<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
/X/ JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
<TABLE>
<S> <C>
COMMISSION FILE NUMBER 1-9319 COMMISSION FILE NUMBER 1-9320
PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC.
- ---------------------------------------------------- ----------------------------------------------------
(Exact name of registrant as specified in its (Exact name of registrant as specified in its
charter) charter)
</TABLE>
<TABLE>
<S> <C> <C> <C>
DELAWARE 94-0358820 DELAWARE 94-2878485
- ------------------------- ------------------------- ------------------------- -------------------------
(State or other (I.R.S. Employer (State or other (I.R.S. Employer
jurisdiction of Identification No.) jurisdiction of Identification No.)
incorporation or incorporation or
organization) organization)
1950 STEMMONS FREEWAY, 1950 STEMMONS FREEWAY,
SUITE 6001 SUITE 6001
DALLAS, TEXAS 75207 DALLAS, TEXAS 75207
- ------------------------- ------------------------- ------------------------- -------------------------
(Address of principal (Zip Code) (Address of principal (Zip Code)
executive offices) executive offices)
</TABLE>
<TABLE>
<S> <C>
(214) 863-1000 (214) 863-1000
- ---------------------------------------------------- ----------------------------------------------------
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
N/A N/A
- ---------------------------------------------------- ----------------------------------------------------
(Former name, former address and former fiscal year, (Former name, former address and former fiscal year,
if changed since last report) if changed since last report)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of each registrant's classes of common stock,
par value $.01 per share, as of the close of business on November 20, 1998, was
as follows:
<TABLE>
<S> <C>
REGISTRANT NUMBER OF SHARES
- ---------------------------------------------------- ----------------------------------------------------
Patriot American Hospitality, Inc. 179,232,121
Wyndham International, Inc. 179,232,121
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
WYNDHAM INTERNATIONAL, INC.
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
COMBINED PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.:
Condensed Combined Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997............. 3
Condensed Combined Statements of Operations for the three months ended September 30, 1998 and 1997 and
the nine months ended September 30, 1998 and 1997 (unaudited).......................................... 4
Condensed Combined Statements of Cash Flows for the nine months ended September 30, 1998 and 1997
(unaudited)............................................................................................ 5
PATRIOT AMERICAN HOSPITALITY, INC.:
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997......... 6
Condensed Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997
and the nine months ended September 30, 1998 and 1997 (unaudited)...................................... 7
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997
(unaudited)............................................................................................ 8
WYNDHAM INTERNATIONAL, INC.:
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997......... 9
Condensed Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997
and the nine months ended September 30, 1998 and the period from July 1, 1997 (inception of operations)
through September 30, 1997 (unaudited)................................................................. 10
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and the
period from July 1, 1997 (inception of operations) through September 30, 1997 (unaudited).............. 11
NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 (UNAUDITED)............................... 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 40
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................................... 66
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits................................................................................................. 66
Reports on Form 8-K...................................................................................... 66
SIGNATURES................................................................................................. 67
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
SEPTEMBER 30, ------------
1998
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in real estate and related improvements and land held for development,
net of accumulated depreciation of $198,810 in 1998 and $68,805 in 1997........... $ 5,661,769 $2,044,649
Cash and cash equivalents........................................................... 118,285 42,431
Restricted cash..................................................................... 29,112 5,005
Accounts and lease revenue receivable............................................... 210,766 57,046
Investment in unconsolidated subsidiaries........................................... 122,075 11,802
Mortgage notes and other receivables from unconsolidated subsidiaries............... 75,906 76,419
Other mortgage notes and other receivables.......................................... 39,383 12,983
Management contracts, net of accumulated amortization of $8,523 in 1998 and $1,574
in 1997........................................................................... 191,129 20,879
Leaseholds, net of accumulated amortization of $3,649 in 1998....................... 146,913 --
Trade names and franchise costs, net of accumulated amortization of $4,699 in 1998
and $122 in 1997.................................................................. 137,069 11,166
Goodwill, net of accumulated amortization of $14,562 in 1998 and $1,851 in 1997..... 537,436 126,007
Deferred expenses, net of accumulated amortization of $21,598 in 1998 and $2,097 in
1997.............................................................................. 94,041 21,417
Deferred acquisition costs.......................................................... 18,037 52,500
Inventories......................................................................... 24,553 10,450
Other assets........................................................................ 93,515 15,099
------------- ------------
Total assets.................................................................... $ 7,499,989 $2,507,853
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit facility, term loans, mortgage notes and capital
leases............................................................................ $ 3,803,808 $1,112,709
Accounts payable and accrued expenses............................................... 383,430 78,468
Dividends and distributions payable................................................. -- 27,636
Deposits............................................................................ 23,687 12,423
Due to unconsolidated subsidiaries.................................................. 7,764 7,304
Deferred income taxes............................................................... 87,636 9,550
Minority interest in the Operating Partnerships..................................... 281,049 220,177
Minority interest in consolidated subsidiaries...................................... 232,157 49,694
Commitment and contingencies
Shareholders' Equity:
Preferred stock, $0.01 par value, authorized: 100,000,000 shares each; shares
issued and outstanding: 8,423,230 shares in 1998................................ 85 --
Excess stock (paired shares), $0.01 par value, authorized: 750,000,000 shares
each; no shares issued and outstanding.......................................... -- --
Common stock (paired shares), $0.01 par value, authorized: 650,000,000 shares
each; issued and outstanding: 155,500,032 shares in 1998 and 73,276,716 shares
in 1997......................................................................... 3,110 1,466
Additional paid in capital........................................................ 2,927,752 1,070,973
Receivable from shareholders and affiliates....................................... (16,111) --
Unearned stock compensation, net of accumulated amortization of $10,756 in 1998
and $5,825 in 1997.............................................................. (13,877) (13,116)
Unrealized loss on securities available for sale.................................. (1,388) --
Unrealized foreign exchange gain.................................................. 4,323 --
Distributions in excess of retained earnings...................................... (223,436) (69,431)
------------- ------------
Total shareholders' equity...................................................... 2,680,458 989,892
------------- ------------
Total liabilities and shareholders' equity...................................... $ 7,499,989 $2,507,853
------------- ------------
------------- ------------
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenue:
Hotel revenue................................................ $ 554,331 $ 30,271 $ 1,266,985 $ 30,271
Lease revenue................................................ 8,932 35,098 49,627 107,084
Racecourse facility revenue.................................. 9,955 10,861 34,945 10,861
Management fee and service fee income........................ 24,358 1,577 61,574 1,577
Interest and other income.................................... 6,274 3,831 12,949 4,963
---------- ---------- ------------ ----------
Total revenue.............................................. 603,850 81,638 1,426,080 154,756
---------- ---------- ------------ ----------
Expenses:
Hotel expenses............................................... 417,814 22,360 924,471 30,009
Racecourse facility operations............................... 8,810 9,213 29,667 9,213
General and administrative................................... 26,571 6,582 64,558 11,663
Interest expense............................................. 82,739 13,933 172,191 31,261
Cost of acquiring leaseholds and license agreements.......... 3,940 43,820 61,000 43,820
Treasury lock settlement..................................... 49,225 -- 49,225 --
Depreciation and amortization................................ 68,236 13,792 155,165 31,798
---------- ---------- ------------ ----------
Total expenses............................................. 657,335 109,700 1,456,277 157,764
---------- ---------- ------------ ----------
Operating loss................................................. (53,485) (28,062) (30,197) (3,008)
Equity in earnings of unconsolidated subsidiaries............ 1,888 1,395 7,375 4,488
---------- ---------- ------------ ----------
Income (loss) before income tax provision, minority interests
and extraordinary item....................................... (51,597) (26,667) (22,822) 1,480
Income tax provision......................................... (6,783) (94) (11,273) (94)
---------- ---------- ------------ ----------
Income (loss) before minority interests and extraordinary
item......................................................... (58,380) (26,761) (34,095) 1,386
Minority interest in the Operating Partnerships.............. 4,722 3,225 6,169 (1,309)
Minority interest in consolidated subsidiaries............... (4,500) (934) (7,514) (1,381)
---------- ---------- ------------ ----------
Loss before extraordinary item................................. (58,158) (24,470) (35,440) (1,304)
Extraordinary loss from early extinguishment of debt, net of
minority interest and income taxes......................... (1,257) (2,534) (31,817) (2,534)
---------- ---------- ------------ ----------
Net loss....................................................... $ (59,415) $ (27,004) $ (67,257) $ (3,838)
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
Basic and Diluted earnings per common Paired Share:
Loss before extraordinary item............................... $ (1.08) $ (0.40) $ (1.10) $ (0.03)
Extraordinary loss........................................... $ (0.01) $ (0.04) $ (0.26) $ (0.05)
---------- ---------- ------------ ----------
Net loss per common Paired Share........................... $ (1.09) $ (0.44) $ (1.36) $ (0.08)
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $ (67,257) $ (3,838)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation......................................................................... 120,864 30,539
Amortization of unearned stock compensation.......................................... 4,818 3,312
Amortization of deferred loan costs.................................................. 18,075 1,342
Amortization of management contracts and trade names................................. 15,523 469
Amortization of goodwill and other assets............................................ 18,778 911
Treasury lock settlement............................................................. 49,225 --
Cost of acquiring leaseholds and license agreements.................................. 55,638 43,820
Net payments collected from unconsolidated subsidiaries.............................. 5,976 1,951
Issuance of stock for bonuses and directors' fee..................................... 880 --
Equity in earnings of unconsolidated subsidiaries.................................... (7,375) (4,488)
Minority interest in income of Operating Partnerships................................ (6,169) 1,309
Minority interest in income of consolidated subsidiaries............................. 7,514 1,381
Deferred income taxes................................................................ (5,352) --
Extraordinary loss from early extinguishment of debt................................. 32,235 2,534
Changes in assets and liabilities:
Accounts and lease revenue receivable and other assets............................. (25,272) (32,567)
Inventories........................................................................ (1,137) --
Accounts payable and other accrued expenses........................................ 20,282 29,211
---------- ---------
Net cash provided by operating activities........................................ 237,246 75,886
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties and related working capital assets..................... (1,349,705) (546,876)
Improvements and additions to hotel properties......................................... (187,695) (53,761)
Net proceeds from real estate sales.................................................... 17,734 77,226
Cash received in acquisition of hotel leases........................................... 98,312 --
Acquisition of management contracts.................................................... (32,299) --
Collections on other notes receivable.................................................. 9,563 525
Increase in restricted cash accounts................................................... (8,283) (38,196)
Deferred acquisition costs............................................................. (34,780) (34,846)
Investment in unconsolidated subsidiaries.............................................. (13,985) (1,574)
Investment in mortgage and other notes receivable...................................... (3,688) (112,625)
Other.................................................................................. (1,467) --
---------- ---------
Net cash used in investing activities............................................ (1,506,293) (710,127)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit facility, term loans, mortgage notes and capital lease
obligations.......................................................................... 2,749,394 1,300,820
Repay borrowings under line of credit facility and other debt.......................... (1,524,481) (822,226)
Payment of deferred loan costs......................................................... (32,729) (18,723)
Proceeds from issuance of common stock................................................. 277,474 255,587
Payment of offering costs.............................................................. (3,805) (12,602)
Payment of merger costs................................................................ -- (11,414)
Contributions received from minority interest in consolidated subsidiaries............. 3,440 16,204
Collections on notes receivable from shareholders and affiliates....................... 2,999 --
Payments to redeem OP Units............................................................ -- (14,596)
Dividends and distributions paid....................................................... (131,038) (44,017)
Other.................................................................................. 3,647 119
---------- ---------
Net cash provided by financing activities........................................ 1,344,901 649,152
---------- ---------
Net increase in cash and cash equivalents................................................ 75,854 14,911
Cash and cash equivalents at beginning of period......................................... 42,431 6,604
---------- ---------
Cash and cash equivalents at end of period............................................... $ 118,285 $ 21,515
---------- ---------
---------- ---------
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
SEPTEMBER 30, ------------
1998
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in real estate and related improvements and land held for development,
net of accumulated depreciation of $173,105 in 1998 and $67,501 in 1997........... $ 5,052,378 $2,016,267
Cash and cash equivalents........................................................... 14,429 15,355
Restricted cash..................................................................... 24,601 5,005
Accounts and lease revenue receivable............................................... 15,636 14,458
Investment in unconsolidated subsidiaries........................................... 942,874 11,802
Mortgage notes and other receivables from unconsolidated subsidiaries............... 75,906 76,419
Subscription Notes receivable from Wyndham.......................................... 133,669 --
Notes and other amounts receivable from Wyndham..................................... 134,849 42,946
Other notes receivable.............................................................. 18,917 --
Investment in leaseholds, net of accumulated amortization of $3,310................. 128,777 --
Trade names, net of accumulated amortization of $313................................ 9,323 --
Goodwill, net of accumulated amortization of $3,348 in 1998 and $1,257 in 1997...... 94,208 87,999
Deferred expenses, net of accumulated amortization of $19,291 in 1998 and $2,097 in
1997.............................................................................. 50,186 21,417
Deferred acquisition costs.......................................................... 4,581 21,374
Other assets........................................................................ 56,092 8,063
------------- ------------
Total assets.................................................................... $ 6,756,426 $2,321,105
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit facility, term loans, mortgage notes and capital
leases............................................................................ $ 3,543,014 $1,112,709
Subscription Notes payable to Wyndham............................................... 73,408 12,875
Notes and other amounts payable to Wyndham.......................................... 42,576 --
Accounts payable and accrued expenses............................................... 116,079 28,151
Dividends and distributions payable................................................. -- 27,185
Deferred lease revenue.............................................................. 17,890 --
Due to unconsolidated subsidiaries.................................................. 7,764 7,304
Minority interest in Patriot Partnership............................................ 227,213 174,640
Minority interest in consolidated subsidiaries...................................... 232,157 49,214
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; authorized: 100,000,000 shares; shares issued
and outstanding: 4,860,876 in 1998.............................................. 49 --
Excess stock, $0.01 par value; authorized: 750,000,000 shares; no shares issued
and outstanding................................................................. -- --
Common stock, $0.01 par value; authorized: 650,000,000 shares; shares issued and
outstanding: 155,500,032 shares in 1998 and 73,276,716 shares in 1997........... 1,555 733
Additional paid in capital........................................................ 2,680,648 990,821
Receivable from shareholders...................................................... (15,034) --
Unearned stock compensation, net of accumulated amortization of $9,866 in 1998 and
$5,825 in 1997.................................................................. (10,017) (13,116)
Unrealized foreign exchange gain.................................................. 4,022 --
Distributions in excess of retained earnings...................................... (164,898) (69,411)
------------- ------------
Total shareholders' equity...................................................... 2,496,325 909,027
------------- ------------
Total liabilities and shareholders' equity...................................... $ 6,756,426 $2,321,105
------------- ------------
------------- ------------
</TABLE>
See notes to condensed financial statements.
6
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Lease revenue.................................................. $ 178,156 $ 47,107 $ 422,808 $ 119,093
Interest and other income...................................... 6,540 3,083 15,311 4,215
---------- ---------- ---------- ----------
Total revenue................................................ 184,696 50,190 438,119 123,308
---------- ---------- ---------- ----------
Expenses:
Real estate and personal property taxes and casualty
insurance.................................................... 16,799 4,253 42,023 11,219
Ground lease expense........................................... 22,128 1,310 42,296 1,993
General and administrative..................................... 5,090 2,501 15,091 7,582
Interest expense............................................... 77,266 14,649 162,294 31,977
Cost of acquiring leaseholds................................... 3,940 43,820 8,279 43,820
Treasury lock settlement....................................... 49,225 -- 49,225 --
Depreciation and amortization.................................. 50,561 12,650 112,253 30,656
---------- ---------- ---------- ----------
Total expenses............................................... 225,009 79,183 431,461 127,247
---------- ---------- ---------- ----------
Operating income (loss).......................................... (40,313) (28,993) 6,658 (3,939)
Equity in earnings of unconsolidated subsidiaries.............. 4,764 1,395 24,011 4,488
---------- ---------- ---------- ----------
Income (loss) before income tax provision, minority interests and
extraordinary item............................................. (35,549) (27,598) 30,669 549
Income tax provision........................................... (127) -- (533) --
---------- ---------- ---------- ----------
Income (loss) before minority interests and extraordinary item... (35,676) (27,598) 30,136 549
Minority interest in Patriot Partnership....................... 2,015 3,340 (3,253) (1,194)
Minority interest in consolidated subsidiaries................. (3,775) (921) (6,203) (1,368)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item.......................... (37,436) (25,179) 20,680 (2,013)
Extraordinary loss from early extinguishment of debt, net of
minority interest............................................ -- (2,534) (30,559) (2,534)
---------- ---------- ---------- ----------
Net loss......................................................... $ (37,436) $ (27,713) $ (9,879) $ (4,547)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and Diluted earnings per common share:
Income before extraordinary item............................... $ (0.94) $ (0.41) $ (0.63) $ (0.04)
Extraordinary loss............................................. -- (0.04) (0.25) (0.05)
---------- ---------- ---------- ----------
Net loss per common share...................................... $ (0.94) $ (0.45) $ (0.88) $ (0.09)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to condensed financial statements.
7
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................ $ (9,879) $ (4,547)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.......................................................................... 105,736 30,048
Amortization of unearned stock compensation........................................... 4,041 3,312
Amortization of deferred loan costs................................................... 16,884 1,342
Amortization of trade names........................................................... 575 --
Amortization of goodwill and other assets............................................. 5,942 730
Treasury lock settlement.............................................................. 49,225 --
Cost of acquiring leaseholds.......................................................... 3,000 43,820
Net payments collected from unconsolidated subsidiaries............................... 5,962 2,353
Issuance of stock for bonuses and directors' fee...................................... 675 --
Equity in earnings of unconsolidated subsidiaries..................................... (24,011) (4,488)
Minority interest in income of Patriot Partnership.................................... 3,253 1,194
Minority interest in income of consolidated subsidiaries.............................. 6,203 1,368
Extraordinary loss from early extinguishment of debt.................................. 30,559 2,534
Changes in assets and liabilities:
Accounts and lease revenue receivable and other assets................................ (57,887) (14,072)
Due from Wyndham...................................................................... 21,572 --
Inventory............................................................................. 64 --
Accounts payable and other accrued expenses........................................... 16,632 7,642
---------- ---------
Net cash provided by operating activities......................................... 178,546 71,236
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties and related working capital assets...................... (1,943,779) (541,555)
Improvements and additions to hotel properties.......................................... (155,732) (53,168)
Net proceeds from land sale............................................................. 17,734 77,226
Cash received upon acquisition of hotel assets.......................................... 9,932 525
Collections on other notes receivable................................................... 4,000 --
Increase in restricted cash accounts.................................................... (6,201) (38,196)
Deferred acquisition costs.............................................................. (8,507) (11,014)
Investment in unconsolidated subsidiaries............................................... (11,402) (1,574)
Investment in mortgage and other notes receivable....................................... (1,305) (112,625)
Other................................................................................... 63 --
---------- ---------
Net cash used in investing activities............................................. (2,095,197) (680,381)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit facility, term loans, mortgage notes and capital lease
obligations........................................................................... 2,562,394 1,300,820
Repay borrowings under line of credit facility and other debt........................... (747,051) (822,226)
Payment of deferred loan costs.......................................................... (31,273) (18,723)
Principal payments on subscription notes payable to Wyndham............................. (12,875) (35,486)
Proceeds from issuance of common stock.................................................. 265,117 243,521
Payment of offering costs............................................................... (3,649) (12,602)
Contributions received from minority interest in consolidated subsidiaries.............. 3,440 16,204
Collections on notes receivable from shareholders....................................... 2,999 --
Payments to redeem OP Units............................................................. -- (14,596)
Dividends and distributions paid........................................................ (127,184) (44,017)
Other................................................................................... 3,807 (22)
---------- ---------
Net cash provided by financing activities......................................... 1,915,725 612,873
---------- ---------
Net increase (decrease) in cash and cash equivalents...................................... (926) 3,728
Cash and cash equivalents at beginning of period.......................................... 15,355 6,604
---------- ---------
Cash and cash equivalents at end of period................................................ $ 14,429 $ 10,332
---------- ---------
---------- ---------
</TABLE>
See notes to condensed financial statements.
8
<PAGE>
WYNDHAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
SEPTEMBER ------------
30, 1998
------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $103,856 $ 27,076
Restricted cash................................. 4,511 --
Accounts receivable............................. 195,130 46,340
Notes and other receivables from Patriot........ 18,396 12,875
Inventories..................................... 24,553 9,144
Prepaid expenses and other current assets....... 32,945 5,227
------------ ------------
Total current assets.......................... 379,391 100,662
Investment in real estate and related
improvements, net of accumulated depreciation of
$25,705 in 1998 and $1,304 in 1997.............. 610,377 28,382
Investments in unconsolidated subsidiaries........ 73,512 --
Subscription Notes receivable from Patriot........ 73,408 --
Notes and other receivables from Patriot.......... 24,180 --
Mortgage notes and other receivables.............. 20,466 12,983
Management contract costs, net of accumulated
amortization of $8,523 in 1998 and $1,574 in
1997............................................ 191,129 20,879
Leasehold costs, net of accumulated amortization
of $339......................................... 18,136 --
Trade names and franchise costs, net of
accumulated amortization of $4,386 in 1998 and
$122 in 1997.................................... 127,746 11,166
Deferred acquisition costs........................ 13,456 31,126
Goodwill, net of accumulated amortization of
$11,214 in 1998 and $594 in 1997................ 443,228 38,008
Deferred expenses, net of accumulated amortization
of $1,134....................................... 43,855 --
Other assets...................................... 4,478 8,882
------------ ------------
Total assets.................................. $2,023,362 $252,088
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........... $260,756 $ 50,317
Dividends and distributions payable............. -- 451
Participating lease payments payable to
Patriot....................................... 61,018 9,519
Deposits........................................ 23,687 12,423
Notes and other amounts payable to Patriot...... 73,831 42,946
Current portion of mortgage notes and capital
lease obligations............................. 25,050 --
------------ ------------
Total current liabilities..................... 444,342 115,656
Subscription Notes payable to Patriot............. 133,669 --
Mortgage notes payable and capital lease
obligations..................................... 235,744 --
Deferred income taxes............................. 87,636 9,550
Minority interest in Wyndham Partnership.......... 53,836 45,537
Minority interest in consolidated subsidiaries.... 894,311 480
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; authorized:
100,000,000 shares; shares issued and
outstanding: 3,562,354 in 1998................ 36 --
Excess stock, $0.01 par value; authorized:
750,000,000 shares; no shares issued and
outstanding................................... -- --
Common stock, $0.01 par value; authorized:
650,000,000 shares; issued and outstanding:
155,500,032 shares in 1998 and 73,276,716
shares in 1997................................ 1,555 733
Additional paid in capital...................... 247,104 80,152
Receivable from shareholders and affiliates..... (1,077 ) --
Unearned executive compensation, net of
accumulated amortization of $777.............. (3,860 ) --
Unrealized loss on securities available for
sale.......................................... (1,388 ) --
Unrealized foreign exchange gain................ 301 --
Retained earnings/(deficit)..................... (68,847 ) (20 )
------------ ------------
Total shareholders' equity.................... 173,824 80,865
------------ ------------
Total liabilities and shareholders' equity.... $2,023,362 $252,088
------------ ------------
------------ ------------
</TABLE>
See notes to condensed financial statements.
9
<PAGE>
WYNDHAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 1, 1997
(INCEPTION OF
THREE MONTHS ENDED NINE MONTHS OPERATIONS)
SEPTEMBER 30, ENDED THROUGH
--------------------- SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Hotel revenue............................................. $ 554,331 $ 30,271 $ 1,266,985 $ 30,271
Racecourse facility revenue............................... 9,955 10,861 34,945 10,861
Management fee and service fee income..................... 24,917 1,577 62,560 1,577
Interest and other income................................. 4,477 1,475 11,755 1,475
---------- --------- ------------- -------------
Total revenue........................................... 593,680 44,184 1,376,245 44,184
---------- --------- ------------- -------------
Expenses:
Hotel expenses............................................ 378,886 16,797 840,153 16,797
Racecourse facility operations............................ 8,810 10,536 29,667 10,536
General and administrative................................ 21,482 4,081 49,467 4,081
Interest expense.......................................... 10,216 11 24,015 11
Cost of acquiring leaseholds.............................. -- -- 52,721 --
Depreciation and amortization............................. 17,675 1,142 42,911 1,142
Lease payments............................................ 174,838 10,686 384,475 10,686
---------- --------- ------------- -------------
Total expenses.......................................... 611,907 43,253 1,423,409 43,253
---------- --------- ------------- -------------
Operating income (loss)..................................... (18,227) 931 (47,164) 931
Equity in earnings of unconsolidated subsidiaries......... 447 -- 2,461 --
---------- --------- ------------- -------------
Income (loss) before income tax provision and minority
interests................................................. (17,780) 931 (44,703) 931
Income tax provision...................................... (6,656) (94) (10,740) (94)
---------- --------- ------------- -------------
Income (loss) before minority interests..................... (24,436) 837 (55,443) 837
Minority interest in Wyndham Partnership.................. 2,707 (115) 9,422 (115)
Minority interest in consolidated subsidiaries............ (4,048) (13) (20,408) (13)
---------- --------- ------------- -------------
Income (loss) before extraordinary item..................... (25,777) 709 (66,429) 709
Extraordinary loss from early debt, extinguishment of
debt, net of income taxes............................... (1,257) -- (1,257) --
---------- --------- ------------- -------------
Net income (loss)........................................... $ (27,034) $ 709 $ (67,686) $ 709
---------- --------- ------------- -------------
---------- --------- ------------- -------------
Basic and Diluted earnings per common share:
Income (loss) before extraordinary item................... $ (0.19) $ 0.01 $ (0.55) $ 0.01
Extraordinary loss........................................ (0.01) -- (0.01) --
---------- --------- ------------- -------------
Net income (loss) per common share........................ $ (0.20) $ 0.01 $ (0.56) $ 0.01
---------- --------- ------------- -------------
---------- --------- ------------- -------------
</TABLE>
See notes to condensed financial statements
10
<PAGE>
WYNDHAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 1, 1997
(INCEPTION OF
NINE MONTHS OPERATIONS)
ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (67,686) $ 709
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation.................................................................... 15,128 491
Amortization of unearned stock compensation..................................... 777 --
Amortization of management contracts and trade names............................ 14,948 469
Amortization of goodwill and other.............................................. 14,026 181
Issuance of stock for bonuses and directors' fees............................... 205 --
Net payment from unconsolidated subsidiaries.................................... 14 --
Cost of acquiring leaseholds.................................................... 52,638 --
Deferred income taxes........................................................... (5,352) --
Equity in earnings of unconsolidated subsidiaries............................... (2,461) --
Minority interest in income of Wyndham Partnership.............................. (9,422) 115
Minority interest in income of consolidated subsidiaries........................ 20,408 13
Extraordinary loss from early extinguishment of debt............................ 1,676 --
Changes in assets and liabilities:
Accounts receivable and prepaid expenses and other assets....................... (13,082) (13,857)
Other receivables from Patriot.................................................. (21,572) --
Inventories..................................................................... (1,201) --
Accounts payable and other accrued expenses..................................... 14,945 14,458
Participating lease payments payable to Patriot................................. 45,697 2,071
------------- -------------
Net cash provided by operating activities................................... 59,686 4,650
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties and related working capital assets................ (22,194) (5,321)
Improvements and additions to hotel properties.................................... (32,950) (593)
Increase in restricted cash account............................................... (2,082) --
Acquisition of management contracts............................................... (32,299) --
Deferred acquisition costs........................................................ (26,273) (23,832)
Cash received upon acquisition of hotel leases.................................... 88,380 --
Investment in other notes receivable.............................................. (2,383) --
Collections on other notes receivable............................................. 5,563 --
Investment in unconsolidated subsidiaries......................................... (2,583) --
Other............................................................................. (1,688) --
------------- -------------
Net cash used in investing activities....................................... (28,509) (29,746)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility and term loans................................... 187,000 --
Repayment of assumed debt......................................................... (775,578) --
Payment of capital lease obligations.............................................. (1,852) 141
Proceeds from issuance of common stock............................................ 12,357 12,066
Payment of offering costs......................................................... (156) --
Payment of merger costs........................................................... -- (11,414)
Payment of deferred loan costs.................................................... (1,456) --
Collections on Subscription Notes................................................. 12,875 35,486
Contributions received from minority interest in consolidated subsidiaries........ 616,268 --
Distributions paid................................................................ (3,855) --
------------- -------------
Net cash provided by financing activities................................... 45,603 36,279
------------- -------------
Net increase in cash and cash equivalents........................................... 76,780 11,183
Cash and cash equivalents at beginning of period.................................... 27,076 --
------------- -------------
Cash and cash equivalents at end of period.......................................... $ 103,856 $ 11,183
------------- -------------
------------- -------------
</TABLE>
See notes to condensed financial statements.
11
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The entity formerly known as Patriot American Hospitality, Inc.
(collectively with its subsidiaries, "Old Patriot"), a Virginia corporation, was
formed April 17, 1995 as a self-administered real estate investment trust
("REIT") for the purpose of acquiring equity interests in hotel properties. On
October 2, 1995, Old Patriot completed an initial public offering of shares of
its common stock and commenced operations.
On July 1, 1997, 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." In January 1998, as a result
of the merger of Wyndham Hotel Corporation with and into Patriot as discussed
below, Patriot American Hospitality Operating Company changed its name to
"Wyndham International, Inc." and is referred to herein, collectively with its
subsidiaries, as "Wyndham." The term "Companies" as used herein includes
Patriot, Wyndham and their respective subsidiaries. Patriot and Wyndham are both
Delaware corporations.
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
commenced its operations concurrent with the closing of the Cal Jockey Merger on
July 1, 1997.
The shares of common stock of Patriot are paired and trade together with the
shares of common stock of Wyndham as a single unit pursuant to a stock pairing
arrangement. These units, consisting of one share of common stock of Patriot
paired with one share of common stock of Wyndham, are referred to herein as
"Paired Shares."
A substantial portion of the assets of Patriot are held by Patriot American
Hospitality Partnership, L.P. (the "Patriot Partnership"). Patriot contributed
such assets to the Patriot Partnership in exchange for units of limited
partnership interest ("OP Units") of the Patriot Partnership. In addition, a
substantial portion of the assets of Wyndham are held by Wyndham International
Operating Partnership, L.P. (the "Wyndham Partnership," formerly known as
Patriot American Hospitality Operating Partnership, L.P.). Wyndham contributed
such assets to the Wyndham Partnership in exchange for OP Units of the Wyndham
Partnership. Collectively, the Wyndham Partnership and the Patriot Partnership
are referred to herein as the "Operating Partnerships."
Patriot, through its wholly owned subsidiary, PAH GP, Inc., is the sole
general partner and the holder of a 1.0% general partnership interest in the
Patriot Partnership. In addition, Patriot, through its wholly owned subsidiary,
PAH LP, Inc., owns an approximate 88.5% limited partnership interest in the
Patriot Partnership as of September 30, 1998. Wyndham owns a 1.0% general
partnership interest and an approximate 87.3% limited partnership interest in
the Wyndham Partnership.
