earnings (loss) per share.............. $ (0.32) $ (0.03) $ 1.20 $ .40 $ (.72)
========= ========= ========= ========= =========
Shares used in basic earnings per share
calculation................................. 6,050,000 6,050,200 6,086,443 6,050,200 6,050,200
========= ========= ========= ========= =========
Diluted earnings (loss) per share............ $ (0.32) $ (0.03) $ 1.17 $ .40 $ (.72)
========= ========= ========= ========= =========
Shares used in diluted earnings per
share calculation........................... 6,050,000 6,050,200 6,247,241 6,050,200 6,050,200
========= ========= ========= ========= =========
Pro forma information reflecting income taxes
on a separate return basis (unaudited):
Income (loss) before tax provision and
minority interests......................... $ 1,491 $ 14,960 $ 8,234 $ (1,131)
Provision for income taxes.................. (1,305) (3,478) (2,545) (1,902)
Minority interests in income................ (1,262) (4,000) (3,636) (2,910)
Dividend on preferred stock of Condado
Plaza...................................... (164) (246) (516) (557)
--------- --------- --------- ---------
Net income (loss)......................... $ (1,240) $ 7,236 $ 1,537 $ (6,500)
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-48
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------------ --------------------------
1997 1996 1997 1996 1995
-------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $ (1,830) $ (159) $ 7,317 $ 2,437 $(4,364)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 3,027 2,809 5,707 5,430 5,994
Provision for loss on receivables............... 407 69 366 1,457 1,842
Undistributed loss of nonconsolidated
affiliates..................................... 2,836 3,028 1,196 3,465 7,003
Deferred income taxes........................... (446) -- 347 3,239 (1,626)
Minority interests.............................. 1,404 1,262 4,000 3,636 2,910
Increase (decrease) resulting from changes in
operating assets and liabilities:
Receivables.................................... (2,171) (2,231) (1,309) 342 (541)
Other current assets........................... (563) 8 54 459 471
Accounts payable and accruals.................. 1,540 1,938 2,192 (12) (1,152)
Net amounts due from nonconsolidated
affiliates.................................... (1,535) (3,007) (5,170) (1,931) (5,906)
Other assets and liabilities not reflected
elsewhere..................................... 99 319 (10) (618) 218
-------- --------- ------- -------- -------
Net cash provided by operating activities......... 2,768 4,036 14,690 17,904 4,849
Investing activities:
Purchase of property and equipment................ (2,195) (1,727) (3,153) (1,149) (2,066)
Purchase of additional shares of subsidiaries..... -- -- (1,500) -- (3,925)
Investments in and advances to nonconsolidated
affiliates....................................... (1,026) (186) -- -- (1,360)
Collections from nonconsolidated affiliates....... -- 612 -- 985 2,010
Other investing................................... -- -- 1,760 -- --
-------- --------- ------- -------- -------
Net cash used in investing activities............. (3,221) (1,301) (2,893) (164) (5,341)
Financing activities:
Payment of long-term debt and notes payable....... (2,648) (2,628) (8,703) (3,887) (4,568)
Proceeds from short-term note..................... -- -- 4,500 -- --
Capital contribution from WMS Industries Inc...... -- -- 1,643 -- --
Net intercompany transactions with WMS Industries
Inc.............................................. -- (909) 4,273 (6,275) 3,125
Issuance of preferred stock....................... 3,000 -- -- -- --
Purchase of preferred stock of Condado Plaza by
WMS Industries Inc............................... -- -- -- -- 2,500
Redemption of preferred stock of Condado Plaza
from WMS Industries Inc.......................... -- -- -- (3,400) --
Dividends on preferred stock...................... (115) -- -- -- --
Dividends paid to minority shareholders of
subsidiary....................................... (115) (151) (2,240) (1,189) (783)
-------- --------- ------- -------- -------
Net cash (used) provided by financing activities.. 122 (3,688) (527) (14,751) 274
-------- --------- ------- -------- -------
Increase (decrease) in cash and cash equivalents... (331) (953) 11,270 2,989 (218)
Cash and cash equivalents at beginning of year..... 17,886 6,616 6,616 3,627 3,845
-------- --------- ------- -------- -------
Cash and cash equivalents at end of year........... $ 17,555 $ 5,663 $17,886 $ 6,616 $ 3,627
======== ========= ======= ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-49
<PAGE>
WHG RESORTS & CASINOS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance as of June 30, 1994............................. $ -- $ 1 $ 3,849 $35,577 $39,427
Net loss.............................................. -- -- -- (4,364) (4,364)
---- ------- ------- -------
Balance as of June 30, 1995............................. -- 1 3,849 31,213 35,063
Net income............................................ -- -- -- 2,437 2,437
----- ---- ------- ------- -------
Balance as of June 30, 1996............................. -- 1 3,849 33,650 37,500
Net income............................................ -- -- -- 7,317 7,317
Capital contributions by WMS Industries Inc........... -- -- 10,507 -- 10,507
6,050.2 for 1 stock split............................. -- 60 (60) -- --
----- ---- ------- ------- -------
Balance as of June 30, 1997............................. -- 61 14,296 40,967 55,324
Net loss (unaudited).................................. -- -- -- (1,830) (1,830)
Issue preferred stock (unaudited)..................... 3 -- 2,997 -- 3,000
Preferred stock dividends (unaudited)................. -- -- -- (115) (115)
----- ---- ------- ------- -------
Balance as of December 31, 1997 (unaudited)............. $ 3 $ 61 $17,293 $39,022 $56,379
===== ==== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-50
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND COMPANY OPERATIONS
Basis of Presentation
WHG Resorts & Casinos Inc. ("WHG") was formerly known as WMS Hotel
Corporation. Prior to the April 21, 1997 spin-off, WHG was a wholly owned
subsidiary of Williams Hotel Corporation ("WHC"). WHC was a wholly-owned
subsidiary of WMS Industries Inc. ("WMS"). WMS merged WHC, just prior to the
April 21, 1997 spin-off, into WHG at which time the predecessor financial
statements of WHC appearing herein became the financial statements of WHG.
The consolidated financial statements of WHG reflect results of operations,
cash flows, financial position and changes in stockholders' equity and have
been prepared using the historical basis in the assets and liabilities and
historical results of operations of WHG and subsidiaries and affiliates.
The pro forma information reflecting income taxes on a separate return basis
(unaudited), included with the consolidated statements of operations, reflects
the provision for income taxes without the tax benefits allocated to WHG from
WMS for utilization of partnership losses in the WMS consolidated Federal
income tax return, see Note 6--Income Taxes. WHG during the periods presented
did not have income subject to Federal income tax that could have been
included in its consolidated Federal income tax return or in the separate tax
returns of certain of its subsidiaries along with the partnership losses to be
able to realize the tax benefits.
Company Operations
WHG through its subsidiaries and affiliates owns, operates and manages two
of the leading hotels and casinos located in San Juan, Puerto Rico, and
through a second affiliate, the El Conquistador Resort & Country Club, a
destination resort complex in Las Croabas, Puerto Rico. WHG's holdings
include: a 100% interest in Posadas de Puerto Rico Associates, Incorporated,
the owner of the Condado Plaza Hotel & Casino ("Condado Plaza"); a 50%
interest in Posadas de San Juan Associates, a partnership which owns the El
San Juan Hotel & Casino ("El San Juan"); a 23.3% indirect interest in El
Conquistador Partnership L.P. which owns the El Conquistador Resort & Country
Club; and a 62% interest in Williams Hospitality Group Inc. ("WHGI"), the
management company for the above properties.
WHG was a wholly owned subsidiary of WMS prior to April 21, 1997. On April
21, 1997 WMS distributed 100% of the outstanding voting common stock of WHG to
WMS's stockholders, thereby creating a new independent public corporation.
The consolidated interim financial statements as of and for the six months
ended December 31, 1997 and 1996 included herein are unaudited. Such information
reflects all adjustments consisting solely of normal recurring adjustments,
which are in the opinion of management necessary for a fair presentation of the
consolidated balance sheet as of December 31, 1997 and the consolidated results
of operations and cash flows for the six months ended December 31, 1997 and
1996. Due to the seasonality of the businesses, the reported results are not
necessarily indicative of those expected for the entire year. Certain
information and disclosures normally included in annual financial statements in
accordance with generally accepted accounting principles have been excluded or
omitted in presentation of the consolidated interim financial statements.
NOTE 2: PRINCIPAL ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts of WHG and its
majority-owned subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated. Investments in companies that
are 20% to 50% owned are accounted for by the equity method. WHG records its
equity in the results of operations of El Conquistador Partnership L.P., based
on that partnership's fiscal year end of March 31.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates.
F-51
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
Inventories, which consist mainly of food, beverages and supplies, are
valued at the lower of cost (determined by the first-in, first-out method) or
market.
Property and Equiptment
Property and equipment are stated at cost and depreciated by the straight-
line method over their estimated useful lives.
Excess of Purchase Cost Over Amount Assigned to Net Assets Acquired
(Goodwill)
Goodwill arising from acquisitions is being amortized by the straight-line
method over 20 to 40 years.
Casino Revenues
Casino revenues are the net win from gaming activities, which is the
difference between gaming wins and losses.
Casino Promotional Allowances
Casino promotional allowances represent the retail value of complimentary
food, beverages and hotel services furnished to patrons, commissions and
transportation costs.
Advertising Expense
The cost of advertising is charged to earnings as incurred and for fiscal
1997, 1996 and 1995 was $809,000, $988,000 and $1,103,000, respectively.
NOTE 3: ACQUISITIONS
In July 1994, the Company acquired 5% of Williams Hospitality increasing its
interest from 57% to 62%. In July 1994, the Company acquired 2.5% of Posadas
de Puerto Rico Associates, Incorporated increasing its interest from 92.5% to
95%. In April 1997, the Company acquired the remaining 5% of Posadas de Puerto
Rico Associates, Incorporated increasing its interest from 95% to 100%.
NOTE 4: INVESTMENTS IN NONCONSOLIDATED AFFILIATES
Investments in nonconsolidated affiliates consist of a 50% interest in
Posadas de San Juan Associates, a partnership ("PSJA") and a 23.3% indirect
interest in El Conquistador Partnership L.P. ("El Conquistador") through a
46.5% interest in WKA El Con Associates, a partnership ("WKA El Con").
F-52
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Current receivables from nonconsolidated affiliates at June 30 were:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
PSJA................................................... $ 252 $ 61
WKA El Con............................................. 85 64
El Conquistador........................................ 768 483
-------- --------
$ 1,105 $ 608
======== ========
Investments in and noncurrent receivables and advances to nonconsolidated
affiliates at June 30 were:
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Investments:
PSJA................................................. $ (6,690) $ (7,678)
WKA El Con........................................... (2,813) (612)
Receivables and advances:
PSJA................................................. 25,541 23,148
WKA El Con........................................... 5,062 4,556
El Conquistador...................................... 9,503 7,712
-------- --------
$ 30,603 $ 27,126
======== ========
</TABLE>
PSJA operates as a partnership, therefore, 50% of its accumulated deficit is
recorded as an investment. Summarized financial data for PSJA's financial
position at June 30, 1997 and 1996 and PSJA's results of operations for fiscal
1997, 1996 and 1995 and the six months ended December 31, 1997 and 1996 were:
<TABLE>
<CAPTION> DECEMBER 31, DECEMBER 31,
1997 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------ ------------ ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current assets................... $ -- -- $ 8,133 $ 6,558 --
Noncurrent assets................ -- -- 35,804 35,198 --
Total assets..................... -- -- 43,937 41,756 --
Payable to affiliates............ -- -- 237 61 --
Other current liabilities........ -- -- 10,659 10,101 --
Total current liabilities........ -- -- 10,896 10,162 --
Noncurrent payable to
affiliates...................... -- -- 25,591 23,148 --
Other noncurrent liabilities..... -- -- 20,831 23,803 --
Total noncurrent liabilities..... -- -- 46,422 46,951 --
Partners' capital deficiency..... -- -- (13,381) (15,357) --
Total liabilities and partners'
capital deficiency.............. -- -- 43,937 41,756 --
Revenues......................... $ 24,913 22,161 51,732 50,124 $ 51,797
Management fees and interest
payable to WHGI................. 2,459 2,099 5,325 4,738 4,691
Other costs and expenses......... 23,265 21,621 44,431 46,746 49,507
Net income (loss)................ $ (811) $ (1,559) $ 1,976 $ (1,360) $ (2,401)
</TABLE>
F-53
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a 46.5% interest in WKA El Con which has a 50% interest in
El Conquistador. Summarized financial data for WKA El Con's financial position
at June 30, 1997 and 1996 and WKA El Con's results of operations for fiscal
1997, 1996 and 1995 and the six months ended December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------ ------------ ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loans receivable from El
Conquistador.................... -- -- $ 18,343 $ 16,116 --
Investment in El Conquistador,
net............................. -- -- (12,464) (7,763) --
Other assets, net................ -- -- 2,384 3,566 --
Total assets..................... -- -- 8,263 11,919 --
Current payable to WHGI.......... -- -- 85 64 --
Long-term note payable including
interest........................ -- -- 5,527 5,197 --
Long-term notes payable to
partners including interest..... -- -- 10,475 9,791 --
Partners' (capital deficiency)... -- -- (7,824) (3,133) --
Total liabilities and partners'
capital deficiency.............. -- -- 8,263 11,919 --
Net operating income (loss)...... $ 20 $ (11) 10 (178) $ (356)
Equity in net loss of El
Conquistador to March 31 for
fiscal years and to June 30 for
the six months ended
December 31.................... (5,244) (4,819) (4,701) (6,120) (13,739)
Equity in income of Las Casitas.. -- -- -- 313 1,627
Net (loss)....................... $(5,224) $(4,830) $ (4,691) $ (5,985) $(12,468)
</TABLE>
The WKA El Con's long-term note payable is collateralized by a pledge of a
second mortgage on land owned by the Company that cost $3,761,000 and a WMS
guarantee of $1,000,000 as to which WHG will indemnify WMS in the event of any
payments made on the guarantee. The other partners of WKA El Con have pledged
cash and a portion of their interest in WHGI stock, in proportion to their
interests in WKA El Con, to WHG to be used in the event the guarantee is drawn
on.
El Conquistador is a destination resort and casino which began operations in
November 1993. Summarized financial data for El Conquistador's financial
position at March 31, 1997 and 1996 (the partnership's fiscal year end) and El
Conquistador's results of operations for fiscal years ended March 31, 1997,
1996 and 1995 and the six months ended September 30, 1997 and 1996 were:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
------------ ------------- -------------- -------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current assets................ -- -- $ 13,618 $ 11,823 --
Land, building and equipment,
net.......................... -- -- 185,552 190,463 --
Deferred debt issuance and
pre-opening costs, net....... -- -- 5,841 8,587 --
Other assets.................. -- -- 419 818 --
Total assets.................. -- -- 205,430 211,691 --
Current liabilities........... -- -- 22,829 23,281 --
Debt due February 1, 1998..... -- -- 120,000 -- --
Long-term debt................ -- -- 26,660 149,324 --
Long-term due to partners and -- --
affiliates................... -- -- 48,869 42,611 --
Partners' (capital
deficiency).................. -- -- (12,928) (3,525) --
Total liabilities and capital
deficiency................... -- -- 205,430 211,691 --
Revenues...................... $ 39,294 $ 37,801 92,958 89,214 $ 84,743
Management fees and interest
payable to WHGI.............. 2,272 2,227 6,282 5,820 3,874
Interest payable to partners.. 951 1,241 2,498 2,598 1,898
Other costs and expenses...... 41,927 39,415 84,434 82,538 95,324
Depreciation and
amortization................. 4,632 4,354 9,147 10,499 11,124
Net (loss).................... $ (10,488) $ (9,636) $ (9,403) $(12,241) $(27,477)
</TABLE>
F-54
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At March 31, 1997 WHGI has provided guarantees amounting to $2,170,000 in
connection with leasing and other financing transactions of El Conquistador.
Debt of the El Conquistador of $120,000,000 is collateralized by a letter of
credit which terminates on March 9, 1998. Under the terms of the loan
agreement, such debt is required to be repaid on February 1, 1998 in the event
the letter of credit is not renewed or replaced prior to November 9, 1997. El
Conquistador has engaged investment advisors to investigate obtaining an
alternative letter of credit or financing arrangement. If such an alternative
is not found, the Company's investment in, receivables from, advances to and
potential payments on guarantees for El Conquistador totaling $18,463,000 at
June 30, 1997 may not be recoverable. In the event this amount is not
recovered the 38% minority interest in WHGI would absorb approximately
$5,900,000 of the charge. WHGI would also incur a loss of future management
fees from El Conquistador. For the years ended June 30, 1997, 1996 and 1995,
the Company accrued approximately $5,650,000, $5,395,000 and $3,704,000,
respectively, in management fee revenue from El Conquistador. The Company also
recorded equity in losses of El Conquistador of $2,188,000, $2,786,000 and
$5,803,000 in the years ending June 30, 1997, 1996 and 1995, respectively.
Consolidated retained earnings of the Company at June 30, 1997 is reduced by
$23,262,000 for the Company's ownership percentage in the accumulated deficit
of PSJA and WKA El Con which are accounted for under the equity method.
Interest earned by the Company from all the nonconsolidated affiliates for
the years ended June 30, 1997, 1996 and 1995 was $1,823,000, $1,650,000 and
$1,373,000, respectively.
NOTE 5: PROPERTY AND EQUIPMENT
At June 30 net property and equipment were:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 7,535 $ 7,535
Buildings and improvements............................. 47,865 45,294
Furniture, fixtures and equipment...................... 31,975 30,473
-------- --------
87,375 83,302
Less accumulated depreciation.......................... (43,514) (38,383)
-------- --------
Net property and equipment............................. $ 43,861 $ 44,919
======== ========
</TABLE>
NOTE 6: INCOME TAXES
The Company's two operating subsidiaries and two nonconsolidated affiliates
operate under the provisions of the Puerto Rico Tourism Incentives Act of 1993
which provides a ten-year incentive grant which may be extended for ten years.
Major benefits include a 90% exemption from income taxes on income deemed to
be derived from tourism operations. The grant also provides a 90% exemption
from municipal real and personal property taxes. Income deemed to be derived
from casino operations are not covered by the grant.
The two operating subsidiaries, the Condado Plaza and WHGI elect to file
income tax returns under Section 936 of the United States Internal Revenue
Code which provides for total or, after 1994, partial exemption from Federal
income taxes on income from sources within Puerto Rico if certain conditions
are met. The portion of taxes that can be exempt under Section 936 is
determined by the calculation of certain limits prescribed by Section 936.
These limits are either based on certain costs and expenses ("economic
activity method") or a fixed
F-55
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
percentage as prescribed in Section 936 ("percentage limitation method").
Corporations that operate under Section 936 cannot be members of a
consolidated Federal income tax return. The tax exemption under Section 936
generally decreases each year until the benefits terminate in 2005.
The Condado Plaza elected the economic activity method which results in a
100% exemption from Federal income taxes. WHGI elected the percentage
limitation method which resulted in a Federal tax provision of $2,793,000 in
fiscal 1997, $1,741,000 in fiscal 1996 and $1,149,000 in fiscal 1995.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes in the consolidated Federal income tax
return of WMS and allocated to the Company through April 22, 1997.
Significant components of the Company's deferred tax assets and liabilities
at June 30 were:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities resulting from:
Tax over book deductions of WKA El Con.................. $(1,033) $ (686)
Tax over book deductions of PSJA........................ (1,605) (1,605)
------- -------
Deferred tax liability.................................. $(2,638) $(2,291)
======= =======
</TABLE>
The Company's provision for income taxes was calculated on a historical
basis. WHG and certain of its subsidiaries were members of the WMS
consolidated Federal income tax return since their inception until April 21,
1997, the effective date of the spin off. Accordingly, losses for Federal
income tax purposes which were primarily generated by the Company's equity in
loss of nonconsolidated affiliates in the form of partnership losses were
utilized by WMS in its consolidated tax return and resulted in tax benefits.
The Company received the tax benefits of $428,000, $4,139,000 and $510,000 for
usage of such losses during the years ended June 30, 1997, 1996 and 1995,
respectively.
Significant components of the (provision) credit for income taxes for the
years ended June 30, 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal:
Certain Puerto Rico corporate income subject
to federal tax............................... $(2,793) $(1,741) $(1,149)
U.S. subsidiaries--primarily partnership
losses of nonconsolidated affiliates......... 428 4,139 510
------- ------- -------
Total federal............................... (2,365) 2,398 (639)
Puerto Rico.................................... (685) (804) (753)
------- ------- -------
Total current (provision) credit............ (3,050) 1,594 (1,392)
Deferred--federal, primarily from book to tax
differences on partnership losses.............. (347) (3,239) 1,626
------- ------- -------
(Provision) credit for income taxes............. $(3,397) $(1,645) $ 234
======= ======= =======
</TABLE>
F-56
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For financial reporting purposes, income (loss) before income tax credit
(provision) and minority interests is comprised of the following components
for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income tax credit
(provision) and minority interests:
Puerto Rico corporate income.................. $16,908 $11,487 $ 5,652
U.S. subsidiaries--primarily partnership
losses of nonconsolidated affiliates......... (1,948) (3,253) (6,783)
------- ------- -------
$14,960 $ 8,234 $(1,131)
======= ======= =======
</TABLE>
The provision (credit) for income taxes differs from the amount computed
using the statutory federal income tax rate as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal income tax at 35%............. $ 5,236 $ 2,882 $ (395)
Puerto Rico corporate loss resulting in no tax
benefit........................................ -- 199 1,525
Puerto Rico corporate income taxed at lower
rates.......................................... (2,180) (1,671) (1,602)
Other, net...................................... 341 235 238
------- ------- -------
$ 3,397 $ 1,645 $ (234)
======= ======= =======
</TABLE>
Undistributed earnings of the Puerto Rico subsidiaries that operate as
Section 936 corporations under Federal income tax regulations were
approximately $41,800,000 at June 30, 1997. Those earnings are considered
indefinitely reinvested and, accordingly, no provision for income or toll gate
taxes has been provided thereon. Upon distribution of those earnings in the
form of dividends, the Company would be subject to U.S. income tax of
approximately $2,300,000 and toll gate withholding taxes of approximately
$750,000.
WHG and WMS have entered into a tax sharing agreement that provides for the
rights and obligations of each company regarding deficiencies and refunds, if
any, relating to Federal and Puerto Rico income taxes for tax years up to and
including fiscal 1997.
During fiscal 1997, 1996 and 1995 income taxes paid to taxing authorities
were $2,728,000, $2,289,000 and $1,549,000, respectively.
NOTE 7: NOTES PAYABLE AND LONG-TERM DEBT
The Condado Plaza has a $2,000,000 bank line of credit which is payable on
demand with interest at the prime rate plus 1 percentage point, 9.5% and 9.25%
at June 30, 1997 and 1996, respectively. Borrowings under the line were
$1,000,000 on June 30, 1997 and $2,000,000 on June 30, 1996. The line of
credit is collateralized by a mortgage on the Condado Plaza property and
accounts receivable.
F-57
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt at June 30 was:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Condado Plaza mortgage note, due in increasing semi-
annual amounts through 1999, 12%..................... $21,900 $24,150
Other................................................. 1,649 2,704
------- -------
23,549 26,854
Less current maturities............................... (3,681) (3,299)
------- -------
$19,868 $23,555
======= =======
</TABLE>
Scheduled payments by fiscal year on long-term debt are as follows:
$3,681,000 in 1998 and $19,868,000 in 1999.
The amount of interest paid during fiscal 1997, 1996 and 1995 was
$3,255,000, $3,679,000 and $4,306,000, respectively.
NOTE 8: AUTHORIZED SHARES
At June 30, 1997 the authorized common stock of WHG consists of 12,000,000
shares of $.01 par value of which 6,050,200 shares were issued and
outstanding. The Company's capital structure at June 30, 1997 also consists of
3,000,000 shares of Class A non-voting common stock of which none are
outstanding. The Company also has 2,000,000 shares of authorized preferred
stock, none were issued at June 30, 1997. The preferred stock will be issuable
in series, and the relative rights and preferences and the number of shares in
each series are established by the Board of Directors. At June 30, 1997,
300,000 shares of the Preferred Stock were designated as Series B Preferred
Stock and reserved for issuance. See Note 16. At June 30, 1996 the capital
structure consisted of 1,000 shares of no par value common stock of which 100
were issued and outstanding.
NOTE 9: STOCK OPTION PLAN
The Company's stock option plan allows for the grant of both incentive stock
options and nonqualified options on shares of voting common stock through the
year 2007. The stock option plan allows for the grant of options on 900,000
shares of common stock to officers, directors, employees and under certain
conditions to consultants and advisers to the Company and its subsidiaries.
The stock option committee has the authority to fix the terms and conditions
upon which each option is granted, but in no event shall the term exceed ten
years or be granted at less than 100% of the fair market value of the stock at
the date of grant in the case of incentive stock options and 85% of the fair
market value of the stock on the date of grant in the case of non-qualified
stock options.
The Company accounts for stock options for purposes of determining net
income in accordance with APB Opinion No. 25 "Accounting for Stock Issued to
Employees." SFAS No. 123 regarding stock option plans permits the use of APB
No. 25 but requires the inclusion of certain pro forma disclosures in the
footnotes.
If the Company had adopted the expensing provisions of SFAs No. 125 the
Company's pro forma net income for fiscal 1997 would have been $5,876,000. Pro
forma primary and fully diluted earnings per share for fiscal 1997 would have
been $0.97 and $0.96, respectively. There is no effect on reported amounts for
fiscal 1996, since the options were not granted until fiscal 1997.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants, all of which were in 1997: dividend yield 0%;
expected volatility 32%; risk free interest rates of 6.2%; and expected lives
of four years.
F-58
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
During fiscal 1997, there were 898,000 options granted, all of which were
outstanding on June 30, 1997 and have a weighted average exercise price of
$8.49, a weighted average fair market value of $2.94, a weighted average
contractual life of 9.8 years and exercise prices that range from $8.38 to
$11.00. At June 30, 1997, 472,000 options are exercisable with a weighted
average exercise price of $8.38.
NOTE 10: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to
concentrations of credit and market risk consist primarily of cash equivalents
and accounts receivable. By policy, the Company places its cash equivalents
only in high credit quality securities and limits the amounts invested in any
one security. At June 30, 1997, accounts receivable are from hotel and casino
guests and travel agents located throughout North America and Latin America
and because of the number and geographic distribution, concentration is
limited.
The estimated fair value of financial instruments at June 30, 1997 has been
determined by the Company, using available market information and valuation
methodologies considered to be appropriate. The amounts reported for cash
equivalents and current notes payable are considered to be a reasonable
estimate of their fair value.
At June 30, 1997, the $21,900,000 Condado Plaza 12% mortgage note payable is
estimated to have a fair value of $22,781,000 using discounted cash flow
analysis based on an estimated interest rate of 8.25%. The mortgage note is
subject to a substantial prepayment penalty based on interest rate
differentials plus a fixed percentage.
NOTE 11: LEASE COMMITMENTS
Operating leases relate principally to hotel facilities and equipment. A
portion of the Condado Plaza hotel facilities are leased from a partnership
owned by a former minority shareholder of the Condado Plaza. The former
minority shareholder lease extends through 2008 at an annual rent of $684,000
through September 30, 1998 with periodic escalations thereafter to an annual
rent of $827,000 in 2004. Rent expense for fiscal 1997, 1996 and 1995 was
$760,000, $1,027,000 and $1,077,000, respectively (including $684,000, paid in
each fiscal 1997, 1996 and 1995, under the former minority shareholder lease
at the Condado Plaza). Total net future lease commitments for minimum rentals
at June 30, 1998, 1999, 2000, 2001, 2002 and thereafter are $718,000,
$769,000, $786,000, $786,000, $786,000 and $1,490,000, respectively.
F-59
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12: TRANSACTIONS WITH WMS
The Company's two operating subsidiaries and two nonconsolidated affiliates
have each provided for its off-season cash needs through its own operating
cash and from individual short-term note arrangements. Plant and equipment
additions at each property have also generally been provided by its own cash
from operations or third party financing. Cash advances from WMS, for the
periods reported, have been used for investment purposes. A summary of
advances and repayments between WMS and the Company prior to the April 21,
1997 spin-off for the years ended June 30, 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Advances from (repayments to) WMS by use or
source:
Purchase of additional shares in subsidiaries.... $ -- $ -- $3,738
Investment in and advances to (repayments from)
WKA El Con...................................... -- (546) 157
Cash primarily generated from Williams
Hospitality dividends........................... -- (1,590) (260)
Cash received from WMS for cumulative tax
benefits........................................ 4,357 -- --
Other, net....................................... 409 -- --
Income tax benefits from partnership losses
utilized by WMS-- see Note 6.................... (493) (4,139) (510)
------ ------- ------
$4,273 $(6,275) $3,125
====== ======= ======
</TABLE>
During fiscal 1995 the Condado Plaza sold to WMS 50 shares of 8% non-voting
preferred stock with a liquidation preference of $50,000 per share for
$2,500,000 bringing the total of such preferred stock held by WMS to 150
shares and $7,500,000 at June 30, 1995. During fiscal 1996 the Condado Plaza
redeemed 68 of those preferred shares at $50,000 per share for $3,400,000.
During fiscal 1997 the remaining 82 preferred shares were contributed to the
capital of WHG. In April 1997, the Condado Plaza redeemed 41 of those
preferred shares at $50,000 per share for $2,050,000. Subsequent to June 30,
1997 (July and August 1997), an additional 24 shares were redeemed at $50,000
per share for $1,200,000.
<TABLE>
<S> <C>
During fiscal 1997 WMS contributed the following to the capital of
WHG (in thousands):
Net, intercompany payable to WMS................................. $ 4,764
Cash contribution................................................ 1,643
82 preferred shares of PPRA, liquidation preference of $50,000... 4,100
-------
Total contribution............................................... $10,507
=======
</TABLE>
NOTE 13: PENSION PLAN
Certain subsidiaries are required to make contributions on behalf of
unionized employees to defray part of the costs of the multi-employer pension
plans established by their respective labor unions. Such contributions are
computed using a fixed charge per employee. Contributions to the plans for
fiscal 1997, 1996 and 1995 were $377,000, $340,000 and $352,000, respectively.
F-60
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1997 and 1996 are as
follows, in thousands except per share amounts:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1997 Quarters:
Revenues................... $ 12,879 $ 17,175 $ 21,592 $ 17,988
========== ========== ========== ==========
Operating income........... $ 790 $ 4,312 $ 8,115 $ 3,870
Interest expense, net...... (301) (282) (263) (85)
Equity in income (loss) of
nonconsolidated
affiliates................ (1,289) (1,739) 633 1,199
Credit (provision) for
income taxes.............. 89 (313) (2,078) (1,095)
Minority interests......... (421) (841) (1,670) (1,068)
Dividend on preferred stock
of subsidiary............. (82) (82) (82) --
---------- ---------- ---------- ----------
Net income (loss).......... $ (1,214) $ 1,055 $ 4,655 $ 2,821
========== ========== ========== ==========
Primary earnings per
share..................... $ (.20) $ (.17) $ .77 $ .46
========== ========== ========== ==========
Shares used in
calculation............... 6,050,200 6,050,200 6,050,200 6,195,774
========== ========== ========== ==========
Fully diluted earnings per
share..................... $ (.20) $ (.17) $ .77 $ .45
========== ========== ========== ==========
Shares used in
calculation............... 6,050,200 6,050,200 6,050,200 6,247,241
========== ========== ========== ==========
Pro forma net income (loss)
reflecting income taxes on
a separate return basis... $ (1,675) $ 435 $ 5,121 $ 3,355
========== ========== ========== ==========
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1996 Quarters:
Revenues................... $ 13,404 $ 17,452 $ 21,450 $ 16,388
========== ========== ========== ==========
Operating income (loss).... $ (226) $ 4,069 $ 7,248 $ 2,467
Interest expense, net...... (560) (493) (395) (411)
Equity in income (loss) of
nonconsolidated
affiliates................ (2,087) (1,510) (318) 450
Credit (provision) for
income taxes.............. 448 (153) (1,005) (935)
Minority interests......... (298) (896) (1,585) (857)
Dividend on preferred stock
of subsidiary............. (150) (146) (126) (94)
---------- ---------- ---------- ----------
Net income (loss).......... $ (2,873) $ 871 $ 3,819 $ 620
========== ========== ========== ==========
Earnings per share......... $ (.47) $ .14 $ .63 $ .10
========== ========== ========== ==========
Shares used................ 6,050,200 6,050,200 6,050,200 6,050,200
========== ========== ========== ==========
Pro forma net income (loss)
reflecting income taxes on
a separate return basis... $ (3,623) $ 361 $ 3,713 $ 1,086
========== ========== ========== ==========
</TABLE>
For pro forma net income (loss), see Note 1--Basis of Presentation.
F-61
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15: SEGMENT INFORMATION
The Company's operations are conducted through two industry segments: the
operation of the Condado Plaza and the management of hotels/casinos. Industry
segment information for the fiscal years ended June 30 follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Condado Plaza................................ $ 55,697 $ 55,322 $ 57,530
WHGI........................................ 18,227 16,939 17,350
Intersegment revenues elimination--WHGI fees
charged to Condado Plaza................... (4,290) (3,567) (4,002)
-------- -------- --------
Total revenues............................ $ 69,634 $ 68,694 $ 70,878
======== ======== ========
Operating income (loss)
Condado Plaza............................... $ 6,348 $ 2,830 $ (1,465)
WHGI........................................ 11,923 10,837 9,174
General corporate administrative expenses... (1,184) (109) (85)
-------- -------- --------
Total operating income.................... $ 17,087 $ 13,558 $ 7,624
======== ======== ========
Identifiable assets
Condado Plaza............................... $ 55,385 $ 53,323 $ 57,879
WHGI........................................ 15,086 18,582 17,737
General investment and corporate............ 15,294 5,095 5,994
Investments in, receivables and advances to
nonconsolidated affiliates................. 31,708 27,734 29,696
-------- -------- --------
Total identifiable assets................. $117,473 $104,734 $111,306
======== ======== ========
Depreciation of property and equipment
Condado Plaza............................... $ 4,227 $ 4,120 $ 4,656
WHGI........................................ 777 769 681
-------- -------- --------
Total depreciation of property and
equipment................................ $ 5,004 $ 4,889 $ 5,337
======== ======== ========
Capital expenditures
Condado Plaza............................... $ 3,181 $ 1,078 $ 2,030
WHGI........................................ 41 71 36
-------- -------- --------
Total capital expenditures................ $ 3,222 $ 1,149 $ 2,066
======== ======== ========
</TABLE>
NOTE 16: CONTINGENT LIABILITIES
The Company is involved in various disputes arising in the ordinary course
of business, which may result in litigation. Management expects no material
adverse effect on the Company's financial condition as a result of these
matters.
NOTE 17: SALE OF PREFERRED STOCK SUBSEQUENT TO JUNE 30, 1997
The Board of Directors exercised the put provisions of a Put Option and Call
Option Agreement that was established on April 21, 1997 which resulted in the
Chairman of the Board purchasing on July 31, 1997, 300,000 shares of Series B
Preferred Stock for $3,000,000 in cash. Each share of Series B Preferred Stock
has 5 votes
F-62
<PAGE>
WHG RESORTS & CASINOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
per share voting collectively with the common stockholders and a liquidation
preference of $10.00 per share plus accrued dividends, has a quarterly
dividend equal to the prime rate plus one half percent calculated on the
liquidation preference and the holder has a redemption right after three years
or earlier in the event of two unpaid quarterly dividends. The holder of the
Series B Preferred Stock can convert into shares of common stock. The
conversion price is $9.00, which is the lower of the closing price of the
voting common stock on its first day of official trading ($9.00) and the
closing price in the New York Stock Exchange at the close of business on the
business day immediately prior to the date of issuance of the Preferred Stock
($12.50).
NOTE 18: PROPOSED ACQUISITION SUBSEQUENT TO JUNE 30, 1997
On September 17, 1997, the Company executed an asset purchase agreement to
acquire an existing 127 room Hotel and related land next to the Condado Plaza
for $9,600,000, subject to certain terms and conditions, including
satisfactory due diligence. If the agreement is finalized, the Company intends
to finance the purchase price through long term financing and the use of
excess cash currently available.
F-63
<PAGE>
SCHEDULE II
WHG RESORTS & CASINOS INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------------- ------------ ----------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS-- BALANCE AT
BEGINNING OF COSTS AND OTHER AMOUNTS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITTEN OFF PERIOD
----------- ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for
receivables:
1997.................. $474,000 $ 366,000 $-- $ 191,000 $649,000
======== ========== ==== ========== ========
1996.................. $399,000 $1,457,000 $-- $1,382,000 $474,000
======== ========== ==== ========== ========
1995.................. $755,000 $1,842,000 $-- $2,198,000 $399,000
======== ========== ==== ========== ========
Unrealized holding loss
on noncurrent
marketable equity
securities:
1997.................. $ -- $ -- $-- $ -- $ --
======== ========== ==== ========== ========
1996.................. $ -- $ -- $-- $ -- $ --
======== ========== ==== ========== ========
1995.................. $ -- $ -- $-- $ -- $ --
======== ========== ==== ========== ========
</TABLE>
- --------
(1) Included as a direct reduction of stockholders' equity.
F-64
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Posadas de San Juan Associates
We have audited the accompanying balance sheets of Posadas de San Juan
Associates as of June 30, 1997 and 1996, and the related statements of
operations and deficit, and cash flows for each of the three years in the
period ended June 30, 1997. Our audits also included the financial statement
schedule of valuation and qualifying accounts for each of the three years in
the period ended June 30, 1997. These financial statements and schedule are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Posadas de San Juan
Associates at June 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1997,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
San Juan, Puerto Rico
August 7, 1997
F-65
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ ------------------------
1997 1997 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,666,500 $ 2,681,100 $ 2,443,700
Trade accounts receivable, less allowance for
doubtful accounts of $606,300 and $357,100
at June 30, 1997 and 1996, respectively, and
$961,700 at December 31, 1997..................... 5,585,800 3,692,000 2,370,700
Inventories........................................ 987,300 969,500 906,400
Prepaid expenses................................... 729,500 790,300 837,100
----------- ----------- -----------
Total current assets............................. 9,969,100 8,132,900 6,557,900
Land, building and equipment:
Land............................................... 3,300,000 3,300,000 3,300,000
Building........................................... 14,350,700 14,350,700 14,350,700
Building improvements.............................. 14,695,100 14,285,400 12,439,600
Furniture, fixtures and equipment.................. 36,331,100 36,114,600 33,814,000
Construction in progress........................... 2,000,900 113,400 --
---------- ----------- -----------
70,677,800 68,164,100 63,904,300
Less accumulated depreciation...................... 35,053,400 33,353,000 30,080,700
---------- ----------- -----------
35,624,400 34,811,100 33,823,600
Operating equipment, net............................. 498,600 523,000 570,700
Deferred financing costs, less accumulated
amortization of $662,400 and $530,900 at
June 30, 1997 and 1996, respectively,
and $729,600 at December 31, 1997................... 334,800 402,000 533,500
Other assets......................................... 293,400 68,300 270,500
---------- ----------- -----------
Total assets......................................... $46,720,300 $43,937,300 $41,756,200
=========== =========== ===========
LIABILITIES AND DEFICIENCY IN PARTNERSHIP CAPITAL
Current liabilities:
Trade accounts payable............................. $ 6,916,500 $ 4,078,700 $ 4,039,900
Accrued compensation and related benefits.......... 965,900 1,376,600 1,139,300
Other accrued liabilities.......................... 3,237,400 2,032,600 1,458,700
Due to affiliated companies........................ 1,126,400 237,600 11,600
Note payable to bank............................... -- -- 300,000
Current portion of long-term debt.................. 3,170,600 3,170,600 3,152,000
---------- ----------- -----------
Total current liabilities........................ 15,416,800 10,896,100 10,101,500
Long-term debt, net of current portion............... 18,938,100 20,831,400 23,805,000
Due to Williams Hospitality Group Inc................ 26,556,900 25,590,800 23,206,700
Deficiency in partnership capital:
Capital contribution............................... 7,000,000 7,000,000 7,000,000
Deficit............................................ (21,191,500) (20,381,000) (22,357,000)
---------- ----------- -----------
Total deficiency in partnership capital.............. (14,191,500) (13,381,000) (15,357,000)
---------- ----------- -----------
Total liabilities and deficiency in partnership
capital............................................. $46,720,300 $43,937,300 $41,756,200
=========== =========== ===========
</TABLE>
See accompanying notes.
F-66
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------------- ----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rooms.............................. $ 10,223,300 $ 8,895,200 $ 22,588,800 $ 22,016,700 $ 21,517,300
Food and beverage.................. 6,700,200 6,075,700 13,218,000 13,424,400 12,688,200
Casino............................. 10,286,300 8,233,600 19,582,200 18,117,600 22,575,400
Rental and other income............ 1,772,300 1,443,300 3,255,800 3,503,000 2,852,400
Less casino promotional
allowances........................ (4,069,000) (2,486,800) (6,905,300) (6,937,900) (7,836,300)
------------ ------------ ------------ ------------ ------------
Net revenues..................... 24,913,100 22,161,000 51,739,500 50,123,800 51,797,000
Costs and expenses:
Rooms.............................. 3,419,900 3,082,300 6,764,600 6,891,000 6,775,000
Food and beverage.................. 4,526,800 4,421,100 9,297,400 9,506,100 9,340,600
Casino............................. 5,583,800 4,650,600 9,729,000 10,716,800 14,027,100
Selling, general and
administrative.................... 4,871,500 4,480,900 8,803,200 9,094,000 8,953,700
Management and incentive management
fees.............................. 1,894,900 1,605,500 4,336,700 3,850,100 3,893,000
Property operation, maintenance and
energy costs...................... 2,224,200 2,337,900 4,509,700 4,803,200 4,416,800
Depreciation and amortization...... 1,783,800 1,661,500 3,438,800 3,595,300 3,617,300
------------ ------------ ------------ ------------ ------------
24,304,900 22,239,800 46,879,400 48,456,500 51,023,500
------------ ------------ ------------ ------------ ------------
Income (loss) from operations.... 608,200 (78,800) 4,860,100 1,667,300 773,500
Interest income...................... -- -- -- -- 2,500
Interest expense..................... (1,418,700) (1,479,900) (2,884,100) (3,026,800) (3,176,800)
------------ ------------ ------------ ------------ ------------
Net income (loss).................... (810,500) (1,558,700) 1,976,000 (1,359,500) (2,400,800)
Deficit at beginning of year......... (20,381,000) (22,357,000) (22,357,000) (20,997,500) (18,596,700)
------------ ------------ ------------ ------------ ------------
Deficit at end of year............... $(21,191,500) $(23,915,700) $(20,381,000) $(22,357,000) $(20,997,500)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-67
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------------ -------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)...................... $ (810,500) $(1,558,700) $ 1,976,000 $(1,359,500) $(2,400,800)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 1,783,800 1,661,500 3,438,800 3,595,300 3,617,300
Provision for losses on accounts
receivable.......................... 651,190 157,800 150,600 1,278,200 3,880,400
Gain or sale of equipment............ -- -- -- (46,600) --
Changes in operating assets and
liabilities:
Amounts due to/from affiliated
companies.......................... 1,854,900 1,874,900 2,610,100 2,086,700 639,600
Trade accounts receivable........... (2,544,990) (1,596,000) (1,471,900) 503,900 833,200
Inventories and prepaid expenses.... 43,000 283,500 (16,400) 193,600 21,600
Other assets........................ (225,100) 15,900 167,200 (10,500) (125,600)
Trade accounts payable, accrued
expenses and other accrued
liabilities........................ 3,631,900 1,600,200 850,000 (990,600) (2,493,100)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities........................ 4,384,200 2,439,100 7,704,400 5,250,500 3,972,600
Investing Activities
Proceeds from sale of equipment...... -- -- -- 119,300 --
Purchases of property and equipment.. (2,529,900) (2,567,300) (4,059,700) (2,502,800) (3,310,000)
Purchases of operating equipment--
net................................. 24,400 12,700 47,700 78,800 635,900
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities........................ (2,505,500) (2,554,600) (4,012,000) (2,304,700) (2,674,100)
Financing Activities
Proceeds from long-term debt......... -- -- -- -- 156,200
Proceeds from short-term borrowings.. -- 700,000 -- 300,000 --
Payment of short-term borrowings..... -- -- (300,000) -- --
Payments of long-term debt........... (1,893,300) (1,407,600) (3,155,000) (2,326,400) (2,046,800)
----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities........................ (1,893,300) (707,600) (3,455,000) (2,026,400) (1,890,600)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents...................... (14,600) (823,100) 237,400 919,400 (592,100)
Cash at beginning of year.............. 2,681,100 2,443,700 2,443,700 1,524,300 2,116,400
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 2,666,500 $ 1,620,600 $ 2,681,100 $ 2,443,700 $ 1,524,300
=========== =========== =========== =========== ===========
Included in cash provided by operating
activities above:
Interest paid........................ -- -- $ 2,887,600 $ 3,031,400 $ 3,232,500
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-68
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. INTERIM INFORMATION (UNAUDITED)
The interim financial statements as of and for the six months ended
December 31, 1997 and 1996 included herein are unaudited. Such information
reflects all adjustments, consisting solely of normal recurring adjustments,
which are in the opinion of management necessary for a fair presentation of the
balance sheet as of December 31, 1997 and the results of operations and cash
flows for the six months ended December 31, 1997 and 1996. Due to the
seasonality of the business, the reported results are not necessarily indicative
of those expected for the entire year. Certain information and disclosures
normally included in annual financial statements in accordance with generally
accepted accounting principles have been excluded or omitted in presentation of
the interim financial statements.
2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES
Organization
Posadas de San Juan Associates (the Partnership), is a joint venture
organized under the General Partnership Laws of the State of New York,
pursuant to a Joint Venture Agreement dated July 27, 1984, as amended (the
Agreement). The Partnership is 50% owned by ESJ Hotel Corporation, a wholly-
owned subsidiary of Posadas de Puerto Rico Associates, Incorporated (Posadas
de Puerto Rico), with the remainder owned by entities owned by individual
investors (collectively, the Partners). Posadas de Puerto Rico is 100% owned
by WHG Resorts & Casinos Inc., a publicly-held corporation. The Partnership
shall continue to exist until July 27, 2024, unless terminated earlier by
mutual agreement of the Partners pursuant to the Agreement. The Agreement
provides that the net profits or losses of the Partnership shall be allocated
to the Partners in the same proportion as their capital contributions.
The Partnership owns and operates the El San Juan Hotel & Casino (the
"Hotel"), a luxury resort hotel and casino property in San Juan, Puerto Rico.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.
Inventories
Inventories, which consist mainly of food, beverages and supplies, are
valued at the lower of cost (first-in, first-out method) or market.
Land, Building and Equipment
Land, building and equipment are stated on the basis of cost. Building and
equipment are depreciated by the straight-line method over their estimated
useful lives.
Deferred Financing Costs
Deferred financing costs are being amortized over the maturities of the
related debt.
Casino Revenues
Casino revenues are the net win from gaming activities, which is the
difference between gaming wins and losses.
F-69
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
Promotional Allowances
Casino promotional allowances represent the retail value of complimentary
food, beverage and hotel services furnished to patrons, commissions and
transportation costs.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs
for fiscal years 1997, 1996 and 1995 amounted to approximately $1,388,000,
$1,394,000 and $1,299,000, respectively.
Fair Values of Financial Instruments
The methods and assumptions used to estimate the fair value of the different
classes of financial instruments were as follows:
Long-term debt: The carrying amount of the long-term borrowings at June 30,
1997 approximates fair value. The fair values were estimated using discounted
cash flows, based on the current borrowing rates for similar types of
borrowing arrangements.
3. FURNITURE, FIXTURES AND EQUIPMENT FUND
In accordance with the terms of the Management Agreement and a certain loan
agreement (see Note 6), the Partnership is required to deposit cash equal to
4% of hotel gross revenues each month into a furniture, fixtures and equipment
fund.
Williams Hospitality Group Inc. (Williams Hospitality), a hotel/casino
management company that is an affiliated company, (on behalf of the
Partnership) withdraws from the fund amounts required to pay the cost of
replacements of, and additions to, furniture, fixtures and equipment at the
Hotel. At June 30, 1997 and 1996, there were no unexpended funds available.
4. TRADE ACCOUNTS RECEIVABLE
At June 30, 1997 and 1996 trade accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Trade accounts receivable--casino................... $2,001,600 $1,045,100
Less allowance for doubtful accounts................ 516,100 266,100
---------- ----------
1,485,500 779,000
Trade accounts receivable--hotel.................... 2,296,700 1,682,700
Less allowance for doubtful accounts................ 90,200 91,000
---------- ----------
2,206,500 1,591,700
---------- ----------
$3,692,000 $2,370,700
========== ==========
</TABLE>
Approximately 51% and 31% of the trade accounts receivable--casino, as of
June 30, 1997 and 1996, respectively, are from customers in Latin America.
F-70
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
5. DUE TO AFFILIATED COMPANY
Amounts due to affiliated company consist of fees earned by Williams
Hospitality and other payments made by Williams Hospitality for services
rendered on behalf of the Partnership. At June 30, 1997 and 1996 amounts due
to an affiliated company consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Due to Williams Hospitality--noncurrent:
Incentive management fees....................... $11,283,400 $ 9,878,900
Interest on incentive management fees........... 5,506,400 4,526,800
Basic management fees........................... 8,801,000 8,801,000
----------- -----------
$25,590,800 $23,206,700
=========== ===========
</TABLE>
Payment of substantially all the noncurrent amounts due to Williams
Hospitality are restricted under the terms of the Loan Agreement (see Note 6).
6. LINE OF CREDIT
The Partnership has available a $1,000,000 revolving line of credit with a
bank, which is payable on demand, bearing interest at one percentage over the
prime rate. The line of credit is collateralized by substantially all trade
accounts receivable and leases with concessionaires as well as the mortgage
covering long-term debt. As of June 30, 1997, there was no balance outstanding
under the line of credit.
7. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Mortgage note payable to bank.......................... $23,250,000 $26,250,000
Capital lease obligation bearing interest at 11.18%
payable in monthly installments of $3,450, including
interest through 1999................................. 70,000 109,600
Capital lease obligation bearing interest at 9.5%
payable in monthly installments of $10,413, including
interest through 2001................................. 396,100 480,700
Chattel mortgage note payable bearing interest at 9%,
payable in monthly installments of $3,900, including
interest through 1998, collateralized with personal
property.............................................. 85,900 116,700
Note payable to a non-related party, non-interest
bearing, payable in two annual installments of
$100,000 beginning on October 1, 1998................. 200,000 --
----------- -----------
24,002,000 26,957,000
Less current portion................................... 3,170,600 3,152,000
----------- -----------
$20,831,400 $23,805,000
=========== ===========
</TABLE>
The mortgage note payable to bank is collateralized by all the Partnership's
real and personal property. The note is payable in accelerating monthly
installments with a final installment of $7,500,000 due in fiscal 2003.
Interest is payable at rates from 6.7% to 7.3% on $18,250,000 of the note.
Interest rates have not been fixed on
F-71
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
$5,000,000 of the note, which at June 30, 1997 was at an interest rate of
7.97%, which is reset every seven days. Under the terms of the loan agreement,
50% of the excess net free cash flow, as defined, each year is required to be
used to prepay the final installment of the note until it is reduced to
$3,000,000. Further, distributions to the partners and payment of basic and
incentive management fees and accrued interest thereon outstanding at the date
of the borrowing may only be paid to the extent of the remaining 50% of the
excess net free cash flow. Excess net free cash flow, as defined, amounted to
$648,000 at June 30, 1997.
Maturities of long-term debt are as follows:
Fiscal year ending in:
<TABLE>
<S> <C>
1998........................................................... $ 3,170,600
1999........................................................... 3,392,000
2000........................................................... 3,726,000
2001........................................................... 3,588,400
2002........................................................... 2,625,000
Thereafter..................................................... 7,500,000
-----------
$24,002,000
===========
</TABLE>
8. INCOME TAXES
The Partnership operated under the provisions of the Puerto Rico Tourism
Incentives Act of 1993 (the 1993 Act). The 1993 Act provides for a ten-year
grant which may be extended for an additional ten-year term. Major benefits of
this grant are: a 90% exemption from income taxes on hotel income through the
entire term of the grant, and a 90% exemption from municipal real and personal
property taxes for the first five years. The Partnership's casino operations
are not covered by the tax exemption grant and are fully taxable.
As of June 30, 1997, the Partnership had net operating loss carryforwards of
approximately $20,391,600, net of approximately $1,600,000 used to offset 1997
taxable income for Puerto Rico income tax purposes from its combined hotel and
casino operations and, accordingly, no Puerto Rico taxes have been provided in
the accompanying financial statements. Such losses may be utilized to offset
future Puerto Rico taxable income through June 30, 2001 as follows: 1998,
$2,064,000; 1999, $3,271,000; 2000, $3,896,600; 2001, $6,046,000 and 2002,
$5,114,000.
Following the provisions of SFAS No. 109, the deferred tax asset that
results from the cumulative net operating loss carryforwards has been fully
reserved.
For Puerto Rico income tax purposes the Partnership is taxed as if it were a
corporation. Income of the Partnership for federal income tax purposes is
taxable to the Partners.
9. TRANSACTIONS WITH RELATED PARTIES
The Partnership has an Operating and Management Agreement (the Management
Agreement) dated October 2, 1986 with Williams Hospitality. The Management
Agreement provides that Williams Hospitality is to manage the Hotel until the
year 2005 for a basic management fee of 5% of the Hotel's gross revenues (as
defined in the Management Agreement) and an incentive management fee of 12% of
the Hotel's gross operating profits (as defined in the Management Agreement).
In addition, the Partnership is required to pay certain administrative
expenses incurred by Williams Hospitality in connection with management of the
Hotel.
F-72
<PAGE>
POSADAS DE SAN JUAN ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
During fiscal years 1997, 1996 and 1995 basic management fees amounted to
$2,932,200, $2,852,500 and $2,981,600, respectively. Incentive management fees
amounted to $1,404,500, $997,600 and $911,500, respectively, for the same
fiscal years. Administrative costs and service fees charged by Williams
Hospitality during fiscal years 1997, 1996 and 1995, amounted to $1,422,600,
$1,446,700 and $1,844,000, respectively.
During fiscal years 1997, 1996 and 1995, interest at 10% charged to the
Partnership by Williams Hospitality amounted to $987,900, $888,100 and
$797,000, respectively.
During fiscal years 1997, 1996 and 1995, the Partnership was charged by
Posadas de Puerto Rico $338,100, $243,600 and $92,800, respectively, for
certain services provided.
During fiscal years 1997, 1996 and 1995, the Partnership charged Posadas de
Puerto Rico $337,400, $256,100 and $191,500, respectively, for certain
services rendered.