At September 30, 1998, Patriot and Wyndham, through the Operating
Partnerships and other subsidiaries, owned interests in 184 hotels with an
aggregate of over 44,700 guest rooms and leased 122 hotels from third parties
with over 15,700 rooms. In addition, Wyndham manages 171 hotels with over
12
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION: (CONTINUED)
42,000 guest rooms and franchises 9 hotels with over 2,500 rooms. Patriot leases
216 of its hotels to Wyndham and 14 of Patriot's hotels are leased to third
party lessees (the "Lessees") who are responsible for operating the hotels.
Generally, these leases provide 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.
Seventy-six of the Companies' hotels are owned by special purpose entities
(the "Non-Controlled Subsidiaries"). Patriot owns approximately a 99% non-voting
interest and Wyndham owns approximately a 1% controlling voting interest in each
of the Non-Controlled Subsidiaries. Therefore, the operating results of the
Non-Controlled Subsidiaries are combined with those of Wyndham for financial
reporting purposes. Patriot accounts for its investment in the Non-Controlled
Subsidiaries using the equity method of accounting.
PRINCIPLES OF CONSOLIDATION
The unaudited separate consolidated financial statements include the
accounts of Patriot and Wyndham, their respective wholly owned subsidiaries and
the partnerships, corporations and limited liability companies in which Patriot
or Wyndham owns a controlling interest. The unaudited separate consolidated
financial statements of Patriot and Wyndham have also been combined for purposes
of financial statement presentation. All significant intercompany accounts and
transactions have been eliminated.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in Patriot's and Wyndham's Joint Annual Report on
Form 10-K for the year ended December 31, 1997. Certain prior year amounts have
been reclassified to conform to current period presentation.
BUSINESS SEGMENTS
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131 ("Statement 131"), "Disclosures About Segments of an Enterprise and Related
Information" which specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to be
disclosed. Statement 131 is effective for fiscal years beginning after December
15, 1997, but need not be applied to interim financial statements in the initial
year of its application. Management believes this statement will result in
expanded disclosure for the financial statements.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 ("Statement 133"), "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years
13
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION: (CONTINUED)
beginning after June 15, 1999. The Companies expect to adopt Statement 133
effective January 1, 2000. Statement 133 will require the Companies to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings, or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. Management has not yet determined what the effect of
Statement 133 will be on the earnings and financial position of the Companies.
PARTICIPATING LEASE REVENUE RECOGNITION
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim
Financial Periods ("EITF 98-9"). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger the contingent income are met. Management has reviewed the
terms of its Participating Leases and has determined that the provisions of EITF
98-9 will impact Patriot's current revenue recognition on an interim basis, but
will have no impact on Patriot's annual participating rent revenue or interim
cash flow from its Participating Leases. Patriot has adopted the provisions of
EITF 98-9 and elected to apply the provisions of the new pronouncement on a
prospective basis.
Generally, Patriot's Participating Leases provide for the payment of the
greater of (i) a fixed base rent or (ii) participating rent, based on the
revenue of the hotels, plus certain additional charges, as applicable. The
Participating Leases contain annual revenue thresholds used to calculate the
various tiers of participating rent which are prorated on a monthly basis to
determine monthly participating rent payments. The provisions of EITF 98-9 call
for straight-line recognition of the annual base rent throughout the year and
for the deferral of any additional lease amounts collected or due from the
Lessees until such amounts exceed the annual revenue thresholds. This will
generally result in base rent being recognized in the first and second quarters
and participating rents already collected or due from the Lessees being deferred
and then recognized in the third and fourth quarters due to the structure of
Patriot's Participating Leases and the seasonality of the hotel operations. The
effect of the change was to defer recognition of $1,789 of lease revenue during
the nine months ended September 30, 1998.
2. HOTELS AND OTHER BUSINESSES ACQUIRED:
HOTEL INVESTMENTS PURCHASED
Through September 30, 1998, Patriot, through the Patriot Partnership and its
subsidiaries, invested approximately $234,116 in the acquisition of four hotels
with a total of over 1,700 guest rooms and the Golden Door Spa. These
acquisitions were financed primarily with funds drawn on Patriot's revolving
credit facility, the issuance of 53,989 OP Units of the Operating Partnerships
valued at approximately $1,496, the issuance of 390,335 Paired Shares valued at
approximately $10,000 and the assumption of mortgage debt in the amount of
approximately $80,074. In addition, Patriot acquired an office building that
will be converted into a hotel for approximately $33,900.
14
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED)
BUSINESS COMBINATIONS
WYNDHAM HOTEL CORPORATION--On January 5, 1998, Wyndham Hotel Corporation
("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.
Thirteen of the 14 hotel leases assumed by Patriot were sub-leased to Wyndham.
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 certain of the Non-Controlled Subsidiaries. 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
Patriot's revolving credit facility), and the assumption of approximately
$59,063 in debt.
In April 1998, the Companies issued an aggregate 240,437 Paired Shares
valued at approximately $5,347 in settlement of certain purchase price
adjustment arrangements related to Old Wyndham's acquisition of ClubHouse
Hotels, Inc.
WHG CASINOS & RESORTS, INC. AND RELATED TRANSACTIONS--On January 16, 1998, a
subsidiary of Wyndham merged with and into WHG Casinos & Resorts Inc. ("WHG"),
with WHG being the surviving corporation (the "WHG Merger"). As a result of the
WHG Merger, Wyndham 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 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 $21,300 of debt was
assumed, resulting in total purchase consideration of approximately $159,400.
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").
On July 13, 1998, Patriot acquired the remaining minority interests held by
a third party in entities that own the El Conquistador and the El San Juan Hotel
& Casino for a total purchase price of approximately $3,890. Wyndham owns the
controlling general partner interest in the partnerships that own the El San
Juan Hotel & Casino and the El Conquistador. Wyndham also holds voting control
of Williams Hospitality Group, Inc. Therefore, the operating results of these
entities have been consolidated with those of Wyndham for financial reporting
purposes.
15
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED)
On August 3, 1998, the Companies refinanced certain debt related to the El
Conquistador and the Condado Plaza Hotel & Casino (the "Interim Financing").
Proceeds of $145,000 from the refinancing were used to repay outstanding
indebtedness of approximately $139,350, to pay legal and closing costs and to
establish certain reserves, including interest reserves, required by the loan
agreements. The loans are secured by mortgages on the properties, bear interest
at a rate of LIBOR plus 2.25% and, prior to the extension described below,
matured on November 3, 1998.
Hurricane Georges passed through Puerto Rico on September 21 and 22, 1998.
The hurricane caused approximately $60,000 of property related damage, excluding
the impact of business interruption, to El Conquistador, Condado Plaza Hotel &
Casino and the El San Juan Hotel & Casino properties. As a result of the damage,
the three properties experienced varying periods of business interruption. All
of the Companies' properties on Puerto Rico are insured with both comprehensive
property damage and business interruption insurance, subject to certain
deductibles. See "Note 13--Subsequent Events" for a discussion of the impact of
Hurricane Georges on the Companies' properties in Puerto Rico.
On October 20, 1998, the El Conquistador Partnership, L.P., which is
beneficially owned 100% by the Companies (the "El Conquistador Partnership"),
filed a Form S-11 with the SEC with respect to the offering (the "Bond
Offering") of the undivided interests in the loan agreement between Puerto Rico
Industrial, Tourist, Educational, Medical and Environmental Control Facilities
Financing Authority ("AFICA") and the El Conquistador Partnership relating to
certain AFICA tourism revenue bonds (the "AFICA Bonds"). It is contemplated that
the AFICA Bonds will be issued in the total principal amount of $100,000, will
consist of serial bonds and term bonds and will be issued in register form,
without coupons, in denominations which are multiples of $5. AFICA will issue
the AFICA Bonds and lend the proceeds to the El Conquistador Partnership
pursuant to the loan agreement (the "AFICA Loan Agreement"). The El Conquistador
Partnership will use the loan proceeds to repay the Interim Financing entered
into on August 3, 1998, to fund certain reserves and to pay certain costs and
expenses of issuing the AFICA Bonds. The AFICA Bonds will be secured by a lien
on substantially all of the assets of the El Conquistador Partnership.
On November 3, 1998, the Companies entered into agreements to extend the
maturity of certain debt related to the El Conquistador and the Condado Plaza
Hotel & Casino from November 3, 1998 to January 29, 1999. The extension
agreements required that $10,000 be deposited into an escrow account in
installments beginning on the date of the extension through January 12, 1999.
Upon the satisfactory completion of certain conditions, the $10,000 will be
released from escrow.
ARCADIAN INTERNATIONAL LIMITED--On April 6, 1998, Patriot announced the
completion of its acquisition of all of the issued and to-be-issued shares of
Arcadian International Limited ("Arcadian," formerly known as Arcadian
International Plc) for 60 pence per share. Including the exercise of all
outstanding options to purchase shares, the assumption of debt and the
acquisition of the remaining shares in the Malmaison Group, the total
transaction cost was approximately L185,900 (approximately $308,700 U.S. based
on exchange rates at the time of closing). As a result of the transaction,
Patriot acquired ten owned hotels located throughout England; one owned hotel in
Jersey; five owned and managed Malmaison Hotels; two resorts under development
in Tuscany, Italy and Paris, France; and the proprietary Malmaison brand name.
Patriot also acquired Arcadian's 50% partnership interest in the redevelopment
of the luxury Great
16
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED)
Eastern Hotel in London, to be branded as a flagship Wyndham Hotel and operated
by Wyndham once the development has been completed. Collectively, the
transactions described above are referred to herein as the "Arcadian
Acquisition."
In connection with the Arcadian Acquisition, Patriot entered into a
short-term financing agreement on April 15, 1998 with Paine Webber Real Estate
Securities Inc. ("Paine Webber Real Estate") whereby Paine Webber Real Estate
loaned Patriot $160,000 through April 15, 1999, at a rate equal to the borrowing
rate on Patriot's Revolving Credit Facility. As described below in Note 13, the
Companies currently anticipate that this $160,000 loan will be satisfied in
connection with the Companies' transfer of certain assets to Paine Webber Real
Estate. In addition, Patriot assumed approximately $112,600 of debt in
connection with the Arcadian Acquisition.
INTERSTATE HOTELS COMPANY--On June 2, 1998, pursuant to an Agreement and
Plan of Merger dated as of December 2, 1997, as thereafter amended, (the
"Interstate Merger Agreement") between Patriot, Wyndham and Interstate Hotels
Company ("Interstate"), Interstate merged with and into Patriot with Patriot
being the surviving company (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 (the "Cash Consideration"), subject to proration in certain
circumstances, or (ii) a number of Paired Shares of Patriot and Wyndham 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").
As a result of the Interstate Merger, Patriot acquired controlling interest
in, or ownership of, 42 hotels representing over 12,000 rooms; leases for 84
hotels representing over 10,100 rooms and management or service agreements for
82 hotels representing over 20,400 rooms located throughout the United States
and in Canada, the Caribbean and Russia.
The total purchase consideration for the Interstate Merger of approximately
$2,086,812 consisted of 28,825,875 Paired Shares, cash of approximately $525,385
to pay Interstate shareholders who elected to receive cash, approximately
$787,117 in debt assumed or refinanced by Patriot and approximately $73,351 to
pay other transaction-related costs. In addition, Interstate shareholders
received rights to receive a cash distribution of $0.429 on each share of
Interstate common stock that was converted into Paired Shares, aggregating
approximately $9,138.
On May 27, 1998, the Companies and Interstate entered into a settlement
agreement (the "Settlement Agreement") with Marriott International, Inc.
("Marriott") which addressed certain claims asserted by Marriott in connection
with Patriot's then-proposed merger with Interstate. The Settlement Agreement
provided for the dismissal of litigation brought by Marriott and allowed
Patriot's merger with Interstate to close on June 2, 1998.
In addition to dismissal of the Marriott litigation, the Settlement
Agreement provides for three principal transactions: (i) the re-branding of ten
Marriott hotels under the Wyndham name, (ii) the assumption by Marriott of the
management of ten Marriott hotels formerly managed by Interstate for the
remaining term of the Marriott franchise agreement, and (iii) the divestiture by
the Companies by January 29, 1999 (subject to extension for 60 days upon payment
of certain fees by the Companies) of the
17
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED)
third-party management business that was operated by Interstate (the
"Spin-off"). See "Note 13-- Subsequent Events" for a discussion of recent
activity regarding the Spin-off.
SF HOTEL COMPANY, L.P.--On June 5, 1998, Patriot, through the Patriot
Partnership, acquired all of the partnership interests in SF Hotel Company, L.P.
("Summerfield") for approximately $298,915 (the "Summerfield Acquisition"). The
total purchase consideration for the Summerfield Acquisition consisted of
approximately 3,223,795 OP Units of the Operating Partnerships, 1,397,281 Paired
Shares, cash of approximately $165,514 and assumption of debt in the amount of
approximately $17,083. In addition, the purchase price is subject to future
adjustment based on (i) the market price of the Paired Shares through the end of
1998 and (ii) achievement of certain performance criteria through 2001 for seven
hotels that are currently under development. See "Note 13--Subsequent Events"
for a discussion of recent activity regarding these price adjustment mechanisms.
As a result of the Summerfield Acquisition, Patriot acquired four Summerfield
Suites-Registered Trademark- hotels, leasehold and management interests in 24
Summerfield Suites-Registered Trademark-, Sierra Suites-Trademark- and Sunrise
Suites hotels and management contracts and franchise interests for 12 additional
Summerfield Suites-Registered Trademark- and Sierra Suites-Registered Trademark-
hotels. Patriot has leased or sub-leased such hotels to Wyndham. In addition,
Patriot acquired the development contracts for several additional hotels.
CHC INTERNATIONAL--On June 30, 1998, pursuant to an Agreement and Plan of
Merger dated as of September 30, 1997 (the "CHCI Merger Agreement") between
Patriot, Wyndham and CHC International ("CHCI"), the hospitality-related
businesses of CHCI merged with and into Wyndham with Wyndham being the surviving
company (the "CHCI Merger"). CHCI's gaming operations were transferred to a new
legal entity prior to the CHCI Merger and such operations were not a part of the
transaction. As a result of the CHCI Merger, Wyndham, through its subsidiaries,
acquired the remaining 50% investment interest in GAH-II, L.P. ("GAH"), the
remaining 17 leases and 16 of the associated management contracts related to the
Patriot hotels leased by CHC Lease Partners, 8 third-party management contracts,
two third-party asset management contracts, the Grand Bay proprietary brand name
and certain other hospitality management assets. The aggregate purchase price of
the 17 leasehold interests was approximately $52,723, which is reflected as a
cost of acquiring leaseholds in the accompanying statements of operations of
Wyndham.
By operation of the CHCI Merger, all the issued and outstanding shares of
common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain
stock option rights were exchanged for an aggregate of 1,781,173 shares of
Series A Redeemable Convertible Preferred Stock, par value $0.01 per share of
Wyndham (the "Wyndham Series A Preferred Stock") and 1,781,181 shares of Series
B Redeemable Convertible Preferred Stock, par value $0.01 per share, of Wyndham
(the "Wyndham Series B Preferred Stock"). In addition, Wyndham assumed CHCI's
outstanding debt in the amount of approximately $16,600.
In addition, on September 30, 2000 and September 30, 2002, Wyndham may be
obligated to pay the CHCI stockholders and a subsidiary of Wyndham may be
obligated to pay a Gencom-related entity additional consideration, in each case
based upon the performance of certain specified assets.
OTHER
During the second quarter of 1998, Patriot re-acquired the leasehold
interests for three of its hotels from two of the Lessees for an aggregate
purchase price of approximately $4,339, which is reflected as a
18
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED)
cost of acquiring leaseholds in the accompanying statements of operations of
Patriot. The Companies issued 118,112 Paired Shares valued at $3,000 and paid
cash of $637 to Metro Hotels Leasing Corporation and paid cash of $702 to
NorthCoast Hotels, L.L.C. in connection with the transaction. Patriot has leased
the hotels to Wyndham.
In connection with Patriot's acquisition of certain license agreements,
Patriot recognized an expense of $3,940 related to the cost of acquiring these
agreements for the third quarter of 1998.
In July 1998, Wyndham acquired an approximate 50% limited partnership
interest in a partnership with affiliates of Don Shula's Steakhouses, Inc. for
$1,500 in cash and 156,272 preferred units of limited partnership interest of
Wyndham Partnership valued at approximately $3,500. Wyndham entered into this
joint venture arrangement to expand the Shula's Steak House brand as a food and
beverage amenity in certain of Patriot's hotels.
3. SUBSCRIPTION NOTES:
In order to effect the issuance of the paired shares of common stock and OP
Units which were issued in connection with certain of the Companies' mergers,
other acquisition transactions and forward equity transactions, Patriot and
Wyndham have issued promissory notes to fund issuance of Paired Shares and OP
Units (the "Subscription Notes").
In connection with the issuance of Paired Shares in the Wyndham Merger,
Patriot issued Subscription Notes payable to Wyndham in the aggregate amount of
$30,535. These Subscription Notes bear interest at a rate of LIBOR plus 1% per
annum and mature January 31, 2001.
In connection with the issuance of Paired Shares in the WHG Merger, Wyndham
issued Subscription Notes payable to Patriot in the aggregate amount of
$133,669. These Subscription Notes bear interest at a rate of 8.7% per annum and
mature in January 2001.
In connection with the issuance of Paired Shares and OP Units of the
Operating Partnerships in the Summerfield Acquisition, Patriot issued
Subscription Notes payable to Wyndham in the aggregate amount of $5,816. These
Subscription Notes bear interest at a rate of 8.7% per annum and mature in
January 2001.
In connection with the issuance of Paired Shares in the Interstate Merger,
Patriot issued Subscription Notes payable to Wyndham in the aggregate amount of
$34,591. These Subscription Notes bear interest at a rate of 8.7% per annum and
mature in January 2001.
In connection with the issuance of Paired Shares in the UBS forward equity
transaction, Patriot issued a promissory note payable to Wyndham in the
principal amount of $4,565. The promissory note bears interest at a rate of 8%
and matures on December 31, 2000.
In connection with the issuance of Paired Shares in the Nations forward
equity transaction, Patriot issued a promissory note payable to Wyndham in the
principal amount of $6,091. The promissory note bears interest at a rate of 8%
and matures on February 28, 2001.
In connection with the issuance of Paired Shares in the PaineWebber forward
equity transaction, Patriot issued a promissory note payable to Wyndham in the
principal amount of $6,955. The promissory note bears interest at a rate of 8%
and matures on April 30, 2001.
19
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
4. REVOLVING CREDIT FACILITY, TERM LOANS AND OTHER MORTGAGE DEBT:
In connection with the Interstate Merger, the Companies closed on the
commitment from The Chase Manhattan Bank and Chase Securities, Inc. and Paine
Webber Real Estate to increase Patriot's existing credit facilities to an
aggregate of $2,700,000 (an increase of $1,450,000 from the prior $1,250,000
credit package). The increased credit facilities include the $900,000 Revolving
Credit Facility and a series of term loans in the aggregate amount of up to
$1,800,000 (the "Term Loans"). Proceeds from the increased credit facilities
were used to fund the cash portion of the Interstate Merger consideration, as
well as to refinance certain outstanding indebtedness of the Patriot Companies.
Interest rates on the credit facilities are based on the Companies' leverage
ratio and vary from 1.5% to 2.5% over LIBOR. Patriot incurred approximately
$27,405 in loan fees and other expenses associated with this financing
arrangement.
As of November 12, 1998, the Companies had approximately $12,200 of
available funds under the Revolving Credit Facility. Additionally, certain Term
Loans have maturities of January 31, 1999 ($350,000); March 31, 1999 ($400,000);
and March 31, 2000 ($450,000). The Companies also have approximately $205,000 of
other debt which is currently due on or before December 31, 1998. The Companies
are in current negotiations to refinance or extend the maturity of the existing
indebtedness. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Combined Liquidity and Capital Resources."
The Companies previously entered into three treasury interest rate lock
agreements to protect the Companies against the possibility of rising interest
rates. Under the rate lock agreements, the Companies receive or make payments
based on the difference between specified interest rates, 6.06%, 6.07%, and
5.625%, and the actual 10-year U.S. Treasury interest rate on a principal amount
of $525,000. The Companies settled the entire $525,000 in treasury interest rate
locks resulting in a $49,225 one-time charge to earnings in the third quarter of
1998.
The Companies entered into a fourth interest rate swap arrangement during
the first quarter of 1998 to swap floating rate LIBOR-based interest rates for a
fixed rate interest amount as a hedge against $125,000 of the outstanding
balance on the Companies' revolving credit facility. The interest rate swap
fixes the LIBOR portion of the revolving credit facility interest rate at
5.5575% per annum through November 2002. If the actual LIBOR rate is less than
the specified fixed interest rate, Patriot is obligated to pay the differential
interest amount, such amount being recorded as incremental interest expense. If
the LIBOR is greater than the specified fixed interest rate, the differential
interest amount is refunded to Patriot.
In June 1998, the Companies entered into a fifth interest rate swap
arrangement as a hedge against $250,000 of the outstanding balance on the
Companies' variable rate debt. The interest rate swap provides for a fixed LIBOR
rate of 5.8425% per annum through June 2003. If the actual LIBOR rate is less
than the specified fixed interest rate, Patriot is obligated to pay the
differential interest amount, such amount being recorded as incremental interest
expense. If the LIBOR is greater than the specified fixed interest rate, the
differential interest amount is refunded to Patriot.
Additionally, in connection with the Interstate Merger, Patriot assumed four
interest rate hedge contracts: an interest rate cap that limits LIBOR to 6% on
up to $105,000 of indebtedness through June 1999; an interest rate cap that
limits LIBOR to 6% on up to $234,750 of indebtedness through October 1998; an
interest rate cap that limits LIBOR to 7% on up to $208,750 of indebtedness from
20
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
4. REVOLVING CREDIT FACILITY, TERM LOANS AND OTHER MORTGAGE DEBT: (CONTINUED)
October 1996 through October 1999; and an interest rate swap that provides for a
fixed LIBOR rate of 5.8% on $72,000 of indebtedness through December 2000.
During the third quarter of 1998, the Companies incurred a charge for a
write-off of loan costs of $1,676, net of tax benefits of $419, in connection
with the Interim Financing on the El Conquistador and the Condado Plaza Hotel &
Casino.
5. COMPREHENSIVE INCOME (LOSS):
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("Statement 130"),
"Reporting Comprehensive Income" which establishes standards for reporting and
display of comprehensive income (loss) and its components. The Companies have
adopted Statement 130 beginning with their interim financial statements for the
first quarter of 1998. Total comprehensive income (loss) for the periods is as
follows:
COMBINED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss.............................................. $ (59,415) $ (27,004) $ (67,257) $ (3,838)
Unrealized loss on securities available for sale...... (767) -- (1,388) --
Unrealized foreign exchange gain...................... 4,313 -- 4,323 --
--------- --------- --------- ---------
Total comprehensive loss.............................. $ (55,869) $ (27,004) $ (64,322) $ (3,838)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
PATRIOT
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss............................................... $ (37,436) $ (27,713) $ (9,879) $ (4,547)
Unrealized foreign exchange gain....................... 4,002 -- 4,022 --
--------- --------- --------- ---------
Total comprehensive loss............................... $ (33,434) $ (27,713) $ (5,857) $ (4,547)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
21
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
5. COMPREHENSIVE INCOME (LOSS): (CONTINUED)
WYNDHAM
<TABLE>
<CAPTION>
JULY 1, 1997
THREE MONTHS ENDED NINE MONTHS (INCEPTION OF
ENDED OPERATIONS)
SEPTEMBER 30, SEPTEMBER THROUGH
-------------------- 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Net income (loss).................................. $ (27,034) $ 709 $ (67,686) $ 709
Unrealized loss on securities available for sale... (767) -- (1,388) --
Unrealized foreign exchange gain................... 311 -- 301 --
--------- --------- ----------- -----
Total comprehensive income (loss).................. $ (27,490) $ 709 $ (68,773) $ 709
--------- --------- ----------- -----
--------- --------- ----------- -----
</TABLE>
22
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
6. COMPUTATION OF EARNINGS PER SHARE:
Earnings per share have been computed as follows:
COMBINED BASIC AND DILUTED EARNINGS PER SHARE(1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Loss before extraordinary item...................... $ (58,158) $ (24,470) $ (35,440) $ (1,304)
Adjustment for equity forwards(2)................... (95,063) -- (95,063) --
Preferred stock dividends........................... (2,695) -- (4,250) --
--------- --------- --------- ---------
Loss to common stockholders before extraordinary
items............................................. (155,916) (24,470) (134,753) (1,304)
Extraordinary loss.................................. (1,257) (2,534) (31,817) (2,534)
--------- --------- --------- ---------
Net loss to common stockholders..................... $(157,173) $ (27,004) $(166,570) $ (3,838)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of Paired Shares
outstanding....................................... 144,451 61,647 122,391 49,454
Dilutive securities:
Effect of unvested stock grants................... -- -- -- --
Dilutive options to purchase Paired Shares........ -- -- -- --
Dilutive effect of price adjustment
arrangements.................................... -- -- -- --
Dilutive convertible preferred shares............. -- -- -- --
--------- --------- --------- ---------
144,451 61,647 122,391 49,454
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per Paired Share:
Loss to common stockholders before extraordinary
items........................................... $ (1.08) $ (0.40) $ (1.10) $ (0.03)
Extraordinary loss................................ (0.01) (0.04) (0.26) (0.05)
--------- --------- --------- ---------
Net loss.......................................... $ (1.09) $ (0.44) $ (1.36) $ (0.08)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) The combined Companies are in a loss position for both the three months
ended September 30, 1998 and 1997 and the nine months ended September 30,
1998 and 1997. Therefore, the presentation of basic and diluted earnings per
share are identical since the securities which could have a dilutive impact
on earnings per share are anti-dilutive.
(2) The adjustment relates to the mark-to-market adjustment for the UBS
Transaction and the Nations Transaction (described in Note 7), which can be
settled in cash or stock, at the Companies' option. There is no adjustment
to earnings per share for the PaineWebber Transaction since it can be
settled in stock only and is accounted for by the Reverse Treasury Stock
Method.
23
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
6. COMPUTATION OF EARNINGS PER SHARE: (CONTINUED)
PATRIOT BASIC AND DILUTED EARNINGS PER SHARE(1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item............. $ (37,436) $ (25,179) $ 20,680 $ (2,013)
Adjustment for equity forwards(2)................... (95,063) -- (95,063) --
Preferred stock dividends........................... (3,110) -- (3,110) --
--------- --------- --------- ---------
Loss to common stockholders before extraordinary
items............................................. (135,609) (25,179) (77,493) (2,013)
Extraordinary loss.................................. -- (2,534) (30,559) (2,534)
--------- --------- --------- ---------
Net loss to common stockholders..................... $(135,609) $ (27,713) $(108,052) $ (4,547)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares
outstanding....................................... 144,451 61,647 122,391 49,454
Dilutive securities:
Effect of unvested stock grants................... -- -- -- --
Dilutive options to purchase common shares........ -- -- -- --
Dilutive effect of price adjustment
arrangements.................................... -- -- -- --
Dilutive convertible preferred shares............. -- -- -- --
--------- --------- --------- ---------
144,451 61,647 122,391 49,454
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Loss to common stockholders before extraordinary
items........................................... $ (0.94) $ (0.41) $ (0.63) $ (0.04)
Extraordinary loss................................ -- (0.04 (0.25) (0.05)
--------- --------- --------- ---------
Net loss.......................................... $ (0.94) $ (0.45) $ (0.88) $ (0.09)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Patriot is in a loss position for both the three months ended September 30,
1998 and 1997 and the nine months ended September 30, 1998 and 1997.
Therefore, the presentation of basic and diluted earnings per share are
identical since the securities which could have a dilutive impact on
earnings per share are anti-dilutive.
(2) The adjustment relates to the mark-to-market adjustment for the UBS
Transaction and the Nations Transaction (described in Note 7), which can be
settled in cash or stock, at the Companies' option. There is no adjustment
to earnings per share for the PaineWebber Transaction since it can be
settled in stock only and is accounted for by the Reverse Treasury Stock
Method.
24
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
6. COMPUTATION OF EARNINGS PER SHARE: (CONTINUED)
WYNDHAM BASIC AND DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
JULY 1,
1997
(INCEPTION
OF
THREE MONTHS ENDED NINE MONTHS OPERATIONS)
SEPTEMBER 30, ENDED THROUGH
-------------------- SEPTEMBER SEPTEMBER
1998(1) 1997 30, 1998(1) 30, 1997
--------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item......... $ (25,777) $ 709 $ (66,429) $ 709
Preferred stock dividends....................... (1,140) -- (1,140) --
--------- --------- ----------- -----------
Income (loss) to common stockholders before
extraordinary items........................... (26,917) 709 (67,569) 709
Extraordinary loss.............................. (1,257) -- (1,257) --
--------- --------- ----------- -----------
Net income (loss) to common stockholders........ $ (28,174) $ 709 $ (68,826) $ 709
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Weighted average number of common shares
outstanding................................... 144,451 61,647 122,391 61,647
Dilutive securities:
Effect of unvested stock grants............... -- 891 -- 891
Dilutive options to purchase common shares.... -- 1,100 -- 1,100
Dilutive effect of price adjustment
arrangements................................ -- -- -- --
Dilutive convertible preferred shares......... -- -- -- --
--------- --------- ----------- -----------
144,451 63,638 122,391 63,638
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Earnings per share:
Income (loss) to common stockholders before
extraordinary items......................... $ (0.19) $ 0.01 $ (0.55) $ 0.01
Extraordinary loss............................ (0.01) -- (0.01) --
--------- --------- ----------- -----------
Net income (loss)............................. $ (0.20) $ 0.01 $ (0.56) $ 0.01
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
- ------------------------
(1) Wyndham is in a loss position for both the three months and nine months
ended September 30, 1998. Therefore, the presentation of basic and diluted
earnings per share are identical since the securities which could have a
dilutive impact on earnings per share are anti-dilutive.
7. COMMITMENTS AND CONTINGENCIES:
The Companies are parties to transactions with three counterparties
involving the sale of an aggregate of 13.3 million shares of Paired Common
Stock, with related Price Adjustment Mechanisms, as described below.
UBS TRANSACTION. On December 31, 1997, the Companies entered into
transactions with UBS Limited and Union Bank of Switzerland, London Branch
(together with its successor, UBS AG, London
25
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Branch, "UBS" and, together with Warburg Dillon Read, LLC, the "UBS Parties").
Pursuant to the terms of a Purchase Agreement dated as of December 31, 1997 (the
"UBS Purchase Agreement"), UBS Limited purchased 3,250,000 Paired Shares (the
"Initial UBS Shares") from the Companies at a purchase price of $28.8125 per
share (the last reported sale price of the Paired Shares on December 30, 1997)
for approximately $91,800 in net proceeds. The net proceeds were used by the
Companies to repay existing indebtedness. The Initial UBS Shares represent
approximately 1.8% of the outstanding Paired Shares as of the date of this
filing. UBS received from the Companies a placement fee of 2%, or approximately
$1,900.