F-73
<PAGE>
SCHEDULE II
POSADAS DE SAN JUAN ASSOCIATES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------------- -------- ----------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS-- BALANCE AT
BEGINNING OF COSTS AND OTHER AMOUNTS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITTEN OFF PERIOD
----------- ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for
receivables:
1997.................... $ 357,100 $ 150,600 $-- $ (98,599) $606,299
========== ========== ==== =========== ========
1996.................... $ 434,546 $1,278,200 $-- $ 1,355,646 $357,100
========== ========== ==== =========== ========
1995.................... $1,290,819 $3,880,413 $-- $ 4,736,686 $434,546
========== ========== ==== =========== ========
</TABLE>
F-74
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
WKA El Con Associates
We have audited the accompanying balance sheets of WKA El Con Associates (a
joint venture partnership) as of June 30, 1997 and 1996, and the related
statements of operations and deficit, and cash flows for each of the three
years in the period ended June 30, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WKA El Con Associates as
of June 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that WKA
El Con Associates will continue as a going-concern. As more fully described in
Note 8, El Conquistador Partnership L.P., a 50% owned partnership, has not
renewed or replaced a letter of credit collateralizing $120,000,000 of
indebtedness. In the event that the letter of credit is not renewed or
replaced prior to November 9, 1997, the debt will be required to be repaid on
February 1, 1998. This condition raises substantial doubt about the
Partnership's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classifications of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
San Juan, Puerto Rico
August 11, 1997
F-75
<PAGE>
WKA EL CON ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, --------------------------
1997 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash............................................... $ 3,600 $ 3,600 $ 3,200
Notes receivable from affiliated company........... 19,096,300 18,343,200 16,116,000
Investment in Las Casitas Development Company...... -- 242,600 1,292,600
Capitalized interest, less accumulated amortization
of $100,400 and $71,000 at June 30, 1997 and 1996,
respectively, and $115,100 at December 31, 1997... 1,353,400 1,368,100 1,397,500
Deferred debt issuance costs and other assets, less
accumulated amortization of $598,600 and
$496,200 at June 30, 1997 and 1996, respectively,
and $649,800 at December 31, 1997................. 718,600 769,800 872,200
------------ ------------ ------------
Total assets................................... $ 21,171,900 $ 20,727,300 $ 19,681,500
============ ============ ============
LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL
Liabilities:
Long-term note payable........................... $ 5,526,200 $ 5,527,400 $ 5,197,000
Due to affiliated company........................ 153,200 85,100 64,200
Due to partners.................................. 10,832,600 10,475,100 9,790,700
Losses in excess of equity investment in El
Conquistador Partnership L.P. .................. 17,708,200 12,464,200 7,762,600
------------ ------------ ------------
Total liabilities.............................. 34,220,200 28,551,800 22,814,500
Deficiency in partners' capital:
Contributed...................................... 20,286,200 20,286,200 20,286,200
Deficit.......................................... (33,334,500) (28,110,700) (23,419,200)
------------ ------------ ------------
Total deficiency in partners' capital.......... (13,048,300) (7,824,500) (3,133,000)
------------ ------------ ------------
Total liabilities and deficiency in partners'
capital....................................... $ 21,171,900 $ 20,727,300 $ 19,681,500
============ ============ ============
</TABLE>
See accompanying notes.
F-76
<PAGE>
WKA EL CON ASSOCIATES
STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------------- ----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Interest income..................... $ 664,100 $ 605,500 $ 1,241,100 $ 1,150,100 $ 1,027,600
Costs and expenses:
Interest.......................... 567,300 536,200 1,078,400 1,145,800 1,137,600
Professional fees................. 10,600 13,900 20,900 40,100 83,400
Amortization...................... 65,900 65,900 131,800 142,000 163,200
------------ ------------ ------------ ------------ ------------
643,800 616,000 1,231,100 1,327,900 1,384,200
------------ ------------ ------------ ------------ ------------
Income (loss) before equity in
operations of investees............ 20,300 (10,500) 10,000 (177,800) (356,600)
Equity in operations of investees:
El Conquistador Partnership L.P... (5,244,100) (4,819,500) (4,701,500) (6,120,500) (13,738,400)
Las Casitas Development Company... -- -- -- 313,200 1,627,100
------------ ------------ ------------ ------------ ------------
(5,244,100) (4,819,500) (4,701,500) (5,807,300) (12,111,300)
------------ ------------ ------------ ------------ ------------
Net loss............................ (5,223,800) (4,830,000) (4,691,500) (5,985,100) (12,467,900)
Accumulated deficit at beginning of
year............................... (28,110,700) (23,419,200) (23,419,200) (17,434,100) (4,966,200)
------------ ------------ ------------ ------------ ------------
Accumulated deficit at end of year.. $(33,334,500) $(28,249,200) $(28,110,700) $(23,419,200) $(17,434,100)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-77
<PAGE>
WKA EL CON ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------------- --------------------------------------
1997 1996 1997 1996 1995
----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Operating Activities
Net loss............................... $(5,223,800) $(4,830,000) $(4,691,500) $(5,985,100) $(12,467,900)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Amortization......................... 65,900 65,900 131,800 142,000 163,200
Equity in operations of affiliates
including $1,050,000 and $950,000
in cash distributions received in
fiscal years 1997 and 1996,
respectively, and $300,100 and
$600,000 in cash distributions
received during the six months
ended December 31, 1997 and 1996,
respectively........................ 5,544,100 5,419,500 5,751,600 6,757,300 12,111,300
Changes in operating assets and
liabilities:
Accrued interest income added to
notes receivable.................... (405,300) (605,000) (1,177,200) (1,122,800) (1,000,600)
Other receivables.................... -- -- -- -- 13,200
Accrued interest expense added to
long-term liabilities............... -- 536,100 330,400 1,102,900 974,500
Accounts payable..................... (1,200) -- -- -- (36,700)
Due to affiliated company............ 10,600 13,900 -- 58,900 --
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
operating activities.............. (9,700) 600,400 345,100 953,200 (243,000)
Investing Activities
Sale of certificate of deposit held in
escrow................................ -- -- -- 682,500 100,000
Increase on deferred debt issuance
costs and other assets................ -- -- -- -- (230,400)
Increase in notes receivable from
affiliated company.................... (347,800) (600,000) (1,050,000) (950,000) (423,500)
----------- ----------- ----------- ----------- ------------
Net cash used in investing
activities........................ (347,800) (600,000) (1,050,000) (267,500) (553,900)
Financing Activities
Partners' contributed capital.......... -- -- -- 1,295,700 1,870,500
Partners' loans--net................... 357,500 -- 684,400 (852,900) 323,500
Payments to affiliated company......... -- -- 20,900 (1,125,300) (1,397,100)
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
financing activities.................. 357,500 -- 705,300 (682,500) 796,900
----------- ----------- ----------- ----------- ------------
Net increase in cash................... -- 400 400 3,200 --
Cash at beginning of year.............. 3,600 3,200 3,200 -- --
----------- ----------- ----------- ----------- ------------
Cash at end of year.................... $ 3,600 $ 3,600 $ 3,600 $ 3,200 $ --
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-78
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. INTERIM INFORMATION (UNAUDITED)
The interim financial statements as of and for the six months ended December
31, 1997 and 1996, included herein are unaudited. Such information reflects all
ajustments, consisting solely of normal recurring adjustments, which are in the
opinion of management necessary for a fair presentation of the balance sheet as
of December 31, 1997 and the results of operations and cash flows for the six
months ended December 31, 1997 and 1996. Due to the seasonality of the business,
the reported results are not necessarily indicative of those expected for the
entire year. Certain information and disclosures normally included in annual
financial statements in accordance with generally accepted accounting principles
have been excluded or omitted in presentation of the interim financial
statements.
2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES
Organization
WKA El Con Associates (the Partnership) is a joint venture organized under
the General Partnership Law of the State of New York, pursuant to a Joint
Venture Agreement (the Agreement) dated January 9, 1990, as amended, for the
purpose of becoming a general and limited partner of El Conquistador
Partnership L.P. (El Con). The Partnership is owned 46.54% by WHG El Con Corp.
(formerly known as WMS El Con Corp.), which is wholly-owned by WHG Resorts &
Casino Inc., 37.23% by AMK Conquistador, S.E. and 16.23% by Hospitality
Investor Group, S.E. The Partnership shall continue to exist until January 9,
2040, unless terminated earlier pursuant to the Agreement. Net profits or
losses of the Partnership will be allocated to the partners in accordance with
the terms of the Agreement.
The Partnership is a 50% limited partner in Las Casitas Development Company
I, S en C (S.E.) ("Las Casitas"), a joint venture constructing and selling
condominiums on property adjacent to El Con.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in Affiliated Companies
The investments in affiliated companies are accounted for under the equity
method. El Con equity is recorded by the Partnership based on El Con's fiscal
year of March 31. Las Casitas equity is recorded by the Partnership based on
Las Casitas' fiscal year of June 30. Capitalized interest is being amortized
by the straight-line method over the estimated useful life of the El
Conquistador property.
Deferred Debt Issuance Costs and Other Assets
Deferred debt issuance costs include legal and bank fees incurred in
connection with the issuance of the debt, and are being amortized over the
maturity of the related debt. Certain other capital and pre-opening costs
relating to El Con were incurred by the Partnership and are being amortized
over 5 to 50 years.
Fair Values of Financial Instruments
Note payable: The carrying amount of the note payable at June 30, 1997
approximates fair value. The fair value was estimated using discounted cash
flows, based on the current borrowing rates for similar types of borrowing
arrangements.
F-79
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
3. NOTES RECEIVABLE FROM AFFILIATED COMPANY
At June 30, 1997 and 1996 notes receivable from El Con consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note receivable due on demand......................... $ 136,000 $ 136,000
Note receivable due through May, 2002 (See Note 5)....... 4,000,000 4,000,000
Subordinated notes receivable due in 2003 to 2005 (See
Note 4).............................................. 8,229,700 8,229,700
Accrued interest receivable........................... 3,977,500 2,800,300
Deficiency loan participation......................... 2,000,000 950,000
----------- -----------
$18,343,200 $16,116,000
=========== ===========
</TABLE>
Repayment of the notes, including accrued interest, is subordinated to other
long-term debt of El Con.
4. INVESTMENT IN AFFILIATED COMPANIES
In 1991, the Partnership borrowed $9,000,000 from Williams Hospitality Group
Inc. (Williams Hospitality), a hotel/casino management company that is an
affiliated company, and invested the proceeds in the partnership capital of El
Con, a joint venture organized to acquire the El Conquistador property. The
Partnership owns a 50% interest, as both a general and limited partner, of El
Con (See Note 4).
Summarized financial information for El Con as of March 31, 1997 and 1996
and for the years then is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Total assets...................................... $205,430,000 $211,691,000
Total liabilities................................. 218,359,000 215,216,000
Deficiency in partners capital.................... 12,929,000 3,525,000
Revenues.......................................... 92,958,000 89,214,000
Net loss.......................................... 9,403,000 12,241,000
</TABLE>
The Partnership's investment in Las Casitas amounts to $5,000.
5. DUE TO AFFILIATED COMPANY AND PARTNERS
At various times, the partners loaned the Partnership $8,229,700 under the
terms of loan agreements. The notes are payable in 2003 to 2005 and bear
interest at the prime rate commencing on various dates. The Partnership has
advanced the same amount under a subordinated note to El Con under the same
terms as the borrowing from the partners. (See Note 3).
In November 1993, the partners advanced $782,500 to the Partnership that was
invested in a bank certificate of deposit. During fiscal year 1996 the
remaining balance of $682,500 was withdrawn from the certificate and
distributed to the partners. The certificate of deposit was held in escrow and
was pledged as collateral to the bank for a bank loan of an equal amount to El
Con. Interest accrued on the partners' advances at the same interest rate
earned on the certificate of deposit.
During fiscal year 1997 and 1996, respectively, the Partnership purchased
from Williams Hospitality $1,050,000 and $950,000, respectively, of
participation in a deficiency loan to El Con. The loan and interest at 9.16%
are payable from specified future cash flow of El Con. The partnership
guarantees a revolving credit facility with a bank in the aggregate amount of
up to $4,000,000 of El Conquistador.
F-80
<PAGE>
WKA EL CON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
6. LONG-TERM NOTE PAYABLE
The long-term note payable to a bank includes accrued interest of $1,527,400
and $1,197,000 at June 30, 1997 and 1996, respectively. The note is payable in
quarterly installments of $250,000 commencing in May 2000. Any unpaid
principal and interest is payable in May 2002. The note bears interest at a
variable rate, computed quarterly, equal to LIBOR, plus 1.75%. Under the terms
of the Credit Facility Agreement dated May 5, 1992, interest payments are
deferred during the first five years. The $4,000,000 borrowing was loaned to
El Conquistador under similar terms. (See Note 3).
The note is collateralized by second mortgages on parcels of land owned by
Williams Hospitality and Posadas de Puerto Rico Associates, Incorporated,
affiliated companies through common ownership, with a cost of approximately
$3,761,000, and a guarantee of $1,000,000 by WHG Resorts & Casino Inc., the
ultimate owner of WHG El Con Corp.
7. INCOME TAXES
The Partnership is not taxable for Puerto Rico income tax purposes pursuant
to an election submitted to the Puerto Rico Treasury Department. Instead, each
partner reports their distributive share of the Partnership's profit or losses
in their respective income tax returns and, therefore, no provision for income
taxes has been made in the accompanying financial statements. Income or loss
of the Partnership for Federal income tax purposes is reported by the
partners.
8. REFINANCING
El Con, a partnership 50% owned by the Partnership, has not renewed or
replaced a letter of credit collateralizing $120,000,000 of Industrial Revenue
Bonds, which expires on March 9, 1998. The debt is required to be repaid on
February 1, 1998 in the event the letter of credit is not renewed or replaced
prior to November 9, 1997. El Con has retained an investment banking firm to
assist in structuring the refinancing of El Con's debt. Based on operating
history of the El Con resort, El Con's management believes such refinancing
will be achieved, but there can be no assurance thereof. If such refinancing
is not renewed or replaced, it raises substantial doubt about El Con's and the
Partnership's ability to continue as going-concerns.
F-81
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
El Conquistador Partnership L.P.
We have audited the accompanying balance sheets of El Conquistador
Partnership L.P. as of March 31, 1997 and 1996, and the related statements of
operations and (deficiency in) partners' capital, and cash flows for each of
the three years in the period ended March 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of El Conquistador
Partnership L.P. at March 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that El
Conquistador Partnership L.P. will continue as a going-concern. As more fully
described in Note 14, to date El Conquistador Partnership L.P. has not renewed
or replaced a letter of credit collateralizing $120,000,000 of indebtedness.
In the event that the letter of credit is not renewed or replaced prior to
November 9, 1997, the debt will be required to be repaid on February 1, 1998.
This condition raises substantial doubt about the El Conquistador Partnership
L.P.'s ability to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classifications of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
San Juan, Puerto Rico
May 2, 1997
F-82
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, --------------------------
1997 1997 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash.............................................. $ 1,128,177 $ 2,380,218 $ 856,983
Restricted cash and investments held by bank...... 3,480,539 3,360,607 2,879,355
Trade accounts receivable, less allowance for
doubtful accounts of $301,765 and $894,187
at March 31, 1997 and 1996, respectively,
and $346,436 at December 31, 1997................ 5,851,394 4,764,607 5,302,884
Due from affiliated companies..................... 96,364 428,987 314,999
Inventories....................................... 1,673,266 1,662,877 1,522,463
Prepaid expenses and other current assets......... 1,723,603 1,020,716 945,905
------------- ------------ ------------
Total current assets............................ 13,953,343 13,618,012 11,822,589
Due from affiliated company........................ 71,428 418,957 817,868
Land, building and equipment:
Land.............................................. 14,372,707 14,372,707 14,372,707
Building.......................................... 158,039,190 158,039,190 158,039,190
Furniture, fixture and equipment.................. 34,658,913 32,664,796 31,359,202
------------- ------------ ------------
207,070,810 205,076,693 203,771,099
Less accumulated depreciation..................... 25,944,072 21,116,551 14,777,283
------------- ------------ ------------
181,126,738 183,960,142 188,993,816
Operating equipment, net........................... 1,488,342 1,592,219 1,469,350
Deferred debt issuance costs, net of accumulated
amortization of $5,709,747 and $4,731,745 at
March 31, 1997 and 1996, respectively, and
$4,410,348 at December 31, 1994................... 2,247,117 2,980,622 3,958,624
Deferred pre-opening costs, net of accumulated
amortization of $10,519,175 and $8,751,425 at
March 31, 1997 and 1996, respectively, and
$11,884,985 at December 31, 1997.................. 1,534,694 2,860,504 4,628,254
------------- ------------ ------------
Total assets.................................... $ 200,421,662 $205,430,456 $211,690,501
============= ============ ============
LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL
- -----------------------------------------------
Current liabilities:
Trade accounts payable............................ $ 6,781,796 $ 5,474,496 $ 7,657,546
Advance deposits.................................. 10,104,458 5,572,317 3,568,390
Accrued interest.................................. 1,597,476 1,785,687 1,510,080
Other accrued liabilities......................... 4,629,819 5,271,335 4,673,189
Due to affiliated companies....................... 655,084 545,824 652,896
Note payable to bank.............................. 6,000,000 1,500,000 2,773,359
Current portion of long-term debt................. 120,000,000 120,000,000 --
Current portion of chattel mortgages and capital
lease obligations................................ 1,893,063 2,679,819 2,444,993
------------- ------------ ------------
Total current liabilities....................... 151,661,696 142,829,478 23,280,453
Long-term debt..................................... 25,000,000 25,000,000 145,000,000
Chattel mortgages and capital lease obligations,
net of current portion............................ -- 1,660,040 4,324,358
Due to affiliated companies........................ 12,956,100 11,491,977 8,531,671
Due to partners.................................... 38,774,451 37,377,424 34,079,309
Deficiency in partners' capital:
Limited partners.................................. (23,774,997) (10,989,193) (2,996,497)
General partners.................................. (4,195,588) (1,939,270) (528,793)
------------- ------------ ------------
Total deficiency in partners' capital........... (27,970,585) (12,928,463) (3,525,290)
------------- ------------ ------------
Total liabilities and deficiency in partners'
capital.......................................... $ 200,421,662 $205,430,456 $211,690,501
============= ============ ============
</TABLE>
See accompanying notes.
F-83
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
STATEMENTS OF OPERATIONS AND DEFICIENCY IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
---------------------------- ----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms............................. $ 25,129,621 $ 24,419,749 $ 40,023,903 $ 38,817,160 $ 37,942,821
Food and beverage................. 17,428,549 17,633,438 26,235,365 26,188,693 27,298,340
Casino............................ 3,553,713 4,011,214 6,005,242 6,179,133 6,054,569
Rental and other income........... 14,473,191 12,954,106 21,959,328 19,165,969 14,652,328
------------ ------------ ------------ ------------ ------------
60,585,074 59,018,507 94,223,838 90,350,955 85,948,058
Less casino promotional
allowances....................... (458,447) (849,206) (1,265,710) (1,136,499) (1,205,380)
----------- ------------ ------------ ------------ ------------
Net revenues.................... 60,126,627 58,169,301 92,958,128 89,214,456 84,742,678
Costs and expenses:
Rooms............................. 9,603,101 8,242,928 12,377,694 12,853,157 14,755,239
Food and beverage................. 12,314,635 12,811,291 17,602,484 17,638,186 20,797,173
Casino............................ 2,383,568 2,764,980 3,848,981 3,686,904 3,923,817
Selling, general and
administrative................... 11,950,303 10,449,921 14,657,312 12,992,841 18,115,433
Management and incentive
management fees.................. 2,984,995 2,969,676 5,680,355 5,394,675 3,703,819
Property operation, maintenance
and energy costs................. 9,094,645 9,389,203 12,382,577 12,396,063 14,408,347
Depreciation and amortization..... 6,933,069 6,856,179 9,146,664 10,499,296 11,124,075
Other expenses.................... 6,875,562 6,943,646 9,702,212 9,201,228 9,722,662
----------- ------------ ------------ ------------ ------------
62,139,878 60,427,824 85,398,279 84,662,350 96,550,565
----------- ------------ ------------ ------------ ------------
Income (loss) from operations... (2,013,251) (2,258,523) 7,559,849 4,552,106 (11,807,887)
Interest income..................... 127,840 139,431 199,110 228,625 467,922
Interest expense.................... 13,156,711 12,691,706 17,162,132 17,021,764 16,136,755
----------- ------------ ------------ ------------ ------------
Net loss............................ (15,042,122) (14,810,798) (9,403,173) (12,241,033) (27,476,720)
Deficiency in partners' capital at
beginning of year.................. (12,928,463) (3,525,290) (3,525,290) 8,715,743 36,191,325
Partners' capital contribution...... -- -- -- -- 1,138
----------- ------------ ------------ ------------ ------------
Deficiency in partners' capital at
end of year........................ $ (27,970,585) $(18,336,088) $(12,928,463) $ (3,525,290) $ 8,715,743
============= ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-84
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
---------------------------- ----------------------------------------
1997 1996 1997 1996 1995
---------------------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................ $ (15,042,122) $ (14,810,798) $ (9,403,173) $(12,241,033) $(27,476,720)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization..... 6,933,069 6,856,179 9,146,664 10,499,296 11,124,075
Provision for losses on accounts
receivable....................... 119,000 115,400 205,400 363,245 1,808,641
Incentive management fees......... 860,043 899,148 2,375,526 2,224,381 679,259
Deferred interest expense to
partners and affiliates.......... 2,001,107 2,678,051 3,100,085 2,995,431 2,063,981
Changes in operating assets and
liabilities:
Restricted cash and investments
held by bank................... (119,932) (452,969) (481,252) 503,353 2,549,446
Trade accounts receivable....... (1,205,787) 259,754 332,877 1,987,789 2,187,211
Inventories..................... (10,389) (62,762) (140,414) 529,503 61,249
Prepaid expenses and other
current assets................. (702,887) (261,981) (74,811) 26,105 491,032
Trade accounts payable and
advance deposits............... 5,839,441 3,157,463 (179,123) (3,663,803) (1,323,693)
Accrued interest and other
accrued liabilities............ (829,727) 30,746 873,753 (1,220,058) 1,156,483
Affiliated companies, net....... 789,412 1,604,522 99,017 (97,985) 1,967,073
----------- ----------- ---------- ---------- -----------
Net cash provided by (used in)
operating activities............... (1,368,772) 12,753 5,854,549 1,906,224 (4,711,963)
INVESTING ACTIVITIES
Purchases of property and
equipment.......................... (2,040,350) (1,624,905) (1,305,594) (826,611) (3,525,762)
Purchase (usage) of operating
equipment, net..................... 103,877 1,966 (122,869) (37,454) 523,641
----------- ----------- ---------- ---------- -----------
Net cash used in investing
activities......................... (1,936,473) (1,622,939) (1,428,463) (864,065) (3,002,121)
FINANCING ACTIVITIES
Payments of principal on long-term
debt............................... (2,446,796) (1,698,440) (2,429,492) (2,198,146) (1,976,625)
Proceeds from long-term debt........ -- -- -- -- 772,000
Proceeds from notes payable to
bank............................... 4,500,000 3,500,000 9,500,000 7,684,685 --
Payments of principal on notes
payable to bank.................... -- -- (10,773,359) (6,549,685) (200,000)
Proceeds from partners' and
affiliated loans, and capital
contributions...................... -- -- 800,000 -- 8,698,134
----------- ----------- ---------- ---------- -----------
Net cash provided by (used in) financing
activities......................... 2,053,204 1,801,560 (2,902,851) (1,063,146) 7,293,509
----------- ----------- ---------- ---------- -----------
Net increase (decrease) in cash..... (1,252,041) 191,374 1,523,235 (20,987) (420,575)
Cash at beginning of year........... 2,380,218 856,983 856,983 877,970 1,298,545
----------- ----------- ---------- ---------- -----------
Cash at end of year................. $ 1,128,177 $ 1,048,357 $ 2,380,218 $ 856,983 $ 877,970
=========== =========== ============ ============ ============
Supplemental disclosure of cash flow
information:
Interest paid..................... -- -- $ 13,789,097 $ 14,026,453 $ 14,314,600
=========== =========== ============ ============ ============
</TABLE>
See accompanying notes.
F-85
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. INTERIM INFORMATION (UNAUDITED)
The interim financial statements as of and for the nine months ended December
31, 1997 and 1996 included herein are unaudited. Such information reflects all
adjustments consisting solely of normal recurring adjustments, which are in the
opinion of management necessary for a fair presentation of the balance sheet as
of December 31, 1997 and the results of operations and cash flows for the nine
months ended December 31, 1997 and 1996. Due to the seasonality of the business,
the reported results are not necessarily indicative of those expected for the
entire year. Certain information and disclosures normally included in annual
financial statements in accordance with generally accepted accounting principles
have been excluded or omitted in presentation of the interim financial
statements.
2. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES
Organization
El Conquistador Partnership L.P. (the Partnership), is a limited partnership
organized under the laws of Delaware, pursuant to a Joint Venture Agreement
dated January 12, 1990 (the Agreement). The Partnership is 50% owned by WKA El
Con Associates (WKA El Con), a partnership owned by several partners
affiliated with Williams Hospitality Group Inc. (Williams Hospitality), and
50% by Kumagai Caribbean, Inc. (Kumagai), a wholly-owned subsidiary of Kumagai
International USA, Inc. The joint venture partners (Partners) are both General
Partners and Limited Partners in the Partnership. The Partnership shall
continue to exist until March 31, 2030, unless terminated earlier by mutual
agreement of the General Partners. The Agreement provides that net profits or
losses of the Partnership after deducting a preferred cumulative annual return
of 8.5% on the Partners unrecovered capital accounts, as defined, will be
allocated to the Partners on a 50-50 ratio subject to certain exceptions, as
defined.
The Partnership owns and operates a luxury resort hotel and casino in Las
Croabas, Puerto Rico (the Resort).
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories, which consist mainly of food, beverages and supplies, are
valued at the lower of cost (first-in, first-out method) or market.
Land, Building and Equipment
Land, building and equipment are stated on the basis of cost. Building and
equipment are depreciated by the straight-line method over their estimated
useful lives.
Deferred Debt Issuance Costs
Debt issuance costs include legal and underwriting fees, other fees incurred
in connection with the financing and other costs. These costs are being
amortized on a straight-line basis over the term of the debt.
Deferred Pre-Opening Costs
Pre-opening costs consist of amounts incurred in connection with the
marketing, organization, planning and development of the Resort. Such costs
include staffing, marketing, legal and other costs incurred prior to the
commencement of operations of the Resort. The costs are being amortized on a
straight-line basis over a five year period through November 1998.
Casino Revenues
Casino revenues are the net win from gaming activities, which is the
difference between gaming wins and losses.
F-86
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
Casino Promotional Allowances
Casino promotional allowances represent the retail value of complimentary
rooms, food, beverage and hotel services furnished to patrons.
3. RESTRICTED CASH AND INVESTMENTS HELD BY BANK
Pursuant to the terms of the bond agreement (see Note 9), the Partnership
had cash and investments on deposit with the trustee for the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Interest due May 1.................................. $1,778,961 $1,584,000
Interest due August 1............................... 1,581,646 1,295,355
---------- ----------
$3,360,607 $2,879,355
========== ==========
</TABLE>
4. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Trade accounts receivable--hotel................... $4,559,108 $5,259,478
Less allowance for doubtful accounts............... 144,615 217,362
---------- ----------
4,414,493 5,042,116
Trade accounts receivable--casino.................. 474,614 345,171
Less allowance for doubtful accounts............... 124,500 84,403
---------- ----------
350,114 260,768
---------- ----------
Trade accounts receivable, net..................... $4,764,607 $5,302,884
========== ==========
</TABLE>
5. TRANSACTIONS WITH RELATED PARTIES
The Partnership has an Operating and Management Agreement (the Management
Agreement) with Williams Hospitality. The Management Agreement provides that
Williams Hospitality will manage the Resort for a period of 20 years for a
basic management fee of 3.5% of the Resorts' gross revenues, as defined, and
an incentive management fee of 10% of the Resorts' operating profit, as
defined. Incentive management fees accrued each year are not payable until
significant cash flows levels are achieved. In addition, the Partnership is
required to pay certain administrative expenses incurred by Williams
Hospitality in connection with management of the Resort.
During fiscal years 1997 and 1996, basic management fees amounted to
$3,305,000 and $3,170,000, respectively. Incentive management fees amounted to
approximately $2,376,000 and $2,224,000 during fiscal years 1997 and 1996,
respectively. In addition, Williams Hospitality charged the Partnership
approximately $3,258,000 and $2,728,000 in fiscal years 1997 and 1996,
respectively, for services provided to the Resort.
In addition, the Partnership was charged by Posadas de Puerto Rico
Associates, Incorporated (Posadas de Puerto Rico), hotel and casino operations
affiliated through common ownership, approximately $410,000 and $437,000 in
fiscal years 1997 and 1996, respectively, for services provided to the Resort.
F-87
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
As of March 31, 1997 each partner had advanced $8,365,685 to the Partnership
under notes that are due for various periods up to ten years with interest at
the Citibank, N.A. in New York base rate. Repayment of interest and principal
is subordinated to other long-term debt. In addition, each partner had
advanced to the Partnership $4,000,000 under a May 5, 1992 loan agreement. The
loan agreement provides for the payment of interest at a variable rate,
computed quarterly, equal to LIBOR plus 1.75%. Interest payments will be
deferred during the first five years. The principal and deferred interest
accrued at March 31, 1997 is payable in quarterly installments of $250,000
commencing in March 2000 and a final lump-sum payment in February 2002. The
loan is collateralized by a subordinated pledge of the Partnership's assets.
As of March 31, 1997 each partner had provided $3,800,000 to cover cash flow
deficiency in the Partnership's operations as provided by the Agreement. The
deficiency loans consist of $3,800,000 in cash by Kumagai, and the conversion
of amounts due from the Partnership to Williams Hospitality to loans for WKA
El Con. The deficiency loans bear interest at 9.16%. Repayment of interest and
principal is subordinated to other long-term debt.
As of March 31, 1997, the outstanding balance of advances made by the
Partnership to Williams Hospitality for the purchase of transportation
equipment leased to the Partnership under a five year service agreement
amounted to $727,200. Service agreement payments by the Partnership are equal
to the $39,819 monthly amounts receivable under the advance. Repayment of the
advances by Williams Hospitality are limited to amounts payable under the
service agreement. This transportation equipment is pledged as collateral by
Williams Hospitality to the Partnership's chattel mortgage notes.
In addition, a subsidiary of Williams Hospitality financed other
transportation equipment from an external borrowing amounting to $441,000
repayable over five years. Monthly payments amount to $9,699. Also, in
February 1997, a subsidiary of Williams Hospitality financed a ferryboat from
an external borrowing amounting to $456,000, repayable over seven years.
Monthly payments amount to $7,561. The Partnership chartered the
transportation equipment and ferryboat under terms similar to the transaction
described in the preceding paragraph.
In October 1996, each partner advanced $400,000 as required by a loan
agreement (see Note 7). The notes bear interest at the prime rate at the Chase
Bank in the New York base rate. Repayment of principal are subordinated to
other debt.
The chattel mortgage notes payable (see Note 8) are collateralized by a bank
standby letter of credit of $3,423,000. The letter of credit is collateralized
by certificates of deposit for $2,000,000 issued by the bank in equal amounts
to Williams Hospitality and Kumagai. The chattel mortgage notes, and capital
leases are guaranteed by Williams Hospitality and Kumagai.
6. NOTES PAYABLE TO BANK
On October 4, 1996 the Partnership entered into an amendment to a loan
agreement whereby the Government Development Bank for Puerto Rico (GDB)
extended the Partnership a $6,000,000 credit facility. The notes issued under
the credit facility will bear interest at 1% over LIBOR, and are secured by a
mortgage note on the Partnership's real property and a leasehold mortgage note
on leased land of $120,000. At March 31, 1997 the Partnership had outstanding
borrowings of $1,500,000 with an interest rate at March 31, 1997 of 6.56%.
As of March 31, 1996, the Partnership's borrowings of $2,500,000 with a bank
were repaid during fiscal year 1997.
F-88
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
7. DUE TO AFFILIATED COMPANIES AND PARTNERS
Amounts due to affiliated companies consist of fees earned by Williams
Hospitality, funds advanced to the Partnership and other payments made by
Williams Hospitality, and for services rendered by Posadas de Puerto Rico and
Posadas de San Juan. Amounts due to affiliated companies consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
Current:
Due to Williams Hospitality:
Basic management fees............................ $ 435,309 $ 414,718
Other............................................ 83,891 195,523
Due to Posadas de Puerto Rico.................... 26,624 37,380
Due to Posadas de San Juan....................... -- 5,275
----------- ----------
$ 545,824 $ 652,896
=========== ==========
Non current:
Affiliate:
Due to Williams Hospitality:
Incentive management fees...................... $ 5,542,528 $3,167,002
Interest at 10% on incentive management fees... 338,405 89,350
Advances....................................... 3,800,000 3,800,000
Interest on advances........................... 856,282 503,368
Other.......................................... 375,528 375,528
----------- ----------
10,912,743 7,935,248
Due to KG Caribbean.............................. 579,234 596,423
----------- ----------
$11,491,977 $8,531,671
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Partners:
Due to WKA El Con:
Advances......................................... $12,765,685 $12,365,685
Interest on advances............................. 3,594,886 2,522,285
Due to Kumagai:
Advances......................................... 16,565,685 16,165,685
Interest on advances............................. 4,451,168 3,025,654
----------- -----------
$37,377,424 $34,079,309
=========== ===========
</TABLE>
F-89
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
8. CHATTEL MORTGAGES AND CAPITAL LEASE OBLIGATIONS
Chattel mortgages and capital lease obligations on equipment consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Chattel mortgage notes payable bearing interest at
9%, payable in monthly installments of $215,784,
including interest, through 1998, collateralized
with personal property.............................. $3,868,202 $6,023,820
Capital lease obligations bearing interest at 11.5%,
payable in monthly installments of $28,335,
including interest, through 1998, collateralized
with personal property, net of $48,307 in 1997 and
$121,571 in 1996 representing interest.............. 471,657 745,531
---------- ----------
4,339,859 6,769,351
Less current portion................................. 2,679,819 2,444,993
---------- ----------
$1,660,040 $4,324,358
========== ==========
</TABLE>
Maturities of chattel mortgages and capital lease obligations are as follows:
<TABLE>
<S> <C>
1998........................................................... $2,679,819
1999........................................................... 1,660,040
----------
$4,339,859
==========
</TABLE>
See Note 5 for additional collateral and guarantees.
Assets and accumulated depreciation recorded under capital lease obligations
are included in land, building and equipment as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Equipment............................................. $1,288,373 $1,288,373
Less accumulated depreciation......................... 880,393 622,717
---------- ----------
$ 407,980 $ 665,656
========== ==========
</TABLE>
9. LONG-TERM DEBT
At March 31, 1997 and 1996, long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Industrial Revenue Bonds Series A................. $ 90,000,000 $ 90,000,000
Industrial Revenue Bonds Series B................. 30,000,000 30,000,000
Government Development Bank of Puerto Rico........ 25,000,000 25,000,000
------------ ------------
145,000,000 145,000,000
Less current portion.............................. 120,000,000 --
------------ ------------
$ 25,000,000 $145,000,000
============ ============
</TABLE>
F-90
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
On February 7, 1991 the Puerto Rico Industrial, Medical, Educational and
Environmental Pollution Control Facilities Financing Authority (the Authority)
sold industrial revenue bonds (Bonds) for $120,000,000 and loaned the proceeds
to the Partnership to be used for the payment of project costs pursuant to a
Loan Agreement. The Loan Agreement provides that the Partnership will pay all
interest and principal on the Bonds.
The Authority issued 1991 Series A, Industrial Revenue Bonds for $90,000,000
and 1991 Series B, Industrial Revenue Bonds for $30,000,000.
Commencing on May 1, 1996, the Bonds are subject to redemption at the
Partnership's option at par plus accrued interest, if any. The Bonds are due
on November 1, 1999 and interest is payable quarterly. The 1991 Series A Bonds
and the 1991 Series B Bonds bear interest at a variable rate, computed
quarterly, equal to 100% and 94%, respectively, of a LIBOR rate minus 1/8th of
1%. Effective November 1, 1996, the interest rate on the 1991 Series A Bonds
increased to 100% of the LIBOR rate. On February 7, 1991 the Partnership
entered into an Interest Swap Agreement that expires on March 8, 1998 by which
the Partnership agrees to pay, effective May 1, 1991, a fixed rate of 7.55% on
the outstanding principal of $120,000,000 in exchange for the counterparty's
obligation to pay the variable interest rate described above.
The Loan Agreement provides that the Partnership will deposit with the
trustee all interest which will become due not later than the 124th day
preceding the date of payment. The Bonds are collateralized by a letter of
credit, that terminates on February 7, 1998, issued by the Mitsubishi Bank,
Limited.
The Partnership pays an annual letter of credit fee of approximately 1.25%
of the Bond principal except under certain circumstances the rate may be
reduced to 1.2%. In addition, in connection with the letter of credit the
Partnership pays an annual agent's fee of approximately .25% of the Initial
Stated Amount, as defined.
Under the provisions of a term loan agreement with the GDB, the Partnership
borrowed $25,000,000 for the payment of project costs. The loan is due on
February 7, 2006. The loan agreement provides for a variable interest rate
equivalent to a LIBOR rate minus .5% plus an add-on margin as provided in the
loan agreement. Interest is payable quarterly in arrears.
Commencing on April 1, 1993, the Partnership is required to deposit annually
with an escrow agent 50% of the Available Cash Flow, as defined in the Loan
Agreement with GDB, up to a maximum of $1,666,700 plus any prior year
requirement in arrears. Through March 31, 1997, there had been no amounts
deposited in escrow under this provision.
The Bonds and the term loan with GDB are collateralized by a first and
second mortgage lien on the Resort, a chattel mortgage on personal property,
and an assignment of various contracts and a management agreement with a
related party. The collateral is subject to a subordination agreement in favor
of the Mitsubishi Bank, Limited.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107 "Disclosures About
Fair Value of Financial Instruments", requires the disclosure of the fair
value of the Partnership's financial instruments at March 31, 1997 and 1996.
The carrying amount of cash and investments, notes payable to bank, chattel
mortgage notes and capitalized leases approximates fair value because of the
short maturity of the instruments or recent issuance. The fair value of the
Partnership's long-term debt has not been determined because similar terms and
conditions may no longer be available.
F-91
<PAGE>
EL CONQUISTADOR PARTNERSHIP L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
11. INCOME TAXES
The Partnership is not taxable for Puerto Rico income tax purposes pursuant
to an election submitted to the Puerto Rico Treasury Department. Instead, each
Partner reports their distributive share of the Partnership's profit and
losses in their respective income tax returns and, therefore, no provision for
income taxes has been made in the accompanying financial statements.
During 1997, the Partnership was granted a tax exemption grant under the
provisions of the Puerto Rico Tourism Incentives Act of 1993 (the Tourism
Act). The Tourism Act provides for a ten-year grant which may be extended for
an additional ten-year term. Major benefits of this Act are: a 90% exemption
from income taxes on hotel income, and a 90% exemption from municipal real and
personal property taxes through the entire term of the grant. The
Partnership's casino operations are not covered by the tax exemption grant and
are fully taxable.
12. ADVERTISING COSTS
The Partnership recognizes the costs of advertising as expense in the year
in which they are incurred. Advertising costs amounted to approximately
$1,446,000 and $847,000 for fiscal years 1997 and 1996, respectively.
13. COMMITMENTS
The Partnership leases land under an operating lease agreement for thirty-
one years with renewal options for two five-year periods. Following are the
minimum annual rental payments on the operating lease subsequent to March 31,
1997:
<TABLE>
<S> <C>
1998........................................................... $ 190,000
1999........................................................... 210,000
2000........................................................... 210,000
2001........................................................... 210,000
2002........................................................... 210,000
Thereafter..................................................... 5,840,000
----------
$6,870,000
==========
</TABLE>
Total rent expense for fiscal years 1997, and 1996 amounted to approximately
$1,391,000 and $985,000, respectively.
14. REFINANCING
The Industrial Revenues Bonds amounting to $120,000,000 at March 31, 1997
are collateralized by a letter of credit which expires on March 9, 1998. Under
the terms of the loan agreement, such debt is required to be repaid on
February 1, 1998 in the event the letter of credit is not renewed or replaced
prior to November 9, 1997 (See Note 9). El Conquistador Partnership L.P. has
engaged an investment banking firm to assist in structuring the refinancing of
El Conquistador Partnership L.P.'s debt. Based on operating history of the
Resort, El Conquistador Partnership L.P.'s management believes such
refinancing will be achieved, but there can be no assurance thereof. If such
refinancing is not renewed or replaced, it raises substantial doubt about El
Conquistador Partnership L.P.'s ability to continue as a going-concern.
F-92
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and
Shareholders of CHC International, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of the
hospitality division of CHC International, Inc. at November 30, 1996 and 1997,
and the results of its operations and its cash flows for the years ended
November 30, 1995, 1996 and 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements were prepared on the basis of presentation
as described in Note 1.
/s/ Price Waterhouse, LLP
Miami, Florida
February 27, 1998
F-93
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
November 30, February 28,
------------ ------------
1996 1997 1998
---- ---- ----
Assets (unaudited)
------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 1,627 $ 8,634 $ 5,592
Trade accounts receivable , net of allowance for doubtful accounts of $699,
$669 and $555 at 1996, 1997 and 1998, respectively 1,482 7,817 9,024
Trade accounts receivable - affiliates, net of allowance for doubtful accounts
of $716, $1,135 and $961 at 1996, 1997 and 1998, respectively 1,108 1,244 1,108
Notes receivable - affiliates and officers 480 2,463 2,493
Marketable securities - - 6,250
Deferred income tax - 9,386 7,426
Inventories 121 1,487 1,427
Other current assets 800 632 674
---------- --------- --------
Total current assets 5,618 31,663 33,994
Property and equipment, net 669 1,718 1,839
Investments in and advances to affiliates 8,457 8,424 5,166
Receivables, net 1,900 1,950 1,950
Receivables - affiliates and officers - 2,656 2,832
Intangibles, net 6,047 5,472 5,329
Other assets 3,548 4,400 4,384
---------- --------- --------
Total Assets $ 26,239 $ 56,283 $ 55,494
========== ========== ========
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current Liabilities
Accounts payable $ 672 $ 4,333 $ 3,591
Due to affiliates and officers 2,005 12,894 13,044
Deferred compensation plan liability - 5,374 5,452
Accrued expenses 5,904 18,417 17,742
Current portion of long-term debt and capital lease obligations 11,857 13,457 12,921
---------- --------- --------
Total current liabilities 20,438 54,475 52,750
Deferred compensation plan liability 6,102 2,494 2,493
Long-term debt 1,921 1,360 1,273
Due to affiliates 3,750 1,245 1,255
Other liabilities 108 179 243
---------- --------- --------
Total liabilities 32,319 59,753 58,014
---------- --------- --------
Commitments and contingencies (Note 12) - - -
Stockholders' Equity (Deficit)
Preferred stock, $.01 par value; 1,000 shares
authorized; no shares issued or outstanding - - -
Common stock, $.005 par value; 20,000 shares
authorized; 10,621 shares issued and outstanding at
1996, 1997 and 1998, respectively 53 53 53
Additional paid-in capital 13,853 16,112 16,750
Accumulated deficit (12,012) (11,936) (15,398)
Notes receivable stock purchases - affiliates (7,675) (7,675) (7,675)
Unearned compensation (299) (24) -
Net unrealized gains on marketable securities - - 3,750
---------- --------- --------
Total stockholders' equity (deficit) (6,080) (3,470) (2,520)
---------- --------- --------
Total liabilities and stockholders' equity (deficit) $ 26,239 $ 56,283 $ 55,494
========== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
November 30, February 28,
----------------------------------- ------------
1995 1996 1997 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenues
Rooms $ 4,638 $ 5,282 $ 25,331 $ 17,704
Food and beverage 3,907 4,351 15,953 10,143
Management service fees - affiliates 5,212 4,284 5,703 578
Management service fees - non-affiliates 5,391 4,748 4,773 894
----------- ----------- ---------- ---------
Total revenues 19,148 18,665 51,760 29,319
----------- ----------- ---------- ---------
Operating Expenses
Rooms 1,075 1,223 5,553 4,058
Food and beverage 2,386 2,772 8,883 6,033
Participating lease payments - - 10,251 7,790
Management service and operating costs 14,455 14,097 26,849 12,077
Depreciation and amortization 832 853 1,045 296
----------- ----------- ---------- ---------
Total operating expenses 18,748 18,945 52,581 30,254
----------- ----------- ---------- ---------
Income (loss) from operations before
equity in net earnings (losses) of affiliates 400 (280) (821) (935)
Equity in net earnings (losses) of affiliates 355 1,003 (346) (210)
----------- ----------- ---------- ---------
Income (loss) from operations 755 723 (1,167) (1,145)
----------- ----------- ---------- ---------
Other Income (Expense)
Interest income 1,720 686 846 332
Interest expense (2,365) (3,304) (2,340) (458)
Loss on impairment of notes receivable (4,431) - - -
Transaction and other costs (Note 1) - - (9,073) (171)
Other income (expense) (104) 29 1,298 48
----------- ----------- ---------- ---------
Total other income (expense) (5,180) (2,589) (9,269) (249)
Minority interests 148 163 108 -
----------- ----------- ---------- ---------
Loss before provision (benefit) for income taxes (4,277) (1,703) (10,328) (1,394)
Provision (benefit) for income taxes 131 92 (10,404) 2,068
----------- ----------- ---------- ---------
Net income (loss) $ (4,408) $ (1,795) $ 76 $ (3,462)
========== ========== =========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED NOVEMBER 30, 1995, 1996 AND 1997
AND THREE MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Notes Net
Receivable Unrealized Total
Common Stock Additional Stock Gains on Stockholders'
------------ Paid-in Accumulated Purchases- Unearned Marketable Equity
Shares Amount Capital Deficit Affiliates Compensation Securities (Deficit)
------ ------ ------- ------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1994 10,355 $ 52 $22,645 $ (5,809) $ (7,350) $ (523) $ - $ 9,015
Receipts from notes receivable stock
purchases - affiliates - - - - 664 - - 664
Amortization of unearned
compensation - - - - - 116 - 116
Net change in gaming division - - (5,595) - - - - (5,595)
intercompany account
Net loss - - - (4,408) - - - (4,408)
------- ------ ------- -------- -------- ------- ------- -------
Balance, November 30, 1995 10,355 52 17,050 (10,217) (6,686) (407) - (208)
------- ------ ------- -------- -------- ------- ------- -------
Additional common shares issued 266 1 2,999 - (3,000) - - -
Receipts from notes receivable stock
purchases - affiliates - - - - 2,011 - - 2,011
Amortization of unearned
compensation - - - - - 108 - 108
Net change in gaming division
intercompany account - - (6,196) - - - - (6,196)
Net loss - - - (1,795) - - - (1,795)
------- ------ ------- -------- -------- ------- ------- -------
Balance, November 30, 1996 10,621 53 13,853 (12,012) (7,675) (299) - (6,080)
------- ------ ------- -------- -------- ------- ------- -------
Amortization of unearned
compensation - - - - - 275 - 275
Net change in gaming division
intercompany account - - 2,259 - - - - 2,259
Net income - - - 76 - - - 76
------- ------ ------- -------- -------- ------- ------- -------
Balance, November 30, 1997 10,621 53 16,112 (11,936) (7,675) ( 24) - (3,470)
------- ------ ------- -------- -------- ------- ------- -------
Amortization of unearned
compensation - - - - - 24 - 24
Net change in gaming division
intercompany account - - 638 - - - - 638
Change in market value of marketable
securities, net - - - - - - 3,750 3,750
Net Loss - - - (3,462) - - - (3,462)
------- ------ ------- -------- -------- ------- ------- -------
Balance, February 28, 1998
(unaudited) 10,621 $ 53 $16,750 $(15,398) $(7,675) $ - $ 3,750 $(2,520)
======= ====== ======= ======== ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(PAGE 1 OF 2)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
November 30, February 28,
----------- -----------
1995 1996 1997 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,408) $ (1,795) $ 76 $ (3,462)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision (benefit) for losses or impairments on
receivables and equity investments 5,765 (212) 96 203
Depreciation and amortization 832 853 1,045 296
Amortization of deferred charges 844 1,533 949 26
Undistributed equity in net (earnings) losses of affiliates (355) (1,003) 346 210
Deferred income taxes - - (10,500) 2,008
Minority interests (148) (163) (108) -
Gain on sale of hotel investments - - (1,245) -
Change in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (292) 313 (450) (1,264)
Trade accounts receivable - affiliates (796) 227 (999) 302
Inventories (10) (64) 736 60
Other assets and other receivables (982) (1,727) 1,027 (90)
Increase (decrease) in:
Accounts payable (667) (231) (249) (742)
Accrued expenses (202) (478) 5,889 (820)
Deferred compensation plan liability 600 565 1,766 145
Other liabilities (34) 56 181 63
-------- -------- --------- --------
Net cash provided (used) by operating activities 147 (2,126) (1,440) (3,065)
-------- -------- --------- --------
Cash flows from investing activities:
Sales of notes receivable - 7,200 - -
Purchases of property and equipment (168) (134) (1,470) (255)
Investments in and advances to affiliates (2,645) (50) (1,089) (537)
Cash and cash equivalents from consolidation of affiliate - - 8,830 -
Sales of or distributions from investments in affiliates 959 834 1,959 -
Project loans and advances (1,900) - (2,160) -
-------- -------- --------- --------
Net cash (used) provided by investing activities (3,754) 7,850 6,070 (792)
-------- -------- --------- --------
Cash flows from financing activities:
Receipts from notes receivable stock purchases - affiliates 7,756 2,011 - -
Increase (decrease) in due to affiliates (1,145) 408 (919) (1,201)
Borrowings 2,900 500 2,880 2,000
Payments of debt and capital lease obligations and
other deferred charges (577) (1,925) (1,843) (622)
Net change in gaming division intercompany account (5,595) (6,196) 2,259 638
-------- -------- --------- --------
Net cash provided (used) by financing activities 3,339 (5,202) 2,377 815
-------- -------- --------- --------
Net increase (decrease) in cash and cash equivalents (268) 522 7,007 (3,042)
Cash and cash equivalents at beginning of year 1,373 1,105 1,627 8,634
-------- -------- --------- --------
Cash and cash equivalents at end of year $ 1,105 $ 1,627 $ 8,634 $ 5,592
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(PAGE 2 OF 2)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
November 30, February 28,
------------ ------------
1995 1996 1997 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,626 $ 1,718 $ 1,438 $ 339
======= ======= ======== =======
Cash paid during the period for income taxes $ 96 $ 89 $ 40 $ 16
======= ======= ======== =======
Cash received during the period for income taxes $ 29 $ 36
======= ========
Supplemental Schedule of noncash investing and financing activities:
Common Stock Issued:
Notes receivable stock purchase-affiliates $ 3,000
=======
Investments in Affiliates:
Loan for purchase of interest in GAH-II, L.P. $ 3,750
Loan for investment in CHC Lease Partners 1,088
Operating partnership units received as payment of
interest 572
Operating partnership units received as payment of
notes receivable stock purchases - affiliates 388
-------
Total investments in affiliates $ 5,798
=======
Consolidation of affiliate:
Cash and cash equivalents $ 8,830
Non-cash assets 14,459
Liabilities (17,401)
--------
Net assets 5,888
Net assets distributed to Gencom Lessee, L.P. (2,944)
--------
Net assets consolidated $ 2,944
========
Other:
Capital leases and license agreements $ 166 $ 41
======= =======
Change in market value of marketable securities, net $ 3,750
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
CHC International, Inc.'s ("CHC") major operations consist of (i) the
hospitality division which manages, leases and invests in hotel and resort
properties and (ii) the gaming division which owns, manages and develops casino
properties. The financial statements of CHC - Hospitality Division (the
"Company") have been prepared pursuant to the Agreement and Plan of Merger by
and among Wyndham International, Inc. (formerly Patriot American Hospitality
Operating Company) ("Wyndham"), Patriot American Hospitality, Inc. ("PAH") and
CHC dated as of September 30, 1997 (the "Merger Agreement"). The Merger
Agreement contemplates, subject to appropriate approvals, (i) CHC's contribution
of its gaming division to a wholly-owned subsidiary ("Spinco"), (ii) CHC's
distribution of all of the common stock of Spinco to the stockholders of CHC pro
rata based on their ownership in CHC, (iii) CHC's retention of its hospitality
business and (iv) CHC merging into Wyndham subsequent to the distribution of
Spinco. The foregoing transactions will be consummated at closing of the Merger
Agreement (the "Closing").
The financial statements have been prepared as if the Company has operated as an
independent, stand alone entity for all periods presented and give no effect to
the net changes of assets and liabilities contemplated by the Merger Agreement.
Such financial statements have been prepared using the historical basis of
accounting and include all of the assets, liabilities, revenues and expenses
previously included in CHC's consolidated financial statements prior to the
transactions contemplated by the Merger Agreement, except for all the assets,
liabilities (including contingent liabilities), revenues and expenses of the
gaming division of CHC and its subsidiaries. Consequently, these financial
statements include certain balances for goodwill and other assets and
liabilities related to the Company that were previously included in CHC's
consolidated financial statements including (i) the allocation of certain fixed
assets and related depreciation expense, (ii) notes receivable and borrowings
and related interest income and expense and (iii) other liabilities and related
expenses. In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 55 ("SAB 55"), the Company's financial statements exclude certain
corporate expenses incurred by CHC on the gaming division's behalf. All
significant intercompany balances and transactions have been eliminated.
Investments in less than majority-owned non-gaming businesses, in which a
significant equity ownership interest is held, are accounted for on the equity
method.
F-99
<PAGE>
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Summary of Significant Accounting Policies
- ------------------------------------------
These financial statements have been prepared in accordance with generally
accepted accounting principles. Significant accounting policies are summarized
below. Certain amounts in the financial statements and notes thereto have been
reclassified for comparative purposes.
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
- -------------------
Hotel room and food and beverage revenues and expenses from leased hotel
operations are included in the statements of operations during the lease term.
Revenues from rooms and food and beverage sales are recognized at the time the
related service is performed.
Revenues from management service fees for management of hotels are based upon
contracted terms and are recognized when the services are performed. Included in
management service fees - affiliates is a $2,000 termination fee received in
connection with the termination of the Company's management agreement with an
affiliated hotel during the year ended November 30, 1997.
Reimbursed Operating Expenses
- -----------------------------
The Company is fully reimbursed by certain managed hotels for salaries and
related costs for hotel personnel employed by the Company in accordance with
management contract terms and the administration of services consisting
primarily of sales, marketing and reservations. These costs amounted to $47,324,
$50,237 and $50,644 for the years ended November 30, 1995, 1996, and 1997,
respectively. All such costs and related reimbursements have been netted in the
statements of operations, with reimbursable amounts and accrued salaries and
related costs reflected as trade accounts receivable and accrued expenses,
respectively, in the balance sheets.
During the year ended November 30, 1995 the Company was reimbursed for $1,400 of
costs incurred in conjunction with an unconsummated transaction previously
expensed in the statements of operations during the period inception (February
3, 1994) to November 30, 1994.
F-100
<PAGE>
Transaction and Other Costs
- ---------------------------
The Company's costs in the amount of $9,073 incurred as a result of the
transactions contemplated by the Merger Agreement including investment banking,
legal, accounting and employee severance have been expensed in the statement of
operations during the year ended November 30, 1997 (See Note 14).
Stock Based Compensation
- ------------------------
The Company, during fiscal 1997, adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation" which
establishes a fair value based method of accounting for stock based compensation
plans, the effect of which can either be disclosed or recorded. The Company has
chosen to retain its intrinsic value method of accounting for stock based
compensation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include short-term investments with original purchase
maturities of 90 days or less.
Trade Accounts Receivable and Trade Accounts Receivable - Affiliates
- --------------------------------------------------------------------
Trade accounts receivable are from non-affiliated hotels under management and
lease, and hotel customers. Trade accounts receivable - affiliates are
receivables from hotel or other entities in which the Company, its stockholders
or officers have an investment interest. The Company provides an allowance for
doubtful accounts based upon a periodic review of outstanding receivables and
evaluation of aggregate collectibility.
Inventories
- -----------
Inventories, consisting of food, beverages, china, linens, silverware and
glassware, are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization are
provided on a straight-line basis over estimated useful lives of the assets.
Useful lives range from three to five years. Expenditures for repairs and
maintenance are charged to expenses as incurred. Expenditures for major renewals
and betterments, which significantly extend the useful lives of existing
equipment, are capitalized and depreciated.