In connection with the issuance of the Initial UBS Shares, the Companies
entered into a Forward Stock Contract, dated as of December 31, 1997, with UBS
(as amended on August 14, 1998 and September 11, 1998, the "Forward Stock
Contract"). Pursuant to the Forward Stock Contract, the Companies have agreed to
effect a settlement, in one or more transactions (each a "UBS Settlement"), with
respect to a number of Paired Shares equal to the number of Initial UBS Shares,
at a per Paired Share price equal to $28.8125 plus a forward accretion
reflecting an imputed return at LIBOR plus 140 basis points, minus an adjustment
to reflect distributions on the Paired Shares (the "UBS Forward Price"). The
forward accretion component represents a guaranteed rate of return to UBS. The
Paired Shares to be delivered to or by UBS may consist of Paired Shares acquired
under the UBS Purchase Agreement or otherwise.
The Companies may effect a UBS Settlement by (i) delivering to UBS Paired
Shares (the "UBS Settlement Shares") equal in value (valued at the daily average
closing price for the Paired Shares over a specific period of time (the "UBS
Unwind Price")) to the UBS Forward Price at the time of such UBS Settlement
times the number of Paired Shares subject to such UBS Settlement (the "UBS
Settlement Amount") in exchange for the number of shares subject to such UBS
Settlement, (ii) delivering to (or, in the event the UBS Unwind Price is greater
than the UBS Forward Price, receiving from) UBS a number of Paired Shares equal
to the difference between the number of the UBS Settlement Shares and the number
of shares subject to such UBS Settlement, or (iii) delivering to UBS cash equal
to the UBS Settlement Amount in exchange for the shares subject to such UBS
Settlement. If the Companies make a UBS Settlement in Paired Shares, they must
also pay to UBS (i) an unwind accretion fee (payable in cash or shares) equal to
50% of the UBS Settlement Amount times the imputed return of LIBOR plus 140
basis points over the period designated for such UBS Settlement and (ii) a
placement fee equal to 0.50% of the UBS Settlement Amount. The Forward Stock
Contract provides that shares may be delivered in settlement only if the
Companies have on file with the SEC an effective registration statement covering
the resale by UBS of the shares to be delivered. A registration statement
covering up to 4,000,000 shares to be sold by UBS was declared effective (as
amended) on October 15, 1998. A registration statement covering up to an
additional 40,000,000 shares to be sold by PWFS, Nations and UBS was declared
effective on October 15, 1998.
In connection with the September 11, 1998 amendment to the Forward Stock
Contract, the Companies paid down $45,628 under the Forward Stock Contract
through the application of cash collateral that had previously been delivered to
UBS pursuant to the Forward Stock Contract. In addition, the Companies have
delivered an additional 2,474,359 Paired Shares and $8,252 to UBS as collateral
pursuant to the
26
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Forward Stock Contract. The cash collateral held by UBS is subject to adjustment
every two weeks such that the amount of cash collateral is equal to the number
of shares subject to the Forward Stock Contract times the amount by which the
UBS Forward Price exceeds the closing price for the Paired Shares on the trading
day immediately preceding the adjustment date (such closing price the "UBS Reset
Price" and such product the "UBS Interim Settlement Amount"). With the prior
written consent of UBS, the Companies may elect to deliver to UBS a number of
Paired Shares (the "UBS Interim Settlement Shares") equal in value (valued at
the UBS Reset Price) to 125% of the UBS Interim Settlement Amount.
The Forward Stock Contract provides that if the average closing price of the
Paired Shares for any two consecutive trading days does not equal or exceed
$11.00 (the "UBS Unwind Threshold"), UBS has the right to force a complete
settlement under the Forward Stock Contract. As a result of the failure of the
average closing price of the Paired Shares for October 2 and October 5, 1998 to
equal or exceed $11.00, UBS became entitled to force a complete settlement
pursuant to the terms of the Forward Stock Contract and continues to be so
entitled. In addition, the Forward Stock Contract reached maturity on October
15, 1998. UBS has asserted that the Companies are in default under the terms of
the Forward Stock Contract as the result of the Companies not delivering certain
cash collateral and not making final settlement of the Forward Stock Contract in
cash, although the Companies have disputed this assertion. See "Potential
Dilution and Liquidity Effects of the Price Adjustment Mechanisms" below.
UBS also has the right to force a complete settlement under the Forward
Stock Contract if the Companies (i) are in default with respect to certain
financial and notice covenants under the Forward Stock Contract, (ii) are in
default under the Corporation's credit facility with Chase Manhattan Bank, (iii)
are in default with respect to certain specified indebtedness of the Companies,
(iv) declare bankruptcy or become insolvent or fail to post sufficient cash
collateral, (v) effect an early settlement, unwind or liquidation of any
transaction similar to the transaction with UBS or (vi) fail to settle the
transaction in cash simultaneously with the sale by the Companies of certain
property. A registration statement covering the sale of up to 4,000,000 shares
by UBS was declared effective (as amended) on October 15, 1998. Also, a
registration statement covering the sale of up to an additional 40,000,000
shares by PWFS, Nations and UBS was declared effective on October 15, 1998.
However, there can be no assurance that such registration statements will remain
effective or that the Companies will not be required to register more Paired
Shares in connection with the Forward Stock Contract.
NATIONS TRANSACTION. On February 26, 1998, the Companies entered into
transactions with a subsidiary of NationsBank Corporation (together with
NationsBanc Mortgage Capital Corporation, "Nations"). Pursuant to the terms of a
Purchase Agreement dated as of February 26, 1998 (the "Nations Purchase
Agreement"), Nations purchased 4,900,000 Paired Shares (the "Initial Nations
Shares") from the Companies at a purchase price of $24.8625 per share (which
reflected a 2.5% discount from $25.50, the last reported sale price of the
Paired Shares on February 25, 1998) for net proceeds of approximately $121,800.
The net proceeds were used by the Companies to repay existing indebtedness. The
Initial Nations Shares represent approximately 2.7% of the outstanding Paired
Shares as of the date of this filing.
In connection with the issuance of the Initial Nations Shares, the Companies
entered into a Purchase Price Adjustment Mechanism, dated as of February 26,
1998, with Nations (as amended on August 14,
27
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
1998, the "Nations Price Adjustment Mechanism"). Pursuant to the Nations Price
Adjustment Mechanism, the Companies have agreed to effect certain purchase price
adjustments on or before February 26, 1999, in one or more transactions (each a
"Nations Settlement"), with respect to a number of Paired Shares equal to the
number of Initial Nations Shares, by reference to a per Paired Share price equal
to $25.50 plus a forward accretion representing an imputed return at LIBOR plus
150 basis points, minus an adjustment to reflect distributions on the Paired
Shares (the "Nations Forward Price"). The Paired Shares to be delivered to or by
Nations may consist of Paired Shares acquired under the Nations Purchase
Agreement or otherwise.
The Companies may effect a Nations Settlement by (i) delivering to Nations
Paired Shares (the "Nations Settlement Shares") equal in value (valued at the
dollar volume weighted average price for the Paired Shares (as calculated
pursuant to the Nations Price Adjustment Mechanism) over a specific period of
time (the "Nations Unwind Price")) to the Nations Forward Price at the time of
such Nations Settlement times the number of shares subject to such Nations
Settlement (the "Nations Settlement Amount") in exchange for the number of
shares subject to such Nations Settlement, (ii) delivering to (or, in the event
the Nations Unwind Price is greater than the Nations Forward Price, receiving
from) Nations a number of Paired Shares equal to the difference between the
number of Nations Settlement Shares and the number of shares subject to such
Nations Settlement, or (iii) delivering to Nations cash equal to the Nations
Settlement Amount in exchange for a number of Paired Shares equal to the number
of shares subject to such Nations Settlement. If the Companies effect a
settlement pursuant to clause (i) or (ii) above, they must also pay a placement
fee equal to 2% of the Nations Settlement Amount. The Nations Price Adjustment
Mechanism provides that shares may be delivered in settlement only if (i) the
Companies have on file with the SEC an effective registration statement covering
the sale by Nations of the shares to be delivered, (ii) for settlement at
maturity, the dollar volume weighted average price of the Paired Shares (as
calculated pursuant to the Nations Price Adjustment Mechanism) on the date of
such settlement is greater than or equal to $20.00 and (iii) for settlement at
maturity, no Mandatory Nations Unwind Event (as defined below) has occurred and
is continuing. If the above conditions are not met when they apply, the
Companies generally must deliver cash equal to the Nations Settlement Amount.
The Nations Price Adjustment Mechanism provides that on or after October 15,
1998, if the dollar volume weighted average price of the Paired Shares for any
two consecutive trading days does not equal or exceed certain amounts (the
"Nations Unwind Thresholds"), Nations has the right to force a partial or
complete settlement under the Nations Price Adjustment Mechanism. The Nations
Unwind Thresholds are $20.00 (33% settlement), $18.75 (67%) and $17.25 (100%).
As a result of failure of the price of the Paired Shares to exceed the Nations
Unwind Thresholds, pursuant to the terms of the Nations Price Adjustment
Mechanism, Nations became entitled to force a complete settlement under the
Nations Price Adjustment Mechanism on October 16, 1998, and continues to be so
entitled. Nations has not required any settlement under the Nations Price
Adjustment Mechanism to date. See "Potential Dilution and Liquidity Effects of
the Price Adjustment Mechanism" below.
Nations also has the right to force a complete settlement under the Nations
Price Adjustment Mechanism at any time upon the occurrence of any of the
following (each a "Mandatory Nations Unwind
28
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Event"): (i) default of the Companies with respect to certain indebtedness, (ii)
declaration by the Companies of bankruptcy or insolvency or failure to post
sufficient cash collateral or (iii) the sale or refinancing by the Companies of
certain properties in which the net proceeds of such sale or refinancing (up to
the amount necessary to effect a complete cash settlement) are not applied to a
cash settlement under the Nations Price Adjustment Mechanism. The Nations Price
Adjustment Mechanism also provides that, upon the consummation of the sale or
refinancing of certain properties by the Companies with a third party, the
Companies must apply the net proceeds to the extent necessary to effect a
complete cash settlement under the Nations Price Adjustment Mechanism. The
Companies have agreed to use all commercially reasonable efforts to effect such
a sale or refinancing. The Companies' planned sale of assets to Paine Webber
Real Estate (as described in Note 13 below) would give rise to a Mandatory
Nations Unwind Event absent a waiver by Nations. The Companies are seeking such
a waiver, but no assurance can be given as to whether or on what terms it will
be obtained. In addition, the Companies' bank group has indicated its belief
that consent under the credit facility would be required in connection with such
sale. No assurance can be given as to whether or on what terms such consent, if
required, will be obtained. Under the terms of the Nations Price Adjustment
Mechanism, upon the occurrence of a Mandatory Nations Unwind Event, if the Daily
Average Price (as defined) of the Paired Shares does not exceed $20.00, the
Companies would be deemed to have elected to settle the Nations Price Adjustment
Mechanism in cash (and the Companies would not be entitled to elect to settle in
stock). The Daily Average Price of the Paired Shares on November 19, 1998 was
$7.46.
As of the date of this filing, the Companies have delivered an aggregate of
13,886,547 Paired Shares and $179.2 to Nations as collateral to secure the
Companies' obligations under the Nations Price Adjustment Mechanism. A
registration statement covering the sale by PWFS, Nations and UBS of up to
40,000,000 Paired Shares in connection with the Price Adjustment Mechanisms has
been declared effective; however there can be no assurance that such
registration statement will remain effective or that the Companies will not be
required to register more Paired Shares in connection with the Price Adjustment
Mechanisms.
PWFS TRANSACTION. On April 6, 1998, the Companies entered into transactions
with PaineWebber Incorporated ("PaineWebber") and PaineWebber Financial
Products, Inc. ("PWFS" and, together with PaineWebber, the "PaineWebber
Parties"). Pursuant to the terms of a Purchase Agreement dated as of April 6,
1998 (the "PaineWebber Purchase Agreement"), PaineWebber purchased 5,150,000
Paired Shares (the "Initial PaineWebber Shares") from the Companies at a
purchase price of $27.01125 per share, which reflected a 2% discount to the last
reported sale price of the Paired Shares on April 3, 1998, for net proceeds of
approximately $139,100. The net proceeds were used by the Companies to repay
existing indebtedness. The Initial PaineWebber Shares represent approximately
2.9% of the outstanding Paired Shares as of the date of this filing.
In connection with the issuance of the Initial PaineWebber Shares, the
Companies entered into a Purchase Price Adjustment Mechanism Agreement, dated as
of April 6, 1998, with PWFS (as amended on August 14, 1998, September 30, 1998
and October 22, 1998, the "PaineWebber Price Adjustment Agreement"). Upon any
settlement under the PaineWebber Price Adjustment Agreement (a "PW Settlement"),
29
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
the purchase price of the Initial PaineWebber Shares subject to the PW
Settlement is adjusted based upon the difference between (i) the proceeds (net
of a negotiated resale spread or underwriting discount) received by PWFS from
the sale of the Paired Shares and (ii) a reference price (the "Reference Price")
equal to the closing price for a Paired Shares on April 3, 1998 plus a forward
accretion reflecting an imputed return at LIBOR plus 140 basis points, minus an
adjustment to reflect distributions on the Initial PaineWebber Shares prior to
the date of such PW Settlement (such difference, the "PW Price Difference"). If
the PW Price Difference is positive, PWFS must deliver Paired Shares or cash to
the Companies equal in value to the aggregate PW Price Difference. If the PW
Price Difference is negative, the Companies must deliver to PWFS additional
Paired Shares equal in value (net of a negotiated resale spread or underwriting
discount, as the case may be) to the aggregate PW Price Difference. The
PaineWebber Price Adjustment Agreement provides that shares may be delivered in
settlement only if the Companies have on file with the SEC an effective
registration statement covering the resale by PWFS of the shares to be
delivered. Although a registration statement covering the sale of up to
40,000,000 Paired Shares by PWFS, Nations and UBS in connection with the Price
Adjustment Mechanisms has been declared effective, there can be no assurance
that such registration statement will remain effective or that the Companies
will not be required to register more Paired Shares in connection with the Price
Adjustment Mechanisms.
Pursuant to the PaineWebber Price Adjustment Agreement, the Companies have
to date delivered 17,816,281 Paired Shares to PWFS as collateral ("Collateral
Shares") and have paid cash dividends totaling $192.3 on the Collateral Shares,
which amount is held by PWFS as collateral. Such number of shares is subject to
adjustment every two weeks such that the value of the Collateral Shares plus the
Initial PaineWebber Shares that have not been settled (valued at the closing
price of the Paired Shares on the adjustment date) is equal to the amount by
which the Reference Price times the number of shares subject to the PaineWebber
Price Adjustment Agreement (i.e., the number of Initial PaineWebber Shares that
have not been settled) exceeds $5,000 (such excess amount, the "Collateral
Amount"). The PaineWebber Price Adjustment Agreement provides, that if the
resale by PWFS of the shares to be so delivered is not covered by an effective
registration statement, then the Companies, at their option, must deliver to
PWFS either (i) a number of Collateral Shares equal in value to 125% of the
Collateral Amount or (ii) cash collateral equal to the Collateral Amount.
Although a registration statement covering the sale of up to 40,000,000 Paired
Shares by PWFS, Nations and UBS in connection with the Price Adjustment
Agreements has been declared effective, there can be no assurance that such
registration statement will remain effective or that the Companies will not be
required to register more Paired Shares in connection with the Price Adjustment
Mechanisms.
The PaineWebber Price Adjustment Agreement provides that if the closing
price of the Paired Shares on any trading day does not equal or exceed $16.00,
PWFS has the right to force a complete settlement under the PaineWebber Price
Adjustment Agreement through any commercially reasonable manner of sale
specified by PWFS. As a result of the failure of the closing price of the Paired
Shares to equal or exceed $16.00 on August 25, 1998, pursuant to the terms of
the PaineWebber Price Adjustment Agreement, PWFS became entitled to force a
complete settlement under the PaineWebber Price Adjustment Agreement and
continues to be so entitled. In addition, the PaineWebber Price Adjustment
Agreement
30
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
reached maturity on October 15, 1998. PWFS has not required any settlement under
the PaineWebber Price Adjustment Agreement to date although it has reserved its
right to do so. See "Potential Dilution and Liquidity Effects of the Price
Adjustment Mechanisms" below.
PWFS also has the right to force a complete settlement under the PaineWebber
Price Adjustment Agreement if the Companies (i) are in default with respect to
certain specified indebtedness of the Companies or (ii) effect an early
settlement, unwind or liquidation of any transaction similar to the transaction
with PWFS.
POTENTIAL DILUTION AND LIQUIDITY EFFECTS OF THE PRICE ADJUSTMENT
MECHANISMS. Settlement under one or more of the Price Adjustment Mechanisms
described above could have adverse effects on the Companies' liquidity or
dilutive effects on the Companies' capital stock. As of the date of this filing,
all three counterparties to the Price Adjustment Mechanisms were, pursuant to
the terms of the Price Adjustment Mechanisms, entitled to require settlement of
their transactions. If upon settlement the reset price or unwind price (in the
case of the UBS and Nations transactions) or the market price (in the case of
the PWFS transaction) of the Paired Shares is less than the applicable forward
price or reference price, the Companies must deliver cash or additional Paired
Shares to effect such settlement. Delivery of cash would adversely affect the
Companies' liquidity, and delivery of shares would have dilutive effects on the
Companies' capital stock. Moreover, to settle in stock under any of the Price
Adjustment Mechanisms, the Companies may be required to issue Paired Shares at a
depressed price, which would heighten the dilutive effects on the Companies'
capital stock. The dilutive effects of a stock settlement increase significantly
as the market price of the Paired Shares declines below the applicable forward
price or reference price. Furthermore, under certain circumstances, the
Companies may settle in Paired Shares only if a registration statement covering
such shares is effective. Although to date registration statements covering the
sale of up to 44,000,000 Paired Shares in connection with the Price Adjustment
Mechanisms have been declared effective, there can be no assurance that such
registration statements will remain effective or that the Companies will not be
required to register more Paired Shares in connection with the Price Adjustment
Mechanisms.
The market price of the Paired Shares has dropped significantly below the
applicable forward price or reference price under each of the Price Adjustment
Mechanisms. As a result, the Companies have to date made cash payments
(including cash dividends on collateral shares) totaling $54,252 (including a
partial settlement of $45,628 in cash under the UBS Forward Stock Contract) and
delivered an aggregate of 34,177,187 additional Paired Shares as collateral
pursuant to the Price Adjustment Mechanisms. If the Companies settled all three
transactions in cash on November 12, 1998, they would be obligated to deliver to
the counterparties a total of approximately $314,369 (assuming application of
the cash currently held as collateral by the counterparties) and would receive
from the counterparties a total of 13.3 million Paired Shares plus all Paired
Shares then held as collateral by them.
The terms of the Price Adjustment Mechanisms provide that all three
counterparties currently have the right to require the Companies to settle their
transactions. Moreover, UBS has asserted that the Companies are in default under
the terms of the Forward Stock Contract as the result of the Companies
31
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
not delivering certain cash collateral and not making final settlement of the
Forward Stock Contract in cash, although the Companies have disputed this
assertion.
The Companies are currently in discussions regarding possible resolutions of
the Price Adjustment Mechanisms to provide the Companies with the opportunity to
resolve the Price Adjustment Mechanisms through payments of cash or other forms
of consideration, and thus to avoid the need to settle in shares. There can be
no assurance that such discussions will be successful. Moreover, any such
resolutions may require the consent of the lenders under the Companies' credit
facility. No assurances can be given that any such consent, if required and
sought, would be obtained, or that the Companies would be able to meet their
obligations under any such settlement arrangement.
8. RELATED PARTY TRANSACTIONS:
In connection with the CHCI Merger, Mr. Karim Alibhai, President and Chief
Operating Officer of Wyndham, received 156,863 OP Units of the Operating
Partnerships valued at approximately $5,000 and entities affiliated with Mr.
Alibhai received 85,600 shares of Wyndham Series A Preferred Stock and 85,600
shares of Wyndham Series B Preferred Stock with an aggregate value of
approximately $3,980. These units and shares were issued in consideration of Mr.
Alibhai's ownership interests in CHCI and its affiliates. In addition, Mr.
Sherwood M. Weiser, a director of Wyndham, received 394,397 shares of Wyndham
Series A Preferred Stock and 394,398 shares of Wyndham Series B Preferred Stock
valued at $18,182 in connection with the CHCI Merger as consideration for his
ownership interest in CHCI and its affiliates.
9. INCOME TAXES:
As a result of the Wyndham Merger, the WHG Merger and the Interstate Merger,
Wyndham recorded a deferred tax liability totaling $108,221. The deferred tax
liability represents the tax effects of differences between the fair values and
the tax bases of identifiable assets acquired and liabilities assumed in
connection with the transactions.
The income tax provision for Wyndham is affected by certain expenses which
are deductible in determining net income for GAAP purposes, but are
non-deductible for federal income tax purposes. The income tax provision is also
affected by Wyndham's ownership of certain subsidiaries which are not
consolidated for federal income tax purposes.
32
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
10. CASH DIVIDENDS DECLARED; 1998 DIVIDENDS
<TABLE>
<CAPTION>
DIVIDEND
PER
SHARE(1)
-----------
<S> <C>
1997:
First quarter...................................................................................... $ 0.2625
Second quarter..................................................................................... $ 0.3225(2)
Third quarter...................................................................................... $ 0.2625
1998:
First quarter...................................................................................... $ 0.3200(3)
Second quarter..................................................................................... $ 0.3200(4)
</TABLE>
- ------------------------
(1) Represents shares of Old Patriot Common Stock for periods through July 1,
1997, and Paired Shares for periods after July 1, 1997, except that
dividends have been paid only on shares of Patriot Common Stock for periods
after July 1, 1997. No dividends have been paid on shares of Wyndham
International Common Stock.
(2) Dividends paid for second quarter of 1997 include a special dividend of
$0.06 per share paid by Old Patriot on June 30, 1997. To maintain its
qualification as a REIT prior to consummation of the Cal Jockey merger, Old
Patriot was required to distribute to its stockholders any undistributed
"real estate investment trust taxable income" of Old Patriot for Old
Patriot's short taxable year ending with the consummation of the Cal Jockey
Merger.
(3) On May 4, 1998, Patriot declared a dividend of $0.32 per share for the first
quarter of 1998. The dividend was paid on May 29, 1998 to shareholders of
record on May 20, 1998.
(4) On July 28, 1998, Patriot declared a dividend of $0.32 per share for the
second quarter of 1998. The dividend was paid on August 20, 1998 to
shareholders of record on August 10, 1998.
Patriot is currently reviewing its liquidity and financial condition.
Accordingly, Patriot has decided not to declare a dividend with respect to the
third quarter at this time. Instead, prior to December 31, 1998, Patriot intends
to declare a dividend, payable in cash or securities in January, 1999, which
will be at least sufficient to satisfy the federal income tax requirements with
respect to dividends in order for Patriot to continue to qualify as a REIT.
11. PRO FORMA FINANCIAL INFORMATION:
The following unaudited separate and combined pro forma results of
operations of Patriot and Wyndham are presented as if the 487 hotels owned,
leased, managed or franchised by the Companies as of September 30, 1998, had
been acquired on January 1, 1997. Such acquisition transactions include: (i) the
Cal Jockey Merger, the Wyndham Merger, the Interstate Merger and the CHCI Merger
and the related transactions; (ii) the closing on the commitment for the
Revolving Credit Facility and Term Loans; (iii) the acquisition of Grand
Heritage Hotels, Inc. and other Grand Heritage subisidiaries; (iv) the Arcadian
Acquisition and the Summerfield Acquisition; (v) the WHG Transactions; and (vi)
the private placements of equity securities and public offering of the
Companies' common stock which occurred during the first nine months of 1998 and
during 1997. The following unaudited pro forma financial information is not
33
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
11. PRO FORMA FINANCIAL INFORMATION: (CONTINUED)
necessarily indicative of what actual results of operations of Patriot and
Wyndham would have been assuming such transactions had been completed as of
January 1, 1997, nor do they purport to represent the results of operations for
future periods.
PATRIOT AND WYNDHAM
COMBINED PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Total revenue..................................................... $ 1,929,924 $ 1,794,741
------------ ------------
------------ ------------
Net loss(1)....................................................... $ (86,513) $ (45,931)
Adjustment for equity forwards(2)................................. (95,063) --
Preferred stock dividends......................................... (4,250) --
------------ ------------
Net loss to common stockholders................................. $ (185,826) $ (45,931)
------------ ------------
------------ ------------
Earnings per share--
Basic loss per Paired Share....................................... $ (1.33) $ (0.33)
------------ ------------
------------ ------------
Diluted loss per Paired Share..................................... $ (1.33) $ (0.33)
------------ ------------
------------ ------------
Weighted average number of Paired Shares and Paired Share
equivalents outstanding:
Basic........................................................... 139,820 139,820
------------ ------------
------------ ------------
Diluted......................................................... 139,820 139,820
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Combined pro forma net loss for the nine months ended September 30, 1998
includes costs to acquire leaseholds and treasury lock settlement costs,
non-recurring expenses, in the amount of $61,000 and $49,225, respectively.
Combined pro forma net loss for the nine months ended September 30, 1997
includes costs to acquired leaseholds, a non-recurring expense, in the
amount of $43,820 that was reported by the Companies.
(2) The adjustment relates to the mark-to-market adjustment for the UBS
Transaction and the Nations Transaction (described in Note 7), which can be
settled in cash or stock, at the Companies' option. There is no adjustment
to earnings per share for the PaineWebber Transaction since it can be
settled in stock only and is accounted for by the Reverse Treasury Stock
Method.
34
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
11. PRO FORMA FINANCIAL INFORMATION: (CONTINUED)
PATRIOT
CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Total revenue..................................................... $ 565,944 $ 545,601
------------ ------------
------------ ------------
Net income (loss)(1).............................................. $ 17,263 $ (42,754)
Adjustment for equity forwards(2)................................. (95,063) --
Preferred stock dividends......................................... (3,110) --
------------ ------------
Net loss to common stockholders................................. $ (80,910) $ (42,754)
------------ ------------
------------ ------------
Earnings per share--
Basic earnings (loss) per share................................... $ (0.58) $ (0.31)
------------ ------------
------------ ------------
Diluted earnings (loss) per share................................. $ (0.58) $ (0.31)
------------ ------------
------------ ------------
Weighted average number of common shares and common share
equivalents outstanding:
Basic........................................................... 139,820 139,820
------------ ------------
------------ ------------
Diluted......................................................... 139,820 139,820
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Consolidated pro forma net loss for the nine months ended September 30, 1998
includes costs to acquire leaseholds and treasury lock settlement costs,
non-recurring expenses, in the amount of $8,279 and $49,225, respectively,
that were reported by Patriot. Consolidated pro forma net loss for the nine
months ended September 30, 1997 includes costs to acquired leaseholds, a
non-recurring expense, in the amount of $43,820 that was reported by
Patriot.
(2) The adjustment relates to the mark-to-market adjustment for the UBS
Transaction and the Nations Transaction (described in Note 7), which can be
settled in cash or stock, at the Companies' option. There is no adjustment
to earnings per share for the PaineWebber Transaction since it can be
settled in stock only and is accounted for by the Reverse Treasury Stock
Method.
35
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
11. PRO FORMA FINANCIAL INFORMATION: (CONTINUED)
WYNDHAM
CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Total revenue..................................................... $ 1,901,245 $ 1,760,812
------------ ------------
------------ ------------
Net loss(1)....................................................... $ (114,085) $ (3,177)
Preferred stock dividends......................................... (1,140) --
------------ ------------
Net loss to common stockholders................................. $ (115,225) $ (3,177)
------------ ------------
------------ ------------
Earnings per share
Basic loss per share.............................................. $ (0.82) $ (0.02)
------------ ------------
------------ ------------
Diluted loss per share............................................ $ (0.82) $ (0.02)
------------ ------------
------------ ------------
Weighted average number of common shares and common share
equivalents outstanding:
Basic........................................................... 139,820 139,820
------------ ------------
------------ ------------
Diluted......................................................... 139,820 139,820
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Consolidated pro forma net loss for the nine months ended September 30, 1998
includes costs to acquire leaseholds, a non-recurring expense, in the amount
of $52,721 that was reported by Wyndham.
12. LIQUIDITY:
The Companies are evaluating possible means of meeting near-term debt
service requirements and improving liquidity through refinancing or extending
the maturity of existing indebtedness, issuing additional equity securities, and
divesting certain non-core, non-proprietarily branded hotel assets. The
Companies have also re-strategized capital expenditures (currently estimated at
$100,000 for 1999) and development programs, are improving operating
efficiencies, and are in discussions to seek possible amendments to the
Revolving Credit Facility.
No assurances can be made regarding the availability or terms of additional
sources of capital for the Companies in the future and no assurances can be
given regarding the Companies' ability to successfully refinance or extend the
maturity of existing indebtedness. A default by the Companies under current
existing indebtedness may cause a cross-default under other existing
indebtedness, including, without limitation, the Revolving Credit Facility. No
assurances can be given regarding the Companies' success in securing any
amendments to the Revolving Credit Facility. Additionally, in the absence of
such amendments, no assurances can be given that the Companies will meet the
reduced EBITDA coverage ratio
36
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
12. LIQUIDITY: (CONTINUED)
requirements which go into effect in December under the Revolving Credit
Facility. If the Companies are unable to secure additional sources of financing
in the future, are unable to successfully refinance existing indebtedness, or
are unable to obtain amendments to existing convenants under the Revolving
Credit Facility, no assurance can be made that the Companies will be able to
meet their financial obligations as they come due without substantial dilution
of assets outside the ordinary course of business, restructuring of debt,
externally forced revisions of its operations or similar actions. Additionally,
no assurances can be given that the lack of future financing sources would not
have a material adverse effect on the Companies' financial condition and results
of operations.
13. SUBSEQUENT EVENTS:
In September 1998, Hurricane Georges hit the island of Puerto Rico and the
Gulf coast of the United States, including Florida and Louisiana. Patriot owns
three properties on Puerto Rico, the El Conquistador Resort and Country Club,
the El San Juan Hotel and Casino and the Condado Plaza Hotel. The hurricane
caused approximately $60,000 of property related damage, excluding the impact of
business interruption, to the El Conquistador, Condado Plaza Hotel & Casino and
the El San Juan Hotel & Casino properties. As a result of the damage, the three
properties experienced varying periods of business interruption. In addition to
these properties, Wyndham manages two properties on the island, the Old San Juan
Hotel and Casino and the Wyndham Palmas del Mar.
The Companies' damage assessment teams, working with the underwriters for
the Companies' insurance providers, have inspected each of the Companies' owned
or managed properties on Puerto Rico and while none of the properties were
destroyed, each sustained damages requiring repair and construction.
Furthermore, each of the Companies' owned or managed properties sustained
damages to the surrounding grounds and landscaping which are in the process of
being repaired. To date, the El San Juan, the Old San Juan, the El Conquistador
and the Palmas del Mar have re-opened for business. It is currently anticipated
that the remainder of the closed rooms at the Condado Plaza, the stand alone
ballroom at the Palmas del Mar and the suites at Las Casitas and certain other
ancillary facilities at the El Conquistador will re-open in late November. In
addition, the grand opening of the Golden Door Spa at the El Conquistador which
was scheduled for mid-October will be delayed until mid-December. The Companies'
estimated re-opening dates are subject to the availability of construction
materials and labor. No assurance can be given that the Companies' owned or
manage properties in Puerto Rico will be operating at full capacity by these
estimated dates.