Equipment held under capital leases is amortized over the lesser of useful life
or lease term.
F-101
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Investments in and Advances to Affiliates
- -----------------------------------------
Investments in and advances to affiliates include units of limited partnership
interest ("OP Units") in the Patriot American Hospitality Partnership, L.P.
("Patriot REIT Partnership"). The OP Units are subject to redemption rights
which became exercisable, subject to certain restrictions, on October 2, 1996.
The redemption rights require the Patriot REIT Partnership to redeem each OP
Unit for cash equal to the value of a share of PAH common stock or, at PAH's
election, for one share of PAH common stock. The OP Units are stated at cost
which is based upon the fair market value of PAH common stock at the date of
issue with an appropriate discount for restrictions imposed on the OP Units.
Deferred Charges
- ----------------
Costs incurred in connection with the Company's term loan are recorded as
deferred charges and are amortized over the term of the loan. Trademark and
organization costs are amortized on a straight line basis over 40 and 5 years,
respectively.
Deferred charges consist of the following at November 30,:
1996 1997
---- ----
Deferred debt costs $ 3,197 $ 3,097
Trademark and organization costs 1,110 1,114
------- -------
4,307 4,211
Accumulated amortization (2,698) (3,278)
------- -------
Deferred charges, net $ 1,609 $ 933
======= =======
Intangibles
- -----------
Goodwill is amortized on a straight line basis over 30 to 40 years. Management
contract intangibles are amortized on a straight-line basis over 9 to 25 years.
The Company periodically assesses the future benefit associated with management
contract intangibles through a review on a contract by contract basis of
estimated undiscounted future operating cash flow. Any impairment of intangible
assets is charged to operations and reflected as a reduction of the related
intangible asset account.
Income Taxes
- ------------
Income taxes are provided based on the liability method of accounting pursuant
to SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are
recorded to reflect tax consequences on future years' differences between tax
bases of assets and liabilities and their financial reporting amounts at each
year-end as if the Company were a stand alone taxpayer.
F-102
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interim Unaudited Financial Information
- ---------------------------------------
The financial statements for the three months ended February 28, 1998 are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended February 28,
1998 are not necessarily indicative of the results that may be expected for a
fully year.
Concentration of Credit Risk
- ----------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk exist principally in cash balances with banks in excess of Federal
Deposit Insurance Corporation ("FDIC") insured limits, receivable balances and
investments in OP Units.
The Company places its cash with high quality financial institutions; however,
at November 30, 1997, the Company has cash balances with financial institutions
in excess of FDIC insured limits. Management believes the credit risk related to
these deposits is minimal.
The Company provides its services to the hotel industry. Hotel management
services are contracted for terms normally ranging from 1 to 20 years, and in
limited instances on a month-to-month basis. To reduce credit risk, the Company,
through its management of such hotels, monitors the hotels' financial condition.
Concentrations of credit risk with respect to accounts receivable from hotel
customers are limited due to the large number of customers and their dispersion
across many hotels and geographies. The Company does not generally require
collateral from customers. Five management contracts accounted for 26%, 26% and
41% of management service fees revenues for the years ended November 30, 1995,
1996 and 1997, respectively.
The Company has a note receivable from the Rhode Island Convention Center
Authority in conjunction with agreements to develop and operate a hotel. To
reduce credit risk with respect to the note receivable from the Rhode Island
Convention Center Authority, the Company, through its management of the
property, which is the primary source of repayment, monitors the hotel's
financial condition, and management believes the credit risk related to the
receivable is minimal.
The Company has notes receivable from certain stockholders for the purchase of
the Company's common stock and notes receivable from certain limited
partnerships owned by all stockholders which have invested in a hotel and
adjacent retail complex. Management believes the concentration of credit risk
with respect to the notes from certain stockholders (see Note 13) and certain
affiliated limited partnerships is minimal (see Note 14).
The estimated fair value of financial instruments have been determined by the
Company using available market and effective interest rate information for such
instruments. The carrying amounts of such financial instruments, except the OP
Units, approximate their fair value. Included in investments and advances to
affiliates in the balance sheet are OP Units with a book value of $3,638. The
recorded value of the OP Units is estimated based upon the quoted market
F-103
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
price of PAH common stock less an appropriate discount for the restrictions
imposed on the OP Units. The estimated fair value of the OP Units at November
30, 1997 is $10,000.
Liquidity
- ---------
The Company has short-term liquidity and capital resource requirements which
will need to be met prior to Closing of the Merger Agreement, including income
tax obligations resulting from the planned distribution of the common stock of
Spinco to the stockholders of the Company, debt service requirements and other
transaction related costs. Management expects these liquidity and capital
resource requirements to be funded by stockholders capital contributions and OP
unit sales. Management believes that sufficient sources of capital will be
available to fund these short-term liquidity and capital resource requirements.
NOTE 2 - RECEIVABLES
Receivables consist of a $1,900 note receivable from the Rhode Island Convention
Center Authority with an interest rate equal to the lesser of manager share of
net cash flow as defined or 11% (effective interest rate of 1.0% and 4.5% as of
November 30, 1996 and 1997, respectively) payable annually, interest only, with
principal due on earlier of December 30, 2024 or the date the management
agreement is terminated.
The Company owned nonrecourse subordinated notes in the amount of $12,500
("Notes Receivable Crystal Palace") secured by a leasehold interest in the
Crystal Palace Hotel. The Company originally recorded a discount of $1,000 on
the Notes Receivable Crystal Palace. On December 29, 1995, The Company sold its
interest in the Notes Receivable Crystal Palace to the issuer for $7,200, plus
accrued interest. The Company recorded a loss on the impairment in value for the
Notes Receivable Crystal Palace of $4,431 during the year ended November 30,
1995.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at November 30,:
1996 1997
---- ----
Furniture, fixtures and other equipment $ 615 $ 1,893
Leasehold improvements 198 132
Equipment under capital leases 384 379
------ -------
1,197 2,404
Accumulated depreciation and amortization (528) (686)
------ -------
Property and equipment, net $ 669 $ 1,718
====== =======
Depreciation expense was $82, $129 and $422 for the years ended November 30,
1995, 1996 and 1997, respectively.
F-104
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - LEASES
Capital Leases
- --------------
The Company leases certain equipment under capital leases. Minimum rentals under
such capital leases are as follows at November 30, 1997:
Year ending November 30,:
1998 $ 68
1999 62
2000 55
2001 9
----
Total minimum lease payments 194
Less amount representing interest 32
----
Net obligations 162
Less current portion 52
----
Long-term portion $110
====
The long-term portion of capital lease obligations is included in long-term
debt.
Operating Leases
- ----------------
The Company leases office and warehouse space under operating lease agreements.
The Company also leases office space from a partnership owned 58% by certain of
its officers under an operating lease whose term runs through April 30, 2004
(see Note 14).
The Company entered into an agreement to lease and operate the Washington Duke
Inn, located in Durham, North Carolina. The initial lease term, which was
through July 31, 1997 includes payment of $95 on or before August 1, 1996 and a
monthly rent of $134 plus 6% of gross revenues through July 31, 1996; $134 plus
7% of gross revenues through July 31, 1997; and $155 plus 7% of gross revenues
from August 1, 1997 through July 31, 1998. Effective January 1, 1997, the
Company entered into a new agreement to lease and operate the Washington Duke
Inn which supersedes the previous agreement. The term, which is through December
31, 2002 includes rent for each year of 22% of gross revenues up to $10,000,
adjusted annually, plus 30% of gross revenues in excess of $10,000, adjusted
annually, provided in any event a minimum rent of $1,800. Rent is payable
monthly. In addition, the Company purchased $1,505 of furniture, fixtures and
equipment in exchange for a promissory note and is required to fund a reserve
account for furniture, fixtures and equipment expenditures in an amount not less
than 3% of gross revenues in 1997 and 4% of gross revenues thereafter (see Note
9).
F-105
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Future minimum lease payments, for all operating leases with non-cancellable
terms in excess of one year are as follows at November 30, 1997:
Year ending November 30,:
------------------------
1998 $ 2,199
1999 2,180
2000 2,164
2001 2,164
2002 2,164
Thereafter 665
-------
Total minimum lease payments $11,536
=======
Rental expense amounted to $2,143, $2,437 and $3,027 for the years ended
November 30, 1995, 1996 and 1997, respectively.
NOTE 5 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
On October 2, 1995, CHC Lease Partners was formed as the initial lessee to lease
and operate certain hotels owned by the Patriot REIT Partnership, a
majority-owned subsidiary of PAH. CHC Lease Partners, a general partnership, at
formation was owned jointly by CHC REIT Lessee Corp. ("CHCR"), a wholly-owned
subsidiary of the Company and by Gencom Lessee, L.P. ("Gencom Lessee"), an
affiliate of a principal of the Gencom group of companies (which included GAH -
II, L.P. ("GAH") noted below). At inception, each partner contributed to CHC
Lease Partners cash of $2,000 and OP Units which, after an appropriate discount
from the fair market value of PAH common stock, were valued at $2,550.
The Company, also on October 2, 1995, purchased a 50% ownership interest in GAH,
a Houston, Texas based hotel management business, from Patriot American
Hospitality, L.P. for a nonrecourse note in the amount of $3,750 (See Note 9)
and also contributed $150 to GAH.
CHC Lease Partners began operating twenty hotels on October 2, 1995 and during
1996 and 1997, entered into substantially similar operating leases for a total
of five additional hotels acquired by the Patriot REIT Partnership. The hotels
leased by the Patriot REIT Partnership to CHC Lease Partners under separate
participating lease agreements contain cross-default provisions. These leases,
requiring CHC Lease Partners to maintain minimum levels of net worth and working
capital, have terms ranging from ten to twelve years and require payment of the
greater of (1) minimum base rent or (2) participating rent.
CHC Lease Partners then entered into separate management agreements with a
wholly-owned subsidiary of the Company or GAH, to manage the leased hotels.
Management fees earned
F-106
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
under such agreements are subordinate to CHC Lease Partners' obligations to the
Patriot REIT Partnership under the participating lease agreements.
On September 30, 1997, CHC Lease Partners distributed eight participating lease
agreements to Gencom Lessee and declared distributions of its working capital
and OP Units equally to CHCR and Gencom Lessee. Accordingly, the Company became
the sole owner of the remaining participating lease agreements, assets and
liabilities and continues to do business as CHC Lease Partners. The Company
accounted for CHC Lease Partners using the equity method through August 31, 1997
and began consolidating CHC Lease Partners on September 1, 1997.
Simultaneous with the distribution of the eight participating lease agreements,
the requirement to maintain certain minimum levels of net worth was amended. The
amendment also removed the requirement to maintain certain special collateral,
allowing CHC Lease Partners to distribute to its partners the OP Units
originally used to capitalize CHC Lease Partners.
Summarized balance sheet and statement of operations information for CHC Lease
Partners, accounted for using the equity method, at November 30, 1996 and the
period from inception (October 2, 1995) to November 30, 1995, the year ended
November 30, 1996 and the nine months ended August 31, 1997 are as follows:
Summarized balance sheet information
- ------------------------------------
November 30,
------------
1996
----
Current assets $ 25,245
Investments 5,100
Other assets 391
--------
Total assets $ 30,736
========
Current liabilities $ 19,376
Long-term liabilities 2,369
--------
Total liabilities 21,745
--------
Net assets $ 8,991
========
F-107
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Summarized statement of operations information
- ----------------------------------------------
November 30, August 31,
------------ ----------
1995 1996 1997
---- ---- ----
Revenues $ 22,807 $156,086 $135,758
======== ======== ========
Income before lessee income (expense) $ 957 $ 2,921 $ 477
======== ======== ========
Lessee income (expense) $ (639) $ (2,258) $ (1,547)
======== ======== ========
Net income (loss) $ 318 $ 663 $ (1,070)
======== ======== ========
The Company received cash distributions from CHC Lease Partners of $545 and
$1,500 for the year ended November 30, 1996 and nine months ended August 31,
1997, respectively, and made cash contributions to CHC Lease Partners of $250
for the nine months ended August 31, 1997.
CHC Lease Partners at November 30, 1997 has future lease commitments to the
Patriot REIT Partnership under participating lease agreements through the year
2008. Minimum future rental payments under these non-cancellable operating
leases are as follows:
Year Ending November 30,
------------------------
1998 $ 27,070
1999 27,273
2000 27,478
2001 27,684
2002 27,892
Thereafter 113,557
--------
$250,954
========
Summarized balance sheet and statement of operations information for GAH, which
is accounted for using the equity method, at December 31, 1996 and the period
date of acquisition (October 2, 1995) to December 31, 1995 and the year ended
December 31, 1996 is as follows:
Summarized balance sheet information
- ------------------------------------
December 31, 1996
-----------------
Current assets $1,983
Other assets 1,077
------
Total assets $3,060
======
Current liabilities $1,586
Long-term liabilities 107
------
Total liabilities 1,693
------
Net assets $1,367
======
F-108
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Summarized statement of operations information
- ----------------------------------------------
December 31,
------------
1995 1996
---- ----
Revenues $1,149 $7,284
====== ======
Income (loss) before minority interest $ (30) $1,211
====== ======
Net income (loss) $ (33) $1,194
====== ======
The cost of the Company's initial investment in excess of its interest in the
net assets has been assigned to management contracts and goodwill, which are
being amortized on a straight-line basis over 12 and 30 years, respectively. The
unamortized excess of the Company's investment over the Company's interest in
GAH is $3,425 and $3,187 at November 30, 1996 and 1997, respectively.
During the year ended November 30, 1997, the Company recognized, included in
other income (expense) in the statement of operations, $1,245 of gains
previously deferred, related to sales of two hotel investments to the Patriot
REIT Partnership.
The Company's remaining investments in and advances to affiliates in the
aggregate are not significant.
F-109
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 - INTANGIBLES
Intangibles consist of the following at November 30, :
1996 1997
---- ----
Management contract intangibles $ 4,226 $ 4,226
Goodwill 5,919 5,919
------- -------
10,145 10,145
Accumulated amortization (4,098) (4,673)
------- -------
Intangibles, net $ 6,047 $ 5,472
======= =======
Amortization expense, net was $638, $669 and $566 for the years ended November
30, 1995, 1996 and 1997, respectively. The Company has included in amortization
the write-off of $35 and $83 of management contract intangibles related to
terminated contracts for the years ended November 30, 1995 and 1996,
respectively.
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Company maintains a non-qualified deferred compensation plan which covers
most management employees and provides two levels of participation (i) for
pre-1992 participants an annual retirement benefit, after twenty-five years of
service, equal to 50% of the participant's average last five years pay, reduced
by social security benefits and further reduced for years of service less than
twenty-five, on a pro rata basis and (ii) for post-1992 participants an annual
contribution equal to 5% of the participant's annual pay. Benefits, except for
the benefits for participants severed in conjunction with the Merger Agreement
which vested immediately, are vested on an eleven year cliff basis and earn 7%
annually on any unfunded amounts. Assets designated to cover plan liabilities
include cash, accounts receivable, life insurance policies on the lives of
certain participants, short-term investments and a loan to an officer. While it
is the intention of management to utilize the assets designated for the deferred
compensation plan to pay plan benefits, such assets have not been placed in
trust and are not otherwise restricted and accordingly, they are available for
general corporate purposes.
Under the terms of the life insurance policies, the Company receives the cash
surrender value if the policies are terminated or all benefits due upon the
death of the insured. In addition, the Company can borrow against the available
net cash surrender value of the policies.
F-110
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of the assets designated for the deferred
compensation plan which are included in other assets at November 30,:
1996 1997
---- ----
Gross cash surrender value of insurance policies $ 1,225 $ 1,299
Less policy loans (1,157) (1,242)
------- -------
Cash surrender value of insurance policies, net 68 57
Accounts receivable 82 82
Cash and cash equivalents 614 614
Loan to officer 1,077 1,147
------- -------
Total assets designated for the deferred
compensation plan $ 1,841 $ 1,900
======= =======
Deferred compensation plan costs, net of forfeitures, included in the combined
statements of operations for the years ended November 30, 1995, 1996 and 1997
were approximately $569, $374 and $1,357, respectively. The earnings rate for
the deferred compensation plan benefit liability was 7% for the years ended
November 30, 1995, 1996 and 1997.
Deferred compensation plan costs, net of forfeitures, for the years ended
November 30, 1995, 1996 and 1997, include the following components:
1995 1996 1997
---- ---- ----
Service cost $381 $142 $1,005
Interest cost on projected benefit obligation 188 232 352
---- ---- ------
Deferred compensation plan costs $569 $374 $1,357
==== ==== ======
The following table details the status of the plan at November 30:
1996 1997
---- ----
Actuarial present value of benefit obligations:
Vested benefits $ 5,016 $ 7,844
Non-vested benefits 1,086 24
------- -------
Projected benefit obligations $ 6,102 $ 7,868
======= =======
Plan assets less than projected benefit obligations $(6,102) $(7,868)
======= =======
On January 1, 1998, the Company adopted a new non-qualified defined contribution
secured savings plan ("Secured Savings Plan") for management employees, which
provides for contributions equal to a certain percentage of the participants
pay. Benefits under the deferred compensation plan of (i) $5,374 will be paid to
participants or transferred to the Secured Savings Plan and funded by November
30, 1998 and (ii) $2,494 funded over a three year period.
F-111
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 - INCOME TAXES
The Company files income tax returns as part of CHC's consolidated group. Income
taxes in the accompanying financial statements are computed as if the Company
had been a separate taxable entity.
The Company's provision (benefit) for income taxes attributable to continuing
operations is comprised of the following for the years ended November 30,:
1995 1996 1997
---- ---- ----
Current
- -------
State $ 81 $ 52 $ (3)
Foreign 50 40 99
---- ---- --------
Total current tax expense 131 92 96
Deferred
- --------
Deferred tax benefit - - (10,500)
---- ---- --------
Total provision (benefit) for income taxes $131 $ 92 $(10,404)
==== ==== ========
The Company has accumulated tax net operating loss carryforwards of
approximately $7,400 as of November 30, 1997. Approximately $1,100, $4,000 and
$2,300 of the net operating loss carryforwards will expire in the years 2009,
2010 and 2011, respectively. The tax net operating loss carryforward is
generally available to offset future taxable earnings.
The difference between the taxes provided for continuing operations at the U.S.
federal statutory rate and the Company's actual tax provision is reconciled
below for the years ended November 30,:
1995 1996 1997
---- ---- ----
Taxes provided at statutory rate $ - $ - $ -
Reduction in valuation allowance - - (10,500)
State tax expense (benefit), net of federal benefit 81 52 (3)
Foreign tax expense 50 40 99
---- ---- --------
Total provision (benefit) for income taxes $131 $ 92 $(10,404)
==== ==== ========
Pursuant to SFAS No. 109, the Company recognized $10,500 of certain deferred tax
assets during the year ended November 30, 1997, since it has been determined
that net operating and capital loss carryforwards, as well as the reversal of
other deferred tax assets will be utilized to offset future taxable income,
primarily resulting from the Spinco transaction described in Note 1. The
residual deferred tax assets are fully reserved at November 30, 1997. The
ultimate realization of the remaining deferred tax assets will be carried
forward to future years for possible utilization. Management believes that the
valuation allowance at November 30, 1997 is appropriate, given the probability
of the future reversal of these taxable temporary differences.
F-112
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The approximate effect of the Company's temporary differences and carryforwards
that give rise to deferred tax balances at November 30, were as follows:
1995 1996 1997
---- ---- ----
Net operating loss carryforwards $ - $ - $ 2,957
Capital loss carryforwards - - 2,069
Deferred compensation plan liability - - 2,480
Transaction costs - - 2,286
Other, net - - (406)
------- ------- -------
Current deferred tax asset $ $ - $ 9,386
======= ======= =======
1995 1996 1997
---- ---- ----
Net operating loss carryforwards $ 224 $ 1,688 $ -
Capital loss carryforwards - - -
Deferred compensation plan liability 2,106 2,330 1,114
Bad debt reserve 559 800 658
Notes receivable reserve 1,772 - -
Other, net 1,275 878 1,428
------- ------- -------
5,936 5,696 3,200
Valuation allowance (5,936) (5,696) (2,086)
------- ------- -------
Noncurrent deferred tax asset $ - $ - $ 1,114
======= ======= =======
F-113
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - LONG-TERM DEBT
Long-term debt is comprised of the following as of November 30,:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Variable-rate term loan (effective interest rate of 10.0% and 8.375% at November
30, 1996 and 1997, respectively) interest payable quarterly and principal
payable in quarterly installments of 2.5% of the principal amount outstanding
commencing June 30, 1997 with balance due June 30, 1998 $11,500 $10,925
Variable-rate loan (effective interest rate of 10.25% and 10.50% at November 30,
1996 and 1997, respectively) interest payable monthly and principal payable in
annual installments of $190 with balance due December 30, 1997 1,710 1,520
7% note payable - interest and principal payable monthly with balance due
December 31, 2002 - 1,350
Variable-rate unsecured demand loans (effective interest rate of 9.50% at November
30, 1997) interest payable monthly. - 500
8% note payable - interest payable annually and principal payable in annual
installments of $120 through October 10, 1999 360 360
Capital lease obligations (see Note 4) 208 162
-------- --------
Total debt 13,778 14,817
Current portion (11,857) (13,457)
-------- --------
Total long-term debt $ 1,921 $ 1,360
======== ========
</TABLE>
Aggregate principal payments for the long-term debt including capital lease
obligations are as follows at November 30, 1997:
Year ending November 30:
-----------------------
1998 $13,457
1999 408
2000 304
2001 281
2002 291
Thereafter 76
-------
Total $14,817
=======
F-114
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's variable-rate term loan (the "Term Loan"), as amended, with
$11,500 and $10,925 outstanding as of November 30, 1996 and 1997, respectively,
(i) bears interest at the bank's base lending rate plus 2.0% or, at the
Company's option, London Interbank Market Rate (LIBOR) plus 4 1/2%, (ii) is
secured by substantially all of the Company's assets and (iii) initially matured
February 28, 1997. On February 28, 1997, the Term Loan was further amended
whereby the Term Loan (i) bears interest at the bank's lending rate plus 1.5%
or, at the Company's option, LIBOR plus 2.5% and (ii) matures in quarterly
installments of 2.5% of the principal amount outstanding commencing June 30,
1997 with the balance due June 30, 1998. The Company has also agreed to pay the
lender a fee equal to 1.5% of the fair market value of the Company, but in no
event less than $2,500 or more than $6,000. The fee is payable at the lender's
option at any time during the ten-year period commencing February 28, 1997.
Interest expense for the years ended November 30, 1995, 1996 and 1997 include
$500, $1,200 and $435, respectively, related to the lender fee.
The Company's variable-rate loan agreement with a commercial bank with $1,710
and $1,520 outstanding as of November 30, 1996 and 1997, respectively, bears
interest at the bank prime rate plus 2% per annum payable monthly. Principal is
payable in annual installments of $190 in December 1995 and 1996, with the
balance due in December 1997. The balance due December 1997 has been extended to
March 30, 1998.
The Company's unsecured $750 line of credit with a commercial bank guaranteed by
two shareholders of CHC with $500 outstanding as of November 30, 1997, bears
interest at the bank rate plus 1% per annum payable monthly. Principal is
payable on demand.
In January 1997, in connection with the agreement to lease and operate the
Washington Duke Inn, the Company purchased $1,505 of furniture, fixtures and
equipment in exchange for a promissory note with $1,350 outstanding as of
November 30, 1997. The loan bears interest at 7% per annum. Principal and
interest are payable monthly with balance due December 31, 2002. The loan is
secured by the furniture, fixtures and equipment and limits the sale or
encumbrance of the furniture, fixtures and equipment. In connection with the
expiration of the lease, the Company has the right to resell the furniture,
fixtures and equipment to the original seller and the original seller has the
right to repurchase the furniture, fixtures and equipment for $1,505.
F-115
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Related Party Borrowings
- ------------------------
In October 1995, the Company borrowed 53,314 OP Units from certain shareholders.
As permitted by the securities loan agreement, the OP Units, valued after an
appropriate discount at $1,088, were contributed by the Company to CHC Lease
Partners (see Note 5). The Company must return OP Units to the shareholders on
demand and pay to the shareholders interest equal to distributions received by
the Company from the OP Units.
In October 1995, in connection with the Company's purchase of a 50% interest in
GAH (see Note 5), the Company entered into a nonrecourse loan agreement with the
seller in the amount of $3,750. The loan bears interest at the lesser of 9.0%
and the maximum non-usurious amount permissible. Interest and principal are
payable quarterly commencing January 25, 1996 from 25% of GAH net cash flow, as
defined, continuing until the earlier of October 2, 2000 or the date all amounts
outstanding under the nonrecourse term loan are paid in full. As of both
November 30, 1996 and 1997, $3,750 is outstanding under the loan. In connection
with the Merger Agreement all amounts outstanding under the nonrecourse term
loan are due at Closing of the Merger Agreement and are reflected as due to
officers and affiliates - current as of November 30, 1997 in the balance sheet.
In August 1997, CHC established a $750 line of credit on an unsecured basis with
Carnival Corporation. Advances under the line of credit bear interest at prime
rate plus 1% payable monthly. Principal is payable at maturity August 27, 1998.
As of November 30, 1997 no amounts are outstanding under the line of credit.
In September 1997, CHC established a $7,000 line of credit on an unsecured basis
with Patriot American Hospitality Operating Partnership, L.P. in conjunction
with the Merger Agreement. Advances under the line of credit bear interest at
base rate loans rate as defined plus 1% payable monthly. Principal is payable at
maturity, the Closing of the Merger Agreement. As of November 30, 1997 no
amounts are outstanding under the line of credit.
Related party borrowings are included in due to affiliates and officers in the
balance sheets.
The Company's financing agreements contain customary financial covenants.
NOTE 11 - MINORITY INTEREST
The Company owns a 75% interest in the TCC-Registry Joint Venture (the "Registry
Venture"). The Company's financial statements include 100% of the assets,
liabilities and operations of the Registry Venture. The effects of the minority
interests have been reflected in the statements of operations. Minority
interests in the Registry Venture of $108 as of November 30, 1996 are included
in other liabilities in the balance sheets. At November 30, 1997, accumulated
losses have eliminated all minority interests.
F-116
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of its business, the Company is named as defendant in
legal proceedings resulting from incidents taking place at hotels it manages, or
in which it has an ownership interest. The Company maintains comprehensive
liability insurance and also requires hotel owners to maintain adequate
insurance coverage. Management believes such coverage to be of a nature and
amount sufficient to ensure that the Company is adequately protected from any
material financial loss as a result of such claims.
The Company owns a 30% interest in Plaza Associates Limited Partnership ("Plaza
Associates") which owns and operates the Holiday Inn - Dayton Mall in Dayton,
Ohio. The Company has joint and severally guaranteed partial payment of two
Plaza Associates notes payable. The joint and several guaranty is mitigated by a
contribution agreement among Plaza Associates partners which reduced the
Company's obligation to 30% of the guaranty. The total maximum potential
liability to the Company under the guaranty after giving effect to the
contribution agreement is as follows: through December 31, 1999 up to $375;
January 1, 2000 to December 31, 2002 up to $225; January 1, 2003 to March 1,
2004 up to $150 and zero thereafter. In addition, The Company has joint and
severally guaranteed payment of certain other Plaza Associates obligations, the
maximum potential liability to the Company is $733.
NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIT)
As a result of the basis of presentation as outlined in Note 1, including the
allocation of certain assets and liabilities to the gaming division, the
Company's equity (deficit) includes balances arising from the net change in the
gaming division's intercompany account with the Company.
In June 1994, the Company granted to an executive officer 155,000 shares of
common stock valued at $3.75 per share, subject to forfeiture if employment is
terminated prior to vesting. The stock grant originally scheduled to vest over
five years has been accelerated and now vests 50% of the shares of common stock
in January 1997 and 50% of the shares of common stock in January 1998.
Compensation expense for the stock grant was $116, $108 and $275 for the years
ended November 30, 1995, 1996 and 1997, respectively.
Pursuant to the terms of a stock purchase agreement dated November 30, 1994
between the Company and Carnival Corporation and certain shareholders, the
Company agreed to sell an aggregate of 4,000,000 shares of common stock at $6.25
per share. The aggregate purchase price of $25,000 was satisfied by the
conversion of a $10,000 Carnival Corporation revolving credit loan, $9,350 in
installment notes payable and the balance in cash. The notes bear interest at
7.1% payable annually with principal installments due annually of $2,337. The
installments due on November 30, 1995 and 1996 were paid and the installments
due on November 30, 1997 and 1998 plus accrued interest have been extended so
all obligations under the notes are payable
F-117
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
in full fifteen months after the Closing of the Merger Agreement. The notes are
secured by a pledge of all purchased shares of common stock.
Pursuant to the terms of a stock purchase agreement dated November 29, 1996
between the Company and CHC Investor Partners, L.P. ("CHC Investor"), a Texas
limited partnership, whose general partner, is controlled by a principal owner
of the Gencom group of companies, the Company sold 265,513 shares of common
stock at $11.30 per share and granted non-qualified stock options to purchase
61,130 shares of common stock at a per share exercise price of $11.30. The
aggregate purchase price of $3,000 was satisfied with a note. The note bears
interest at 7.1% payable annually and was originally due in installments of $500
on November 29, 1997 and $2,500 on November 29, 1998. The installments due on
November 29, 1997 and 1998 have been extended so obligations under the note,
plus accrued interest, are payable $1,500 at the Closing of the Merger
Agreement, but in no event later than November 30, 1998, and $1,500 on November
30, 1998.
The Company has an Employee Stock Option Plan (the "Plan") which provides for
the grant to employees of both incentive stock options (within the meaning of
Section 422 of the Internal Revenue Code) and non-statutory stock options to
eligible employees (including officers and directors) and non-employee
directors. A total of 1,700,000 shares of common stock has been reserved for
issuance under the Plan.
The table below summarizes the status of the Company's Plan as of and for the
years ended November 30, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ --------------------------- --------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
- ------- ------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 988,052 $ 6.25 988,052 $ 6.25 1,221,805 $ 7.24
Granted - - 264,317 11.45 231,932 11.30
Returned - - (30,564) 11.50 - -
------- --------- ---------
Outstanding at end of year 988,052 6.25 1,221,805 7.24 1,453,737 7.89
======= ========= =========
Options excercisable at
year-end 197,610 419,672 646,996
Weighted-average fair value of
options granted during the
year $ - $ 5.90 $ 5.82
</TABLE>
F-118
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about options outstanding at November
30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXCERCISABLE
---------------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXCERCISABLE EXERCISE PRICE
- -------------------- ------------- -------------------- -------------------- -------------- --------------------
<S> <C> <C> <C> <C> <C>
$6.25 988,052 7.0 years $ 6.25 592,831 $ 6.25
$11.30 - 11.50 465,685 8.9 11.37 54,165 11.36
------------- --------------
1,453,737 7.6 7.89 646,996 6.68
============= ==============
</TABLE>
All options issued were granted at the fair market value of CHC's common stock
on the date of grant, have a term of ten years, and generally become exercisable
with respect to 20% of the covered shares commencing one year after grant, and
are generally exercisable with respect to an additional 20% of the covered
shares after each additional year until fully exercisable.
The fair value of each option grant was estimated on the date of the grant using
the minimum value method with the following assumptions for the years ended
November 30, 1995, 1996 and 1997; risk-free interest rate of 7.5%, no dividend
yield, expected lives of 10 years and no volatility.
The Company applies Accounting Principals Board No. 25 and related
interpretations in accounting for the Plan. Accordingly, no compensation cost
has been recognized. Had compensation cost for the Company's Plan been
determined based upon the fair value at the grant dates for awards under the
Plan consistent with the method of SFAS No. 123, the Company's pro forma net
loss would have been $5,044, $2,575 and $462 for the years ended November 30,
1995, 1996 and 1997, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS AND ALLOCATIONS
The Company provides services and pays certain costs which are reimbursable
under management agreements with hotels, which are affiliated with the Company
by virtue of common ownership. Total fees earned from affiliated hotels for the
years ended November 30, 1995, 1996 and 1997 were $5,212, $4,284 and $5,703,
respectively. Total fees and reimbursable expenses due from affiliated hotels
were $1,108 and $1,244 at November 30, 1996 and 1997, respectively.
In March, 1994, CHC and Carnival Corporation entered into a 20 year Trademark
License Agreement providing for CHC's use of the "Carnival" trademark so that
CHC may conduct business as "Carnival Hotels and Casinos" (and the Company may
do business as "Carnival Hotels and Resorts"). Fees due under the agreement are
the greater of $100, or 1% of CHC's revenues, as
F-119
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
defined. The trademark license fees for the Company the years ended November 30,
1995, 1996 and 1997 were $115, $150 and $134, respectively.
Certain of the Company's officers hold a 58% interest in a partnership which
owns the office building in which the Company's executive offices are located.
Under this lease, rental expense for the years ended November 30, 1995, 1996 and
1997 were $401, $375 and $417, respectively.
The Company provides accounting services, at cost, to certain entities owned and
controlled by certain of its officers. The entities are obligated to reimburse
the Company for such services provided. The cost of such services were $175,
$145 and $155 for the years ended November 30, 1995, 1996 and 1997,
respectively.
The Company has an agreement with a principal owner of the Gencom group of
companies to equally share certain of the costs incurred as a result of the
transactions contemplated by the Merger Agreement. The portion of costs to be
shared by the principal owner of the Gencom group of companies is $1,427 as of
November 30, 1997.
Concurrent with the Merger Agreement, the Company also entered into a
Hospitality Advisory, Asset Management and Support Services Agreement with
Wyndham whereby Wyndman will provide certain hospitality advisory, asset
management and support services to the Company for base fees aggregating $350
per month plus 50% of the amount of gross management fees, leakage and other
income in excess of $350. The cost of such services were $1,466 during the year
ended November 30, 1997.
CHC has allocated a portion of its corporate expenses to the gaming division.
These expenses include management and corporate overhead; benefit
administration; risk management/insurance administration, and other support and
executive functions. Allocations and charges were based on either a direct cost
pass through or a percentage allocation for such services provided based on
factors such as revenues, management time, or headcount. Such allocations and
charges totaled $3,734, $3,720 and $4,451 for the years ended November 30, 1995,
1996 and 1997, respectively.
Management believes that the basis used for allocating corporate services is
reasonable and that the terms of these transactions would not materially differ
from those that would result from transactions among unrelated parties.
Pursuant to the terms of a stock purchase agreement dated November 30, 1994,
certain shareholders agreed to buy from Carnival Corporation at $6.25 per share,
2,610,000 shares of Company common stock. The aggregate purchase price of
$16,313 was paid in promissory notes due November 30, 1998 subject to certain
condition as defined in the stock purchase agreement. The notes bear interest at
6.0% payable at maturity. The stock purchase agreement provides
F-120
<PAGE>
CHC INTERNATIONAL, INC. - HOSPITALITY DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
certain shareholders a put option which requires Carnival Corporation to
repurchase at $6.25 per share plus a rate of return of 6.1% per annum, all of
the 2,610,000 shares of Company common stock, by November 30, 1998. The stock
purchase agreement also requires Carnival Corporation to reduce its ownership in
the Company's common stock (assuming exercise of the put option ) to less than
25% of the Company's outstanding common stock no later than November 30, 1998,
as defined in the stock purchase agreement (See Note 13).
Pursuant to the terms of a stock purchase agreement dated November 29, 1996, CHC
Investor agreed to buy from certain shareholders at $11.30 per share, 265,513
shares of Company common stock from certain shareholders for $3,000 in cash (See
Note 13).
In October 1997 the Company loaned $2,110 to a partnership owned by the
Company's shareholders, the proceeds of such loans were invested in a hotel and
adjacent retail complex located in Miami, Florida. The note, secured by an
interest in a limited partnership, bears interest at 5.6% with interest and
principal payable at maturity October 31, 1999.
The Company entered into borrowing arrangements with certain shareholders and
affiliates (See Note 9).
****************************
F-121
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Interstate Hotels Company:
We have audited the accompanying consolidated balance sheets of Interstate
Hotels Company (the Company) as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1996 and 1997, and the consolidated results of its
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ COOPERS & LYBRAND L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
February 11, 1998, except
for Note 21, as to which the
date is March 1, 1998,
and except for Note 3, as
to which the date is
March 30, 1998
F-122
<PAGE>
INTERSTATE HOTELS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 32,323 $ 31,988
Accounts receivable, net.................................. 21,556 40,827
Stock subscription receivable, net........................ 14,286 --
Deferred income taxes..................................... 1,649 2,104
Prepaid expenses and other assets......................... 11,961 13,837
-------- ----------
Total current assets.............................. 81,775 88,756
Restricted cash............................................. 15,995 3,823
Property and equipment, net................................. 709,151 1,153,911
Investments in hotel real estate............................ 5,605 41,297
Officers and employees notes receivable..................... 4,643 12,157
Intangible and other assets................................. 66,592 73,519
-------- ----------
Total assets................................. $883,761 $1,373,463
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade................................... 12,152 16,015
Accounts payable--health trust............................ 2,440 90
Accrued payroll and related benefits...................... 15,072 21,861
Other accrued liabilities................................. 23,926 40,730
Current portion of long-term debt......................... 11,767 53,001
-------- ----------
Total current liabilities......................... 65,357 131,697
Long-term debt.............................................. 396,044 747,123
Deferred income taxes....................................... 4,081 19,376
Other liabilities........................................... 1,213 1,715
-------- ----------
Total liabilities................................. 466,695 899,911
-------- ----------
Minority interests.......................................... 7,768 17,177
Commitments and contingencies............................... -- --
-------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000 shares authorized;
no shares outstanding.................................. -- --
Common stock, $.01 par value; 75,000 shares authorized;
35,425 shares issued and outstanding as of December 31,
1997................................................... 352 354
Paid-in capital........................................... 407,784 411,808
Retained earnings......................................... 1,432 45,018
Unearned compensation..................................... (270) (805)
-------- ----------
Total shareholders' equity........................ 409,298 456,375
-------- ----------
Total liabilities and shareholders' equity... $883,761 $1,373,463
======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-123
<PAGE>
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Lodging revenues:
Rooms..................................................... $ -- $ 89,930 $440,938
Food and beverage......................................... -- 42,502 137,067
Other departmental........................................ -- 8,685 38,074
Management and related fees................................. 45,018 49,268 45,633
------- -------- --------
45,018 190,385 661,712
------- -------- --------
Lodging expenses:
Rooms..................................................... -- 20,900 101,860
Food and beverage......................................... -- 31,033 100,585
Other departmental........................................ -- 3,936 16,602
Property costs............................................ -- 41,707 175,202
General and administrative.................................. 9,811 10,912 15,322
Payroll and related benefits................................ 15,469 17,529 21,265
Non-cash compensation....................................... -- 11,896 --
Lease expense............................................... -- 3,477 73,283
Depreciation and amortization............................... 4,201 14,862 40,561
------- -------- --------
29,481 156,252 544,680
------- -------- --------
Operating income..................................... 15,537 34,133 117,032
Other income (expense):
Interest, net............................................. 99 (12,421) (44,255)
Other, net................................................ 203 (270) (2,447)
------- -------- --------
Income before income tax expense..................... 15,839 21,442 70,330
Income tax expense.......................................... -- 15,325 26,744
------- -------- --------
Income before extraordinary items.................... 15,839 6,117 43,586
Extraordinary loss from early extinguishment of debt, net of
tax benefit of $3,997..................................... -- 7,733 --
------- -------- --------
Net income (loss).................................... $15,839 $ (1,616) $ 43,586
======= ======== ========
Basic earnings per common share (Note 18)................... $ 1.23
========
Diluted earnings per common share (Note 18)................. $ 1.22
========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-124
<PAGE>
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
---------
<TABLE>
<CAPTION>
RETAINED RECEIVABLE
COMMON PAID-IN (DEFICIT) UNEARNED PARTNERS' FROM
STOCK CAPITAL EARNINGS COMPENSATION CAPITAL SHAREHOLDERS TOTAL
----- ------- -------- ------------ ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............... $ 42 $ 17,880 $ (739) $ -- $ 3,878 $(2,203) $ 18,858
Effect of reorganization................. (42) 4,520 -- -- (4,478) -- --
Assumption of liability by principal
shareholder............................ -- 1,220 -- -- -- -- 1,220
Common stock of new entities and capital
contributions.......................... 3 -- -- -- 600 -- 603
Stock options granted.................... -- 3,263 -- (3,263) -- -- --
Assumption of shareholders' liability.... -- -- (12,995) -- -- -- (12,995)
Net decrease in receivable from
shareholders........................... -- -- -- -- -- 573 573
Distributions paid....................... -- -- (14,842) -- -- -- (14,842)
Net income............................... -- -- 15,839 -- -- -- 15,839
---- -------- -------- ------- ------- ------- --------
Balance at December 31, 1995............... 3 26,883 (12,737) (3,263) -- (1,630) 9,256
Cancellation of stock options issued in
1995................................... -- (3,263) -- 3,263 -- -- --
Issuance of stock........................ 8 12,154 -- (379) -- -- 11,783
Unearned compensation recognized......... -- -- -- 109 -- -- 109
Net decrease in receivable from
shareholders........................... -- -- -- -- -- 1,630 1,630
Dividends and capital distributions...... -- (30,000) (8,423) -- -- -- (38,423)
Contribution of IHC's net assets for
Common Stock........................... 125 (24,333) 24,208 -- -- -- --
Issuance of Common Stock, net............ 186 357,287 -- -- -- -- 357,473
Stock subscription receivable, net....... 6 14,280 -- -- -- -- 14,286
Issuance of Common Stock for
acquisitions........................... 24 54,776 -- -- -- -- 54,800
Net loss................................. -- -- (1,616) -- -- -- (1,616)
---- -------- -------- ------- ------- ------- --------
Balance at December 31, 1996............... 352 407,784 1,432 (270) -- -- 409,298
Issuance of stock, net of cancellation... 1 566 -- (567) -- -- --
Unearned compensation recognized......... -- -- -- 32 -- -- 32
Issuance of Common Stock................. 1 3,129 -- -- -- -- 3,130
Options exercised........................ -- 329 -- -- -- -- 329
Net income............................... -- -- 43,586 -- -- -- 43,586
---- -------- -------- ------- ------- ------- --------
Balance at December 31, 1997............... $354 $411,808 $ 45,018 $ (805) $ -- $ -- $456,375
==== ======== ======== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-125
<PAGE>
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
---------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 15,839 $ (1,616) $ 43,586
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 4,201 14,862 40,561
Minority interests' share of equity (loss) income
from investments in hotel real estate............. (10) 503 3,964
Non-cash compensation................................ -- 11,896 --
Deferred income taxes................................ -- 6,671 14,840
Write-off of deferred financing fees................. -- 6,169 --
Other................................................ (299) (231) (750)
Cash (used) provided by assets and liabilities:
Accounts receivable, net............................. (2,377) 1,280 (19,271)
Prepaid expenses and other assets.................... (257) (11,289) (1,861)
Accounts payable..................................... 4,775 2,953 1,513
Accrued liabilities.................................. 3,456 10,073 23,593
-------- --------- ---------
Net cash provided by operating activities......... 25,328 41,271 106,175
-------- --------- ---------
Cash flows from investing activities:
Change in restricted cash.............................. (811) (13,899) (48,177)
Acquisitions of hotels, net of cash received........... -- (417,601) (358,291)
Purchase of property and equipment, net................ (438) (16,253) (63,542)
Restricted funds used to purchase property and
equipment............................................ -- 10,383 60,349
Investments in hotel real estate....................... (13,038) (5,605) (35,143)
Change in notes receivable, net........................ (7,686) (3,424) (7,514)
Other.................................................. (885) (3,015) (8,062)
-------- --------- ---------
Net cash used in investing activities............. (22,858) (449,414) (460,380)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt........................... 35,000 360,100 540,450
Repayment of long-term debt............................ (15,265) (247,939) (206,223)
Financing costs paid, net.............................. (2,088) (14,997) (3,547)
Minority interests, net................................ 882 6,896 5,445
Proceeds from issuance of Common Stock, net............ -- 357,473 17,745
Capital contributions.................................. 603 -- --
Repayment of funds advanced to shareholders, net....... 573 1,630 --
Repayment of notes payable to shareholders............. -- (30,000) --
Dividends and capital distributions paid............... (14,842) (6,732) --
-------- --------- ---------
Net cash provided by financing activities......... 4,863 426,431 353,870
-------- --------- ---------
Net change in cash and cash equivalents.................. 7,333 18,288 (335)
Cash and cash equivalents at beginning of period......... 6,702 14,035 32,323
-------- --------- ---------
Cash and cash equivalents at end of period............... $ 14,035 $ 32,323 $ 31,988
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-126
<PAGE>
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
1. ORGANIZATION AND BASIS OF PRESENTATION:
Organization:
Interstate Hotels Company (the Company) was formed in April 1996 in
anticipation of an initial public offering of the Company's Common Stock in June
1996 (the IPO, see Note 4). As of December 31, 1997, the Company owned 23 hotels
and had a controlling interest in 17 other hotels (collectively, the Owned
Hotels). The Company has also entered into 79 long-term operating leases (the
Leased Hotels) in connection with and since the acquisition of the management
and leasing businesses affiliated with Equity Inns, Inc., a publicly traded real
estate investment trust (Equity Inns REIT), in November 1996.
The consolidated financial statements of the Company consist of the
historical results of Interstate Hotels Corporation and Affiliates (IHC), the
Company's predecessors, and the operations of the Owned Hotels from the
respective dates of their acquisitions. The working capital and operating
results of the Leased Hotels are also included in the Company's consolidated
financial statements because the operating performance associated with such
hotels is guaranteed by the Company. Prior to the IPO, the consolidated
financial statements reflected only the historical operations of the
predecessors.
The Company provides management and other related services principally to
owned, managed and leased hotels through its wholly owned subsidiaries. The
Company provides these services to hotels located in 35 states, the District of
Columbia, Canada, the Caribbean and Russia, with the largest concentration of
hotels in the states of Florida and California. These hotels are operated under
a number of franchise agreements, with the largest franchisors being Marriott
International, Inc. and Promus Hotels, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and entities more than 50% owned. All significant intercompany transactions and
balances have been eliminated in consolidation. Minority interests represent the
proportionate share of the equity that is owned by third parties in entities
controlled by the Company. The net income or loss of such entities is allocated
to the minority interests based on their percentage ownership throughout the
year and is included in other income (expense) in the consolidated statements of
operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Cash and Cash Equivalents:
All unrestricted, highly liquid investments purchased with a remaining
maturity of three months or less are considered to be cash equivalents. The
Company maintains cash and cash equivalents with various financial institutions
in excess of the amount insured by the Federal Deposit Insurance Corporation.
Management believes the credit risk related to these cash and cash equivalents
is minimal.
F-127
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Restricted Cash:
The long-term debt agreements discussed in Note 8 and the franchise
agreements referred to in Note 16 provide that cash from hotel operations be
restricted for the future acquisition or replacement of property and equipment
each year based on a percentage of gross hotel revenues. The requirements range
from 3% to 6%. Capital restricted under applicable government insurance
regulations is also included in restricted cash, and represents 20% of the
annual insurance premiums written by the Company (see Note 14).
Property and Equipment:
Property and equipment are recorded at cost, which includes the allocated
purchase price for hotel acquisitions, and are depreciated on the straight-line
method over their estimated useful lives. Expenditures for repairs and
maintenance are expensed as incurred. Expenditures for major renewals and
betterments that significantly extend the useful life of existing property and
equipment are capitalized and depreciated. The cost and related accumulated
depreciation applicable to property no longer in service are eliminated from the
accounts and any gain or loss thereon is included in operations.
Investments in Hotel Real Estate:
The Company accounts for investments in less than 50% but greater than 20%
owned hotels in which it can exert significant influence under the equity method
of accounting. All other investments are accounted for under the cost method.
Investments in hotel real estate consist of two hotels accounted for under the
equity method and five hotels accounted for under the cost method.
Officers and Employees Notes Receivable:
Officers and employees notes receivable consist principally of the
severance payments discussed in Note 3 and notes from two executives. The notes
from two executives bear interest, are fully recourse to the borrowers and are
forgiven and expensed ratably, if certain conditions are met, until the notes
mature in June 2006. The Company also makes loans from time to time to other
employees, which are payable upon demand and generally do not bear interest
until such demand is made. Certain notes may be forgiven and expensed provided
certain conditions are satisfied. Officers and employees notes receivable also
include a note with an officer and significant shareholder of the Company (see
Note 16).
Intangible and Other Assets:
Intangible and other assets consist of the amounts paid to obtain
management and lease contracts, deferred financing fees and long-term notes
receivable with managed hotels. Goodwill is also included in intangible and
other assets, and represents the excess of the purchase price over the net
assets of businesses acquired. Intangible and other assets, except for the
long-term notes receivable, are amortized on the straight-line method over the
life of the underlying contracts or estimated useful lives.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of:
The carrying values of long-lived assets, which include property and
equipment and all intangible assets, are evaluated periodically in relation to
the operating performance and future undiscounted cash flows of the underlying
assets. Adjustments are made if the sum of expected future net cash flows is
less than book value.
F-128
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Deferred Income Taxes:
Deferred income taxes are recorded using the liability method. Under this
method, deferred tax assets and liabilities are provided for the differences
between the financial statement and the tax basis of assets and liabilities
using enacted tax rates in effect for the years in which the differences are
expected to reverse.
Revenue Recognition:
Management and related fees are recognized when earned. The Owned Hotels
and Leased Hotels recognize revenue from their rooms, food and beverage and
other departments as earned on the close of each business day.
Reimbursable Expenses:
The Company is reimbursed for costs associated with providing insurance
services, purchasing and renovation services, MIS support, centralized
accounting, leasing, training and relocation programs to owned, managed and
leased hotels. These revenues are included in management and related fees and
the corresponding costs are included in general and administrative and payroll
and related benefits in the consolidated statements of operations.
Capitalized Interest:
Costs related to the construction of new hotels or significant renovations
to Owned Hotels include capitalized interest, which is amortized over the
estimated useful lives of the underlying assets. The Company capitalized
interest costs of approximately $2,300 in 1997.
Insurance:
Insurance premiums are recorded as income on a pro-rata basis over the life
of the related policies, with the portion applicable to the unexpired terms of
the policies in force recorded as unearned premium reserves. Losses are provided
for reported claims, claims incurred but not reported and claims settlement
expense at each balance sheet date. Such losses are based on management's
estimate of the ultimate cost of settlement of claims. Actual liabilities may
differ from estimated amounts. Any changes in estimates are reflected in current
earnings.
Financial Instruments:
The Company uses interest rate hedge contracts for the purpose of hedging
interest rate exposures, which involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal amounts. The
amounts to be paid or received are accrued as interest rates change and
recognized over the life of the contracts as an adjustment to interest expense.
Gains and losses realized from the termination of interest rate hedges are
recognized over the remaining life of the hedge contract. As a policy, the
Company does not engage in speculative or leveraged transactions, nor does the
Company hold or issue financial instruments for trading purposes.
Recently Adopted Accounting Pronouncements:
The Company has adopted Statement of Financial Accounting Standard (SFAS)
No. 128 "Earnings per Share" issued in February 1997. This statement requires
the disclosure of basic and diluted earnings per share
F-129
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
and revises the method required to calculate these amounts. The adoption of this
standard did not materially impact previously reported earnings per share
amounts.
New Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." The new
standard requires that all public business enterprises report information about
operating segments, as well as specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed. The new standard, which is effective for the fiscal year ending
December 31, 1998, will not have a financial impact on the Company.
Reclassifications:
Certain amounts in previously issued financial statements have been
reclassified to conform to the presentation adopted in the 1997 consolidated
financial statements.
3. MERGER WITH PATRIOT AMERICAN HOSPITALITY:
On December 2, 1997, the Company entered into an Agreement and Plan of
Merger with Patriot American Hospitality, Inc. and Wyndham International, Inc.
(formerly Patriot American Hospitality Operating Company) (collectively,
Patriot), pursuant to which the Company will merge with and into Patriot, with
Patriot being the survivor (the Merger). The Merger is contingent upon, among
other customary conditions, the approval by the shareholders of the Company and
Patriot, and is expected to be consummated in the second quarter of 1998. The
Agreement and Plan of Merger provides for the payment by the terminating party,
as the case may be, of a break-up fee of $50,000 if the Merger is terminated
under certain circumstances.
In connection with the Merger, certain change-in-control and other
severance-related provisions will be triggered. For tax planning purposes, the
Company made advances totaling $6,451 to certain executives in 1997 of the
severance amounts that would be due to them under their change-in-control
agreements upon consummation of the Merger. These executives have agreed to
repay the net after-tax amounts (including tax benefits to the executives) of
such payments to the Company if the Merger does not occur, and, as such, these
amounts are included in officers and employees notes receivable on the
consolidated balance sheet as of December 31, 1997. Patriot has agreed, in
certain circumstances, to indemnify the Company for certain lost tax benefits
resulting from these payments in the event that the Merger does not occur.
On March 30, 1998, Marriott International, Inc. (Marriott) filed a lawsuit
in the United States District Court for the District of Maryland seeking to
enjoin the Merger until the Company complies with certain rights of notification
and first refusal which Marriott alleges would be triggered by the Merger. There
can be no assurance as to the outcome of this proceeding.
4. PUBLIC OFFERINGS:
IPO:
In June 1996, the Company completed an initial public offering of
12,448,350 shares of its Common Stock for net proceeds of $240,453. In
connection with the IPO, Blackstone Real Estate Advisors, L.P. and certain of
its affiliates (collectively, Blackstone) exercised an option to receive
2,133,333 shares of Common Stock of the Company for an exercise price of
$23,300.
F-130
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
4. PUBLIC OFFERINGS--CONTINUED
In connection with the IPO, the Company acquired all of Blackstone's equity
interests in 13 of the Owned Hotels for a cash purchase price of $124,400, and
Blackstone contributed to the Company its equity interest in one Owned Hotel in
consideration for $8,300 of Common Stock of the Company. Additionally, in
connection with the IPO, the principal shareholders of IHC contributed to the
Company all of the outstanding shares of common stock of IHC and their equity
interests in these 14 Owned Hotels in exchange for Common Stock of the Company.
The acquisition of Blackstone's equity interests has been accounted for using
the purchase method of accounting, except that carryover basis was used for 9.3%
of the acquired interests. The contributions of IHC's common stock and equity
interests in hotels in exchange for Common Stock of the Company have been
accounted for using carryover bases.
Follow-on Offering:
In December 1996, the Company completed a follow-on public offering of
4,000,000 shares of its Common Stock at a price of $25 per share (the Follow-on
Offering). In January 1997, the underwriters purchased an additional 600,000
shares of Common Stock at $25 per share pursuant to over-allotment options. Net
proceeds to the Company were $93,720 from the Follow-on Offering and $14,286
from the exercise of the over-allotment options. The Company recorded the
exercise of the over-allotment options as stock subscription receivable, net of
the underwriting discount, on the consolidated balance sheet as of December 31,
1996.
5. ACQUISITIONS:
During 1997, the Company acquired 11 Owned Hotels and minority interests in
five other hotels for a total acquisition price of approximately $423,141. Such
acquisitions were accounted for using the purchase method of accounting. Five of
the 11 Owned Hotels acquired in 1997 were purchased from entities partially
owned by a significant shareholder (see Note 16). Additionally, the Company
opened two Owned Hotels that were developed for a total cost of approximately
$15,343, as well as entered into long-term operating leases with Equity Inns
REIT for 31 hotels.
During 1996 and subsequent to the IPO and related transactions discussed in
Note 4, the Company acquired 13 Owned Hotels and minority interests in two other
hotels for a total acquisition price of approximately $328,374. In November
1996, the Company acquired for 1,957,895 shares of Common Stock the management
and leasing businesses affiliated with Equity Inns REIT, which resulted in
goodwill of approximately $26,691. The businesses consisted of eight management
contracts and 48 long-term lease contracts. The above acquisitions were
accounted for using the purchase method of accounting. One of the 13 Owned
Hotels acquired in 1996 was purchased from an entity partially owned by
significant shareholders (see Note 16).