All of the Companies' owned or managed properties on Puerto Rico are insured
with both comprehensive property damage and business interruption insurance,
subject to certain deductibles. The Companies have hired a consultant to assess
their business interruption claims and are currently negotiating with their
insurance carriers regarding coverage for the losses sustained at the Puerto
Rico properties. While the Companies currently believe that substantially all of
the damages sustained at their Puerto Rico properties will be covered by
insurance, no assurances can be made regarding the timing or amount of the
actual payments that will ultimately be received by the Companies under these
policies.
37
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
13. SUBSEQUENT EVENTS: (CONTINUED)
On October 20, 1998, the El Conquistador Partnership, L.P. (the "El
Conquistador Partnership"), which is beneficially owned 100% by the Companies,
filed a Form S-11 with the SEC with respect to the offering (the "Bond
Offering") of the undivided interests in the loan agreement between Puerto Rico
Industrial, Tourist, Educational, Medical and Environmental Control Facilities
Financing Authority ("AFICA") and the El Conquistador Partnership relating to
certain AFICA tourism revenue bonds (the "AFICA Bonds"). It is contemplated that
the AFICA Bonds will be issued in the total principal amount of $100,000, will
consist of serial bonds and term bonds and will be issued in register form,
without coupons, in denominations which are multiples of $5. AFICA will issue
the AFICA Bonds and lend the proceeds to the El Conquistador Partnership
pursuant to the loan agreement (the "AFICA Loan Agreement"). The El Conquistador
Partnership will use the loan proceeds to repay the Interim Financing entered
into on August 3, 1998, to fund certain reserves and to pay certain costs and
expenses of issuing the AFICA Bonds. The AFICA Bonds will be secured by a lien
on substantially all the assets of the El Conquistador Partnership.
On October 23, 1998, Patriot notified the Summerfield Partners'
Representative of Patriot's intention to deliver the additional consideration
due under the Summerfield Acquisition agreement based on the market price of the
Paired Shares through the end of 1998 in the form of OP Units. Patriot currently
estimates the additional consideration due under the Summerfield Acquisition
agreement at approximately $10,500.
On November 3, 1998, the Companies entered into agreements to extend the
maturity of certain debt related to the El Conquistador and the Condado Plaza
Hotel & Casino from November 3, 1998 to January 29, 1999. The extension
agreements required that $10,000 be deposited into an escrow account in
installments beginning on the date of the extension through January 12, 1999.
Upon the satisfactory completion of certain conditions, the $10,000 will be
released from escrow.
On November 8, 1998, the Companies announced two asset disposition
transactions which, in aggregate, are expected to total approximately $206,500.
The first transaction, currently under a letter of intent, is to transfer seven
hotels representing approximately 1,982 guest rooms, as well as a controlling
interest in Interstate Hotel Management, Inc., to affiliates of Paine Webber
Real Estate for aggregate consideration of approximately $165,000, including the
satisfaction of $160,000 in debt owed by the Companies to Paine Webber Real
Estate in connection with the Arcadian Acquisition. This consideration may be
subject to an additional earn-out if the hotels meet certain return targets.
This transaction is expected to close on or before December 23, 1998 subject to
the satisfactory completion of PaineWebber's due diligence and customary closing
conditions. This acquisition, if consummated, would be in lieu of the Spin-off
contemplated under the Marriott Settlement Agreement. This transaction is
subject to third-party consents and conditions. There can be no assurance that a
definitive contract will be entered into, that the consents and conditions will
be satisfied, or that the transaction will ultimately be consummated.
The second transaction, which is expected to close by November 20, 1998,
includes the sale of a 100% interest in two hotel properties and a 50% equity
interest in two other hotel properties to Mr. Milton Fine, a director of
Patriot, for an aggregate purchase price of $41,500.
38
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
13. SUBSEQUENT EVENTS: (CONTINUED)
On November 12, 1998, the Companies announced they had retained Morgan
Stanley Dean Witter & Co. and Chase Securities Inc. as co-advisors to explore
alternatives responding to issues relating to debt maturities and the forward
equity contracts. The Companies are exploring a broad range of alternatives to
address these matters, including, without limitation, a sale of equity and/or
debt securities, a business combination or a sale of certain assets. No
assurances can be given as to whether or when (or on what terms) any transaction
would be consummated.
On November 16, 1998, the Companies announced they will offer a stock option
exchange program for its employees who were awarded options since the Companies
acquired the paired-share structure. Certain senior executives and directors
will not participate in the exchange. The Companies will utilize the Black
Schole's Option Pricing Model, one of two valuation models recognized by the
SEC, to compute the appropriate exchange of the formerly issued options. The
share price on the to-be-exchanged options will be determined by the higher of
the average price of the Companies paired shares over a five-day trading period
that commenced on Tuesday, November 10, 1998, or the closing price of the
Companies paired shares on the fifth trading day. The result of the exchange
will be the award of fewer options in aggregate, but at a calculated amount of
$8.10 per share, to ensure that the option program continues as a valuable
vehicle through which to incent and retain valuable employees.
Certain lenders on the debt assumed in the Arcadian Acquisition have rights
to consent to the roll-over of certain short-term leases which are subject to
renewal in December 1998. Certain lenders have asserted that they intend not to
consent to the roll-over of these leases. As a result, the Companies would be
required to refinance such debt if such consents could not be obtained.
The Companies are in discussions regarding the sale of certain hotels
currently leased to NorthCoast Hotels. No definitive agreement has been reached
regarding this sale and no assurances can be given that the transaction will be
consummated.
As previously disclosed, the Companies are currently reviewing the
characterization and recognition in the fourth quarter of 1998 of approximately
$16,000 of income relating to the cancellation of certain rights.
39
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Companies' Joint Annual Report on Form 10-K for the
year ended December 31, 1997.
Certain statements with respect to future events, including, without
limitation, statements regarding availability of equity or debt financing, the
Companies' ability to successfully refinance or extend the maturity of existing
indebtedness, and the Companies' ability to successfully negotiate a settlement
to the forward equity contracts in this Form 10-Q constitute "forward-looking
statements" as that term is defined under Section21E of the Securities Exchange
Act of 1934, as amended and the Private Securities Litigation Reform Act of
1995. The words "believe", "expect", "anticipate", "intend", "estimate" and
other expressions which are predictions of or indicate future events and trends
and which do not relate to historical matters identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements and to note that they speak only as of the date
hereof. Although forward-looking statements reflect management's good faith
beliefs, reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance or achievement of the Companies to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. The Companies undertake
no obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise. Certain
factors that might cause a difference include, but are not limited to, risks
associated with the availability of equity or debt financing at terms and
conditions favorable to the Companies, the willingness of the Companies'
existing lenders to refinance, extend or amend the terms of existing
indebtedness, the willingness of the counterparties to the Companies' forward
equity contracts to enter into settlements regarding those agreements; the
Companies' ability to effect sales of assets on favorable terms and conditions;
risks associated with the hotel industry and real estate markets in general; and
risks associated with debt financing.
THE COMPANIES
At September 30, 1998, Patriot and Wyndham, directly or through the
Operating Partnerships and other subsidiaries, owned interests in 184 hotels
totaling over 44,700 rooms and leased 122 hotels from third parties totaling
over 15,700 rooms. In addition, Wyndham managed 171 hotels with over 42,000
rooms for third party owners and franchised nine hotels under the Wyndham,
Summerfield or ClubHouse brands. The hotels are diversified by franchise or
brand affiliation and serve primarily major U.S. business centers. In addition
to hotels catering primarily to business travelers, the Companies' portfolio
includes world-class resort hotels and prominent hotels in major tourist
destinations.
Patriot leases 216 of its owned or leased hotels to Wyndham and 14 of
Patriot's hotels are leased to third party lessees (the "Lessees") who are
responsible for operating the hotels. Generally, these leases provide 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.
Seventy-six of the Companies' hotels are owned or leased by special purpose
entities (the "Non-Controlled Subsidiaries"). Patriot owns an approximate 99%
non-voting interest and Wyndham owns an approximate 1% controlling voting
interest in each of the Non-Controlled Subsidiaries. Therefore, the operating
results of the Non-Controlled Subsidiaries are combined with those of Wyndham
for financial reporting purposes. Patriot accounts for its investment in the
Non-Controlled Subsidiaries using the equity method of accounting.
40
<PAGE>
In addition to leasing and managing hotels, Wyndham is also engaged in the
business of conducting and offering pari-mutuel wagering on thoroughbred horse
racing at the Bay Meadows Racecourse (the "Racecourse").
On November 12, 1998, the Companies announced that they had retained Morgan
Stanley Dean Witter & Co. and Chase Securities Inc. as co-advisors to explore
alternatives responding to issues relating to debt maturities and the forward
equity contracts. The Companies are exploring a broad range of alternatives to
address these matters, including, without limitation, a sale of equity and/or
debt securities, a business combination or a sale of certain assets. No
assurances can be given as to whether or when (or on what terms) any transaction
would be consummated.
HOTELS AND OTHER BUSINESSES ACQUIRED
WYNDHAM HOTEL CORPORATION
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 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. In
addition, Patriot assumed 14 hotel leases, 13 of which were sub-leased to
Wyndham. 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
"Non-Controlled Subsidiaries"). Patriot owns a 99% non-voting interest and
Wyndham owns the 1% controlling voting interest in each of the Non-Controlled
Subsidiaries. Therefore, the operating results of the Non-Controlled
Subsidiaries have been combined with those of Wyndham for financial reporting
purposes. Patriot accounts for its investment in the 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 CASINOS & RESORTS, INC. AND RELATED 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 and
WHG Casinos & Resorts Inc. ("WHG"), a subsidiary of Wyndham merged with and into
WHG, with WHG being the surviving corporation (the "WHG Merger"). As a result of
the WHG Merger, Wyndham 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 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
41
<PAGE>
Shares valued at approximately $49.2 million (collectively, these transactions
and the WHG Merger are referred to herein as the "WHG Transactions").
On July 13, 1998, Patriot acquired the remaining minority interests held by
a third party in entities that own the El Conquistador and the El San Juan Hotel
& Casino for a total purchase price of approximately $3.9 million. Wyndham owns
the controlling general partner interest in the partnerships that own the El San
Juan Hotel & Casino and the El Conquistador. Wyndham also holds voting control
of Williams Hospitality Group, Inc. Therefore, the operating results of these
entities have been consolidated with those of Wyndham for financial reporting
purposes.
On August 3, 1998, the Companies refinanced certain debt related to the El
Conquistador and the Condado Plaza Hotel & Casino. Proceeds of $145.0 million
from the refinancing were used to repay outstanding indebtedness of
approximately $139.3 million, to pay legal and closing costs and to establish
certain reserves, including interest reserves, required by the loan agreements.
The loans are secured by mortgages on the properties, bear interest at a rate of
LIBOR plus 2.25% and, prior to the extension described below, matured on
November 3, 1998.
In September 1998, Hurricane Georges hit the island of Puerto Rico and the
Gulf coast of the United States, including Florida and Louisiana. Patriot owns
three properties on Puerto Rico, the El Conquistador Resort and Country Club,
the El San Juan Hotel and Casino and the Condado Plaza Hotel. The hurricane
caused approximately $60 million of property related damage, excluding the
impact of business interruption, to the El Conquistador, Condado Plaza Hotel &
Casino and the El San Juan Hotel & Casino properties. As a result of the damage,
the three properties experienced varying periods of business interruption. In
addition to these properties, Wyndham manages two properties on the island, the
Old San Juan Hotel and Casino and the Wyndham Palmas del Mar.
The Companies' damage assessment teams, working with the underwriters for
the Companies' insurance providers, have inspected each of the Companies' owned
or managed properties on Puerto Rico and while none of the properties were
destroyed, each sustained damages requiring repair and construction.
Furthermore, each of the Companies' owned or managed properties sustained
damages to the surrounding grounds and landscaping which are in the process of
being repaired. To date, the El San Juan, the Old San Juan, the El Conquistador
and the Palmas del Mar have re-opened for business. It is currently anticipated
that the remainder of the closed rooms at the Condado Plaza, the stand alone
ballroom at the Palmas del Mar and the suites at Las Casitas and certain other
ancillary facilities at the El Conquistador will re-open in late November. In
addition, the grand opening of the Golden Door Spa at the El Conquistador which
was scheduled for mid-October will be delayed until mid-December. The Companies'
estimated re-opening dates are subject to the availability of construction
materials and labor. No assurance can be given that the Companies' owned or
manage properties in Puerto Rico will be operating at full capacity by these
estimated dates.
All of the Companies' owned or managed properties on Puerto Rico are insured
with both comprehensive property damage and business interruption insurance,
subject to certain deductibles. The Companies have hired a consultant to assess
their business interruption claims and are currently negotiating with their
insurance carriers regarding coverage for the losses sustained at the Puerto
Rico properties. While the Companies currently believe that substantially all of
the damages sustained at their Puerto Rico properties will be covered by
insurance, no assurances can be made regarding the timing or amount of the
actual payments that will ultimately be received by the Companies under these
policies.
On November 3, 1998, the Companies entered into agreements to extend the
maturity of certain debt related to the El Conquistador and the Condado Plaza
Hotel & Casino from November 3, 1998 to January 29, 1999. The extension
agreements required that $10 million be deposited into an escrow account in
installments beginning on the date of the extension through January 12, 1999.
Upon the satisfactory completion of certain conditions, the $10 million will be
released from escrow.
42
<PAGE>
ARCADIAN INTERNATIONAL LIMITED
On April 6, 1998, Patriot announced the completion of its acquisition of all
of the issued and to-be-issued shares of Arcadian International Limited
("Arcadian," formerly known as Arcadian International Plc) for 60 pence per
share. Including the exercise of all outstanding options to purchase shares, the
assumption of debt and the acquisition of the remaining shares in the Malmaison
Group, the total transaction cost was approximately L185.9 million
(approximately $308.7 million U.S. based on exchange rates at the time of
closing). As a result of the transaction, Patriot acquired ten owned hotels
located throughout England; one owned hotel in Jersey; five owned and managed
Malmaison Hotels; two resorts under development in Tuscany, Italy and Paris,
France; and the proprietary Malmaison brand name. Patriot also acquired
Arcadian's 50% partnership interest in the redevelopment of the luxury Great
Eastern Hotel in London, to be branded as a flagship Wyndham Hotel and operated
by Wyndham once the development has been completed. Collectively, the
transactions described above are referred to herein as the "Arcadian
Acquisition."
In connection with the Arcadian Acquisition, Patriot entered into a
short-term financing agreement on April 15, 1998 with Paine Webber Real Estate
Securities Inc. ("Paine Webber Real Estate") whereby Paine Webber Real Estate
loaned Patriot $160 million through April 15, 1999, at a rate equal to the
borrowing rate on Patriot's Revolving Credit Facility. The Companies currently
anticipate that this $160 million debt will be satisfied in connection with the
sale of certain hotel and other assets to Paine Webber Real Estate described in
Note 13 to the financial statements. In addition, Patriot assumed approximately
$112.6 million of debt in connection with the Arcadian Acquisition.
INTERSTATE HOTELS COMPANY
On June 2, 1998, pursuant to an Agreement and Plan of Merger dated as of
December 2, 1997, as thereafter amended, (the "Interstate Merger Agreement")
between Patriot, Wyndham and Interstate Hotels Company ("Interstate"),
Interstate merged with and into Patriot with Patriot being the surviving company
(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 (the
"Cash Consideration"), subject to proration in certain circumstances, or (ii) a
number of Paired Shares of Patriot and Wyndham 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").
As a result of the Interstate Merger, Patriot acquired controlling interest
in, or ownership of, 42 hotels representing over 12,000 rooms; leases for 84
hotels representing over 10,100 rooms and management or service agreements for
82 hotels representing over 20,400 rooms located throughout the United States
and in Canada, the Caribbean and Russia.
The total purchase consideration for the Interstate Merger of approximately
$2.1 billion consisted of 28,825,875 Paired Shares, cash of approximately $525.4
million to pay Interstate shareholders who elected to receive cash,
approximately $787.1 million in debt assumed or refinanced by Patriot and
approximately $73.4 million to pay other transaction-related costs. In addition,
Interstate shareholders received rights to receive a cash distribution of $0.429
on each share of Interstate common stock that was converted into Paired Shares,
aggregating approximately $9.1 million.
In connection with the Interstate Merger, the Patriot Companies closed on
the commitment from The Chase Manhattan Bank and Chase Securities, Inc. and
Paine Webber Real Estate to increase Patriot's existing credit facilities to an
aggregate of $2.7 billion (an increase of $1.45 billion from the prior $1.25
billion credit package). The increased credit facilities include the $900
million Revolving Credit Facility and a series of term loans in the aggregate
amount of up to $1.8 billion (the "Term Loans"). Proceeds from the increased
credit facilities were used to fund the cash portion of the Interstate Merger
consideration, as well as to refinance certain outstanding indebtedness of the
Patriot Companies. In addition, the increased credit facilities will be used to
fund future acquisitions and for general working capital purposes. Interest
rates will be based on the Patriot Companies' leverage ratio and may vary from
1.5% to 2.5% over LIBOR.
43
<PAGE>
Patriot incurred approximately $27.4 million in loan fees and other expenses
associated with this financing arrangement.
On May 27, 1998, the Companies and Interstate entered into a settlement
agreement (the "Settlement Agreement") with Marriott International, Inc.
("Marriott") which addressed certain claims asserted by Marriott in connection
with Patriot's then proposed merger with Interstate. The Settlement Agreement
provided for the dismissal of litigation brought by Marriott and allowed
Patriot's merger with Interstate to close on June 2, 1998.
In addition to dismissal of the Marriott litigation, the Settlement
Agreement provides for three principal transactions: (i) rebranding of ten
Marriott hotels under the Wyndham name, (ii) the assumption by Marriott of the
management of ten Marriott hotels formerly managed by Interstate for the
remaining term of the Marriott franchise agreement, and (iii) the Spin-off. On
November 8, 1998, the Companies entered into a letter of intent pursuant to
which the Companies will sell seven hotels, representing approximately 1,982
guest rooms, as well as a controlling interest in Interstate Hotel Management,
Inc., to affiliates of Paine Webber Real Estate Securities Inc. This
transaction, if consummated, would be in lieu of the Spin-off.
SF HOTEL COMPANY, L.P.
On June 5, 1998, Patriot, through the Patriot Partnership, acquired all of
the partnership interests in SF Hotel Company, L.P. ("Summerfield") for
approximately $298.9 million (the "Summerfield Acquisition"). The total purchase
consideration for the Summerfield Acquisition consisted of approximately
3,223,795 OP Units of the Operating Partnerships, 1,397,281 Paired Shares, cash
of approximately $165.5 million and assumption of debt in the amount of
approximately $17.1 million. In addition, the purchase price is subject to
future adjustment based on (i) the market price of the Paired Shares through the
end of 1998 and (ii) achievement of certain performance criteria through 2001
for seven hotels that are currently under development. As a result of the
Summerfield Acquisition, Patriot acquired four Summerfield
Suites-Registered Trademark- hotels, leasehold and management interests in 24
Summerfield Suites-Registered Trademark-, Sierra Suites-Registered Trademark-
and Sunrise Suites hotels and management contracts and franchise interests for
12 additional Summerfield Suites-Registered Trademark- and Sierra
Suites-Registered Trademark-hotels. Patriot has leased or sub-leased such hotels
to Wyndham. In addition, Patriot acquired the development contracts for several
additional hotels.
On October 23, 1998, Patriot notified the Summerfield Partners'
Representative of Patriot's intention to deliver the additional consideration
due under the Summerfield Acquisition agreement based on the market price of the
Paired Shares through the end of 1998 in the form of OP Units. Patriot currently
estimates the additional consideration due under the Summerfield Acquisition
agreement at approximately $10,500,000.
CHC INTERNATIONAL
On June 30, 1998, pursuant to an Agreement and Plan of Merger dated as of
September 30, 1997 (the "CHCI Merger Agreement") between Patriot, Wyndham and
CHC International ("CHCI"), the hospitality-related businesses of CHCI merged
with and into Wyndham with Wyndham being the surviving company (the "CHCI
Merger"). CHCI's gaming operations were transferred to a new legal entity prior
to the CHCI Merger and such operations were not a part of the transaction. As a
result of the CHCI Merger, Wyndham, through its subsidiaries, acquired the
remaining 50% investment interest in GAH-II, L.P. ("GAH"), the remaining 17
leases and 16 of the associated management contracts related to the Patriot
hotels leased by CHC Lease Partners, 8 third-party management contracts, two
third-party asset management contracts, the Grand Bay proprietary brand name and
certain other hospitality management assets.
By operation of the CHCI Merger, all the issued and outstanding shares of
common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain
stock option rights were exchanged for an aggregate of 1,781,173 shares of
Series A Redeemable Convertible Preferred Stock, par value $0.01 per
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share of Wyndham (the "Wyndham Series A Preferred Stock") and 1,781,181 shares
of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share,
of Wyndham (the "Wyndham Series B Preferred Stock"). In addition, Wyndham
assumed CHCI's outstanding debt in the amount of approximately $16.6 million.
In addition, on September 30, 2000 and September 30, 2002, Wyndham may be
obligated to pay the CHCI stockholders and a subsidiary of Wyndham may be
obligated to pay a Gencom-related entity additional consideration, in each case
based upon the performance of certain specified assets.
OTHER ACQUISITIONS
In addition, during the nine months ended September 30, 1998, Patriot
acquired investments in four hotels and the Golden Door Spa for approximately
$234.1 million. These acquisitions were financed primarily with funds drawn on
the Companies' revolving credit facility, the issuance of 53,989 OP Units of the
Operating Partnerships valued at approximately $1.5 million, the issuance of
390,335 Paired Shares valued at approximately $10 million, and the assumption of
other mortgage debt in the amount of approximately $80.1 million. In addition,
Patriot acquired an office building that will be converted into a hotel for
approximately $33.9 million.
In July 1998, Wyndham acquired an approximate 50% limited partnership
interest in a partnership with affiliates of Don Shula's Steakhouses, Inc. for
$1.5 million in cash and 156,272 preferred units of limited partnership interest
of Wyndham Partnership. Wyndham entered into this joint venture arrangement to
expand the Shula's Steakhouse Brand as a food and beverage amenity in certain of
Patriot's hotels.
1998 DIVIDENDS
Patriot is currently reviewing its liquidity and financial condition.
Accordingly, Patriot has decided not to declare a dividend with respect to the
third quarter at this time. Instead, prior to December 31, 1998, Patriot intends
to declare a dividend, payable in cash or securities in January, 1999, which
will be at least sufficient to satisfy the federal income tax requirements with
respect to dividends in order for Patriot to continue to qualify as a REIT.
SALES OF PAIRED COMMON STOCK WITH PRICE ADJUSTMENT MECHANISMS
The Companies are parties to transactions with three counterparties
involving the sale of an aggregate of 13.3 million shares of Paired Common
Stock, with related Price Adjustment Mechanisms, as described below.
UBS TRANSACTION. On December 31, 1997, the Companies entered into
transactions with UBS Limited and Union Bank of Switzerland, London Branch
(together with its successor, UBS AG, London Branch, "UBS" and, together with
Warburg Dillon Read, LLC, the "UBS Parties"). Pursuant to the terms of a
Purchase Agreement dated as of December 31, 1997 (the "UBS Purchase Agreement"),
UBS Limited purchased 3,250,000 Paired Shares (the "Initial UBS Shares") from
the Companies at a purchase price of $28.8125 per share (the last reported sale
price of the Paired Shares on December 30, 1997) for approximately $91.8 million
in net proceeds. The net proceeds were used by the Companies to repay existing
indebtedness. The Initial UBS Shares represent approximately 1.8% of the
outstanding Paired Shares as of the date of this filing. UBS received from the
Companies a placement fee of 2%, or approximately $1.9 million.
In connection with the issuance of the Initial UBS Shares, the Companies
entered into a Forward Stock Contract, dated as of December 31, 1997, with UBS
(as amended on August 14, 1998 and September 11, 1998, the "Forward Stock
Contract"). Pursuant to the Forward Stock Contract, the Companies have agreed to
effect a settlement, in one or more transactions (each a "UBS Settlement"), with
respect to a number of Paired Shares equal to the number of Initial UBS Shares,
at a per Paired Share
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price equal to $28.8125 plus a forward accretion reflecting an imputed return at
LIBOR plus 140 basis points, minus an adjustment to reflect distributions on the
Paired Shares (the "UBS Forward Price"). The forward accretion component
represents a guaranteed rate of return to UBS. The Paired Shares to be delivered
to or by UBS may consist of Paired Shares acquired under the UBS Purchase
Agreement or otherwise.
The Companies may effect a UBS Settlement by (i) delivering to UBS Paired
Shares (the "UBS Settlement Shares") equal in value (valued at the daily average
closing price for the Paired Shares over a specific period of time (the "UBS
Unwind Price")) to the UBS Forward Price at the time of such UBS Settlement
times the number of Paired Shares subject to such UBS Settlement (the "UBS
Settlement Amount") in exchange for the number of shares subject to such UBS
Settlement, (ii) delivering to (or, in the event the UBS Unwind Price is greater
than the UBS Forward Price, receiving from) UBS a number of Paired Shares equal
to the difference between the number of the UBS Settlement Shares and the number
of shares subject to such UBS Settlement, or (iii) delivering to UBS cash equal
to the UBS Settlement Amount in exchange for the shares subject to such UBS
Settlement. If the Companies make a UBS Settlement in Paired Shares, they must
also pay to UBS (i) an unwind accretion fee (payable in cash or shares) equal to
50% of the UBS Settlement Amount times the imputed return of LIBOR plus 140
basis points over the period designated for such UBS Settlement and (ii) a
placement fee equal to 0.50% of the UBS Settlement Amount. The Forward Stock
Contract provides that shares may be delivered in settlement only if the
Companies have on file with the SEC an effective registration statement covering
the resale by UBS of the shares to be delivered. A registration statement
covering up to 4,000,000 shares to be sold by UBS was declared effective (as
amended) on October 15, 1998. A registration statement covering up to an
additional 40,000,000 shares to be sold by PWFS, Nations and UBS was declared
effective on October 15, 1998.
In connection with the September 11 amendment to the Forward Stock Contract,
the Companies paid down $45,627,725 under the Forward Stock Contract through the
application of cash collateral that had previously been delivered to UBS
pursuant to the Forward Stock Contract. In addition, the Companies have
delivered an additional 2,474,359 Paired Shares and $8,252,274 to UBS as
collateral pursuant to the Forward Stock Contract. The cash collateral held by
UBS is subject to adjustment every two weeks such that the amount of cash
collateral is equal to the number of shares subject to the Forward Stock
Contract times the amount by which the UBS Forward Price exceeds the closing
price of the Paired Shares on the trading day immediately preceding the
adjustment date (such closing price the "UBS Reset Price" and such product the
"UBS Interim Settlement Amount"). With the prior written consent of UBS, the
Companies may elect to deliver to UBS a number of Paired Shares (the "UBS
Interim Settlement Shares") equal in value (valued at the UBS Reset Price) to
125% of the UBS Interim Settlement Amount.
The Forward Stock Contract provides that if the average closing price of the
Paired Common Stock for any two consecutive trading days does not equal or
exceed $11.00 (the "UBS Unwind Threshold"), UBS has the right to force a
complete settlement under the Forward Stock Contract. As a result of the failure
of the average closing price of the Paired Common Stock for October 2 and
October 5, 1998 to equal or exceed $11.00, UBS became entitled to force a
complete settlement pursuant to the terms of the Forward Stock Contract and
continues to be so entitled. In addition, the Forward Stock Contract reached
maturity on October 15, 1998. UBS has asserted that the Companies are in default
under the terms of the Forward Stock Contract as the result of the Companies not
delivering certain cash collateral and not making final settlement of the
Forward Stock Contract in cash, although the Companies have disputed this
assertion. See "Potential Dilution and Liquidity Effects of the Price Adjustment
Mechanisms" below.
UBS also has the right to force a complete settlement under the Forward
Stock Contract if the Companies (i) are in default with respect to certain
financial and notice covenants under the Forward Stock Contract, (ii) are in
default under the Corporation's credit facility with Chase Manhattan Bank, (iii)
are in default with respect to certain specified indebtedness of the Companies,
(iv) declare bankruptcy or become insolvent or fail to post sufficient cash
collateral, (v) effect an early settlement, unwind or
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liquidation of any transaction similar to the transaction with UBS or (vi) fail
to settle the transaction in cash simultaneously with the sale by the Companies
of certain property. A registration statement covering the sale of up to
4,000,000 shares by UBS was declared effective (as amended) on October 15, 1998.
Also, a registration statement covering the sale of up to an additional
40,000,000 shares by PWFS, Nations and UBS was declared effective on October 15,
1998. However, there can be no assurance that such registration statements will
remain effective or that the Companies will not be required to register more
Paired Shares in connection with the Forward Stock Contract.
NATIONS TRANSACTION. On February 26, 1998, the Companies entered into
transactions with a subsidiary of NationsBank Corporation (together with
NationsBanc Mortgage Capital Corporation, "Nations"). Pursuant to the terms of a
Purchase Agreement dated as of February 26, 1998 (the "Nations Purchase
Agreement"), Nations purchased 4,900,000 Paired Shares (the "Initial Nations
Shares") from the Companies at a purchase price of $24.8625 per share (which
reflected a 2.5% discount from $25.50, the last reported sale price of the
Paired Shares on February 25, 1998) for net proceeds of approximately $121.8
million. The net proceeds were used by the Companies to repay existing
indebtedness. The Initial Nations Shares represent approximately 2.7% of the
outstanding Paired Shares as of the date of this filing.
In connection with the issuance of the Initial Nations Shares, the Companies
entered into a Purchase Price Adjustment Mechanism, dated as of February 26,
1998, with Nations (as amended on August 14, 1998, the "Nations Price Adjustment
Mechanism"). Pursuant to the Nations Price Adjustment Mechanism, the Companies
have agreed to effect certain purchase price adjustments on or before February
26, 1999, in one or more transactions (each a "Nations Settlement"), with
respect to a number of Paired Shares equal to the number of Initial Nations
Shares, by reference to a per Paired Share price equal to $25.50 plus a forward
accretion representing an imputed return at LIBOR plus 150 basis points, minus
an adjustment to reflect distributions on the Paired Shares (the "Nations
Forward Price"). The Paired Shares to be delivered to or by Nations may consist
of Paired Shares acquired under the Nations Purchase Agreement or otherwise.
The Companies may effect a Nations Settlement by (i) delivering to Nations
Paired Shares (the "Nations Settlement Shares") equal in value (valued at the
dollar volume weighted average price for the Paired Shares (as calculated
pursuant to the Nations Price Adjustment Mechanism) over a specific period of
time (the "Nations Unwind Price")) to the Nations Forward Price at the time of
such Nations Settlement times the number of shares subject to such Nations
Settlement (the "Nations Settlement Amount") in exchange for the number of
shares subject to such Nations Settlement, (ii) delivering to (or, in the event
the Nations Unwind Price is greater than the Nations Forward Price, receiving
from) Nations a number of Paired Shares equal to the difference between the
number of Nations Settlement Shares and the number of shares subject to such
Nations Settlement, or (iii) delivering to Nations cash equal to the Nations
Settlement Amount in exchange for a number of Paired Shares equal to the number
of shares subject to such Nations Settlement. If the Companies effect a
settlement pursuant to clause (i) or (ii) above, they must also pay a placement
fee equal to 2% of the Nations Settlement Amount. The Nations Price Adjustment
Mechanism provides that shares may be delivered in settlement only if (i) the
Companies have on file with the SEC an effective registration statement covering
the sale by Nations of the shares to be delivered, (ii) for settlement at
maturity, the dollar volume weighted average price of the Paired Shares (as
calculated pursuant to the Nations Price Adjustment Mechanism) on the date of
such settlement is greater than or equal to $20.00 and (iii) for settlement at
maturity, no Mandatory Nations Unwind Event (as defined below) has occurred and
is continuing. If the above conditions are not met when they apply, the
Companies generally must deliver cash equal to the Nations Settlement Amount.