F-131
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
6. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Land........................................................ $ 95,192 $ 138,621
Buildings and improvements (15 to 40 years)................. 545,565 925,842
Furniture, fixtures and equipment (5 to 20 years)........... 112,808 183,709
Construction in progress.................................... 669 4,403
-------- ----------
754,234 1,252,575
Less accumulated depreciation............................... 45,083 98,664
-------- ----------
$709,151 $1,153,911
======== ==========
</TABLE>
Depreciation expense was approximately $467, $8,420 and $31,976 for the
years ended December 31, 1995, 1996 and 1997, respectively.
7. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Management contracts (3 to 10 years)........................ $24,825 $ 8,048
Lease contracts (10 to 15 years)............................ 22,600 24,866
Goodwill (25 years)......................................... 21,691 22,191
Deferred financing fees (2 to 7 years)...................... 14,862 18,705
Long-term notes receivable (Note 2)......................... -- 5,335
Other....................................................... 4,477 6,891
------- -------
88,455 86,036
Less accumulated amortization............................... 21,863 12,517
------- -------
$66,592 $73,519
======= =======
</TABLE>
Fully amortized management contracts of $17,757 related to transactions
that occurred in 1989 were written off in 1997.
8. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Term Loans and Revolving Credit Facility.................... $321,600 $637,600
CGL Loan.................................................... 29,250 29,250
Owned Hotel Loans........................................... 56,420 132,604
Other....................................................... 541 670
-------- --------
407,811 800,124
Less current portion........................................ 11,767 53,001
-------- --------
$396,044 $747,123
======== ========
</TABLE>
In June 1996, the Company entered into a $195,000 Term Loan (Term A) and a
$100,000 Revolving Credit Facility (collectively, the Credit Facilities). In
October 1996, the Company amended the Credit
F-132
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
8. LONG-TERM DEBT--CONTINUED
Facilities by converting the borrowings outstanding under the Revolving Credit
Facility to a $100,000 Term Loan (Term B) and increasing the Revolving Credit
Facility capacity to $200,000. In May 1997, the Company further amended its
Credit Facilities by converting the borrowings outstanding under the Revolving
Credit Facility to a $135,000 Term Loan (Term C) and increasing the Revolving
Credit Facility capacity to $350,000. The Term Loans are payable through June
2003 (Terms A and B) and June 2004 (Term C) in escalating quarterly installments
and final balloon payments. The Revolving Credit Facility is payable in June
2003, and provides for borrowings under letters of credit, revolving loans for
working capital and acquisition loans to be used to finance additional hotel
acquisitions. As of December 31, 1997, the Company had approximately $128,000
available on the Revolving Credit Facility. The Credit Facilities include
certain mandatory prepayment provisions.
In June 1996, the Company purchased a subordinated participation interest
in the $119,250 mortgage indebtedness of Interstone/CGL Partners, L.P., a
majority-owned subsidiary of the Company (the CGL Loan). As of December 31, 1996
and 1997, on a consolidated basis, the Company had $29,250 outstanding on the
CGL Loan. The CGL Loan requires no principal payments until the indebtedness
matures in June 2003. All other terms of the CGL Loan, including interest and
covenants, are identical to the Credit Facilities.
Interest on Terms A and B and the Revolving Credit Facility is payable
based on leveraged EBITDA ratio benchmarks. This effective rate was 8.00% at
December 31, 1997. Interest on Term C and the CGL Loan is based on a fixed
percentage of 2.25% and 2.00%, respectively, over a reserve-adjusted Eurodollar
rate. The effective rates at December 31, 1997 were 8.25% and 7.85% on the Term
C and the CGL Loan, respectively.
In an effort to achieve its overall desired position of fixed and floating
rates, the Company has entered into five interest rate hedge contracts (see Note
15). Four of the contracts are interest rate caps that limit LIBOR between 6.0%
and 8.5% on notional amounts ranging from $30,000 to $225,900 and expire at
varying times through August 2004. The Company also has an interest rate swap
that provides for a fixed LIBOR rate of 5.8% on $72,000 of indebtedness through
December 2000.
A nonrefundable commitment fee equal to 3/8 of 1% of the unused portion of
the Revolving Credit Facility is payable quarterly. Additionally, letter of
credit fees equal to 2.25% of the outstanding letters of credit are payable
quarterly.
The Credit Facilities and the CGL Loan contain certain restrictive
covenants, including several financial ratios and restrictions on the payment of
dividends, among other things. At December 31, 1997, the Company was not in
compliance with two covenants that related to certain lease expenditures and
employee loans. The non-compliance has been subsequently waived by the lenders,
and the Company currently anticipates meeting all covenants in the future. The
Company has pledged substantially all of the assets of the Company and an
interest in the rights to the cash flows of certain of the Owned Hotels as
collateral for the Credit Facilities and the CGL Loan.
In connection with seven Owned Hotel acquisitions, the Company incurred
loans (the Owned Hotel Loans) totaling $132,604. During 1997, the Company
refinanced one of the existing Owned Hotel loans in the amount of $31,000 which
was due in January 1998. The maturity for this loan has been extended to
December 1998. The Owned Hotel Loans are due in varying terms ranging from
December 1998 through October 2005, some of which include certain mandatory
prepayment provisions. Interest was payable at rates between 7.47% and 9.50% as
of December 31, 1997. The Owned Hotel Loans are collateralized by the assets of
the respective hotels in which the proceeds of each loan were used to acquire.
F-133
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
8. LONG-TERM DEBT--CONTINUED
Aggregate scheduled maturities of long-term debt for each of the five years
ending December 31 and thereafter are as follows:
<TABLE>
<S> <C>
1998...................................................... $ 53,001
1999...................................................... 33,328
2000...................................................... 52,418
2001...................................................... 60,006
2002...................................................... 142,137
Thereafter................................................ 459,234
--------
$800,124
========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company provides financial guarantees to the owners of the Leased
Hotels for certain minimum operating performance levels, which are annually
increased by the consumer price index and expire through 2012. Presently,
management does not expect to incur any claims against these lease guarantees.
Minimum future lease payments are computed based on the base rent of each lease,
as defined, and are as follows:
<TABLE>
<S> <C>
1998...................................................... $ 52,682
1999...................................................... 52,682
2000...................................................... 52,682
2001...................................................... 52,682
2002...................................................... 52,682
Thereafter................................................ 423,421
--------
$686,831
========
</TABLE>
The Company accounts for the leases of office space (the office leases
expire at varying dates through 2003), certain furniture, fixtures and equipment
(the equipment leases expire at varying dates through 2003) and land leases
associated with four of the Owned Hotels (the land leases expire at varying
dates through 2086) as operating leases. Total rent expense amounted to
approximately $912, $2,922 and $4,458 for the years ended December 31, 1995,
1996 and 1997, respectively. The following is a schedule of future minimum lease
payments under these leases:
<TABLE>
<S> <C>
1998....................................................... $ 5,855
1999....................................................... 5,129
2000....................................................... 4,203
2001....................................................... 3,307
2002....................................................... 2,722
Thereafter................................................. 51,632
-------
$72,848
=======
</TABLE>
In the ordinary course of business, various lawsuits, claims and
proceedings have been or may be instituted or asserted against the Company.
Based on currently available facts, management believes that the disposition of
matters that are pending or asserted will not have a material adverse effect on
the consolidated financial position, results of operations or liquidity of the
Company.
F-134
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
10. PREFERRED AND COMMON STOCK:
The Company has the authority to issue up to 25,000,000 shares of preferred
stock having such rights, preferences and privileges as designated by the Board
of Directors of the Company. The rights of the holders of the Company's Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any shares of such preferred stock that may be issued in the future.
The following represents the number of shares of Common Stock authorized
for issuance under the Company's stock plans:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
1996 Equity Incentive Plan and the Stock Option Plan for
Non-Employee Directors.................................... 2,500,000 2,500,000
Employee Stock Purchase Plan................................ 500,000 500,000
Management Bonus Plan....................................... 250,000 250,000
--------- ---------
3,250,000 3,250,000
========= =========
</TABLE>
The 1996 Equity Incentive Plan and the Stock Option Plan for Non-Employee
Directors provide for options to be granted to eligible employees and directors
to purchase shares of Common Stock. The option price is established at the grant
date at a price not less than the current market value. The options generally
vest over a three year period and expire after ten years. The Employee Stock
Purchase Plan is designed to be a non-compensatory plan, whereby eligible
employees may elect to withhold a maximum of 8% of their salary and use such
amounts to purchase Common Stock. The Management Bonus Plan provides for bonuses
to be paid to key executives of the Company based upon the achievement of
specified goals of both the Company and the executive. Bonuses are based on a
percentage of the individual's annual salary, and up to 20% of each executive's
bonus, at the discretion of management, may be payable in the form of shares of
Common Stock.
The Company has elected to account for stock-based employee compensation
arrangements under the provisions of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" rather than SFAS No. 123 "Accounting
for Stock-Based Compensation." If compensation cost had been determined based on
the fair value at the grant dates according to SFAS No. 123, the Company's net
(loss) income would have been changed to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net (loss) income:
As reported............................................... $(1,616) $43,586
Pro forma................................................. (2,781) 40,231
Basic earnings per common share:
As reported............................................... -- 1.23
Pro forma................................................. -- 1.14
Diluted earnings per common share:
As reported............................................... -- 1.22
Pro forma................................................. -- 1.13
</TABLE>
The effect on basic and diluted earnings per common share in 1996 is not
meaningful and, therefore, has not been provided (see Note 18).
F-135
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
10. PREFERRED AND COMMON STOCK--CONTINUED
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Weighted average risk-free interest rate.................... 6.3% 6.3%
Expected dividend yield..................................... -- --
Expected volatility......................................... 30.3% 31.5%
Expected life (number of years)............................. 3 3
</TABLE>
The transactions for stock options issued under the 1996 Equity Incentive
Plan and the Stock Option Plan for Non-Employee Directors were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGED
-----------------------------------
NUMBER OF REMAINING VALUE EXERCISE RANGE OF
OPTIONS LIFE (YEARS) PER SHARE PRICE EXERCISE PRICE
--------- --- ----- ------ -------------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1995.......... --
Granted................................. 1,589,250 $22.66 $21.00--$26.75
Exercised............................... -- -- --
Canceled................................ 12,500 $21.00 $21.00
---------
Outstanding, December 31, 1996.......... 1,576,750 9.6 $6.44 $22.66 $21.00--$26.75
Granted................................. 65,000 $25.12 $24.13--$27.25
Exercised............................... 14,987 $22.00 $21.00--$25.00
Canceled................................ 44,255 $24.06 $21.00--$25.00
---------
Outstanding, December 31, 1997.......... 1,582,508 8.7 $6.47 $22.73 $21.00--$27.25
=========
Exercisable, December 31, 1996.......... --
Exercisable, December 31, 1997.......... 505,836 8.7 $22.63
Shares reserved for future options as of
December 31, 1997..................... 917,492
</TABLE>
11. SUPPLEMENTAL INCOME STATEMENT INFORMATION:
In December 1995, IHC granted stock options to certain officers to purchase
shares of common stock of IHC. The exercise price of certain stock options was
determined to be below fair market value based on an independent market
valuation. No stock options were exercisable at December 31, 1995. The unearned
compensation related to the stock options granted by IHC was being charged to
expense over the vesting period.
Prior to the IPO, the Company issued 785,533 shares of Common Stock to
certain employees in consideration for the cancellation of the stock options
issued by IHC in 1995. The shares were valued based on the estimated value of
the Common Stock at the time the shares were issued. As a result of the
cancellation of the stock options issued by IHC in 1995 and the issuance of the
Common Stock at no cost to the recipients, the Company reversed the unamortized
unearned compensation recorded by IHC in 1995 and recorded non-cash compensation
expense of $11,896.
In 1996, the Company recorded an extraordinary loss of $7,733, net of tax
benefit of $3,997, as a result of the early extinguishment of certain debt. The
extraordinary loss related principally to the payment of prepayment penalties
and loan commitment fees and the write-off of deferred financing fees.
F-136
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
12. INCOME TAXES:
The provision for income taxes consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Current
Federal............................................... $ 4,153 $11,477
State................................................. 504 427
------- -------
4,657 11,904
------- -------
Deferred:
Federal:.............................................. 6,223 13,638
State................................................. 448 1,202
------- -------
6,671 14,840
------- -------
Income tax expense...................................... 11,328 26,744
Income tax benefit from extraordinary loss.............. 3,997 --
------- -------
$15,325 $26,744
======= =======
</TABLE>
A reconciliation of the Company's effective tax rate to the federal
statutory rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Federal statutory rate...................................... 35% 35%
State taxes, net of federal benefit......................... 2 2
IHC loss as an S corporation................................ 23 --
Conversion from S corporation to C corporation.............. 50 --
Other....................................................... 7 1
--- ---
Effective tax rate.......................................... 117% 38%
=== ===
</TABLE>
The components of net deferred tax assets and liabilities at December 31
consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ------- ------ -------
<S> <C> <C> <C> <C>
Depreciation and amortization................ $ -- $10,809 $ -- $14,238
Minority interests........................... 7,298 -- 1,966 --
Payroll and related benefits................. 1,588 -- 3,150 --
Self-insured health trust.................... 927 -- 34 --
Leases....................................... -- -- -- 7,414
Other........................................ -- 1,436 -- 770
------ ------- ------ -------
$9,813 $12,245 $5,150 $22,422
====== ======= ====== =======
</TABLE>
Prior to the IPO, the Company's predecessors were organized as S
corporations, partnerships and limited liability companies for federal and state
income tax purposes. Accordingly, the predecessors were not subject to income
tax because all taxable income or loss of the predecessors was reported on the
tax returns of their owners. As a result of the change in the Company's tax
status to a C corporation concurrent with the IPO, the Company recorded income
tax expense of $4,881 to establish deferred taxes existing as of the date of the
change in tax status.
F-137
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
13. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes consisted of:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Interest.............................................. $ 507 $13,629 $44,633
Income taxes.......................................... -- 7,710 9,618
</TABLE>
Non-cash investing and financing activities consisted of:
<TABLE>
<S> <C> <C> <C>
Assumption of liability by principal shareholder...... 1,220 -- --
Assumption of shareholders' liability................. 12,295 -- --
Unearned compensation related to 1995 stock options... 3,263 (3,263) --
Unearned compensation related to Common Stock......... -- 379 567
Notes payable issued to shareholders.................. -- 30,000 --
Stock subscription receivable, net.................... -- 14,286 --
Issuance of Common Stock for acquisitions............. -- 54,800 --
Assumption of long-term debt related to
acquisitions........................................ -- -- 58,086
</TABLE>
14. INSURANCE:
The Company provides certain insurance coverage to hotels under the terms
of the various management and lease contracts. This insurance is generally
arranged through third-party carriers. Northridge Insurance Company
(Northridge), a subsidiary of the Company, reinsures a portion of the coverage
from these third-party primary insurers. The policies provide for layers of
coverage with minimum deductibles and annual aggregate limits. The policies are
for coverage relating to innkeepers' losses (general/comprehensive liability),
wrongful employment practices, garagekeeper's legal liability, replacement cost
automobile losses and real and personal property insurance.
The Company is liable for any deficiencies in the IHC Employee Health and
Welfare Plan (and related Health Trust), which provides employees of the Company
with group health insurance benefits. The Company has a financial indemnity
liability policy with Northridge which indemnifies the Company for certain
obligations for the deficiency in the related Health Trust. The premiums for
this coverage received from the properties managed by the Company, net of
intercompany amounts paid for employees at the Company's corporate offices and
Owned and Leased Hotels, are recorded as direct premiums written. There was no
deficiency in the related Health Trust as of December 31, 1997.
All accounts of Northridge are classified with assets and liabilities of a
similar nature in the consolidated balance sheets. The consolidated statements
of operations include the insurance income earned and related insurance expenses
incurred. The insurance income earned has been included in management and
related fees in the consolidated statements of operations and is comprised of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Reinsurance premiums written............................. $4,981 $4,848 $3,664
Direct premiums written.................................. 2,477 2,032 2,221
Reinsurance premiums ceded............................... (422) (414) (544)
Change in unearned premiums reserve...................... (62) 158 (55)
Loss sharing premiums.................................... 698 1,101 1,687
------ ------ ------
Insurance income......................................... $7,672 $7,725 $6,973
====== ====== ======
</TABLE>
F-138
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
15. FINANCIAL INSTRUMENTS:
The carrying values and fair values of the Company's financial instruments
at December 31 consisted of:
<TABLE>
<CAPTION>
1996 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 32,323 $ 32,323 $ 31,988 $ 31,988
Restricted cash........................... 15,995 15,995 3,823 3,823
Investment in marketable securities....... 540 540 540 390
Non-current receivables................... 4,643 4,643 17,492 17,492
Interest rate caps........................ 5,056 3,268 3,132 619
Interest rate swap........................ -- 976 -- (32)
Long-term debt, including current
portion................................. 407,811 406,835 790,498 790,530
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents and restricted cash:
The carrying amounts approximate fair value because of the short maturity
of these investments.
Investment in marketable securities:
The fair value of the investment in marketable securities is based on the
quoted market price at December 31, 1997, and is included in investments in
hotel real estate in the consolidated balance sheets.
Non-current receivables:
The fair value of noncurrent receivables is based on anticipated cash flows
and approximates carrying value.
Interest rate hedges:
The Company manages its debt portfolio by using interest rate caps and
swaps to achieve an overall desired position of fixed and floating rates. The
fair value of interest rate hedge contracts is estimated based on quotes from
the market makers of these instruments and represents the estimated amounts that
the Company would expect to receive or pay to terminate the contracts. Credit
and market risk exposures are limited to the net interest differentials. The
Company is exposed to credit loss in the event of nonperformance by
counterparties on the above instruments, but does not anticipate nonperformance
by any of the counterparties.
Long-term debt:
The fair value of long-term debt is based on interest rates that are
currently available to the Company for issuance of debt with similar terms and
remaining maturities. The fair value of the notional amount of long-term debt
hedged by the swap has been increased or reduced by the fair value of the swap.
16. FRANCHISE AGREEMENTS AND RELATED PARTY TRANSACTIONS:
Franchise Agreements:
The Owned Hotels and the Leased Hotels are generally operated under
franchise agreements with various franchisors. The Owned Hotels are licensed
under the following franchise names: Marriott (20),
F-139
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
16. FRANCHISE AGREEMENTS AND RELATED PARTY TRANSACTIONS--CONTINUED
Hilton (6), Radisson (4), Embassy Suites (3), Westin (2), Courtyard by Marriott
(2), Sheraton (1) and Holiday Inn (1). The Leased Hotels are licensed under the
following franchise names: Hampton Inn (57), Residence Inn (9), Super 8 Motel
(6), Holiday Inn (5), Homewood Suites (5), Sleep Inn (4) and Comfort Inn (3).
The terms of the franchise agreements range from three to 28 years and require
ongoing fees principally based on a percentage of hotel room revenues and food
and beverage revenues.
Transactions with Significant Shareholders:
Of the total revenues earned, approximately $7,886, $7,386 and $3,882 for
the years ended December 31, 1995, 1996 and 1997, respectively, was earned from
hotels in which Milton Fine, Chairman of the Board of Directors and a
significant shareholder of the Company (herein referred to as Mr. Fine), has an
ownership interest. Accounts receivable of approximately $302 and $314 at
December 31, 1996 and 1997, respectively, was due from these hotels. The Company
has waived the management fees for one of these hotels through November 1998.
Five of the 11 Owned Hotels acquired during 1997 were purchased from
entities in which Mr. Fine owned interests ranging from 5.3% to 25.0%. Mr. Fine
retained interests ranging from 0.7% to 2.2% in four of the hotels, as well as
gained a 1.0% interest in one other Owned Hotel that was acquired by the Company
in 1997.
In October 1997, the Company entered into a note receivable with Mr. Fine
that permits up to $1,000 of borrowings. The note receivable bears interest at
6.3%. Semi-annual interest-only payments are due until it matures in December
2002, at which time all unpaid interest and principal is due. As of December 31,
1997, there was $405 outstanding on the note receivable.
In 1996, the Company acquired a controlling interest in one hotel for
$23,787, which includes $9,627 in loans to the previous owners. Significant
shareholders of the Company previously owned a 50% interest in the hotel, one of
which retained a 1.4% interest as a result of the acquisition. The $9,627 in
loans incurred as a result of the acquisition includes a $2,733 note payable to
Mr. Fine, which is included in the Owned Hotel Loans described in Note 8.
17. PREDECESSOR ENTITY EQUITY TRANSACTIONS:
Pursuant to a reorganization in 1995, IHC merged a number of companies and
created subsidiaries for certain other entities which were all under common
control. The reorganization was accounted for in a manner similar to that used
in pooling-of-interests accounting. Additionally, concurrent with the
reorganization, IHC assumed a $12,995 obligation of its principal shareholder
that was accounted for as a distribution of capital. IHC also recorded a
contribution of capital when indebtedness in the amount of $1,220 that was owed
to an affiliate was assumed by the principal shareholder. The reorganization
resulted in the reclassification of $42 between common stock and paid-in capital
and the reclassification of $4,478 between partners' capital and paid-in
capital.
In March 1996, the Company made a capital distribution by issuing notes
payable to the shareholders of IHC in the aggregate amount of $30,000. Such
notes were repaid in June 1996 with the proceeds from the IPO.
18. EARNINGS PER SHARE:
Prior to the consummation of the Company's IPO, the predecessors of the
Company were organized as S corporations, partnerships and limited liability
companies. Accordingly, the Company believes that the
F-140
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
18. EARNINGS PER SHARE--CONTINUED
earnings per share calculations required to be presented are not meaningful for
periods prior to the IPO and, therefore, have not been provided.
Basic earnings per common share was computed by dividing earnings by the
average number of common shares outstanding. Diluted earnings per common share
assumes the issuance of common stock for all potentially dilutive equivalents
outstanding. The details of basic and diluted earnings per common share are as
follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Net income.............................................. $43,586
-------
Weighted average number of common shares outstanding.... 35,320
-------
Basic earnings per common share......................... $ 1.23
=======
Shares issuable upon exercise of dilutive outstanding
stock options......................................... 396
-------
Weighted average number of diluted common shares
outstanding........................................... 35,716
-------
Diluted earnings per common share....................... $ 1.22
=======
</TABLE>
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table sets forth certain items included in the Company's
unaudited consolidated financial statements for each quarter of fiscal 1997 and
1996:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FISCAL 1997:
Total revenues...................................... $129,856 $158,209 $181,524 $192,123
Operating income.................................... 24,303 31,499 27,950 33,280
Net income.......................................... 10,208 12,394 9,898 11,086
Basic earnings per common share..................... .29 .35 .28 .31
Diluted earnings per common share................... .29 .35 .28 .31
FISCAL 1996:
Total revenues...................................... $ 12,295 $ 15,946 $ 65,530 $ 96,614
Operating income (loss)............................. 4,607 (5,775) 16,602 18,699
Income (loss) before
extraordinary items............................... 4,236 (12,299) 7,366 6,814
Net income (loss)................................... 4,236 (19,942) 7,366 6,724
Basic earnings per common share..................... -- -- .26 .22
Diluted earnings per common share................... -- -- .26 .22
</TABLE>
20. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The following unaudited pro forma information is presented as if the
transactions discussed in Notes 4, 5 and 8 had occurred on January 1, 1996. In
management's opinion, all material pro forma adjustments necessary to reflect
the effects of these transactions have been made. The pro forma information does
not include earnings on the Company's pro forma cash and cash equivalents or
certain one-time charges to income, and does not purport to present what the
actual results of operations of the Company would have been
F-141
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------
20. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)--CONTINUED
if the previously mentioned transactions had occurred on such date or to project
the results of operations of the Company for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Total revenues.............................................. $717,734 $766,483
Operating income............................................ 111,776 134,353
Net income.................................................. 32,342 48,745
Pro forma basic earnings per common share................... .91 1.38
Pro forma diluted earnings per common share................. .90 1.36
</TABLE>
21. SUBSEQUENT EVENTS:
In January 1998, the Company acquired a controlling interest in one hotel
for an acquisition price of approximately $32,000. A portion of this acquisition
was purchased for $2,900 from an entity partially owned by a significant
shareholder of the Company. This acquisition has not been included in the pro
forma information in Note 20. In connection with this acquisition, the Company
entered into a subordinated bridge debt facility (the Bridge Facility) that
provides for up to $75,000 of additional borrowings. The Bridge Facility matures
on the earlier of July 20, 1998 or the closing of the Merger discussed in Note
3. The Company borrowed $14,000 under the Bridge Facility to finance this
acquisition.
Effective March 1, 1998, the Company sold a 47.8% interest in three Owned
Hotels to Host Marriott Corporation for $49,193. This acquisition has not been
included in the pro forma information in Note 20.
F-142
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the (a) Joint Registration
Statement on Form S-3 (File No. 333-29671 and No. 333-29671-01) and related
Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc.
(formerly Patriot American Hospitality Operating Company), (b) Joint
Registration Statement on Form S-8 (File No. 333-41927 and No. 333-41927-01) of
Patriot American Hospitality, Inc. and Wyndham International Inc. (formerly
Patriot American Hospitality Operating Company), (c) Joint Registration
Statement on Form S-3 (File No. 333-39313 and 333-39313-01) and related
Prospectus of 1,681,793 paired shares of common stock of Patriot American
Hospitality, Inc. and Wyndham International, Inc. (formerly Patriot American
Hospitality Operating Company), (d) Joint Registration Statement on Form S-4
(File No. 333-44203 and No. 333-44203-01) of Patriot American Hospitality, Inc.
and Wyndham International, Inc., (e) Joint Registration Statement on Form S-8
(File No. 333-44197 and No. 333-44197-01) of Patriot American Hospitality, Inc.
and Wyndham International, Inc., and (f) Joint Registration Statement on Form S-
3 (File No. 333-28085 and No. 333-28085-01) and related Prospectus of
1,000,000,000 of paired common stock and paired preferred stock of Patriot
American Hospitality, Inc. and Wyndham International, Inc. of our report dated
February 12, 1998, on our audit of Wyndham Hotel Corporation as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, included in the Current Report on Form 8-K dated April 20, 1998.
/s/ Coopers & Lybrand L.L.P.
Dallas, Texas
April 20, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the (a) Joint Registration
Statement on Form S-3 (File No. 333-29671 and No. 333-29671-01) and related
Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc.
(formerly Patriot American Hospitality Operating Company), (b) Joint
Registration Statement on Form S-8 (File No. 333-41927 and No. 333-41927-01) of
Patriot American Hospitality, Inc. and Wyndham International. Inc. (formerly
Patriot American Hospitality Operating Company), (c) Joint Registration
Statement on Form S-3 (File No. 333-39313 and No. 333-39313-01) and related
Prospectus of 1,681,793 paired shares of common stock of Patriot American
Hospitality, Inc. and Wyndham International. Inc. (formerly Patriot American
Hospitality Operating Company), (d) Joint Registration Statement on Form S-4
(File No. 333-44203 and No. 333-44203-01) of Patriot American Hospitality, Inc.
and Wyndham International. Inc., (e) Joint Registration Statement on Form
S-8 (File No. 333-44197 and No. 333-44197-01) of Patriot American Hospitality,
Inc. and Wyndham International. Inc., and (f) Joint Registration Statement on
Form S-3 (File No. 333-28085 and No. 333-28085-01) and related Prospectus of
1,000,000,000 of paired common stock and paired preferred stock of Patriot
American Hospitality, Inc. and Wyndham International, Inc. of our reports (i)
dated August 7, 1997 (except for Note 18, as to which the date is September 17,
1997) with respect to the Consolidated Financial Statements of WHG Resorts &
Casinos Inc. and related financial statement schedule; (ii) dated August 7, 1997
with respect to the financial statements of Posadas de San Juan Associates and
related financial statement schedule ; (iii) dated August 11, 1997 with respect
to the financial statements of WKA El Con Associates; and (iv) dated May 2, 1997
with respect to the financial statements El Conquistador Partnership L.P.; all
of which are included in the Joint Current Report on Form 8-K of Patriot
American Hospitality, Inc. and Wyndham International, Inc., dated April 20,
1998.