The Nations Price Adjustment Mechanism provides that on or after October 15,
1998, if the dollar volume weighted average price of the Paired Shares for any
two consecutive trading days does not equal or exceed certain amounts (the
"Nations Unwind Thresholds"), Nations has the right to force a partial or
complete settlement under the Nations Price Adjustment Mechanism. The Nations
Unwind Thresholds are $20.00 (33% settlement), $18.75 (67%) and $17.25 (100%).
As a result of failure of the price of the
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Paired Shares to exceed the Nations Unwind Thresholds, pursuant to the terms of
the Nations Price Adjustment Mechanisms, Nations became entitled to force a
complete settlement under the Nations Price Adjustment Mechanism on October 16,
1998, and continues to be so entitled. Nations has not required any settlement
under the Nations Price Adjustment Mechanism to date. See "Potential Dilution
and Liquidity Effects of the Price Adjustment Mechanisms" below.
Nations also has the right to force a complete settlement under the Nations
Price Adjustment Mechanism at any time upon the occurrence of any of the
following (each a "Mandatory Nations Unwind Event"): (i) default of the
Companies with respect to certain indebtedness, (ii) declaration by the
Companies of bankruptcy or insolvency or failure to post sufficient cash
collateral or (iii) the sale or refinancing by the Companies of certain
properties in which the net proceeds of such sale or refinancing (up to the
amount necessary to effect a complete cash settlement) are not applied to a cash
settlement under the Nations Price Adjustment Mechanism. The Nations Price
Adjustment Mechanism also provides that, upon the consummation of the sale or
refinancing of certain properties by the Companies with a third party, the
Companies must apply the net proceeds to the extent necessary to effect a
complete cash settlement under the Nations Price Adjustment Mechanism. The
Companies have agreed to use all commercially reasonable efforts to effect such
a sale or refinancing. The Companies' planned sale of assets to Paine Webber
Real Estate (as described in Note 13 to the financial statements) would give
rise to a Mandatory Nations Unwind Event absent a waiver by Nations. The
Companies are seeking such a waiver, but no assurance can be given as to whether
or on what terms it will be obtained. In addition, the Companies' bank group has
indicated its belief that consent under the credit facility would be required in
connection with such sale. No assurance can be given as to whether or on what
terms such consent, if required, will be obtained. Under the terms of the
Nations Price Adjustment Mechanism, upon the occurrence of a Mandatory Nations
Unwind Event, if the Daily Average Price (as defined) of the Paired Shares does
not exceed $20.00, the Companies would be deemed to have elected to settle the
Nations Price Adjustment Mechanism in cash (and the Companies are not entitled
to elect to settle in stock). The Daily Average Price of the Paired Shares on
November 19, 1998 was $7.46.
As of the date of this filing, the Companies have delivered an aggregate of
13,886,547 Paired Shares and $179,208 to Nations as collateral to secure the
Companies' obligations under the Nations Price Adjustment Mechanism. A
registration statement covering the sale by PWFS, Nations and UBS of up to
40,000,000 Paired Shares in connection with the Price Adjustment Mechanisms has
been declared effective; however, there can be no assurance that such
registration statement will remain effective or that the Companies will not be
required to register more Paired Shares in connection with the Price Adjustment
Mechanisms.
PWFS TRANSACTION. On April 6, 1998, the Companies entered into transactions
with PaineWebber Incorporated ("PaineWebber") and PaineWebber Financial
Products, Inc. ("PWFS" and, together with PaineWebber, the "PaineWebber
Parties"). Pursuant to the terms of a Purchase Agreement dated as of April 6,
1998 (the "PaineWebber Purchase Agreement"), PaineWebber purchased 5,150,000
Paired Shares (the "Initial PaineWebber Shares") from the Companies at a
purchase price of $27.01125 per share, which reflected a 2% discount to the last
reported sale price of the Paired Shares on April 3, 1998, for net proceeds of
approximately $139.1 million. The net proceeds were used by the Companies to
repay existing indebtedness. The Initial PaineWebber Shares represent
approximately 2.9% of the outstanding Paired Shares as of the date of this
filing.
In connection with the issuance of the Initial PaineWebber Shares, the
Companies entered into a Purchase Price Adjustment Mechanism Agreement, dated as
of April 6, 1998, with PWFS (as amended on August 14, 1998, September 30, 1998
and October 22, 1998, the "PaineWebber Price Adjustment Agreement"). Upon any
settlement under the PaineWebber Price Adjustment Agreement (a "PW Settlement"),
the purchase price of the Initial PaineWebber Shares subject to the PW
Settlement is adjusted based upon the difference between (i) the proceeds (net
of a negotiated resale spread or underwriting discount) received by PWFS from
the sale of Paired Shares and (ii) a reference price (the "Reference Price")
equal
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to the closing price for a Paired Share on April 3, 1998 plus a forward
accretion reflecting an imputed return at LIBOR plus 140 basis points, minus an
adjustment to reflect distributions on the Initial PaineWebber Shares prior to
the date of such PW Settlement (such difference, the "PW Price Difference"). If
the PW Price Difference is positive, PWFS must deliver Paired Shares or cash to
the Companies equal in value to the aggregate PW Price Difference. If the PW
Price Difference is negative, the Companies must deliver to PWFS additional
Paired Shares equal in value (net of a negotiated resale spread or underwriting
discount, as the case may be) to the aggregate PW Price Difference. The
PaineWebber Price Adjustment Agreement provides that shares may be delivered in
settlement only if the Companies have on file with the SEC an effective
registration statement covering the resale by PWFS of the shares to be
delivered. Although a registration statement covering the sale of up to
40,000,000 Paired Shares by PWFS, Nations and UBS in connection with the Price
Adjustment Mechanisms has been declared effective, there can be no assurance
that such registration statement will remain effective or that the Companies
will not be required to register more Paired Shares in connection with the Price
Adjustment Mechanisms.
Pursuant to the PaineWebber Price Adjustment Agreement, the Companies have
to date delivered 17,816,281 Paired Shares to PWFS as collateral ("Collateral
Shares") and have paid cash dividends totaling $192,305 on the Collateral
Shares, which amount is held by PWFS as collateral. Such number of shares is
subject to adjustment every two weeks such that the value of the Collateral
Shares plus the Initial PaineWebber Shares that have not been settled (valued at
the closing price of the Paired Shares on the adjustment date) is equal to the
amount by which the Reference Price times the number of shares subject to the
PaineWebber Price Adjustment Agreement exceeds (i.e., the number of Initial
PaineWebber Shares that have not been settled) $5,000,000 (such excess amount,
the "Collateral Amount"). The PaineWebber Price Adjustment Agreement provides,
that if the resale by PWFS of the shares to be so delivered is not covered by an
effective registration statement, then the Companies, at their option, must
deliver to PWFS either (i) a number of Collateral Shares equal in value to 125%
of the Collateral Amount or (ii) cash collateral equal to the Collateral Amount.
Although a registration statement covering the sale of up to 40,000,000 Paired
Shares by PWFS, Nations and UBS in connection with the Price Adjustment
Agreements has been declared effective, there can be no assurance that such
registration statement will remain effective or that the Companies will not be
required to register more Paired Shares in connection with the Price Adjustment
Mechanisms.
The PaineWebber Price Adjustment Agreement provides that if the closing
price of the Paired Shares on any trading day does not equal or exceed $16.00,
PWFS has the right to force a complete settlement under the PaineWebber Price
Adjustment Agreement through any commercially reasonable manner of sale
specified by PWFS. As a result of the failure of the closing price of the Paired
Shares to equal or exceed $16.00 on August 25, 1998, pursuant to the terms of
the PaineWebber Price Adjustment Agreement, PWFS became entitled to force a
complete settlement under the PaineWebber Price Adjustment Agreement and
continues to be so entitled. In addition, the PaineWebber Price Adjustment
Agreement reached maturity on October 15, 1998. PWFS has not required any
settlement under the PaineWebber Price Adjustment Agreement to date although it
has reserved the right to do so. See "Potential Dilution and Liquidity Effects
of the Price Adjustment Mechanisms" below.
PWFS also has the right to force a complete settlement under the PaineWebber
Price Adjustment Agreement if the Companies (i) are in default with respect to
certain specified indebtedness of the Companies or (ii) effect an early
settlement, unwind or liquidation of any transaction similar to the transaction
with PWFS.
POTENTIAL DILUTION AND LIQUIDITY EFFECTS OF THE PRICE ADJUSTMENT
MECHANISMS. Settlement under one or more of the Price Adjustment Mechanisms
described above could have adverse effects on the Companies' liquidity or
dilutive effects on the Companies' capital stock. As of the date of this filing,
all three counterparties to the Price Adjustment Mechanisms were, pursuant to
the terms of the Price Adjustment Mechanisms, entitled to require settlement of
their transactions. If upon settlement the reset price or
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unwind price (in the case of the UBS and Nations transactions) or the market
price (in the case of the PWFS transaction) of the Paired Shares is less than
the applicable forward price or reference price, the Companies must deliver cash
or additional Paired Shares to effect such settlement. Delivery of cash would
adversely affect the Companies' liquidity, and delivery of shares would have
dilutive effects on the Companies' capital stock. Moreover, to settle in stock
under any of the Price Adjustment Mechanisms, the Companies may be required to
issue Paired Shares at a depressed price, which would heighten the dilutive
effects on the Companies' capital stock. The dilutive effects of a stock
settlement increase significantly as the market price of the Paired Shares
declines below the applicable forward price or reference price. Furthermore,
under certain circumstances, the Companies may settle in Paired Shares only if a
registration statement covering such shares is effective. Although to date
registration statements covering the sale of up to 44,000,000 Paired Shares in
connection with the Price Adjustment Mechanisms have been declared effective,
there can be no assurance that such registration statements will remain
effective or that the Companies will not be required to register more Paired
Shares in connection with the Price Adjustment Mechanisms.
The market price of the Paired Shares has dropped significantly below the
applicable forward price or reference price under each of the Price Adjustment
Mechanisms. As a result, the Companies have to date made cash payments
(including cash dividends on collateral shares) totaling $54,251,513 (including
a partial settlement of $45,627,725 in cash under the UBS Forward Stock
Contract) and delivered an aggregate of 34,177,187 additional Paired Shares as
collateral pursuant to the Price Adjustment Mechanisms. All such collateral
shares are deemed to be outstanding for purposes of the Companies' per share
calculations. If the Companies settled all three transactions in cash on
November 12, 1998, they would be obligated to deliver to the counterparties a
total of approximately $314.4 million (assuming application of the cash
currently held as collateral by the counterparties) and would receive from the
counterparties a total of 13.3 million Paired Shares plus all Paired Shares then
held as collateral by them.
The terms of the Price Adjustment Mechanisms provide that all three
counterparties currently have the right to require the Companies to settle their
transactions. Moreover, UBS has asserted that the Companies are in default under
the terms of the Forward Stock Contract as the result of the Companies not
delivering certain cash collateral and not making final settlement of the
Forward Stock Contract in cash, although the Companies have disputed this
assertion.
The Companies are currently in discussions regarding possible resolutions of
the Price Adjustment Mechanisms to provide the Companies with the opportunity to
resolve the Price Adjustment Mechanisms through payments of cash or other forms
of consideration, and thus to avoid the need to settle in shares. There can be
no assurance that such discussions will be successful. Moreover, any such
resolutions may require the consent of the lenders under the Companies' credit
facility. No assurances can be given that any such consent, if required and
sought, would be obtained, or that the Companies would be able to meet their
obligations under any such settlement arrangement.
PARTICIPATING LEASE REVENUE RECOGNITION
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim
Financial Periods ("EITF 98-9"). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger the contingent income are met. Management has reviewed the
terms of its Participating Leases and has determined that the provisions of EITF
98-9 will impact Patriot's current revenue recognition on an interim basis, but
will have no impact on Patriot's annual participating rent revenue or interim
cash flow from its Participating Leases. Patriot has adopted the provisions of
EITF 98-9 and elected to apply the provisions of the new pronouncement on a
prospective basis.
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PATRIOT AMERICAN HOSPITALITY, INC.
RESULTS OF OPERATIONS: QUARTER ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER
ENDED SEPTEMBER 30, 1997
Patriot's lease revenue from the Lessees (including Wyndham) for the quarter
ended September 30, 1998, increased 278% from $47,107,000 in 1997 to
$178,156,000 in 1998. This increase is primarily due to the acquisition of 174
hotel properties during the past twelve months. Patriot owned or leased 306
hotel properties as of September 30, 1998. Interest and other income increased
from $3,083,000 in 1997 to $6,540,000 in 1998 which is primarily attributable to
additional investments in Subscription Notes and other notes receivable from
Wyndham and interest and dividend income earned on cash investments. Interest
and other income for the three months ended September 30, 1998 includes
$3,667,000 of interest income related to notes receivable from Wyndham.
Generally, Patriot's Participating Leases provide for the payment of the
greater of (i) a fixed base rent or (ii) participating rent, based on the
revenue of the hotels, plus certain additional charges, as applicable. The
Participating Leases contain annual revenue thresholds used to calculate the
various tiers of participating rent which are prorated on a monthly basis to
determine monthly participating rent payments. The provisions of EITF 98-9 call
for straight-line recognition of the annual base rent throughout the year and
for the deferral of any additional lease amounts collected or due from the
Lessees until such amounts exceed the annual revenue thresholds. This will
generally result in base rent being recognized in the first and second quarters
and participating rents already collected or due from the Lessees being deferred
and then recognized in the third and fourth quarters due to the structure of
Patriot's Participating Leases and the seasonality of the hotel operations. The
effect of the change was to defer recognition of $1,789,000 of lease revenue
during the quarter ended September 30, 1998.
For the three months ended September 30, 1998 as compared to the same period
for 1997, Patriot experienced significant increases in expenses as a result of
the acquisition of hotels discussed above.
Real estate and personal property taxes and casualty insurance were
$16,799,000 for the three months ended September 30, 1998, compared to
$4,253,000 for the three months ended September 30, 1997.
Ground lease expense increased from $1,310,000 to $22,128,000 for the three
months ended September 30, 1997 compared to the same period in 1998 as a result
of acquisition of properties subject to existing ground leases, including
$1,318,000 related to the Racecourse land lease with an affiliate of
PaineWebber, Inc.
General and administrative expenses were $5,090,000 for the three months
ended September 30, 1998, compared to $2,501,000 for 1997. This increase is
primarily attributable to Patriot's tremendous growth over the past year through
mergers and acquisitions. General and administrative expenses include the
amortization of unearned stock compensation of $1,381,000 for 1998 and
$1,385,000 for 1997.
Interest expense for the three months ended September 30, 1998 was
$77,266,000 compared to $14,649,000 in 1997. Patriot's outstanding debt
obligations as of September 30, 1998 and 1997 were approximately $3.6 billion
and $727.2 million, respectively. The primary components of interest expense for
the three months ended September 30, 1998 are $54,303,000 of interest related to
the revolving credit facility and term loans, $11,311,000 of interest on
mortgage notes, $8,007,000 of amortization of deferred financing costs and
$7,264,000 of other interest related to other miscellaneous notes, capital lease
obligations and commitments payable. Interest expense for the three months ended
September 30, 1997 consists primarily of $12,372,000 of interest on Patriot's
Revolving Credit Facility, the Old Line of Credit and mortgage note balances
outstanding, $2,461,000, of other interest related to Subscription Notes, other
miscellaneous notes, capital leases and commitments payable and $567,000 of
amortization of deferred financing costs. Additionally, Patriot capitalized
interest totaling $3,619,000 and $751,000 for the three months ended September
30, 1998 and 1997, respectively, associated with major renovations of certain
hotel properties.
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In connection with Patriot's acquisition of certain license agreements
Patriot recognized an expense of $3,940,000 related to the cost of acquiring
these agreements for the third quarter of 1998.
The Companies previously entered into three treasury interest rate lock
agreements to protect the Companies against the possibility of rising interest
rates in connection with an anticipated $850 million corporate bond offering
originally scheduled for the fourth quarter of 1998. However, given current
conditions in the debt capital markets, the Companies have decided to delay this
debt issuance indefinitely. Under the treasury interest rate lock agreements,
the Companies receive or make payment based on the difference between specified
interest rates, 6.06%, 6.07% and 5.62%, and the actual 10-year U.S. Treasury
interest rate on a notional principal amount of $525 million. The Companies have
settled the entire $525 million in treasury interest rate locks at rates between
4.58% and 4.67% resulting in a $49,225,000 one-time charge to earnings in the
third quarter of 1998.
Depreciation and amortization expense was $50,561,000 for the three months
ended September 30, 1998 compared to $12,650,000 for the same period in 1997.
Patriot's share of income from unconsolidated subsidiaries was $4,764,000
for the third quarter of 1998 compared to $1,395,000 for the third quarter of
1997. The increase is primarily attributable to Patriot's investment in the
Non-Controlled Subsidiaries.
Minority interest share of income in the Patriot Partnership was $2,015,000
and $3,340,000 for the three months ended September 30, 1998 and 1997,
respectively. Minority interest share of income in Patriot's other consolidated
subsidiaries was $3,775,000 for the third quarter of 1998 and $921,000 for the
third quarter of 1997.
As a result, the net loss was $37,436,000 for the three months ended
September 30, 1998 and $27,713,000 for the three months ended September 30,
1997.
RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE
MONTHS ENDED SEPTEMBER 30, 1997
Patriot's lease revenue from the Lessees (including Wyndham) for the nine
months ended September 30, 1998, increased 255% from $119,093,000 in 1997 to
$422,808,000 in 1998. This increase is primarily due to the acquisition of 174
hotel properties during the past twelve months. Interest and other income
increased from $4,215,000 in 1997 to $15,311,000 in 1998 which is primarily
attributable to investments in Subscription Notes and other notes receivable
from Wyndham and interest and dividend income earned on cash investments.
Interest and other income for the nine months ended September 30, 1998 includes
$9,695,000 of interest income related to notes receivable from Wyndham.
As discussed above, Patriot elected to adopt the provisions of EITF 98-9
(which provides new guidance for accounting procedures to be applied when
accounting for participating lease income) beginning in May 1998. The effect of
the change was to defer recognition of $7,470,000 of lease revenue during the
nine months ended September 30, 1998. The provisions of EITF 98-9 call for
straight-line recognition of the annual base rent throughout the year and for
the deferral of any additional lease amounts collected or due from the Lessees
until such amounts exceed the annual revenue thresholds. This will generally
result in base rent being recognized in the first and second quarters and
participating rents already collected or due from the Lessees being deferred and
then recognized in the third and fourth quarters due to the structure of
Patriot's Participating Leases and the seasonality of the hotel operations.
For the nine months ended September 30, 1998 as compared to the same period
for 1997, Patriot experienced significant increases in expenses as a result of
the acquisition of hotels discussed above.
Real estate and personal property taxes and casualty insurance were
$42,023,000 for the nine months ended September 30, 1998, compared to
$11,219,000 for the nine months ended September 30, 1997.
Ground lease expense increased from $1,993,000 to $42,296,000 for the nine
months ended September 30, 1997 compared to the same period in 1998 as a result
of acquisition of properties subject to existing ground leases, including
$3,915,000 related to the Racecourse land lease with an affiliate of
PaineWebber, Inc.
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General and administrative expenses were $15,091,000 for the nine months
ended September 30, 1998, compared to $7,582,000 for 1997. This increase is
primarily attributable to Patriot's tremendous growth over the past year through
mergers and acquisitions. General and administrative expenses include the
amortization of unearned stock compensation of $4,041,000 for 1998 and
$3,312,000 for 1997.
Interest expense for the nine months ended September 30, 1998 was
$162,294,000 compared to $31,977,000 in 1997. Patriot's outstanding debt
obligations as of September 30, 1998 and 1997 were approximately $3.5 billion
and $727.2 million, respectively. The primary components of interest expense for
the nine months ended September 30, 1998 are $109,290,000 of interest related to
the revolving credit facility and term loans, $25,627,000 of interest on
mortgage notes, $16,884,000 of amortization of deferred financing costs and
$18,723,000 of other interest related to other miscellaneous notes, capital
lease obligations and commitments payable. Interest expense for the nine months
ended September 30, 1997 consists primarily of $29,867,000 of interest on the
Revolving Credit Facility, the Old Line of Credit and mortgage note balances
outstanding, $2,461,000 of other interest related to Subscription Notes, other
miscellaneous notes, capital leases and commitments payable, and $1,331,000 of
amortization of deferred financing costs. Additionally, Patriot capitalized
interest totaling $8,230,000 and $1,682,000 for the nine months ended September
30, 1998 and 1997, respectively, associated with major renovations of certain
hotel properties.
In connection with Patriot's acquisition of three leasehold interests for
hotels that Patriot owns and leased to certain of the Lessees and the
acquisition of certain license agreements, Patriot recognized expense of
$8,279,000 related to the cost of acquiring these leaseholds and license
agreements.
The Companies previously entered into three treasury interest rate lock
agreements to protect the Companies against the possibility of rising interest
rates in connection with an anticipated $850 million corporate bond offering
originally scheduled for the fourth quarter of 1998. However, given current
conditions in the debt capital markets, the Companies have decided to delay this
debt issuance indefinitely. Under the rate lock agreements, the Companies
receive or make payment based on the difference between specified interest
rates, 6.06%, 6.07% and 5.62%, and the actual 10-year U.S. Treasury interest
rate on a notional principal amount of $525 million. The Companies have settled
the entire $525 million in treasury interest rate locks at rates between 4.58%
and 4.67% resulting in a $49,225,000 one-time charge to earnings in the third
quarter of 1998.
Depreciation and amortization expense was $112,253,000 for the nine months
ended September 30, 1998 compared to $30,656,000 for the same period in 1997.
Patriot's share of income from unconsolidated subsidiaries was $24,011,000
for the nine months ended September 30, 1998 compared to $4,488,000 for 1997.
The increase is primarily attributable to Patriot's investments in the
Non-Controlled Subsidiaries.
Minority interest share of loss in the Patriot Partnership was $3,253,000
and $1,194,000 for the nine months ended September 30, 1998 and 1997,
respectively. Minority interest share of income in Patriot's other consolidated
subsidiaries was $6,203,000 for the first half of 1998 and $1,368,000 for 1997.
Patriot repaid certain debt obligations of Old Wyndham, Interstate and
Summerfield in connection with the Wyndham Merger, the Interstate Merger and the
Summerfield Acquisition. As a result, Patriot incurred certain prepayment
penalties and wrote off the remaining balance of unamortized deferred financing
costs associated with such debt in the aggregate amount of $30,559,000.
As a result, the net loss was $9,879,000 for the nine months ended September
30, 1998 and $4,547,000 for the nine months ended September 30, 1997.
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WYNDHAM INTERNATIONAL, INC.
As of September 30, 1998, Wyndham leased 216 hotels from Patriot, managing
202 of those hotels, and managed 171 hotels for third parties. In addition,
Wyndham operated the Bay Meadows Racecourse. Subsequent to the Cal Jockey Merger
in July 1997, the major portion of the revenues of Wyndham and Patriot have been
derived from the leasing and operation of hotels.
RESULTS OF OPERATIONS: QUARTER ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER
ENDED SEPTEMBER 30, 1997
For the three months ended September 30, 1998, Wyndham (including its
consolidated subsidiaries) had hotel revenues of $554,331,000 from the 290
hotels it operated during the period as compared to $30,271,000 in hotel
revenues from the 29 hotels operated during the three months ended September 30,
1997. In addition, Wyndham reported management fee and service fee income of
$24,917,000 and $1,577,000 for the three months ended September 30, 1998 and
1997, respectively. Interest and other income for the three month period ended
September 30, 1998 increased from $1,475,000 in 1997 to $4,477,000 mainly due to
the interest income related to the Subscription Notes and other notes receivable
from Patriot.
Total revenues from the Racecourse facility operations were $9,955,000 for
the quarter ended September 30, 1998 compared to $10,861,000 for the same
quarter last year. Total costs and expenses associated with the Racecourse
operations were $8,810,000 for the quarter ended September 30, 1998 compared to
$10,536,000 for the same quarter last year. These decreases were primarily
attributable to fewer racing days in the third quarter of 1998 compared to 1997.
Hotel expenses increased from $16,797,000 to $378,886,000 for the quarter
ended September 30, 1998 as a result of the increased number of hotels operated
by Wyndham quarter over quarter.
Lease payments paid to Patriot pursuant to the Participating Leases, other
hotel sub-leases and the Racecourse facility lease increased from $10,686,000 to
$174,838,000 for the for the third quarter of 1998.
General and administrative expenses were $21,482,000 for the period compared
to $4,081,000 for the same period last year. General and administrative expenses
consist primarily of salaries and wages of personnel.
Interest expense for the three months ended September 30, 1998 was
$10,216,000 compared to $11,000 for the same period last year. The increase is
primarily attributable to debt obligations related to the three hotels acquired
in the WHG Merger. The amount also includes $3,667,000 of interest expense
related to the Subscription Notes and other notes payable to Patriot for the
three months ended September 30, 1998.
Depreciation and amortization increased from $1,142,000 to $17,675,000 for
the three months ended September 30, 1998. The increase in depreciation is
attributable to the three hotels acquired in the WHG Merger and assets acquired
in the Interstate Merger.
Wyndham's share of income from unconsolidated subsidiaries was $447,000 for
the three months ended September 30, 1998.
Minority interest's share of income associated with the Wyndham Partnership
was a loss of $2,707,000 for the three months ended September 30, 1998 as
compared to income of $115,000 for the same quarter last year. Minority
interest's share of income in Wyndham's other consolidated subsidiaries was
$4,048,000 in 1998 and $13,000 in 1997.
The extraordinary loss of $1,257,000 for the three months ended September
30, 1998 was a result of costs associated with a debt refinancing.
As a result, the net loss was $27,034,000 for the three months ended
September 30, 1998 and the net income was $709,000 for the three months ended
September 30, 1997.
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<PAGE>
RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30, 1998
The results for the nine months ended September 30, 1998 are not being
compared to the prior period since the prior period only represents July 1, 1997
(inception of operations) through September 30, 1997.
For the nine months ended September 30, 1998, Wyndham (including its
consolidated subsidiaries) had hotel revenues of $1,266,985,000 from the 290
hotels it operated during the period. In addition, Wyndham reported management
fee and service fee income of $62,560,000 for the nine months ended September
30, 1998. Interest and other income for the period included $11,755,000 of
interest income related to the Subscription Notes and other notes receivable
from Patriot.
Total revenues from the Racecourse facility operations were $34,945,000 for
the nine months ended September 30, 1998. Total costs and expenses associated
with the Racecourse operations were $29,667,000 for the nine months ended
September 30, 1998.
Lease payments paid to Patriot pursuant to the Participating Leases, other
hotel sub-leases and the Racecourse facility lease were $384,475,000 for the
nine months ended September 30, 1998.
General and administrative expenses were $49,467,000 for the period and
consist primarily of salaries and wages of personnel.
Interest expense of $24,015,000 for the nine months ended September 30, 1998
is primarily attributable to debt obligations related to the three hotels
acquired in the WHG Merger. The amount also includes $9,695,000 of interest
expense related to the Subscription Notes and other notes payable to Patriot.
In connection with the CHCI Merger, Wyndham acquired 17 leasehold interests
for hotels that Patriot owns. As a result, Wyndham recognized expense of
$52,721,000 related to the cost of acquiring these leaseholds.
Wyndham's share of income from unconsolidated subsidiaries was $2,461,000
for the nine months ended September 30, 1998.
Minority interest's share of losses associated with the Wyndham Partnership
was $9,422,000 for the nine months ended September 30, 1998. Minority interest's
share of income in Wyndham's other consolidated subsidiaries was $20,408,000 in
1998.
The extraordinary loss of $1,257,000 for the three months ended September
30, 1998 was a result of a charge for the write-off of deferred loan costs
associated with a debt refinancing.
As a result, the net loss was $67,686,000 for the nine months ended
September 30, 1998.
STATISTICAL INFORMATION
Third quarter 1998 operating performance across the Companies' owned
portfolio improved over the third quarter of 1997, as reflected in a 5.1%
increase in revenue per available room ("RevPAR"), a 6.6% increase in average
daily rate ("ADR"), and a slight decrease in occupancy of 1.5%.
Similarly, third quarter 1998 operating performance across Wyndham's
comparable branded portfolio of owned and managed hotels (hotels in the
portfolio for one full common fiscal quarter in both periods presented) improved
over the 1997 third quarter, as reflected in a 4.8% increase in RevPAR, a 7.2%
increase in ADR, and a decrease in occupancy of 2.2%.
The Wyndham-branded comparable portfolio was led by strong growth in the
Resort division, which posted a 22.9% increase in RevPAR, as several recently
renovated properties contributed to the improved performance against weak 1997
results. The Garden division also experienced strong performance, with a 6.7%
RevPAR increase driven by improved results at hotels added in the past 18
months. During the third
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<PAGE>
quarter of 1998, Patriot converted four hotels, representing approximately 1,600
rooms, to the Wyndham brand; two of these properties were former Sheratons and
two properties were former Westins.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------------------
OCCUPANCY ADR REVPAR
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
The Companies' owned hotels.................... 73.8% 74.9% $ 103.92 $ 97.49 $ 76.71 $ 72.98
Wyndham-brand comparable portfolio............. 72.0% 73.6% $ 100.83 $ 94.08 $ 72.58 $ 69.26
</TABLE>
For the nine months ended September 30, 1998, the Companies' owned portfolio
also improved over the comparable period in 1997, as reflected in an 6.9%
increase in RevPAR, a 6.3% increase in ADR, and an improvement of 0.6% in
occupancy.
Similarly, operating performance across Wyndham's comparable branded
portfolio of owned and managed hotels for the nine-month period improved over
last year, as reflected in a 9.1% increase in RevPAR, a 7.8% increase in ADR,
and an improvement of 1.2% in occupancy.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------------------
OCCUPANCY ADR REVPAR
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
The Companies' owned hotels................... 73.7% 73.3% $ 108.36 $ 101.98 $ 79.84 $ 74.71
Wyndham-brand comparable portfolio............ 71.8% 71.0% $ 106.49 $ 98.76 $ 76.48 $ 70.08
</TABLE>
COMBINED LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
The Companies' principal source of cash to fund operating expenses and
distributions to stockholders is cash flow provided by operating activities.
Patriot's principal source of revenue is rent payments from the Lessees and
Wyndham under the Participating Leases. Wyndham's principal source of cash flow
is from the operation of the hotels that it leases and/or manages. The Lessees'
and Wyndham's ability to make the rent payments to Patriot is dependent upon
their ability to efficiently manage the hotels and generate sufficient cash flow
from operation of the hotels.