/s/ ERNST & YOUNG LLP
San Juan, Puerto Rico
April 16, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the (a) Joint
Registration Statement on Form S-3 (File No. 333-29671 and No. 333-29671-01) and
related Prospectus of Patriot American Hospitality, Inc. and Wyndham
International, Inc. (formerly Patriot American Hospitality Operating Company),
(b) Joint Registration Statement on Form S-8 (File No. 333-41927 and No.
333-41927-01) of Patriot American Hospitality, Inc. and Wyndham International,
Inc. (formerly Patriot American Hospitality Operating Company), (c) Joint
Registration Statement on Form S-3 (File No. 333-39313 and 333-39313-01) and
related Prospectus of 1,681,793 paired shares of common stock of Patriot
American Hospitality, Inc. and Wyndham International, Inc. (formerly Patriot
American Hospitality Operating Company), (d) Joint Registration Statement on
Form S-4 (File No. 333-44203 and No. 333-44203-1) of Patriot American
Hospitality, Inc. and Wyndham International, Inc., (e) Joint Registration
Statement on Form S-8 (File No. 333-44197 and No. 333-44197-01) of Patriot
American Hospitality, Inc. and Wyndham International, Inc., and (f) Joint
Registration Statement on Form S-3 (File No. 333-28085 and No. 333-28085-01) and
related Prospectus of 1,000,000,000 of paired common stock and paired preferred
stock of Patriot American Hospitality, Inc. and Wyndham International, Inc. of
our report dated February 27, 1998 relating to the financial statements of CHC
International, Inc. Hospitality Division as of November 30, 1997 which appears
in the Current Report on Form 8-K of Patriot American Hospitality, Inc. and
Wyndham International, Inc. dated April 20, 1998.
/s/ PRICE WATERHOUSE LLP
Miami Florida
April 20, 1998
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the (a) Joint Registration
Statement on Form S-3 (File No. 333-29671 and No. 333-29671-01) and related
Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc.
(formerly Patriot American Hospitality Operating Company), (b) Joint
Registration Statement on Form S-8 (File No. 333-41927 and No. 333-41927-01) of
Patriot American Hospitality, Inc. and Wyndham International, Inc. (formerly
Patriot American Hospitality Operating Company), (c) Joint Registration
Statement on Form S-3 (File No. 333-39313 and 333-39313-01) and related
Prospectus of 1,681,793 paired shares of common stock of Patriot American
Hospitality, Inc. and Wyndham International, Inc. (formerly Patriot American
Hospitality Operating Company), (d) Joint Registration Statement on Form S-4
(File No. 333-44203 and No. 333-44203-01) of Patriot American Hospitality, Inc.
and Wyndham International, Inc., (e) Joint Registration Statement on Form S-8
(File No. 333-44197 and No. 333-44197-01) of Patriot American Hospitality, Inc.
and Wyndham International, Inc., and (f) Joint Registration Statement on Form
S-3 (File No. 333-28085 and No. 333-28085-01) and related Prospectus of
1,000,000,000 of paired common stock and paired preferred stock of Patriot
American Hospitality, Inc. and Wyndham International, Inc. of our report dated
February 11, 1998, except for Note 21, as to which the date is March 1, 1998,
and Note 3, as to which the date is March 30, 1998, on our audit of the
consolidated financial statements of Interstate Hotels Company as of December
31, 1996 and 1997, and for each of the three years in the period ended December
31, 1997, included in the Current Report on Form 8-K dated April 20, 1998.
/s/ Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
April 20, 1998
<PAGE>
EXHIBIT 99.1
PATRIOT AMERICAN HOSPITALITY INTERSTATE HOTELS COMPANY
1950 STEMMONS FREEWAY FOSTER PLAZA TEN
SUITE 6001 680 ANDERSEN DRIVE
DALLAS, TX 75207 PITTSBURGH, PA 15220
NYSE: PAH NYSE: IHC
AT PATRIOT AMERICAN, HOSPITALITY:
- ---------------------------------
MEDIA INQUIRIES: ANALYST INQUIRIES:
Suzanne Cottraux Mike Silverman
V.P. of Corporate Communications V.P. of Finance
& Investor Relations (214) 863-1265
(214) 863-1258
AT INTERSTATE HOTELS COMPANY:
- -----------------------------
Lisa O'Connor
Director of Finance and Investor Relations
(412) 937-3319
FOR IMMEDIATE RELEASE
MARCH 30, 1998
PATRIOT AMERICAN HOSPITALITY, INC., WYNDHAM INTERNATIONAL, INC. AND
INTERSTATE HOTELS COMPANY ADJOURN SHAREHOLDERS' MEETINGS ON MERGER
DALLAS AND PITTSBURGH, MARCH 30 -- PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC., WHOSE SHARES ARE PAIRED AND TRADE AS A
SINGLE UNIT (NYSE: PAH), AND INTERSTATE HOTELS COMPANY (NYSE: IHC) announced
today that they had adjourned their previously announced shareholders' meetings
to vote on Interstate's proposed merger into Patriot to Thursday, April 2, 1998
at 1 p.m. CST at the companies' respective headquarters in Dallas, Texas and
Pittsburgh, Pennsylvania.
Proxies representing well over the required number of Patriot paired shares and
Interstate shares were submitted in support of the transaction. However,
Patriot/Wyndham and Interstate elected to convene and then adjourn their
shareholders' meetings without a formal vote so as to permit additional time to
negotiate with Marriott International, Inc. relating to certain issues Marriott
has raised concerning Marriott-branded hotels owned by Interstate. As previously
announced, in connection with the merger agreement, Patriot and Marriott entered
into a non-binding agreement in principle relating to these matters and the
parties had been engaged in around-the-clock negotiations to implement that
agreement. However, Marriott filed a lawsuit earlier today against Interstate
Hotels Company in the United States District Court for the District of Maryland
seeking to enjoin the merger until Interstate complies with certain rights of
notification and first refusal which Marriott alleges would be triggered by the
merger.
<PAGE>
Paul A. Nussbaum, chairman and chief executive officer of Patriot American,
said, "We remain confident that the legal action Marriott chose to take on the
day of our respective shareholders' meetings were convened will not affect the
timely completion of this transaction. By virtue of the overwhelming majority of
Patriot and Interstate shareholders who have voted in support of this merger, as
evidenced by the tally we took this afternoon, we will proceed with our merger
as planned pending any specific direction from the Court to delay."
In the merger, Patriot would acquire 40 percent of the outstanding shares of
Interstate common stock for $37.50 per share in cash, while the remaining 60
percent of Interstate's shares would be converted into paired shares of Patriot
and Wyndham at an exchange ratio of 1.341 paired shares for each Interstate
share. The closing of the transaction is subject to customary conditions,
including the absence of any court order or other legal restraint preventing the
consummation of the merger. The closing is not subject to execution of a
definitive agreement between Patriot and Marriott.
ABOUT PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.
Based in Dallas, Texas, Patriot American Hospitality, Inc. (NYSE: PAH) is
currently the nation's second-largest hotel real estate investment trust (REIT)
with a portfolio currently comprised of 230 owned, managed, leased or franchised
hotels with more than 60,000 rooms. Wyndham International, Inc., comprised of
the Luxury Hotel Division, the Wyndham Hotel Group, the Management Services
Group and the Asset Management Group, leases, manages and franchises primarily
upscale hotel and resort properties represented by its proprietary brands, and
provides management services for third-party owned hotels and resorts.
ABOUT INTERSTATE HOTELS COMPANY
Based on Pittsburgh, Pennsylvania, Interstate Hotels Company is the largest
independent hotel management company in the United States. As of March 1, 1998,
Interstate owned, managed, leased or performed related services for a portfolio
of 214 hotels, totaling 43,447 rooms. The Company owns or has controlling
interest in 41 hotels.
FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results and the timing of certain events could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include the satisfaction of
certain conditions, the obtaining of certain third-party consents, the status of
proposed tax legislation regarding the paired-share structure and other risks
detailed in the Joint Proxy Statement/Prospectus of Patriot American
Hospitality, Inc., Wyndham International, Inc. and Interstate Hotels Company
filed with the Securities and Exchange Commission and distributed to the
companies' respective shareholders in connection with the proposed merger.
Reference is hereby made to the "Risk Factors" set forth in such Joint Proxy
Statement/Prospectus.
<PAGE>
EXHIBIT 99.2
PATRIOT AMERICAN HOSPITALITY INTERSTATE HOTELS COMPANY
1950 STEMMONS FREEWAY FOSTER PLAZA TEN
SUITE 6001 680 ANDERSEN DRIVE
DALLAS, TX 75207 PITTSBURGH, PA 15220
NYSE: PAH NYSE: IHC
AT PATRIOT AMERICAN HOSPITALITY:
- --------------------------------
MEDIA INQUIRIES: ANALYST INQUIRIES:
Suzanne Cottraux Mike Silverman
V.P. of Corporate Communications V.P. of Finance
& Investor Relations (214) 863-1265
(214) 863-1258
AT INTERSTATE HOTELS COMPANY:
- -----------------------------
Lisa O'Connor
Director of Finance and Investor Relations
(412) 937-3319
FOR IMMEDIATE RELEASE
APRIL 2, 1998
PATRIOT AMERICAN HOSPITALITY, INC. AND INTERSTATE MERGER
CLEARED BY COURT TO PROCEED AS PLANNED
DALLAS, TX AND PITTSBURGH, PA - APRIL 2, 1998 - PATRIOT AMERICAN HOSPITALITY,
INC., WHOSE SHARES ARE PAIRED (NYSE: PAH) AND TRADE AS A SINGLE UNIT WITH THOSE
OF WYNDHAM INTERNATIONAL, INC., AND INTERSTATE HOTELS COMPANY (NYSE: IHC) today
announced that the United States District Court for the District of Maryland
denied a request by Marriott International, Inc. (NYSE: MAR) for a temporary
restraining order to block the proposed merger of Interstate into Patriot
American and Wyndham International.
ABOUT PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.
Based in Dallas, Texas, Patriot American Hospitality, Inc. (NYSE: PAH) is
currently the nation's second-largest hotel real estate investment trust (REIT)
with a portfolio currently comprised of 230 owned, managed, leased or franchised
hotels with more than 60,000 rooms. Wyndham International, Inc., comprised of
the Luxury Hotel Division, the Wyndham Hotel Group, the Management Services
Group and the Asset Management Group, leases, manages and franchises primarily
upscale hotel and resort properties represented by its proprietary brands, and
provides management services for third-party owned hotels and resorts.
ABOUT INTERSTATE HOTELS COMPANY
Based on Pittsburgh, Pennsylvania, Interstate Hotels Company is the largest
independent hotel management company in the United States. As of March 1, 1998,
Interstate owned, managed,
<PAGE>
leased or performed related services for a portfolio of 214 hotels, totaling
43,447 rooms. The Company owns or has controlling interest in 41 hotels.
END
<PAGE>
EXHIBIT 99.3
PATRIOT AMERICAN HOSPITALITY INTERSTATE HOTELS COMPANY
1950 STEMMONS FREEWAY FOSTER PLAZA TEN
SUITE 6001 680 ANDERSEN DRIVE
DALLAS, TX 75207 PITTSBURGH, PA 15220
NYSE: PAH NYSE: IHC
AT PATRIOT AMERICAN HOSPITALITY:
- --------------------------------
MEDIA INQUIRIES: ANALYST INQUIRIES:
Suzanne Cottraux Mike Silverman
V.P. of Corporate Communications V.P. of Finance
& Investor Relations (214) 863-1265
(214) 863-1258
AT INTERSTATE HOTELS COMPANY:
- -----------------------------
Lisa O'Connor
Director of Finance and Investor Relations
(412) 937-3319
FOR IMMEDIATE RELEASE
APRIL 2, 1998
PATRIOT AMERICAN/INTERSTATE MERGER
RECEIVES SHAREHOLDER APPROVAL
DALLAS AND PITTSBURGH, - APRIL 2, 1998 - PATRIOT AMERICAN HOSPITALITY, INC.,
WHOSE SHARES ARE PAIRED (NYSE: PAH) AND TRADE AS A SINGLE UNIT WITH THOSE OF
WYNDHAM INTERNATIONAL, INC., AND INTERSTATE HOTELS COMPANY (NYSE: IHC) announced
that their shareholders overwhelmingly voted to approve the proposed merger of
Interstate into Patriot. Earlier today, the United States District Court for the
District of Maryland denied a request by Marriott International, Inc. for a
temporary restraining order to block the merger. The United States Court of
Appeals for the Fourth Circuit has instructed the parties not to close the
merger before noon tomorrow, Friday, April 3rd, to permit the appeals court to
consider a request by Marriott for a temporary injunction pending expedited
appeal of the District Court decision denying injunctive relief.
ABOUT PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.
Based in Dallas, Texas, Patriot American Hospitality, Inc. (NYSE: PAH) is
currently the nation's second-largest hotel real estate investment trust (REIT)
with a portfolio currently comprised of 230 owned, managed, leased or franchised
hotels with more than 60,000 rooms. Wyndham International, Inc., comprised of
the Luxury Hotel Division, the Wyndham Hotel Group, the Management Services
Group and the Asset Management Group, leases, manages and franchises primarily
upscale hotel and resort properties represented by its proprietary brands, and
provides management services for third-party owned hotels and resorts.
ABOUT INTERSTATE HOTELS COMPANY
Based in Pittsburgh, Pennsylvania, Interstate Hotels Company is the largest
independent hotel
<PAGE>
management company in the United States. As of April 1, 1998, Interstate owned,
managed, leased or performed related services for a portfolio of 214 hotels,
totaling 43,447 rooms. The Company owns or has controlling interest in 41
hotels.
END
<PAGE>
EXHIBIT 99.4
PATRIOT AMERICAN HOSPITALITY INTERSTATE HOTELS COMPANY
1950 STEMMONS FREEWAY FOSTER PLAZA TEN
SUITE 6001 680 ANDERSEN DRIVE
DALLAS, TX 75207 PITTSBURGH, PA 15220
NYSE: PAH NYSE: IHC
AT PATRIOT AMERICAN, HOSPITALITY:
- ---------------------------------
MEDIA INQUIRIES: ANALYST INQUIRIES:
Suzanne Cottraux Mike Silverman
V.P. of Corporate Communications V.P. of Finance
& Investor Relations (214) 863-1265
(214) 863-1258
AT INTERSTATE HOTELS COMPANY:
- -----------------------------
Lisa O'Connor
Director of Finance and Investor Relations
(412) 937-3319
FOR IMMEDIATE RELEASE
APRIL 3, 1998
PATRIOT AMERICAN HOSPITALITY, INC., WYNDHAM
INTERNATIONAL, INC. AND INTERSTATE HOTELS COMPANY
UPDATE STATUS OF LEGAL PROCEEDINGS REGARDING
MERGER OF PATRIOT AND INTERSTATE
DALLAS AND PITTSBURGH, - APRIL 3, 1998 - PATRIOT AMERICAN HOSPITALITY, INC.,
WHOSE SHARES ARE PAIRED WITH THOSE OF WYNDHAM INTERNATIONAL, INC. (NYSE: PAH),
AND INTERSTATE HOTELS COMPANY (NYSE: IHC) JOINTLY ANNOUNCED TODAY THAT A JUDGE
OF THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT HAS ORDERED THE
PARTIES NOT TO CLOSE THE MERGER OF INTERSTATE WITH AND INTO PATRIOT PENDING
REVIEW BY A THREE JUDGE PANEL OF THE FOURTH CIRCUIT OF AN APPEAL BROUGHT BY
MARRIOTT INTERNATIONAL, INC. (NYSE: MI) to the United States District Court's
denial of Marriott's motion for a preliminary injunction against the merger. On
March 30, Marriott filed suit in the District Court seeking a preliminary
injunction against the merger. On April 2, the District Court denied Marriott's
motion for injunctive relief. Marriott has filed an expedited appeal of this
ruling to the Fourth Circuit and the judge's ruling today is designed to allow a
three judge panel of the Fourth Circuit an opportunity to hear this appeal.
Both Patriot and Interstate have requested an immediate hearing of Marriott's
appeal of the District Court's order and anticipate such a hearing will occur
promptly. Both Patriot and Interstate remain committed to completing the merger
as expeditiously as possible following the lifting of any legal restraints.
ABOUT PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.
Based in Dallas, Texas, Patriot American Hospitality, Inc. (NYSE: PAH) is
currently the nation's second-largest hotel real estate investment trust (REIT)
with a portfolio currently comprised of 230
<PAGE>
owned, managed, leased or franchised hotels with more than 60,000 rooms. Wyndham
International, Inc., comprised of the Luxury Hotel Division, the Wyndham Hotel
Group, the Management Services Group and the Asset Management Group, leases,
manages and franchises primarily upscale hotel and resort properties represented
by its proprietary brands, and provides management services for third-party
owned hotels and resorts.
ABOUT INTERSTATE HOTELS COMPANY
Based in Pittsburgh, Pa., Interstate Hotels Company is the largest independent
hotel management company in the United States. As of April 1, 1998, Interstate
owned, managed, leased or performed related services for a portfolio of 214
hotels, totaling 43,447 rooms. The Company owns or has a controlling interest in
41 hotels.
FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results and the timing of certain events could
differ materially from those set forth in the forward-looking statements.
END
<PAGE>
EXHIBIT 99.5
PATRIOT AMERICAN HOSPITALITY INTERSTATE HOTELS COMPANY
1950 STEMMONS FREEWAY FOSTER PLAZA TEN
SUITE 6001 680 ANDERSEN DRIVE
DALLAS, TX 75207 PITTSBURGH, PA 15220
NYSE: PAH NYSE: IHC
AT PATRIOT AMERICAN, HOSPITALITY:
- ---------------------------------
MEDIA INQUIRIES: ANALYST INQUIRIES:
Suzanne Cottraux Mike Silverman
V.P. of Corporate Communications V.P. of Finance
& Investor Relations (214) 863-1265
(214) 863-1258
AT INTERSTATE HOTELS COMPANY:
- -----------------------------
Lisa O'Connor
Director of Finance and Investor Relations
(412) 937-3319
FOR IMMEDIATE RELEASE
APRIL 6, 1998
PATRIOT AMERICAN HOSPITALITY, INC. AND INTERSTATE HOTELS
COMPANY ANNOUNCE SCHEDULING OF COURT HEARING
DALLAS, APRIL 6, 1998 - PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM
INTERNATIONAL, INC., WHOSE SHARES (NYSE: PAH) ARE PAIRED AND TRADE AS A SINGLE
UNIT, AND INTERSTATE HOTELS COMPANY (NYSE: IHC) JOINTLY ANNOUNCED TODAY THAT THE
FOURTH CIRCUIT COURT OF APPEALS HAS SCHEDULED A HEARING FOR WEDNESDAY, APRIL 8,
AT 2:30 P.M. TO HEAR AN APPEAL BY MARRIOTT INTERNATIONAL, INC. (NYSE: MAR) to
the order of the United States District Court denying Marriott's motion for a
preliminary injunction against Interstate's merger with and into Patriot.
Patriot American and Interstate announced that they are prepared to complete the
merger promptly, pending the outcome of this hearing.
ABOUT PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.
Based in Dallas, Texas, Patriot American Hospitality, Inc. (NYSE: PAH) is
currently the nation's second-largest hotel real estate investment trust (REIT)
with a portfolio currently comprised of 230 owned, managed, leased or franchised
hotels with more than 60,000 rooms. Wyndham International, Inc., comprised of
the Luxury Hotel Division, the Wyndham Hotel Group, the Management Services
Group and the Asset Management Group, leases, manages and franchises primarily
upscale hotel and resort properties represented by its proprietary brands, and
provides management services for third-party owned hotels and resorts.
ABOUT INTERSTATE HOTELS COMPANY
Based in Pittsburgh, Pennsylvania, Interstate Hotels Company is the largest
independent hotel
<PAGE>
management company in the United States. As of April 1, 1998, Interstate owned,
managed, leased or performed related services for a portfolio of 214 hotels,
totaling 43,447 rooms. The Company owns or has a controlling interest in 41
hotels.
END
<PAGE>
EXHIBIT 99.6
PATRIOT AMERICAN HOSPITALITY INTERSTATE HOTELS COMPANY
1950 STEMMONS FREEWAY FOSTER PLAZA TEN
SUITE 6001 680 ANDERSEN DRIVE
DALLAS, TX 75207 PITTSBURGH, PA 15220
NYSE: PAH NYSE: IHC
AT PATRIOT AMERICAN, HOSPITALITY:
- --------------------------------
MEDIA INQUIRIES: ANALYST INQUIRIES:
Suzanne Cottraux Mike Silverman
V.P. of Corporate Communications V.P. of Finance
& Investor Relations (214) 863-1265
(214) 863-1258
AT INTERSTATE HOTELS COMPANY:
- -----------------------------
MEDIA INQUIRIES: ANALYST INQUIRIES:
Tom Loftus Lisa O'Connor
Director of Corporate Communications Director of Finance and Investor Relations
(412) 937-3382 (412) 937-3319
FOR IMMEDIATE RELEASE
APRIL 8, 1998
PATRIOT AMERICAN, WYNDHAM INTERNATIONAL AND INTERSTATE HOTELS
UPDATE STATUS OF LEGAL PROCEEDINGS REGARDING MERGER
OF PATRIOT AND INTERSTATE
DALLAS, TX AND PITTSBURGH, PA - APRIL 8, 1998 - PATRIOT AMERICAN HOSPITALITY,
INC., WHOSE SHARES ARE PAIRED (NYSE: PAH) AND TRADE AS A SINGLE UNIT WITH THOSE
OF WYNDHAM INTERNATIONAL, INC., AND INTERSTATE HOTELS COMPANY (NYSE: IHC)
jointly announced today that the Court of Appeals for the United States Fourth
Circuit Court heard Marriott International's appeal to enjoin Interstate's
merger with and into Patriot American and remanded the case to the trial court
for reconsideration and expedited resolution, with the recommendation that the
district court judge expedite the trial and that the Court of Appeals would hold
itself ready for any emergency appeals as needed.
Both Interstate and Patriot American are seeking to resolve their differences
with Marriott out of court but no assurance can be given as to whether or when a
resolution will be reached.
Cash elections have been previously submitted with respect to approximately 92%
of Interstate's outstanding common shares. Of shares so submitted, approximately
43.36% are entitled to be exchanged for cash at the rate of $37.50 per share in
the Merger. Interstate will permit its shareholders who have previously made
cash elections to request the return of that portion of their shares which will
not be exchanged for cash upon completion of the merger. This accommodation will
enable the remitted shares to be traded prior to completion of the merger.
Interstate shareholders may contact the Exchange Agent, American Stock Transfer
& Trust Company, at (800) 937-5449 to obtain additional information on how to
request the prompt return of their shares.
ABOUT PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.
Based in Dallas, Texas, Patriot American Hospitality, Inc. (NYSE: PAH) is
currently the nation's second-largest hotel real estate investment trust (REIT)
with a portfolio currently comprised of 230 owned, managed, leased or franchised
hotels with more than 60,000 rooms. Wyndham International, Inc., comprised of
the Luxury Hotel Division, the Wyndham Hotel Group, the Management Services
Group and the Asset Management Group, leases, manages and franchises primarily
upscale hotel and resort properties represented by its proprietary brands, and
provides management services for third-party owned hotels and resorts.
<PAGE>
ABOUT INTERSTATE HOTELS COMPANY
Based in Pittsburgh, Pa., Interstate Hotels Company is the largest independent
hotel management company in the United States. As of April 1, 1998, Interstate
owned, managed, leased or performed related services for a portfolio of 214
hotels, totaling 43,447 rooms. The Company owns or has controlling interest in
41 hotels.
END
<PAGE>
EXHIBIT 99.7
PATRIOT AMERICAN HOSPITALITY INTERSTATE HOTELS COMPANY
1950 STEMMONS FREEWAY FOSTER PLAZA TEN
SUITE 6001 680 ANDERSEN DRIVE
DALLAS, TX 75207 PITTSBURGH, PA 15220
NYSE: PAH NYSE: IHC
AT PATRIOT AMERICAN, HOSPITALITY:
- --------------------------------
MEDIA INQUIRIES: ANALYST INQUIRIES:
Suzanne Cottraux Mike Silverman
V.P. of Corporate Communications V.P. of Finance
& Investor Relations (214) 863-1265
(214) 863-1258
AT INTERSTATE HOTELS COMPANY:
- -----------------------------
Lisa O'Connor
Director of Finance and Investor Relations
(412) 937-3319
FOR IMMEDIATE RELEASE
APRIL 15, 1998
PATRIOT AMERICAN HOSPITALITY, WYNDHAM INTERNATIONAL AND INTERSTATE HOTELS
COMPANY ANNOUNCE SETTING OF TRIAL DATE FOR MARRIOTT LITIGATION; PATRIOT AND
INTERSTATE PROVIDE INTERSTATE SHAREHOLDERS OPTION TO REVOKE CASH ELECTIONS
DALLAS, TX -- APRIL 15, 1998 -- PATRIOT AMERICAN HOSPITALITY, INC. WHOSE SHARES
ARE PAIRED WITH THOSE OF WYNDHAM INTERNATIONAL, INC. (NYSE: PAH), AND INTERSTATE
HOTELS COMPANY (NYSE: IHC) jointly announced that the United States District
Court for the District of Maryland has scheduled April 28, 1998 to commence
trial on claims brought by Marriott International, Inc. (NYSE: MAR) against
Interstate arising from the proposed merger of Interstate with and into Patriot.
On April 8, Patriot and Interstate announced that cash elections had been
submitted with respect to approximately 92% of Interstate's outstanding common
shares, and that of the shares so submitted, approximately 43.36% would be
entitled to be exchanged for cash (at a rate of $37.50 per share) upon
consummation of the Merger. The parties further announced that Interstate would
permit its shareholders who have made cash elections to request the return of
that portion of their shares which would not be exchanged for cash in order to
allow such shares to be freely traded prior to consummation of the Merger.
Patriot and Interstate have agreed today that, upon written request to the
Exchange Agent, Interstate shareholders will also have the option to revoke
their cash elections and request the return of all of their shares. However, to
the extent that Interstate shareholders request the return of shares that would
have been entitled to be exchanged for cash upon consummation of the Merger,
such shares may not subsequently be resubmitted for cash and will instead be
exchanged for 1.341 Patriot paired shares upon consummation of the Merger.
Further, the revocation of cash elections will not alter the number of shares to
be exchanged for cash by those shareholders who choose not to revoke their cash
elections. By virtue of such revocations, the total cash consideration in the
Merger will be reduced pro rata such that shareholders who retain their cash
elections will not have a greater number of shares exchanged for cash.
Shareholders who wish to request the prompt return of any or all of their shares
should contact the Exchange Agent, American Stock Transfer & Trust Company, at
800-937-5449.
Patriot and Interstate further announced that settlement negotiations with
Marriott are continuing, but there can be no assurance as to the outcome thereof
or that a settlement will be reached prior to trial.
<PAGE>
ABOUT PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.
Based in Dallas, Texas, Patriot American Hospitality, Inc. PAH is currently the
nation's second-largest hotel real estate investment trust (REIT) with a
portfolio currently comprised of 241 owned, managed, leased or franchised hotels
with more than 60,000 rooms. Wyndham International, Inc., comprised of the
Luxury Hotel Division, the Wyndham Hotel Group, the Management Services Group
and the Asset Management Group, leases, manages and franchises primarily upscale
hotel and resort properties represented by its proprietary brands, and provides
management services for third-party owned hotels and resorts.
ABOUT INTERSTATE HOTELS COMPANY
Based in Pittsburgh, Pa.,Interstate Hotels Company is the largest independent
hotel management company in the United States. As of April 1, 1998, Interstate
owned, managed, leased or performed related services for a portfolio of 214
hotels, totaling 43,447 rooms. The Company owns or has a controlling interest in
41 hotels.
END