Combined cash and cash equivalents as of September 30, 1998 were $147.4
million, including capital improvement reserves of $29.1 million. Combined cash
flows from operating activities of the Companies were $237.2 million for the
first nine months of 1998, which represent a combination of the collection of
rents under Participating Leases with third party Lessees and cash flows
generated by the hotels operated by Wyndham.
Combined cash and cash equivalents as of September 30, 1997 were $59.7
million, including capital improvement reserves of $38.2 million. Combined cash
flows from operating activities of Patriot were $75.9 million for the first nine
months of 1997, which primarily represent the collection of rents under
Participating Leases.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Through September 30, 1998, the Companies experienced a period of rapid
growth, acquiring an aggregate of $4.5 billion of hotel properties and
management companies. These transactions included the Wyndham Merger, the WHG
Merger, the Arcadian Acquisition, the Interstate Merger, the Summerfield
Acquisition, the CHCI Merger, and the acquisition of four additional hotel
properties and the Golden Door Spa. These transactions were funded with a
combination of an aggregate of approximately $1.4 billion in cash (primarily
drawn from the Companies' Revolving Credit Facility and Term Loans), issuance
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<PAGE>
of and assumption of other debt aggregating approximately $1.4 billion in debt
and the issuance of an aggregate of approximately $1.7 billion of equity
securities.
Combined cash flows used in investing activities of the Companies were $1.5
billion for the nine months ended September 30, 1998, resulting primarily from
the acquisition of hotel properties and management companies, renovation
expenditures at certain hotels, as well as cash deposited on collateral under
one of the Price Adjustment Mechanisms. Combined cash flows from financing
activities of $1.3 billion for the nine months ended September 30, 1998 were
primarily related to borrowings on the Revolving Credit Facility and mortgage
notes, and net proceeds from private placements of equity securities, net of
payments of dividends and distributions.
Combined cash flows used in investing activities were $710.1 million for the
nine months ended September 30, 1997, resulting primarily from the acquisition
of hotel properties. Combined cash flows from financing activities of $649.2
million for the nine months ended September 30, 1997 were primarily related to
borrowings on Patriot's previous line of credit facility, net of payments of
dividends and distributions.
As of September 30, 1998, Patriot had approximately $887.8 million
outstanding under its Revolving Credit Facility and $1.8 billion outstanding on
its Term Loans. The Term Loans have maturities of January 31, 1999 ($350
million); March 31, 1999 ($400 million); and March 31, 2000 ($450 million). As
of September 30, 1998, the Companies also had over $1.2 billion of mortgage and
other debt outstanding (approximately $205 million of which is due on or before
December 31, 1998), resulting in total indebtedness of approximately $3.8
billion. Additionally, under the terms of certain put arrangements, the
Companies could be obligated to purchase a partial interest in a hotel property
for approximately $11 million in January 1999. As of September 30, 1998, the
Companies had approximately $12.2 million of availability under the Revolving
Credit Facility in addition to cash on hand.
The Companies are evaluating possible means of meeting near-term debt
service requirements and improving liquidity through refinancing or extending
the maturity of existing indebtedness, issuing additional equity securities, and
divesting certain non-core, non-proprietarily branded hotel assets. The
Companies have also re-strategized capital expenditures (currently estimated at
approximately $100 million for 1999) and development programs, are improving
operating efficiencies, and are in discussions to seek possible amendments to
the Revolving Credit Facility. In addition, Patriot has decided not to declare a
dividend with respect to the third quarter at this time. Instead, prior to
December 31, 1998, Patriot intends to declare a dividend, payable in cash or
securities in January, 1999, which will be at least sufficient to satisfy the
federal income tax requirements with respect to dividends in order for Patriot
to continue to qualify as a REIT. See "The Companies--1998 Dividends."
No assurances can be made regarding the availability or terms of additional
sources of capital for the Companies in the future and no assurances can be
given regarding the Companies' ability to successfully refinance or extend the
maturity of existing indebtedness. A default by the Companies under current
existing indebtedness may cause a cross-default under other existing
indebtedness, including, without limitation, the Revolving Credit Facility. No
assurances can be given regarding the Companies' success in securing any
amendments to the Revolving Credit Facility. Additionally, in the absence of
such amendments, no assurances can be given that the Companies will meet the
reduced EBITDA coverage ratio requirements which go into effect in December
under the Revolving Credit Facility. If the Companies are unable to secure
additional sources of financing in the future, are unable to successfully
refinance existing indebtedness, or are unable to obtain amendments to existing
covenants under the Revolving Credit Facility, no assurance can be made that the
Companies will be able to meet their financial obligations as they come due
without substantial disposition of assets outside the ordinary course of
business, restructuring of debt, externally forced revisions of its operations
or similar actions. Additionally, no assurances can be given that the lack of
future financing sources would not have a material adverse effect on the
Companies' financial condition and results of operations.
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<PAGE>
As noted above, the Companies are parties to forward equity transactions
with three counterparties involving the sale of an aggregate of 13.3 million
Paired Shares (the "Initial Shares") of the Companies with related Price
Adjustment Mechanisms. The Price Adjustment Mechanisms require the Companies
from time to time to issue additional Paired Shares or pay cash based upon the
difference between the respective forward prices and the market price of the
Companies' Paired Shares. The Companies' aggregate exposure under the Purchase
Price Mechanisms as of November 12, 1998 was approximately $323 million
(assuming the forward equity transactions are settled in cash and without giving
effect to the cash collateral currently held by the counterparties). The
Companies have registered the sale of up to 44 million Paired Shares in
connection with the forward equity transactions; however, to date no sales have
been made under such registration statements. There can be no assurance that
such registration statements will remain effective or that the Companies will
not be required to register additional Paired Shares for delivery under the
forward equity transactions. See "--Sales of Paired Common Stock with Price
Adjustment Mechanisms."
Settlement under one or more of the forward equity transactions could have
adverse effects on the Companies' liquidity or dilutive effects on the
Companies' capital stock. Moreover, settlement (whether by reason of a drop in
the market price of the paired shares or otherwise) may force the Companies to
issue paired shares at a depressed price, which would heighten the dilutive
effects on the Companies' capital stock. The dilutive effects of a stock
settlement increase significantly as the market price of the paired shares
declines below the applicable forward price or reference price.
The market price of the Paired Shares has dropped significantly below the
respective forward prices under the forward equity contracts. As a result, the
Companies to date have made cash payments totaling approximately $54.3 million
and have delivered an aggregate of 34.1 million additional Paired Shares as
collateral to the counterparties.
The Companies' forward equity transactions with PaineWebber and UBS,
representing a total obligation of approximately $195 million (without applying
approximately $8.2 million previously delivered to UBS as collateral), reached
maturity on October 15, 1998 without final settlement by the Companies. UBS has
asserted that the Companies are in default under the terms of its forward
contract as the result of the Companies not delivering certain cash collateral
and not making a final settlement of the contract in cash, although the
Companies dispute this assertion. In addition, because the market price of the
paired common stock is below applicable unwind thresholds under the forward
equity transaction with Nations (which represents an obligation of approximately
$128 million), Nations has the right to require a complete settlement of its
transaction.
The Companies are currently in discussions regarding possible resolutions of
the forward equity transactions to provide the Companies with the opportunity to
resolve the transactions through payments of cash or other forms of
consideration, and thus to avoid the need to settle in shares. There can be no
assurance that such discussions will be successful. Moreover, and such
resolutions may require the consent of the lenders under the Companies'
Revolving Credit Facility. No assurances can be given that any such consent, if
required and sought, would be obtained, or that the Companies would be able to
meet their obligations under any such settlement arrangement.
TREASURY RATE LOCK AGREEMENTS. The Companies previously entered into three
treasury interest rate lock agreements to protect the Companies against the
possibility of rising interest rates in connection with an anticipated $850
million corporate bond offering originally scheduled for the fourth quarter of
1998. However, given current conditions in the debt capital markets, the
Companies have decided to delay this debt issuance indefinitely. Under the rate
lock agreements, the Companies receive or make payments based on the
differential between specified interest rates, 6.06%, 6.07% and 5.62%,
respectively, and the actual 10-year U.S. Treasury interest rate on a notional
principal amount of $525 million. The Companies have settled the entire $525
million in treasury interest rate locks at rates between 4.59% and 4.67%
resulting in a $49.2 million one-time charge to earnings recorded in the third
quarter of 1998.
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<PAGE>
The $49.2 million charge for the treasury locks was paid by a unsecured
promissory note with Chase Manhattan Bank; bears interest at LIBOR plus 225
basis points and matures in November, 1999.
OTHER DEBT REFINANCINGS AND EXTENSIONS. On October 16, 1998, the Companies
refinanced two mortgage loans with Credit Suisse First Boston which encumber the
Embassy Suites Chicago and the Wyndham Greenspoint. The refinanced debt of
approximately $82.1 million bears a fixed interest rate of 8.25% and matures in
10 years with a 25-year principal amortization schedule.
On October 23, 1998, the Companies refinanced a mortgage loan with Credit
Suisse First Boston which encumbers the Wyndham Peachtree Conference Center. The
refinanced debt of approximately $38 million bears an variable interest rate at
LIBOR plus 350 basis points and matures in three years with a 25-year
amortization.
On November 3, 1998, the Companies entered into agreements to extend the
maturity of certain debt related to the El Conquistador and the Condado Plaza
Hotel & Casino from November 3, 1998 to January 29, 1999. The extension
agreements required that $10 million be deposited into an escrow account in
installments beginning on the date of the extension through January 12, 1999.
Upon the satisfactory completion of certain conditions, the $10 million will be
released from escrow.
RENOVATIONS AND CAPITAL IMPROVEMENTS
During the first nine months of 1998, the Companies invested approximately
$187.7 million to renovate or re-brand hotels. Pursuant to certain of the
Participating Leases, Patriot is obligated to establish a reserve for each such
hotel for capital improvements, including the periodic replacement or
refurbishment of furniture, fixtures and equipment ("FF&E"). The aggregate
amount of such reserves averages 4.0% of total revenue, with the amount of such
reserve with respect to each hotel based upon projected capital requirements of
such hotel. Management believes such amounts are sufficient to fund recurring
capital expenditures for the hotels. Capital expenditures, exclusive of
renovations, may exceed these reserves in a single year.
The Companies attempt to schedule renovations and improvements during
traditionally lower occupancy periods in an effort to minimize disruption to the
hotel's operations. Therefore, management does not believe such renovations and
capital improvements will have a material effect on the results of operations of
the hotels. Capital expenditures will be financed through capital expenditure
reserves. See "Combined Liquidity and Capital Resources."
LEGISLATION AFFECTING THE PAIRED SHARE STRUCTURE
Patriot's ability to qualify as a REIT is dependent upon its continued
exemption from the anti-pairing rules of Section 269B(a)(3) of the Internal
Revenue Code of 1986, as amended (the "Code"). Section 269B(a)(3) of the Code
would ordinarily prevent a corporation from qualifying as a REIT if its stock is
paired with the stock of a corporation whose activities are inconsistent with
REIT status, such as Wyndham. The "grandfathering" rules governing Section 296B
generally provide, however, that Section 296B(a)(3) does not apply to a paired
REIT if the REIT and its paired operating company were paired on June 30, 1983.
There are, however, no judicial or administrative authorities interpreting this
"grandfathering" rule in the context of a merger into a grandfathered REIT or
otherwise. Moreover, although Patriot's and Wyndham's respective predecessors,
Cal Jockey and Bay Meadows, were paired on June 30, 1983, if for any reason Cal
Jockey failed to qualify as a REIT in 1983 the benefit of the grandfathering
rule would not be available to Patriot and Patriot would not qualify as a REIT
for any taxable year.
Patriot's ability to utilize the paired structure was limited as a result of
the Internal Revenue Service Restructuring and Reform Act of 1998 (the "IRS
Reform Act of 1998"), which was signed into law by the President on July 22,
1998. Included in the IRS Reform Act of 1998 is a freeze on the grandfathered
status of paired share REITs such as Patriot. Under this legislation, the
anti-pairing rules generally apply to real
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<PAGE>
property interests acquired after March 26, 1998 by Patriot and Wyndham, or a
subsidiary or partnership in which a 10% or greater interest is owned by Patriot
or Wyndham (collectively, the "REIT Group"), unless (i) the real property
interests are acquired pursuant to a written agreement which is binding on March
26, 1998 and all times thereafter or (ii) the acquisition of such real property
interests were described in a public announcement or in a filing with the
Securities and Exchange Commission on or before March 26, 1998. In addition, the
grandfathered status of any property under the foregoing rules will be lost if
the rent on a lease entered into or renewed after March 26, 1998, with respect
to such property exceeds an arm's-length rate. The IRS Reform Act of 1998 also
provides that a property held by Patriot or Wyndham that is not subject to the
anti-pairing rules would become subject to such rules in the event of an
improvement placed in service after December 31, 1999 that changes the use of
the property and the cost of which is greater than 200 percent of (x) the
undepreciated cost of the property (prior to the improvement) or (y) in the case
of property acquired where there is a substituted basis, the fair market value
of the property on the day it was acquired by Patriot and Wyndham. There is an
exception for improvements placed in service before January 1, 2004 pursuant to
a binding contract in effect as of December 31, 1999 and at all times
thereafter. The IRS Reform Act of 1998 also provides an exception that permits
Patriot to acquire new assets through taxable subsidiaries of Patriot, although
in order to comply with the general REIT rules, Wyndham or persons unrelated to
Patriot must own the voting securities of any such taxable subsidiaries. To the
extent of Wyndham's proportionate interest in such subsidiaries the Act requires
Patriot to treat gross revenues from the assets as nonqualifying REIT income for
purposes of the REIT income tests (which generally limit the total amount of
such revenues to 5% of Patriot's gross income determined for tax purposes). In
addition, Patriot must account for its stock in such subsidiaries and any
unsecured loans it makes to them as nonqualifying assets under the REIT asset
tests (which generally limit the total value of Patriot's non-real estate assets
of 25% of its total assets).
On September 16, 1998, the Companies announced that after a thorough review
of numerous restructuring alternatives and current market conditions, they
elected to maintain the paired-share structure. Because Patriot and Wyndham have
retained the paired structure, Patriot will remain subject to the IRS Reform Act
for 1998. The IRS Reform Act of 1998 generally permits Patriot to continue its
current method of operations with respect to its existing assets, including the
assets acquired in the Interstate Merger, the Arcadian Acquisition, the
Summerfield Acquisition and the CHI Merger; provided that none of Patriot's
leases to Wyndham entered into or renewed after March 26, 1998 (which includes a
substantial portion of the Companies' leases) provides for rent in excess of an
arm's-length rate. In that regard, Patriot believes that none of its leases
provides for above-market rent, but Patriot has not obtained independent
appraisals, and the IRS could disagree with its analysis. The legislation also
limits Patriot's ability to make improvements to existing properties that do not
fall within the grandfathering rules described above. In addition, with respect
to the new acquisitions, the legislation requires Patriot to modify its method
of operations, and Patriot generally intends to acquire new assets through
taxable subsidiaries pursuant to the exception noted above, subject to the
limitations of the REIT asset and income tests.
ISSUES REGARDING REIT STATUS
In general, if Patriot ceases or fails to quality as a REIT in any year,
Patriot will be subject to federal income tax on its taxable income for the
entire year of disqualification, and for future taxable years, at regular
corporate rates. In such case, Patriot would no longer be required to make
distributions to stockholders, and the amount of its distributions might be
reduced. The failure to qualify as a REIT would also constitute a default under
certain debt obligations of Patriot. Notwithstanding the Companies' decision to
retain their paired structure, Patriot will not qualify as a REIT for 1998 or
subsequent years unless it operates in accordance with the various REIT
qualification requirements imposed by the Internal Revenue Code. These
requirements impose numerous restrictions on the Companies' activities and could
preclude the Companies from engaging in activities that might otherwise be
beneficial. Moreover, compliance with those requirements is more difficult in
the case of a paired REIT such as Patriot, is
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<PAGE>
further complicated by the additional requirements of the IRS Reform Act of
1998, and could be impacted by future legislation.
Patriot faces a greater risk than most REITs of failing one or more of the
requirements for REIT qualification. First, the Companies could, in the future,
pursue, or be forced to adopt, business strategies that are inconsistent with
one or more of the REIT requirements. For example, management's most recent
valuation of Patriot's assets concluded that slightly more than 75% of the value
of its assets is represented by "real estate assets" within the meaning of the
Code. Sufficient variations in the value of its assets or sufficient sales of
hotels could cause Patriot to fail the REIT asset tests. Second, as discussed
above under "Legislation Affecting the Paired Share Structure," a determination
that Patriot's leases to Wyndham entered into or renewed after March 26, 1998
(which includes a substantial portion of the Companies' leases) provide for rent
in excess of an arm's length rate could cause Patriot to fail the requirements
for REIT qualification. Finally, Patriot is currently negotiating the renewal of
a number of recently expired leases with Wyndham. The ability of payments under
any such renewed lease to qualify as "rents from real property" under the Code
will depend on the terms of each such renewal. In view of the foregoing
uncertainties, no assurance can be given that Patriot will quality as a REIT for
the current year or subsequent years.
Goodwin, Procter & Hoar LLP, special tax counsel to Patriot, has previously
rendered an opinion to Patriot dated April 30, 1998 to the effect that
commencing with the taxable year ending December 31, 1983 to the date of such
opinion, Patriot had been organized and operated in conformity with the
requirements for qualification and taxation as a REIT under the Code, and that
as of the date of such opinion Patriot's proposed method of operation would
enable it to continue to meet the requirements for qualification and taxation as
a REIT under the Code. Patriot has not received any similar REIT qualification
opinion subsequent to April 30, 1998. Stockholders should be aware, however,
that opinions of counsel are not binding upon the IRS or any court. Goodwin,
Procter & Hoar LLP's opinion was based on various assumptions and was
conditioned upon certain representations made by Patriot on or about the date of
such opinion as to factual matters, including representations regarding the
nature of Patriot's properties and the future conduct of Patriot's business. Any
inaccuracy in such assumptions and representations (including as a result of
Patriot's activities subsequent to the date of the opinion) could adversely
affect the opinion.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit Wyndham's and the Lessees'
ability to raise room rates in the face of inflation.
SEASONALITY
The hotel industry is seasonal in nature. Revenues for certain of Patriot's
hotels are greater in the first and second quarters of a calendar year and at
other hotels in the second and third quarters of a calendar year. Seasonal
variations in revenue at the hotels may cause quarterly fluctuations in the
Companies' revenues.
YEAR 2000 COMPLIANCE
Many computer systems were not designed to interpret any dates beyond 1999,
which could lead to business disruptions in the United States and
internationally (the "Year 2000 issue"). The Companies recognize the importance
of minimizing the number and seriousness of any disruptions that may occur as a
result of Year 2000 and have adopted an extensive compliance program. The
Companies' compliance program involves three major program areas:
- corporate information technology infrastructure and reservation systems
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<PAGE>
- other electronic assets (such as, but not limited to, automated time
clocks, point-of-sale, non-information technology systems, including
embedded technologies that operate fire-life safety systems, phone
systems, energy management systems and other similar systems)
- third parties with whom the Companies conduct business
The Companies are applying a three phase approach to each program area:
- Inventory Phase (identify systems and third parties that may be affected
by Year 2000 issues)
- Assessment Phase (prioritize the inventoried systems and third parties,
assess their Year 2000 readiness, plan corrective actions)
- Remediation Phase (implement corrective actions, verify implementation,
formulate contingency plans)
The Companies engaged a consulting firm to conduct the inventory and
assessment phases of the compliance program. The inventory and assessment phases
have been completed with respect to the Companies' corporate information
technology infrastructure and reservation systems. The inventory and assessment
phases have also been completed with respect to the Companies' information
technology and other electronic assets that are located in the Companies'
Hotels, other than the Hotels acquired in the Arcadian Acquisition (the
"Arcadian Hotels") and the Interstate Merger (the "Interstate Hotels"), and 81
Hotels which are either managed by Wyndham but not owned by Patriot or owned by
Patriot but not leased or operated by Wyndham (the "Third Party Compliance
Hotels"). During the fourth quarter of 1998, the Companies expect that the
inventory and assessment phases will be completed with respect to the systems
used in the operation of the Arcadian Hotels and the Interstate Hotels, other
than the Interstate Hotels whose owners have undertaken their own compliance
programs. Based on those completed assessments, the Companies, working with
their consultants, have determined which systems are not Year 2000 compliant and
the scope of the non-compliance.
As previously disclosed, the Companies have been informed by the appropriate
owners or managers/ operators of the Third Party Compliance Hotels that they
intend to effect their own compliance programs. The Companies continuing to
monitor the status of the compliance programs being implemented by those
parties. The Companies are also surveying the Year 2000 compliance of the owners
of the hotels that are franchised under the Wyndham brand but not managed by
Wyndham. However, as those systems are not under the Companies' control, the
Companies will be required to rely on the information provided by those owners
or managers/operators and will not be able to test the assessment or remediation
phases of those parties' compliance programs at the Third Party Compliance
Hotels or those franchised hotels.
The Companies are now preparing the necessary work plans to remediate the
systems for which the assessment phase has been completed, including the
Companies' corporate information technology infrastructure and reservations
systems. The Companies have engaged a consulting firm to provide the support and
additional skills to effect the necessary remediation in sufficient time for
testing and any necessary modifications. The Companies are also negotiating with
hardware vendors to obtain the necessary hardware components and other
equipment, and software vendors to obtain the requisite modifications, upgrades
or new software to implement the Companies' remediation plan.
The Companies presently expect to expend approximately $40 million in
connection with Year 2000 issues. To date, the Companies have expended $1.25
million in connection with the inventory and assessment phases of their
compliance program and $500,000 to remediate their systems. However, the
Companies' anticipated expenditures may increase as the Companies complete the
inventory and assessment phases in respect of the Arcadian and Interstate Hotels
and the remediation plans are effected. In addition, these amounts may increase
if the Companies' remediation efforts do not remain on schedule.
As part of the settlement of litigation arising out of the Interstate
Merger, the Companies agreed to contribute to a new company management of many
of the Interstate Hotels, and then dispose of
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substantially all of that new company's stock by means of a spin-off to the
Companies' stockholders or otherwise. While the disposition is expected to occur
after the Companies complete the inventory and assessment of the Interstate
Hotels, the disposition is expected to occur before any remediation is effected.
As the majority of the Interstate Hotels whose management will be contributed to
the new company are owned by third parties, the Companies expect those owners to
bear all costs related to the inventory, assessment and remediation of those
Interstate Hotels.
The Companies are also surveying their vendors and service providers that
are critical to the Companies' businesses to determine whether they are Year
2000 compliant. The Companies now expect to complete their vendor surveys in the
first quarter of 1999, but cannot guarantee that all vendors or service
providers will comply with the Companies' surveys. More importantly, the
Companies must rely on the information provided by the third parties and will
not be able to test the third parties' compliance. As a result, the Companies
will not be able to ensure the Year 2000 compliance of those vendors or service
providers. During the first quarter of 1999, the Companies intend to determine
the extent to which they will be able to replace vendors and service providers
that are expected to be non-compliant. Due to the lack of an alternative source,
there may be instances in which the Companies will have no alternative but to
remain with non-compliant vendors or service providers. As the Companies
identify the non-compliant vendors and service providers, they will then
determine appropriate contingency plans.
The Companies believe that their current compliance program will allow them
sufficient time to identify which of their systems and other electronic assets
are not Year 2000 compliant and to effect the necessary remediation to avoid
substantial problems arising from Year 2000 induced failures. The Companies
believe that their reprogramming, upgrading and systems replacements will be
implemented by June 30, 1999. The Companies believe that this should provide
adequate time to further correct any problems that did not surface during the
implementation and testing for those systems. Notwithstanding that, the
Companies do recognize that some vendors and the owners and managers/operators
of the Third Party Compliance Hotels may not comply with their present schedules
and could affect the Companies' timing and remediation efforts generally.
In addition to those systems within the Companies' control and the control
of its vendors and suppliers, there are other systems that could have an impact
on the Companies' businesses and which may not be Year 2000 compliant by January
1, 2000. These systems could affect the operations of the air traffic control
system and airlines or other segments of the lodging and travel industries, or
the economy and travel generally. In addition, these systems could affect the
Third Party Compliance Hotels or the Hotels franchised under the Companies'
brands whose owners and managers/operators are implementing their own compliance
programs. These systems are outside of the Companies' control or influence and
their compliance may not be verified by the Companies. However, these systems
could adversely affect the Companies' financial condition or results of
operation.
If the Companies are not successful in implementing their Year 2000
compliance plan, the Companies may suffer a material adverse impact on their
consolidated results of operations and financial condition. Because of the
importance of addressing the Year 2000 problem, the Companies expect to develop
contingency plans if they determine that the remediation phase of their
compliance plan will not be fully implemented by June 30, 1999.
FUNDS FROM OPERATIONS
Combined Funds from Operations of the Companies (as defined and computed
below) was $58.1 million for the three months ended September 30, 1998 and $30.1
million for the three months ended September 30, 1997. Combined Funds from
Operations was $221.9 million for the nine months ended September 30, 1998 and
$78.1 million for the nine months ended September 30, 1997.
Management considers Funds from Operations to be a key measure of REIT
performance. Funds from Operations represents net income (loss) (computed in
accordance with generally accepted accounting
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principles), excluding gains (or losses) from debt restructuring or sales of
property, plus depreciation of real property, amortization of goodwill and
amortization of management contracts and trade names, and after adjustments for
unconsolidated partnerships, joint ventures and corporations. Adjustments for
Patriot's unconsolidated subsidiaries are calculated to reflect Funds from
Operations on the same basis. The Companies have also made certain adjustments
to Funds from Operations for real estate related amortization. Funds from
Operations should not be considered as an alternative to net income or other
measurements under generally accepted accounting principles as an indicator of
operating performance or to cash flows from operating, investing or financing
activities as a measure of liquidity. Funds from Operations does not reflect
working capital changes, cash expenditures for capital improvements or principal
payments on indebtedness.
The following reconciliation of net loss to Funds from Operations
illustrates the difference between the two measures of operating performance for
the three months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net loss.............................................................. $ (59,415) $ (27,004)
Add:
Extraordinary loss from extinguishment of debt...................... 1,257 2,534
Minority interest in the Operating Partnerships..................... (4,722) (3,225)
Depreciation of buildings and improvements and furniture, fixtures
and equipment..................................................... 48,762 12,592
Amortization of goodwill and other assets........................... 9,573 716
Amortization of management contracts and trade names................ 7,295 491
Amortization of capitalized lease costs............................. 2,144 30
Cost of acquiring leaseholds........................................ 3,938 43,820
Treasury lock settlement............................................ 49,225 --
Other............................................................... 2,382 --
Adjustment for Funds from Operations of unconsolidated subsidiaries:
Equity in earnings of unconsolidated subsidiaries................... (1,888) (1,395)
Funds from Operations of unconsolidated subsidiaries................ 2,875 2,121
Adjustment for minority interest share of Funds from Operations of
other consolidated subsidiaries:
Minority interest in earnings of consolidated subsidiaries.......... 4,500 934
Minority interest in Funds from Operations of consolidated
subsidiaries...................................................... (7,863) (934)
---------- ----------
Funds from Operations................................................. $ 58,063 $ 30,680
---------- ----------
---------- ----------
Weighted average shares and OP Units outstanding:
Basic............................................................... 160,005 72,091
---------- ----------
---------- ----------
Diluted............................................................. 172,700 72,082
---------- ----------
---------- ----------
</TABLE>
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<PAGE>
The following reconciliation of net loss to Funds from Operations
illustrates the difference between the two measures of operating performance for
the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net loss............................................................... $ (67,257) $ (3,838)
Add:
Extraordinary loss from extinguishment of debt....................... 31,817 2,534
Minority interest in the Operating Partnerships...................... (6,169) 1,309
Depreciation of buildings and improvements and furniture, fixtures
and equipment...................................................... 115,723 30,539
Amortization of goodwill and other assets............................ 18,754 716
Amortization of management contracts and trade names................. 15,523 535
Amortization of capitalized lease costs.............................. 3,649 102
Cost of acquiring leaseholds......................................... 61,000 43,820
Treasury lock settlement............................................. 49,225 --
Other................................................................ 2,382 --
Adjustment for Funds from Operations of unconsolidated subsidiaries:
Equity in earnings of unconsolidated subsidiaries.................... (7,375) (4,488)
Funds from Operations of unconsolidated subsidiaries................. 10,537 6,883
Adjustment for minority interest share of Funds from Operations of
other consolidated subsidiaries:
Minority interest in earnings of consolidated subsidiaries........... 7,514 1,381
Minority interest in Funds from Operations of consolidated
subsidiaries....................................................... (13,396) (1,381)
---------- ---------
Funds from Operations.................................................. $ 221,927 $ 78,112
---------- ---------
---------- ---------
Weighted average shares and OP Units outstanding:
Basic................................................................ 136,199 57,980
---------- ---------
---------- ---------
Diluted.............................................................. 145,766 59,616
---------- ---------
---------- ---------
</TABLE>
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PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
Since June 30, 1998, the Companies have issued equity securities in private
placements in reliance on an exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended, in the amounts and for the consideration
set forth below.
In July 1998, in connection with the acquisition of an approximate 50%
limited partnership interest in a partnership with affiliates of Don Shula's
Steakhouses, Inc., the Companies issued 156,272 preferred units of limited
partnership interest in the Wyndham Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
<S> <C>
10.1 Purchase Agreement, dated as of April 6, 1998, by and among Patriot American Hospitality,
Inc., Wyndham International, Inc., PaineWebber Incorporated and PaineWebber Financial
Products, Inc.
10.2 Letter Agreement, dated July 30, 1998, by and among Patriot American Hospitality, Inc.,
Wyndham International, Inc. and PaineWebber Financial Products, Inc.
10.3 Letter Agreement, dated September 11, 1998, by and among Patriot American Hospitality, Inc.,
Wyndham International, Inc. and UBS AG, London Branch.
10.4 Letter, dated September 15, 1998, from PaineWebber Financial Products, Inc. to Patriot
American Hospitality, Inc. and Wyndham International, Inc.
10.5 Letter Agreement, dated September 30, 1998, by and among Patriot American Hospitality, Inc.,
Wyndham International, Inc. and PaineWebber Financial Products, Inc.
10.6 Letter Agreement, dated October 22, 1998, by and among Patriot American Hospitality, Inc.,
Wyndham International, Inc. and PaineWebber Financial Products, Inc.
99.1 Debt Maturity Schedule of the Companies as of November 5, 1998.
ITEM NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
27.1 Financial Data Schedule--Patriot (filed herewith).
27.2 Financial Data Schedule--Wyndham (filed herewith).
</TABLE>
(b) Reports on Form 8-K:
(i) Joint Current Report on Form 8-K of Patriot American Hospitality,
Inc. and Wyndham International, Inc. dated June 2, 1998 (Nos.
001-09319 and 001-09320 filed June 17, 1998), as amended August 6,
1998, reporting under Item 2 the Interstate Merger and the
Summerfield Acquisition.
(ii) Joint Current Report on Form 8-K of Patriot American Hospitality,
Inc. and Wyndham International, Inc. dated November 9, 1998 (Nos.
001-09319 and 001-09320 filed November 9, 1998), as amended November
10, 1998, reporting under Item 5 current developments regarding
combined liquidity and capital resources, the forward contracts, the
treasury rate lock agreements, Hurricane Georges and third quarter
1998 earnings.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
DATED: November 20, 1998
<TABLE>
<S> <C>
PATRIOT AMERICAN HOSPITALITY, INC.
/s/ LAWRENCE S. JONES
-----------------------------------------------
Lawrence S. Jones
EXECUTIVE VICE PRESIDENT AND TREASURER
(AUTHORIZED OFFICER AND PRINCIPAL ACCOUNTING
AND FINANCIAL OFFICER)
WYNDHAM INTERNATIONAL, INC.
/s/ LAWRENCE S. JONES
-----------------------------------------------
Lawrence S. Jones
EXECUTIVE VICE PRESIDENT AND TREASURER
(AUTHORIZED OFFICER AND PRINCIPAL ACCOUNTING
AND FINANCIAL OFFICER)
</TABLE>
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<PAGE>
EXHIBIT 10.1
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made as of the 6th day of April, 1998, by and
among Patriot American Hospitality, Inc. (the "REIT"), a Delaware corporation,
Wyndham International, Inc., a Delaware Corporation (the "OPCO") (the REIT and
the OPCO, each a "Company" and together the "Companies"), PaineWebber
Incorporated ("PaineWebber"), and PaineWebber Financial Products Inc., as agent
acting for the account of PaineWebber ("PaineWebber Agent" and, collectively
with PaineWebber, the "PaineWebber Parties").
IN CONSIDERATION of the mutual covenants contained in this Purchase
Agreement, the Companies and the PaineWebber Parties hereby agree as follows:
SECTION 1. Authorization of Sale of the Shares. Subject to the terms and
conditions of this Purchase Agreement, the REIT has authorized the sale to
PaineWebber of 5,150,000 shares of common stock, $.01 par value per share, of
the REIT (the "REIT Shares") and the OPCO has authorized the sale to PaineWebber
of 5,150,000 shares of common stock, $.01 par value per share, of the OPCO (the
"OPCO Shares"), which REIT Shares and OPCO Shares are paired and traded as a
unit consisting of one (1) REIT Share and one (1) OPCO Share (hereinafter each
such paired unit is referred to as a "Paired Share" and the Paired Shares
referred to in this sentence are herein called the "Purchase Shares")). In
addition, the REIT and the OPCO may issue to PaineWebber additional Paired
Shares in settlement of certain of their obligations under that certain Purchase
Price Adjustment Mechanism Agreement (the "Adjustment Agreement"), dated as of
April 6, 1998, between the REIT, the OPCO and PaineWebber (the "Additional
Shares"). The Companies and the PaineWebber Parties agree, to the extent
relevant to their respective business and commercial activities and in the
absence of an administrative determination or judicial ruling to the contrary,
to treat for United States federal income tax and financial accounting purposes
payments and deliveries made under the Adjustment Agreement as adjustments to
the purchase price paid for the Purchase Shares pursuant to Section 2 hereof.
The Purchase Shares and the Additional Shares are hereinafter collectively
called the "Shares."
SECTION 2. Agreement to Sell and Purchase the Purchase Shares. Subject
to the terms and conditions of this Purchase Agreement, on the Closing Date (as
defined in Section 3 hereof), the Companies will sell to PaineWebber the
Purchase Shares for a per Paired Share purchase price equal to 98.00% of the
Closing Price. The "Closing Price" shall equal the closing price reported on
the New York Stock Exchange for a Paired Share on April 3, 1998.
SECTION 3. Delivery of the Purchase Shares at the Closing.
3.1 Closing. The completion of the purchase and sale of the
Purchase Shares (the "Closing") shall occur as soon as practicable on or after
the date hereof on a business day to be agreed upon by the Companies and the
PaineWebber Parties, but in no event later than five business days after the
execution of this Purchase Agreement (hereinafter, the "Closing Date").
<PAGE>
3.2 Conditions. At Closing, the Companies shall deliver to the
PaineWebber Parties one or more stock certificates registered in the name of
PaineWebber representing the number of Purchase Shares set forth in Section 1
above.
The obligation of the Companies to complete the purchase and sale of the
Purchase Shares and deliver such stock certificate(s) to the PaineWebber Parties
at the Closing shall be subject to the following conditions, any one or more of
which may be waived by both of the Companies acting together: (i) receipt by
the Companies of immediately available funds (or other mutually agreed upon form
of payment) in the full amount of the purchase price specified in Section 2 for
the Purchase Shares being purchased hereunder, (ii) the accuracy in all material
respects as of the Closing Date, of the representations and warranties made by
the PaineWebber Parties herein and the fulfillment, in all material respects, of
those undertakings of the PaineWebber Parties to be fulfilled prior to the
Closing, (iii) execution and delivery of the Adjustment Agreement, (iv) receipt
by the Companies of a cross-receipt with respect to the Purchase Shares executed
by PaineWebber Agent on behalf of PaineWebber and (v) receipt by the Companies
of a certificate by an officer or authorized representative of PaineWebber Agent
to the effect that the representations and warranties of the PaineWebber Parties
set forth in Section 5 hereof are true and correct as of the date of this
Agreement and as of the Closing Date.
The obligation of PaineWebber to accept delivery of such stock
certificate(s) and to pay for the Purchase Shares evidenced thereby shall be
subject to the following conditions, any one or more of which may be waived by
the PaineWebber Parties: (i) the accuracy in all material respects, as of the
Closing Date, of the representations and warranties made by the Companies herein
and the fulfillment, in all material respects, of those undertakings of the
Companies to be fulfilled prior to the Closing, (ii) receipt by the PaineWebber
Parties of all opinions, letters and certificates to be delivered by the
Companies pursuant to this Purchase Agreement, (iii) execution and delivery of
the Adjustment Agreement, and (iv) receipt by the PaineWebber Parties of a
cross-receipt with respect to the purchase price for the Purchase Shares
executed by the Companies.
SECTION 4. Representations, Warranties and Covenants of the Companies.
Except as disclosed in the Companies' SEC Filings (as defined below), the REIT
and the OPCO, jointly and severally, hereby represent and warrant to the
PaineWebber Parties, and covenant with the PaineWebber Parties, as follows:
4.1 Organization and Qualification of the Companies. The REIT has
been duly organized and is validly existing as a corporation in good standing
under the laws of Delaware with power and authority to own and lease its
properties and to conduct its business as currently conducted. The REIT is duly
qualified as a corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing or managing of property or the conduct of business, except
where the failure to so qualify would not have a material adverse effect on the
condition, financial or
2
<PAGE>
otherwise, or the earnings, assets, business affairs or business prospects of
the Companies and the Subsidiaries (as defined below) of the Companies
considered as one enterprise. The REIT's existence has not been suspended or
terminated nor have any dissolution, revocation or forfeiture proceedings
regarding the REIT been commenced. The OPCO has been duly organized and is
validly existing as a corporation in good standing under the laws of Delaware
with corporate power and authority to own and lease its properties and to
conduct its business as currently conducted. The OPCO is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing or managing of property or the conduct of business, except
where the failure to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets, business affairs or
business prospects of the Companies and the Subsidiaries considered as one
enterprise. The OPCO's existence has not been suspended or terminated nor have
any dissolution, revocation or forfeiture proceedings regarding the OPCO been
commenced. Entities in which the Companies directly or indirectly have at least
a 50% ownership interest are herein referred to as the "Subsidiaries," and each
individually, as a "Subsidiary."
4.2 Organization and Qualification of Subsidiaries. Each of the
Subsidiaries has been duly organized and is validly existing as a corporation,
limited partnership, or limited liability company, as the case may be, in good
standing under the laws of its respective jurisdiction of organization, with
full power and authority to own, lease and operate its properties and to conduct
the business in which it currently is engaged. Each of the Subsidiaries is duly
qualified as a foreign corporation, limited partnership, or limited liability
company, as the case may be, to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except where
the failure to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets, business affairs or
business prospects of the Companies and the Subsidiaries considered as one
enterprise. All of the issued and outstanding shares of capital stock of each
of the corporate Subsidiaries have been duly authorized and validly issued and
are fully paid and non-assessable. The ownership by the Companies or the
Subsidiaries of the shares of capital stock or limited partnership or equity
interests, as the case may be, of each of the Subsidiaries is as described in
the Companies' SEC Filings.
4.3 Authorized Capital Stock. The REIT has 1.5 billion authorized
shares as of February 9, 1998, consisting of 650 million REIT Shares, par value
$0.01 per share, 750 million shares of excess stock, par value $0.01 per share,
and 100 million shares of preferred stock, par value $0.01 per share ("Patriot
Preferred Stock"). The OPCO has authorized capital stock as of February 9, 1998
of 1.5 billion shares, consisting of 650 million OPCO Shares, par value $0.01
per share, 750 million shares of excess stock, par value $0.01 per share and 100
million shares of preferred stock, par value $0.01 per share. As of February 9,
1998, there were 99,878,341 Paired Shares outstanding, 7,190,091 Paired Shares
were reserved for issuance pursuant to equity plans filed pursuant to the
Companies' SEC Filings (as defined below), and 12,701,170 Paired Shares were
reserved for issuance upon the election by the Companies to
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acquire, in exchange for Paired Shares, units of limited partnership interest in
Patriot American Hospitality Partnership, L.P. and Patriot American Hospitality
Operating Partnership, L.P. tendered by redeeming unit holders. As of February
9, 1998, there were 4,860,876 shares of Patriot Preferred Stock outstanding and
no preferred shares of the OPCO were currently outstanding. The issued and
outstanding Paired Shares of the Companies have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and conform to the description thereof in the Companies' SEC
Filings. Other than as described in the Companies' SEC Filings, the REIT does
not have outstanding any options to purchase, or other rights to subscribe for
or purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the REIT's
stock, stock bonus and other stock plans or arrangements and the options or
other rights granted and exercised thereunder in the Companies' SEC Filings
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
4.4 Issuance, Sale and Delivery of the Shares. The Purchase
Shares to be sold by the Companies have been duly authorized for issuance and,
when issued, delivered and paid for in the manner set forth in this Purchase
Agreement, will be validly issued, fully paid and non-assessable. The
Additional Shares have been duly authorized and, if and when issued pursuant to
the Adjustment Agreement, will be validly issued, fully paid and non-assessable,
Upon payment of the purchase price and delivery of the Shares in accordance with
this Agreement, PaineWebber will receive good, valid and marketable title to the
Shares, free and clear of all security interests, mortgages, pledges, liens,
encumbrances and claims. No approval of or authorization by the respective
shareholders or boards of directors of the Companies will be required for the
issuance and/or sale of the Shares to be sold by the Companies as contemplated
herein or in the Adjustment Agreement, except such as shall have been obtained
on or before the Closing Date. The issuance and/or sale of the Shares to the
PaineWebber Parties by the Companies pursuant to this Purchase Agreement or the
Adjustment Agreement (as the case may be), the compliance by the Companies with
the other provisions of this Purchase Agreement or the Adjustment Agreement and
the consummation of the other transactions contemplated hereby or thereby do not
require the consent, approval, authorization, registration or qualification of
or with any court, governmental authority or agency, except such as shall have
been obtained on or before the Closing Date or in connection with any Resale
Registration Statement filed with respect to any of the Shares. The Companies
meet and will continue to meet the requirements for use of Form S-3 under the
Securities Act, and the rules and regulations of the U.S. Securities and
Exchange Commission (the "Commission") under the Securities Act (the "1933 Act
Regulations"). The Companies have filed and will file all documents which they
are required to file under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations promulgated thereunder (the "1934
Act Regulations") within the time periods prescribed by the Exchange Act and the
1934 Act Regulations and all such documents (collectively, together with the
Companies' registration statements filed under the Securities Act which have
been declared
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effective since January 1, 1997 and have not been withdrawn, the "Companies' SEC
Filings") comply and will comply in all material respects with the requirements
of the Exchange Act and the 1934 Act Regulations, as applicable, and none of
such documents, when so filed, contained or will contain any untrue statement of
a material fact or omitted or will omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. No Resale
Registration Statement filed in respect of any of the Shares, when so filed,
contained or will contain any untrue statement of a material fact or omitted or
will omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
4.5 Due Execution, Delivery and Performance by the Company. Each
of the Companies has full right, power and authority to enter into this Purchase
Agreement and the Adjustment Agreement and perform the transactions contemplated
hereby and thereby. This Purchase Agreement and the Adjustment Agreement have
been duly authorized, executed and delivered by the Companies and, upon the
execution and delivery hereof, each of this Agreement and the Adjustment
Agreement will constitute the valid and binding obligation of each Company,
enforceable in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' and contracting parties' rights generally and
except as enforceability may be subject to general principles of equity
(regardless of whether such enforceability is considered in a proceedings in
equity or at law) and except as the enforceability of the indemnification
agreements of the Companies in Section 7.5 hereof may be limited by public
policy. The execution and delivery of this Purchase Agreement and the
Adjustment Agreement by the Companies and the consummation of the transactions
and the performance of the obligations herein and therein contemplated will not
violate any provision of the certificate of incorporation, bylaws, or other
organizational documents of the Companies, and will not conflict with, result in
the breach or violation of, or constitute, either by itself or upon notice or
the passage of time or both, a default under any material agreement, mortgage,
deed of trust, credit agreement, lease, franchise, license, indenture, note,
permit or other instrument to which either Company is a party or by which either
Company or its respective properties may be bound or affected, any statute or
any authorization, judgment, decree, order, rule or regulation of any court or
any regulatory body, administrative agency or other governmental body applicable
to either Company or any of its respective properties other than violations,
conflicts, breaches or defaults that individually or in the aggregate would not
have a material adverse effect on the condition, financial or otherwise, or on
the earnings, assets, business affairs or business prospects of the Companies
and the Subsidiaries considered as one enterprise. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and delivery of
this Purchase Agreement, the Adjustment Agreement or the consummation of the
transactions contemplated hereby or thereby, except in connection with the
filing of any Resale Registration Statements pursuant to Section 7 below or for
compliance with the blue sky laws applicable to the offering of the Shares.
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4.6 Accountants. The Companies' independent certified public
accountants, who have expressed their opinion with respect to the Most Recent
Financial Statements (as defined below) are independent accountants as required
by the Securities Act and the 1933 Act Regulations.
4.7 No Defaults. Except as to defaults, violations and breaches
which individually or in the aggregate would not have a material adverse effect
on the condition, financial or otherwise, on the earnings, assets, business
affairs or business prospects of the Companies and the Subsidiaries considered
as one enterprise, none of the Companies or any Subsidiary is in violation or
default of any provision of its declaration of trust, charter or bylaws, or
other organizational documents, and none of the aforementioned parties is in
breach of or default with respect to any provision of any agreement, judgment,
decree, order, mortgage, deed of trust, credit agreement, lease, franchise,
license, indenture, permit or other instrument to which it is a party or by
which it or any of its properties are bound.
4.8 No Actions. There is no action, suit or proceeding before or
by any court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Companies, threatened against or affecting either
Company or any Subsidiary, any real property or improvements thereon owned or
leased by any of either Company or the Subsidiaries, including any property
underlying indebtedness held by the Companies (each, individually, a "Property"
and collectively, the "Properties"), or any officer of either Company or any of
the Subsidiaries that, if determined adversely to either Company or any
Subsidiary, any Property, including any property underlying indebtedness held by
either Company and any of the Subsidiaries, or any such officer or trust
manager, would reasonably be expected to (A) result in any material adverse
change in the condition, financial or otherwise, or in the earnings, assets,
business affairs or business prospects of the Companies and the Subsidiaries
considered as one enterprise or (B) materially and adversely affect the
consummation of the transactions contemplated by this Agreement or the
Adjustment Agreement. There is no pending legal or governmental proceeding to
which either Company or any Subsidiary is a party or of which any of their
respective properties or assets or any property, including any property
underlying indebtedness held by either Company or any of the Subsidiaries, is
the subject, including ordinary routine litigation incidental to the business,
that is, considered in the aggregate, material to the condition, financial or
otherwise, or the earnings, assets, business affairs or business prospects of
the Companies and the Subsidiaries considered as one enterprise.
4.9 Properties. (A) Each Company and the Subsidiaries, as the
case may be, has good and marketable title to all the properties and assets
reflected as owned by such entities in the Most Recent Financial Statements, and
good and marketable title to the improvements, if any, thereon and all other
assets that are required for the effective operation of such real property in
the manner in which they currently are operated; subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except (i) those, if any, reflected in
the Most Recent Financial Statement, or (ii) those which would not have a
material adverse effect on the condition, financial or otherwise, or on the
earnings, assets, business affairs or
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business prospects of or with respect to the Companies and the Subsidiaries
considered as one enterprise, (B) the leases of any real property and buildings
held under lease by either Company or any Subsidiary are in full force and
effect, and such entity is not in default in respect of any of the terms or
provisions of such leases and such entity has not received notice of the
assertion of any claim by anyone adverse to such entity's rights as lessee under
such leases, or affecting or questioning such entity's right to the continued
possession or use of the real property and buildings held under such leases or
of a default under such leases, in each case with such exceptions as would not
have a material adverse impact on the condition, financial or otherwise, or on
the earnings, assets, business affairs or business prospects of or with respect
to the Companies and the Subsidiaries considered as one enterprise; (C) none of
the Companies or any of the Subsidiaries or any tenant of any of the Properties
is in default under any of the leases pursuant to which any of the Companies or
the Subsidiaries, as lessor, leases its Property (and neither of the Companies
knows of any event which, but for the passage of time or the giving of notice,
or both, would constitute a default under any of such leases) other than such
defaults that would not have a material adverse effect on the condition,
financial or otherwise, or on the earnings, assets, business affairs or business
prospects of or with respect to the Companies and the Subsidiaries considered as
one enterprise; (D) no person has an option or right of first refusal to
purchase all or part of any Property or any interest therein, other than such
options or rights of first refusal which would not have a material adverse
effect on the condition, financial or otherwise, or on the earnings, assets,
business affairs or business prospects of or with respect to the Companies and
the Subsidiaries, considered as one enterprise; (E) each of the Properties
complies with all applicable codes, laws and regulations (including, without
limitation, building and zoning codes, laws and regulations and laws relating to
access to the Properties), except for such failures to comply that would not
individually or in the, aggregate have a material adverse impact on the
condition, financial or otherwise, or on the earnings, assets, business affairs
or business prospects of the Companies and the Subsidiaries considered as one
enterprise; and (F) none of the Companies has knowledge of any pending or
threatened condemnation proceedings, zoning change, or other proceeding or
action that will in any manner affect the size of, use of, improvements on,
construction on or access to the Properties, including any property underlying
indebtedness held by either Company or any of the Subsidiaries, except such
proceedings or actions that would not have a material adverse effect on the
condition, financial or otherwise, or on the earnings, assets, business affairs
or business prospects of the Companies and the Subsidiaries considered as one
enterprise.
4.10 REIT Qualification. The REIT qualified as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
Code"), with respect to its taxable years ended December 31, 1995, December 31,
1996 and December 31, 1997, and is organized in conformity with the requirements
for qualification as a real estate investment trust, and its manner of operation
has enabled it to meet the requirements for qualification as a real estate
investment trust as of the date hereof, and its proposed manner of operation
will enable it to meet the requirements for qualification as a real estate
investment trust in the future.
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4.11 No Material Change. Since the date of the Most Recent
Financial Statements, and except as otherwise disclosed in the Companies' SEC
Filings as of the Closing Date, (i) neither Company has incurred any liabilities
or obligations, indirect or contingent, which will have a Material Adverse
Effect or entered into any material verbal or written agreement or other
material transaction which is not in the ordinary course of business (it being
agreed that for purposes of this sentence the REIT's ordinary course of business
shall include the acquisition or disposition, directly or indirectly, of real
estate properties or businesses of a type that may be owned by a "real estate
investment trust" (as defined under the Internal Revenue Code) and the OPCO's
ordinary course of business shall include the acquisition or disposition,
directly or indirectly, of assets or businesses related to or engaged in the
hospitality industry) or which could reasonably be expected to result in a
material reduction in the future earnings of the Companies; (ii) no material
casualty loss or material condemnation or other material adverse event with
respect to any Property or any of the Subsidiaries, has occurred that is
material to the Companies and the Subsidiaries considered as one enterprise;
(iii) none of the Companies, or the Subsidiaries is in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there has not
been any change in the capital stock of either Company or the Subsidiaries
(other than the sale of the Purchase Shares hereunder or those reserved for
issuance pursuant to the Adjustment Agreement, issuances pursuant to the
incentive compensation plans of the Companies), or any increase in the
indebtedness of either Company or the Subsidiaries that is material to such
entities, considered as one enterprise; (v) and except for regular quarterly
dividends or distributions on the REIT Shares or the OPCO Shares, there has been
no dividend or distribution of any kind declared, paid or made by either
Company; and (vi) there has not been any material adverse change in the
condition, financial or otherwise, or in the earnings, assets, business affairs
or business prospects of the Companies and the Subsidiaries, considered as one
enterprise, whether or not arising in the ordinary course of business.
4.12 Intellectual Property. None of the Companies or the
Subsidiaries is required to own or possess trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations, which
it does not already own or possess to conduct its businesses as now conducted;
and neither Company has knowledge of any material infringement by it of
trademark, trade name rights, patent rights, copyrights, licenses, trade secrets
or other similar rights of others, and has not received any notice that any
claim has been made against the Companies regarding trademark, trade name,
patent, copyright, license, trade secrets or other infringement.
4.13 Compliance. Neither Company has been advised, or has reason
to believe, that either Company or any Subsidiary is not conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which it is conducting business, including, without limitation, all
applicable local, state and Federal environmental laws and regulations, except
where failure to be so in compliance would not materially adversely affect the
condition, financial or otherwise, or in the earnings, assets, business affairs
or business prospects of the Companies and the Subsidiaries, considered as one
enterprise.
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4.14 Taxes. The Companies and the Subsidiaries have filed all
material federal, state and foreign income and franchise tax returns which have
been required to be filed and have paid or accrued all taxes shown as due
thereon (except for those taxes which are being contested in good faith through
appropriate proceeding, for which adequate reserves have been established and as
to which the PaineWebber Parties have been notified in writing by the
Companies), and the Companies have no knowledge of any tax deficiency which has
been or might be asserted or threatened against the Companies or the
Subsidiaries which could materially adversely affect the business condition,
financial or otherwise, or in the earnings, assets, business affairs or business
prospects of the Companies and the Subsidiaries, considered as one enterprise.
4.15 Transfer Taxes. On the Closing Date, all stock transfer or
other taxes, if any (other than income taxes) which are required to be paid in
connection with the sale and transfer of the Purchase Shares to be sold to
PaineWebber hereunder will be, or will have been, fully paid or provided for by
the Companies and all laws imposing such taxes will be or will have been fully
complied with.
4.16 Investment Company. None of the Companies or any Subsidiary
is required to register as an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
4.17 Additional Information. The Companies represent and warrant
that the information contained in the following documents, which the Companies
have furnished to the PaineWebber Parties, or will furnish or make available
upon request prior to the Closing, is true and correct in all material respects
as of their respective filing dates:
(a) Joint Annual Report on Form 10-K for the year ended
December 31, 1997, which Joint Annual Report includes the Companies' most
recently available audited financial statements together with the report
thereon of the independent certified public accountants (the "Most Recent
Financial Statements"),
(b) Joint Quarterly Reports on Form 10-Q, as amended if
applicable, for the quarters ended Much 31, 1997, June 30, 1997 and
September 30, 1997;
(c) the Companies' proxy statements on Form 14A relating to
(i) the most recent Annual Meetings of the REIT's Shareholders and the
OPCO's Shareholders and (ii) any Special Meetings of the REIT's
Shareholders and the OPCO's Shareholders which occurred during the 12 month
period prior to the date hereof or for which a meeting date has been fixed
and a proxy statement distributed;
(d) all other documents, if any, filed by or with respect to
the REIT and the OPCO with the Commission since January 1, 1997 pursuant to
Section 13, 15(d) or 16(a) of the Exchange Act; and
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(e) a covenant compliance certification stating that none of
the REIT, the OPCO or the Subsidiaries are in default under any of their
respective credit agreements or other financing arrangements.
4.18 Legal Opinion. At or prior to the Closing, counsel to the
Companies will deliver their legal opinions dated the Closing Date to the
PaineWebber Parties in substantially the form of Exhibit A hereto.
4.19 ERISA. The Companies and the Subsidiaries are in compliance
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended and the rules and regulations promulgated thereunder ("ERISA"),
except for such failures to comply as would not singly or in the aggregate have
a material adverse effect on the condition, financial or otherwise, or on the
earnings, assets, business affairs or business prospects of or with respect to
the Companies and the Subsidiaries, considered as one enterprise. Neither a
Reportable Event (as defined under ERISA) nor a Prohibited Transaction (as
defined under ERISA) has occurred with respect to any Plan (as defined below) of
the Companies and/or their respective affiliates; no notice of intent to
terminate a Plan has been filed nor has any Plan been terminated within the past
five years; to the Companies' knowledge, no circumstance exists which
constitutes grounds under Section 402 of ERISA entitling the Pension Benefit
Guaranty Corporation ("PBGC") to institute proceedings to terminate, or appoint
a trustee to administer, a Plan, nor has the PBGC instituted any such
proceedings; the Companies and their affiliates have not completely or partially
withdrawn under Section 4201 or 4202 of ERISA from any Multiemployer Plan (as
defined therein); the Companies and their affiliates have met the minimum
funding requirements of Section 412 of the Code and Section 302 of ERISA with
respect to each Plan and there is no unfunded current liability (as defined
below) with respect to any Plan; the Companies and their affiliates have not
incurred any liability to the PBGC under ERISA (other than for the payment of
premiums under Section 4007 of ERISA); no part of the funds to be used by the
Companies in satisfaction of their obligations under this Purchase Agreement or
the Adjustment Agreement constitute "plan assets" of any "employee benefit plan"
within the meaning of ERISA or of any "plan" within the meaning of Section
4957(e)(I) of the Code, as interpreted by the Internal Revenue Service and the
U.S. Department of Labor in rules, regulations, releases and bulletins or as
interpreted under applicable case law. As used below, "Plan" means an "employee
benefit plan" or "plan" as described in Section 3(3) of ERISA; and "unfunded
current liability" has the meaning provided in Section 302(d)(8)(A) of ERISA.
4.20 Environmental Protection. To the knowledge of the Companies,
except as disclosed in the Companies' SEC Filings, none of the Companies or
their affiliates' properties contain any Hazardous Materials that, under any
Environmental Law, (i) would impose liability on the Companies or any affiliate
that is likely to have a material adverse effect on the condition (financial or
other), business, results of operations, or prospects, of the Companies or (ii)
is likely to result in the imposition of a lien on any material asset owned,
directly or indirectly, by the Companies. To the knowledge of the Companies,
neither of the Companies nor any of their affiliates is subject to any existing,
pending or threatened
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investigation or proceeding by any governmental agency or authority with respect
or pursuant to any Environmental Law, except any which, if adversely determined,
would not have a Material Adverse Effect. As used herein, "Environmental Laws"
mean all federal, state, local and foreign environmental, health and safety
laws, codes and ordinances and all rules and regulations promulgated thereunder,
including, without limitation laws relating to emissions, discharges, releases
or threatened releases of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes into the environment (including, without
limitation, air, surface water, ground water, land surface or subsurface strata)
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
chemicals, or industrial, solid, toxic or hazardous substances or wastes; and
"Hazardous Material" includes, without limitation, (i) all substances which are
designated pursuant to Section 311(b)(2)(A) of the Federal Water Pollution
Control Act ("FWPCA"), 33 U.S.C. Section 1251 et seq.; (ii) any element,
compound, mixture, solution, or substance which is designated pursuant to
Section 102 of the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq.; (iii) any hazardous
waste having the characteristics which are identified under or listed pursuant
to Section 3001 of the Resource Conservation and Recovery Act ("RCRA"),
42 U.S.C. Section 6901 et seq.; (iv) any toxic pollutant listed under
Section 307(a) of the FWPCA; (v) any hazardous air pollutant which is listed
under Section 112 of the Clean Air Act, 42 U.S.C. Section 7401 et seq.; (vi) any
imminently hazardous chemical substance or mixture with respect to which action
has been taken pursuant to Section 7 of the Toxic Substances Control Act,
15 U.S.C. Section 2601 et seq.; and (vii) petroleum, petroleum products,
petroleum by-products, petroleum decomposition by-products, and waste oil.
4.21 Solvency. Immediately following (i) the execution of this
Purchase Agreement and the Adjustment Agreement, (ii) the purchase of the
Purchase Shares pursuant hereto and (iii) the completion of any other
transaction contemplated by this Purchase Agreement and the Adjustment
Agreement, each of the Companies will be solvent and able to pay its debts as
they mature, will have capital sufficient to carry on its business and all
businesses in which it is to engage, and will have assets which will have a
present fair market valuation greater than the amount of all of its liabilities.
This Purchase Agreement and the Adjustment Agreement have been executed and
delivered by the Companies in good faith and in exchange for reasonably
equivalent value. Neither of the Companies intends to incur debts beyond its
ability to pay them as they become due. Each of the Companies' assets and
capital are now, and are expected in the future to be, sufficient to pay the
Companies' ongoing expenses as they are incurred and to discharge all of the
Companies' liabilities in the event that the business of the Companies is
required to be liquidated. The Companies have not entered into this Purchase
Agreement or the Adjustment Agreement or any transaction contemplated hereby or
thereby with an intent to hinder, delay or defraud creditors of any persons or
entity.
4.22 Certificate. A certificate of each Company executed by an
executive officer of such Company, to be dated the Closing Date in form and
substance satisfactory to the PaineWebber Parties to the effect that the
representations and warranties of the Companies set forth in this Section 4 are
true and correct as of the date of this Agreement and as of the
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Closing Date, and such Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied on or
prior to such Closing Date.
4.23 Financial Statements. The Most Recent Financial Statements
(including the notes thereto) present fairly in all material respects the
financial position of the respective entity or entities presented therein at the
respective dates indicated and the results of their operations for the
respective periods specified, and except as otherwise stated in the Most Recent
Financial Statements, said financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis.
The supporting schedules included in the Companies' SEC Filings fairly present
in all material respects the information required to be stated therein. The
financial information and data included in the Companies' SEC Filings present
fairly in all material respects the information included therein and have been
prepared on a basis consistent with that of the financial statements included in
the Companies' SEC Filings and the books and records of the respective entities
presented therein. The pro forma financial information included in the
Companies' SEC Filings has been prepared in accordance with the applicable
requirements of Rules 11-01 and 11-02 of Regulation S-X under the Securities Act
and other 1933 Act Regulations and American Institute of Certified Public
Accountants ("AICPA") guidelines with respect to pro forma financial information
and includes all adjustments necessary to present fairly in all material
respects the pro forma financial position of the respective entity or entities
presented therein at the respective dates indicated and the results of their
operations for the respective periods specified. Other than the historical and
pro forma financial statements (and schedule) included therein, no other
historical or pro forma financial statements (or schedules) are required to be
included in the Companies' SEC Filings. Except as reflected or disclosed in the
financial statements included in the Companies' SEC Filings, none of the
Companies or any of the Subsidiaries is subject to any material indebtedness,
obligation, or liability, contingent or otherwise.
4.24 Labor Disputes. No labor dispute with the employees of the
Companies or any Subsidiary exists or, to the knowledge of the Companies is
imminent.
4.25 Regulation M. None of the Companies, the Subsidiaries or, to
the Companies' knowledge, any of their trust managers, directors, officers or
controlling persons, has taken or will take, directly or indirectly, any action
resulting in a material violation of Regulation M under the Exchange Act, or
designed to cause or result under the Exchange Act or otherwise in, or which has
constituted or which reasonably might be expected to constitute, the unlawful
stabilization or manipulation of the price of any security of either Company or
facilitation of the sale or resale of the Shares.
4.26 Regulation U. The Companies represent that the proceeds of
the Purchase Shares will not be used by the Companies, whether immediate,
incidental or ultimate, to buy or carry margin stock as such terms are defined
in Regulation U by the Board of Governors of the Federal Reserve System.
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SECTION 5. Representations, Warranties and Covenants of PaineWebber Agent
or PaineWebber.
5.1 Investment. The PaineWebber Parties represent and warrant to,
and covenant with, the Companies that: (i) the PaineWebber Parties, taking into
account the personnel and resources it can practically bring to bear on the
purchase of the Purchase Shares contemplated hereby, are knowledgeable,
sophisticated and experienced in making, and are qualified to make, decisions
with respect to investments in shares presenting an investment decision like
that involved in the purchase of the Purchase Shares, including investments in
securities issued by the Companies; (ii) PaineWebber is acquiring the number of
Purchase Shares set forth in Section 2 above in the ordinary course of its
business and for its own account for investment (as defined for purposes of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the regulations
thereunder) only and with no present intention of distributing any of such
Purchase Shares or any arrangement or understanding with any other persons
regarding the distribution of such Purchase Shares except pursuant to a
registration statement effective under, or an exemption from the registration
requirements of, the Securities Act (this representation and warranty does not
limit the right of the PaineWebber Parties to sell Shares pursuant to the terms
of the Adjustment Agreement); (iii) neither PaineWebber Party will directly or
indirectly, sell or otherwise dispose of (or solicit any offers to purchase or
otherwise acquire) any of the Purchase Shares except in compliance with the
Securities Act and any applicable state securities or blue sky laws; (iv) each
PaineWebber Party has completed or caused to be completed the Registration
Statement Questionnaire and the Stock Certificate Questionnaire, both attached
hereto as Appendix I, for use in preparation of the Registration Statement and
the answers thereto are true and correct to the best knowledge of PaineWebber as
of the date hereof and will be true and correct to the best knowledge of
PaineWebber as of the effective date of the Resale Registration Statement; (v)
PaineWebber has, in connection with its decision to purchase the number of
Purchase Shares set forth in Section 2 above, relied solely upon the documents
identified in Section 4.17, the information referred to in Section 7.6 and the
representations, warranties and agreements of the Companies contained herein;
(vi) PaineWebber has had access to such additional information, if any,
concerning the Companies as it has considered necessary in connection with their
investment decision to acquire the Purchase Shares; (vii) each of the
PaineWebber Parties is an "accredited investor" within the meaning of Rule
501(a)(1), (2), (3) or (7) of Regulation D promulgated under the Securities Act;
and (viii) the PaineWebber Parties understand that until the appropriate Resale
Registration Statement has been declared effective by the Commission, the Shares
will contain a legend to the following effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE SHARES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE
SECURITIES ACT OF 1933 OR AN OPINION OF THE COMPANIES'
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COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
5.2 Resale. The PaineWebber Parties acknowledge and agree that in
connection with any transfer of any Shares they will provide to the transfer
agent prompt notice of any Shares sold Pursuant to a Resale Registration
Statement or otherwise transferred in compliance with applicable federal and
state securities laws.
5.3 Due Execution, Delivery and Performance of this Agreement.
The PaineWebber Parties further represent and warrant to, and covenant with, the
Companies that (i) each PaineWebber Party has full right, power, authority and
capacity to enter into this Agreement and to perform its obligations hereunder
and consummate the transactions contemplated hereby and has taken all necessary
action to authorize the execution, delivery and performance of this Agreement,
and (ii) upon the execution and delivery of this Agreement, this Agreement shall
constitute a valid and binding obligation of the PaineWebber Parties enforceable
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
and except that the enforcement of the indemnification agreements in Section 7.5
hereof may be limited by public policy.
5.4 Residence of PaineWebber Agent. PaineWebber Agent is
organized in the State of Delaware and has its principal place of business in
the State of New York.
SECTION 6. Survival of Representations, Warranties and Agreements.
Notwithstanding any investigation made by any party to this Purchase Agreement,
all covenants, agreements, representations and warranties made by the Companies
and the PaineWebber Parties herein and the certificates for the Shares delivered
pursuant hereto shall survive the execution of this Purchase Agreement, the
Adjustment Agreement, the delivery to PaineWebber Agent of the Purchased Shares
being purchased and the payment therefor and the consummation of any other
transactions contemplated hereby or thereby.
SECTION 7. Registration of the Shares; Compliance with the Securities
Act.
7.1 Registration Procedures and Expenses. The Companies shall:
(a) within 60 days after a written request from the
PaineWebber Parties, which request shall not be made within 30 days of the
Closing Date, prepare and file with the Commission a Resale Registration
Statement (as defined below) covering the resale by the PaineWebber
Parties, from time to time, of the Shares (not to exceed a number of Paired
Shares equal to 130% of the number of Purchase Shares) in any of the
manners specified in the Adjustment Agreement (the "Initial Resale
Registration Statement"), use all best efforts to obtain effectiveness of
the Initial Resale
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Registration Statement and use all reasonable best efforts to obtain
effectiveness of the Initial Registration Statement within 60 days of
filing. If the total number of Shares exceeds the number of Shares covered
by the Initial Resale Registration Statement, then the Companies shall
promptly prepare and file with the Commission such additional Resale
Registration Statement or Statements as shall be necessary to cover the
resale by the PaineWebber Parties of such excess Shares in the same manner
as contemplated by the Initial Registration Statement for the Shares
covered thereby (each, an "Additional Resale Registration Statement");
provided that prior to issuing any such excess Shares to the PaineWebber
Parties, the Companies shall cause such Resale Registration Statement to
have become effective. For purposes of this Purchase Agreement, "Resale
Registration Statement" means the Initial Resale Registration Statement,
any Additional Resale Registration Statement or any other registration
statement under the Securities Act on Form S-3 covering the resale by the
PaineWebber Parties of up to a specified number of Shares, filed and
maintained continuously effective by the Companies pursuant to the
provisions of this Section 7, including the prospectus contained therein
(the "Resale Prospectus"), any amendments and supplements to such
registration statement, including all post-effective amendments thereto,
and all exhibits and all material incorporated by reference into such
registration statement;
(b) use all reasonable best efforts to prevent the issuance
of any order suspending the effectiveness of such Resale Registration
Statement or Resale Prospectus or suspending the qualification (or
exemption from qualification) of any of the Shares in any jurisdiction;
(c) prepare and file with the Commission such amendments and
supplements to each Resale Registration Statement and the Resale Prospectus
as may be reasonably requested by the PaineWebber Parties in order to
accomplish the public resale or other disposition of any Shares in
accordance with the terms of the Adjustment Agreement, or as may be
necessary to keep such Resale Registration Statement effective until the
date on which either (i) the Shares covered thereby have been sold by or on
behalf of the PaineWebber Parties or (ii) the PaineWebber Parties have
advised the Companies that they no longer require that such Resale
Registration Statement remain effective;
(d) furnish to the PaineWebber Parties with respect to the
Shares registered under any Resale Registration Statement such reasonable
number of copies of Resale Prospectuses, including any supplements and
amendments thereto, in order to facilitate the public sale or other
disposition of all or any of the Shares by the PaineWebber Parties;
(e) in order to facilitate the public sale or other
disposition of all or any of the Shares by the PaineWebber Parties, furnish
to the PaineWebber Parties with respect to the Shares registered under any
Resale Registration Statement, in connection with any such public sale or
other disposition, an opinion of counsel to the Companies
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covering the matters set forth on Exhibit B hereto and such other documents
as the PaineWebber Parties may reasonably request (including a comfort
letter from the Companies' independent certified public accountants and a
certificate of bring down of representations and warranties in connection
with sale of Shares under the Resale Registration Statement) (collectively,
the "Resale Closing Documents") (i) upon the effectiveness of the Initial
Resale Registration Statement, (ii) quarterly beginning promptly after the
Companies' filing of the Joint Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 in the case of any continuous offering of
Shares under any Resale Registration Statement, and (iii) in the event the
public sale or other disposition of the Shares is effected through an
underwritten offering or a block trade, as of the date of the closing of
any sale of such Shares or date of pricing with respect to the sale of such
Shares, as applicable upon prior notice from the PaineWebber Parties to the
Companies as to which date applies; provided, however, that the Companies
shall not be required to deliver any Resale Closing Documents in the event
that the aggregate offering price of any Shares offered in an underwritten
offering or a block trade is less than $10,000,000, unless as of the date
of any such underwritten offering or block sale, the Companies have not
made any previous delivery of Resale Closing Documents to the PaineWebber
Parties in connection with any other public sale or other disposition of
the Shares;
(f) use all reasonable best efforts to prevent the happening
of any event that would cause any such Resale Registration Statement to
contain a material misstatement or omission or to be not effective and
continuously useable for resale of the Shares during the period that such
Resale Registration Statement is required to be effective and useable;
provided that this paragraph (f) shall in no way limit the Companies' right
to suspend the right of the PaineWebber Parties to effect sales under the
Resale Registration Statement during any Black-out Period as specified at
Section 7.2(g) below;
(g) file documents required of the Companies for normal blue
sky clearance in states specified in writing by the PaineWebber Parties,
provided, however, that the Companies shall not be required to qualify to
do business or consent to service of process in any jurisdiction in which
it is not now so qualified or has not so consented;
(h) bear all expenses in connection with the procedures in
paragraphs (a) through (h) of this Section 7.1 and Section 7.2(a) and the
registration of the Shares pursuant to each Resale Registration Statement,
which expenses shall not include brokerage or underwriting commissions and
taxes of any kind (including without limitations, transfer bonuses) with
respect to any disposition, sale or transfer of Shares sold by the
PaineWebber Parties and for any legal, accounting and other expenses
incurred by the PaineWebber Parties which expenses shall be borne by the
PaineWebber Parties; and
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(i) promptly file any necessary listing applications or
amendments to existing listing applications to cause any Shares registered
under any Resale Registration Statement to be listed or admitted to
trading, on or prior to the effectiveness of any Resale Registration
Statement, on the New York Stock Exchange or any national stock exchange or
automated quotation system on which the Paired Shares are then listed or
traded.
7.2 Covenants in Connection With Registration.
(a) The Companies hereby covenant with the PaineWebber
Parties that (i) the Companies shall not file any Resale Registration Statement
or Resale Prospectus or any amendment or supplement thereto, unless a copy
thereof shall have been first submitted to the PaineWebber Parties and their
counsel and the PaineWebber Parties and their counsel did not object thereto in
good faith (provided that if there is no objection by either the PaineWebber
Parties or their counsel within two business days of receiving any such
material, there shall be deemed to have been no objection thereto); (ii) the
Companies shall immediately notify the PaineWebber Parties of the issuance by
the Commission of any stop order suspending the effectiveness of such Resale
Registration Statement or the initiation of any proceedings for such purpose;
(iii) the Companies shall make all reasonable best efforts to promptly obtain
the withdrawal of any order suspending the effectiveness of such Resale
Registration Statement at the earliest possible moment; (iv) the Companies shall
immediately notify the PaineWebber Parties of the receipt of any notification
with respect to the suspension of the qualification of the Shares for sale under
the securities or blue sky laws of any jurisdiction or the initiation of any
proceeding for such purpose; and (v) the Companies shall immediately notify the
PaineWebber Parties in writing of the happening of any event or the failure of
any event to occur or the existence of any fact or otherwise which results in
any Resale Registration Statement, any amendment or post-effective amendment
thereto, the Resale Prospectus, any prospectus supplement, or any document
incorporated therein by reference containing an untrue statement of a material
fact or omitting to state a material fact required to be, stated therein or
necessary to make the statements therein not misleading and promptly shall
prepare, file with the Commission and promptly furnish to the PaineWebber
Parties a reasonable number of copies of a supplement or post-effective
amendment to such Resale Registration Statement or the Resale Prospectus or any
document incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of the Shares, the Resale
Prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
(b) The PaineWebber Parties shall cooperate with the
Companies in connection with the preparation of the Resale Registration
Statement and shall furnish to the Companies, in a timely manner, all
information in their possession or reasonably obtainable by them, but otherwise
not reasonably obtainable by the Companies, and necessary for inclusion in the
Resale Registration Statement (including, without limitation, information
relating to the ownership by each of them of Paired Shares and the plan of
distribution).
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(c) The PaineWebber Parties shall notify the Companies at
least two business days prior to the earlier of the date on which they intend to
commence effecting any resales of Shares under a Resale Registration Statement
or the date of pricing with respect to the public sale or other disposition of
any Shares under a Resale Registration Statement effected through an
underwritten offering or block trade and if the Companies do not, within such
two day period, advise the PaineWebber Parties of the existence of any facts of
the type referred to in Section 7.2(a) above, then the Companies shall be deemed
to have certified and represented to the PaineWebber Parties that no such facts
then exist and the PaineWebber Parties may rely on such certificate and
representations in making such sales. The preceding sentence shall in no way
limit the Companies' obligations under Section 7.2(a) above.
(d) the Companies shall cooperate with the PaineWebber
Parties to facilitate the timely preparation and delivery of certificates
representing the Shares to be sold under the Resale Registration Statements and
not bearing any restrictive legends and in such denominations and registered in
such names as the PaineWebber Parties may reasonably request at least one
Business Day prior to the closing of any sale of the Shares.
(e) If the method of settlement pursuant to the Adjustment
Agreement is an underwritten offering or block trade of Shares, (i) the
PaineWebber Parties shall have the right to select the managing underwriters or
the executing dealer, as the case may be, who shall be subject to the approval
of the Companies, which approval shall not be unreasonably withheld (it being
understood that PaineWebber Agent is, in any event, reasonably acceptable to the
Companies for this purpose) and (ii) the Companies shall (A) enter into written
agreements (including underwriting agreements) as are customary in underwritten
offerings or block trades, as the case may be; (B) obtain an opinion of counsel
to the Companies and other entities reasonably requested by the underwriters or
the executing dealer, as the case may be, and updates thereof (which may be in
the form of a reliance letter) in form and substance reasonably satisfactory to
the managing underwriters or the executing dealer, as the case may be, and the
PaineWebber Parties addressed to the underwriters or the executing dealer, as
the case may be, and the PaineWebber Parties covering the matters customarily
covered in opinions requested in underwritten offerings or block trades, as the
case may be, and such other matters as may be reasonably requested by such
underwriters or the executing dealer, as the case may be, and the PaineWebber
Parties (it being agreed that the matters to be covered by such opinion may be
subject to customary qualifications and exceptions); (C) obtain "cold comfort"
letters and updates thereof in form and substance reasonably satisfactory to the
managing underwriters or the executing dealer, as the case may be, and the
PaineWebber Parties from the independent certified public accountants of the
Companies (and, if necessary, other independent certified public accountants of
any affiliate or Subsidiary of either of the Companies or of any business
acquired by the Companies for which financial statements and financial data are,
or are required to be, included in the Resale Registration Statement) addressed
to each of the underwriters or the executing dealer, as the case may be, and, if
permitted by applicable accounting rules and statements, the PaineWebber
Parties, such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with underwritten
offerings or block trades, as the case may be, and such other matters as may be
reasonably requested by such underwriters or the executing dealer, as the case
may be, in accordance with
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Statement on Auditing Standards No. 72; (D) ensure that any underwriting
agreement contains indemnification provisions and procedures not less favorable
than that included herein (or such other provisions and procedures acceptable to
the PaineWebber Parties and the underwriters) with respect to all parties to be
indemnified pursuant to said section (including, without limitation, the
underwriters and the PaineWebber Parties); and (E) deliver such other documents
as are customarily delivered in connection with closing of underwritten
offerings or block trades, as the case may be.
(f) The Companies will make reasonably available for
inspection by the PaineWebber Parties, any underwriter, agent or broker-dealer
participating in any disposition of Shares such information and corporate
documents as shall be reasonably necessary to enable them to exercise any
applicable due diligence responsibilities for the purposes of applicable law,
and cause the officers of the Companies and their "significant subsidiaries" (as
that term is defined in Regulation S-X) to be available, upon request at least
two business days in advance, to respond to questions relevant to such due
diligence inquiries.
(g) The parties hereby acknowledge and agree that the
Companies may suspend the right of the PaineWebber Parties to effect sales of
the Paired Shares through use of the prospectus forming a part of a Resale
Registration Statement (except as may further be limited in the Adjustment
Agreement) for a period of no more than 90 days (or fewer if the PaineWebber
Parties are notified to that effect by the Companies) in connection with a
public offering or a sale pursuant to Rule 144A under the Securities Act (an
"Offering") of Paired Shares (or shares of capital stock convertible into Paired
Shares) by the Companies (a "Blackout Period"); provided that (i) there shall be
no more than three Blackout Periods during any 12-month period, and (ii) the
total number of days of all Blackout Periods during any 12-month period shall
not exceed 120. The PaineWebber Parties hereby covenant that they will not sell
any Paired Shares pursuant to said prospectus during a Blackout Period which
shall commence at the time the Companies give the PaineWebber Parties written
notice of such Blackout Period; provided further, that no Blackout Period shall
be applicable or in any way restrict the PaineWebber Parties after the Maturity
Date, or after the occurrence of a Cross Default or a Price Decline Termination
Event (as defined in the Adjustment Agreement).
7.3 Extension of Required Effectiveness. In the event that the
Companies shall give any notice required by Section 7.2(a)(v) hereof, the period
during which the Companies are required to keep such Resale Registration
Statement effective and useable shall be extended by the number of days during
the period from and including the date of the giving of such notice to and
including the date when the PaineWebber Parties are advised in writing by the
Companies that the use of the Resale Prospectus may be resumed.
7.4 Transfer of Shares After Registration. The PaineWebber
Parties agree that they will not effect any disposition of the Shares and
PaineWebber agrees that it will not effect any disposition of its right to
purchase the Shares that would constitute a sale within the meaning of the
Securities Act or pursuant to any applicable state securities or blue sky laws
expect as contemplated in each Resale Registration Statement referred to in
Section 7.1 or
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except pursuant to any exemption from the registration requirements of the
Securities Act (including, without limitation, Rule 144 promulgated thereunder
and any successor thereto) and that it will promptly notify the Companies of any
changes in the information set forth in any such Resale Registration Statement
regarding the PaineWebber Parties or its plan of distribution.
7.5 Indemnification. For the purpose of this Section 7.5 only,
the term "Resale Registration Statement" shall include any final prospectus,
exhibit, supplement or amendment included in or relating to any Resale
Registration Statement referred to in Section 7.1.
(a) Indemnification by the Companies. Each of the Companies
agrees, jointly and severally, to indemnify and hold harmless the PaineWebber
Parties and each person, if any, who controls the PaineWebber Parties within the
meaning of Section 15 of the Securities Act, and any director, officer, employee
or affiliate thereof, as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in any Resale
Registration Statement (or any amendment thereto), including the
information deemed to be part of any Resale Registration Statement pursuant
to Rule 430A(b) of the 1933 Act Regulations, if applicable, or the omission
or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in any related Resale Prospectus or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the Companies shall not
be required under this subsection (i) to indemnify the PaineWebber Parties
with respect to any loss, liability, claim, damage or expense to the extent
such loss, liability, claim, damage or expense arises out of any untrue
statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Companies by the PaineWebber Parties specifically for inclusion in any
Resale Registration Statement or any related Resale Prospectus;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation or of any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any
claim whatsoever for which indemnification is provided under subsection (i)
above, if such settlement is effective with the written consent of the
Companies; and
(iii) against any and all expense whatsoever (including,
without limitation, the fees and other charges of counsel chosen by
PaineWebber) reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceedings by any
governmental agency or body, commenced or
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threatened, or any claim whatsoever for which indemnification is provided
under subsection (i) above, to the extent that any such expense is not paid
under subsection (i) or (ii) above.
(b) Indemnification by the PaineWebber Parties. The
PaineWebber Parties agree to indemnify and hold harmless the Companies, and each
person, if any, who controls the Companies within the meaning of Section 15 of
the Securities Act, and any trust manager, director, officer, employee or
affiliate thereof, against any and all loss, liability, claim, damage and
expense described in the indemnity contained in subsection (a) of this Section
7.5, as incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in any Resale Registration
Statement (or any amendment thereto) or any related Resale Prospectus (or any
amendment or supplement thereto) in reasonable reliance upon and in conformity
with written information furnished to the Companies by the PaineWebber Parties
specifically for inclusion in any Resale Registration Statement or any related
Resale Prospectus.
(c) Proceedings. Each indemnified party shall give notice as
promptly as reasonably practicable to each indemnifying party of any action
commenced against it in respect of which indemnity may be sought hereunder, but
failure to so notify an indemnifying party shall not relieve such indemnifying
party from any liability hereunder to the extent it is not materially prejudiced
as a result thereof and in any event shall not relive it from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of such
action. If it so elects within a reasonable time after receipt of such notice,
an indemnifying party, jointly with any other indemnifying parties receiving
such notice, may assume the defense of such action with counsel chosen by it and
approved by the indemnified parties defendant in such action, unless such
indemnified parties reasonably object to such assumption on the ground that the
named parties to any such action (including any impleaded parties) include both
such indemnified parties and an indemnifying party, and such indemnified parties
reasonably believe that there may be legal defenses available to them which are
different from or in addition to those available to such indemnifying party. If
an indemnifying party assumes the defense of such action, the indemnifying
parties shall not be liable for any fees and expenses of counsel for the
indemnified parties incurred thereafter in connection with such action. In no
event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 7.5 (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not
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include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any indemnified party.
If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 7.5(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
(d) Contribution. If the indemnification provided for in
this Section 7.5 is required by its terms but is for any reason held to be
unavailable to or otherwise insufficient to hold harmless an indemnified party
under paragraph (a), (b) or (c) of this Section 7.5 in respect of any losses,
claims, damages, liabilities or expenses referred to herein, then each
applicable indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of any losses, claims, damages, liabilities
or expenses referred to herein, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Companies and the PaineWebber
Parties from the purchase and sale of the Shares or (ii) if the allocation
provided in clause (i) is not permitted by applicable law, in such proportion or
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Companies and the
PaineWebber Parties in connection with the statements or omissions or
inaccuracies in the representations and warranties in this Agreement which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The respective relative benefits
received by the Companies on the one hand and the PaineWebber Parties on the
other shall be deemed to be in the same proportion as the amount paid by the
PaineWebber Parties to the Companies pursuant to this Agreement and the
Adjustment Agreement and the net proceeds retained by the PaineWebber Parties
from the transactions contemplated by this Agreement and the Adjustment
Agreement. The relative fault of the Companies and the PaineWebber Parties
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or the alleged
omission to state a material fact or the inaccurate or the alleged inaccurate
representation and/or warranty relates to information supplied by the Companies
or by the PaineWebber Parties and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in paragraph (c) of this Section
7.5 any reasonable legal or other fees or expenses incurred by such party in
connection with investigating or defending any action or claim. The provisions
set forth in paragraph (c) of this Section 7.5 with respect to notice of
commencement of any action shall apply if a claim for contribution is to be made
under this paragraph (d) provided, however, that no additional notice shall be
required with respect to any action for which notice has been given under
paragraph (c) for purposes of indemnification. The Companies and the
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PaineWebber Parties agree that it would not be just and equitable if
contribution pursuant to this Section 7.5 were determined solely by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in this paragraph (d). Notwithstanding
the provisions of this Section 7.5, the PaineWebber Parties shall not be
required to contribute any amount in excess of the amount by which the aggregate
net proceeds retained by the PaineWebber Parties from the transactions
contemplated hereby and by the Adjustment Agreement exceeds the amount of any
damages that the PaineWebber Parties has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
(e) Relationship Between the REIT and OPCO. The obligations
set forth in this Section 7.5 shall in no way limit the ability of the Companies
to allocate liability between themselves.
7.6 Information Available. So long as any Resale Registration
Statement covering the resale of any shares owned by the PaineWebber Parties is
effective, the Companies will furnish to the PaineWebber Parties:
(a) as soon as practicable after available, one copy of (i)
their Joint Annual Report to Shareholders, (ii) their Joint Annual Report
on Form 10-K, (iii) their joint Quarterly Reports to Shareholders, (iv)
their joint quarterly reports on Form 10-Q, (v) a full copy of the
particular Resale Registration Statement covering the Shares (the
foregoing, in each case, excluding exhibits) and (iv) upon request, any or
all other filings made with the Commission by the Companies; and
(b) upon the reasonable request of the PaineWebber Parties, a
reasonable number of copies of the Resale Prospectuses to supply to any
other party requiring such Resale Prospectuses;
and the Companies, upon the reasonable request of the PaineWebber Parties, will
meet with the PaineWebber Parties or a representative thereof at the Companies'
headquarters to discuss all information relevant for disclosure in such Resale
Registration Statement covering the Shares, subject to appropriate
confidentiality limitations.
7.7 Remedies. The Companies and the PaineWebber Parties
acknowledge that there would be no adequate remedy at law if the Companies fail
to perform any of their obligations under this Section 7, and accordingly agree
that the PaineWebber Parties, in addition to any other remedy to which it may be
entitled at law or in equity, shall be entitled to compel specific performance
of the obligations of the Companies under this Section 7, and the Companies
hereby waive the defense that a remedy at law would be adequate.
7.8 Notice Requirement. The REIT and the OPCO each covenants and
agrees that it will notify the PaineWebber Parties at any time it becomes aware
that as a
23
<PAGE>
result of a change in the REIT's and the OPCO's capital stock the PaineWebber
Parties beneficially hold more than 4.9% of the REIT's and the OPCO's Paired
Shares.
7.9 Registration Exemptions. For so long as the Companies are
subject to the reporting requirements of Section 13 or 15 of the Exchange Act,
the Companies covenant that they will timely file all reporting required to be
filed by it under the Securities Act and Exchange Act and the rules and
regulations adopted by the Commission thereunder.
SECTION 8. Fees and Expenses.
8.1 Broker's Fees. Other than any fees payable under or in
connection with the Adjustment Agreement, each of the parties hereto represents
that, on the basis of any actions and agreements by it, there are no brokers or
finders entitled to compensation in connection with the sale or issuance of the
Shares to PaineWebber.
8.2 Additional Shares. The Companies will pay to the PaineWebber
Parties an amount equal to $.02 per Additional Share as reimbursement for all
expenses incurred by the PaineWebber Parties in connection with the delivery of
Additional Shares under this Agreement or the Adjustment Agreement.
SECTION 9. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first-class
registered or certified mail, by telegram or telecopy or sent by nationally
recognized overnight express courier postage prepaid, and shall be deemed given
when so mailed or for telecopies, when transmitted and receipt confirmed, and
shall be delivered as addressed as follows:
(a) if to the Companies, to:
Patriot American Hospitality, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attention: John P. Bohlmann, Esq.
Wyndham International, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attention: Carla S. Moreland, Esq.
with copies so mailed to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attention: Gilbert G. Menna, P.C.
24
<PAGE>
or to such other person at such other place as the
Companies shall designate to PaineWebber Parties in
writing; and
(b) if to PaineWebber Agent or PaineWebber, to:
PaineWebber
PaineWebber Financial Products Inc.
1285 Avenue of the Americas, 19th Floor
New York, NY 10019
Attention: Terrence E. Fancher
Telecopier: (212) 713-7949
with a copy so mailed to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Attention: Daniel P. Cunningham, Esq.
Telecopier: (212) 474-3700
SECTION 10. Changes. This Agreement may not be modified or amended except
pursuant to an instrument in writing signed by the Companies and the PaineWebber
Parties.
SECTION 11. Headings. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
SECTION 12. Severability. In case any provision contained in this
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
SECTION 13. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon (i) the successors of the PaineWebber Parties and
(ii) any assignee or transferee of rights and obligations of the PaineWebber
Parties pursuant to the Adjustment Agreement or this Agreement. A transferee of
the PaineWebber Parties pursuant to the Adjustment Agreement or this Agreement,
and any successor, assignee, or transferee, shall be held subject to all of the
terms of this Agreement. Except as set forth in this Section 13, neither the
Companies nor the PaineWebber Parties may assign any of their respective rights,
or delegate any of their respective duties under this Agreement.
SECTION 14. Governing Law; Jurisdiction.
25
<PAGE>
14.1 This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to the
conflicts of law principles thereof.
14.2 Each of the Companies (i) hereby irrevocably submits to the
jurisdiction of, and agrees that any suit shall be brought in, the state and
federal courts located in the City and County of New York for the purposes of
any suit, action or other proceedings arising out of or based upon this
Agreement of the transactions contemplated hereby and (ii) hereby waives to the
extent not prohibited by applicable law, and agrees not to assert, by way or
motions, as a defense or otherwise, in any such proceeding, any claim that it is
not subject personally to the jurisdiction of the above-named courts, that its
property is exempt or immune from attachment or execution, that any such
proceeding brought in one of the above-named courts is brought in an
inconvenient forum, that the venue of any such proceedings brought in one of the
above-named courts is improper, or that this Agreement, or the transactions
contemplated hereby, may not be enforced in or by such court.
SECTION 15. Transfer to Affiliate. Notwithstanding anything herein to the
contrary, PaineWebber may transfer any Paired Shares delivered pursuant to this
Agreement and the Adjustment Agreement to any affiliate of PaineWebber, together
with all of PaineWebber's rights hereunder, provided that (i) such affiliate
shall be an "accredited investor" within the meaning of Rule 501 (a)(1), (2),
(3) or (7) of Regulation D promulgated under the Securities Act, and (ii) such
transfer shall be consistent with the investment representations set forth at
Section 5.1 hereto. In the event of such an assignment such affiliate shall in
all respects be substituted for PaineWebber as a party hereto.
SECTION 16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument, and shall become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties.
SECTION 17. Waiver of Trial by Jury. EACH PARTY HEREBY IRREVOCABLY WAIVES
ANY RIGHT IT MAY HAVE TO JURY TRIAL IN CONNECTION WITH ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
PATRIOT AMERICAN HOSPITALITY, INC.
By: /s/ William W. Evans III
----------------------------------
Name: William W. Evans III
Title: President and Chief
Operating Officer
WYNDHAM INTERNATIONAL, INC.
By: /s/ William W. Evans III
----------------------------------
Name: William W. Evans III
Title: Executive Vice President
PAINEWEBBER INCORPORATED
By: /s/ Terrence E. Fancher
----------------------------------
Name: Terrence E. Fancher
Title: Managing Director
PAINEWEBBER FINANCIAL
PRODUCTS INC.
By: /s/ Terrence E. Fancher
----------------------------------
Name: Terrence E. Fancher
Title: Vice President
<PAGE>
EXHIBIT 10.2
EXECUTION COPY
LETTER AGREEMENT (this "Letter Agreement")
made on this 30th day of July, 1998, by and among
PATRIOT AMERICAN HOSPITALITY, INC., a Delaware
corporation (the "REIT"), WYNDHAM INTERNATIONAL,
INC., a Delaware corporation (the "OPCO", and
together with the REIT, jointly and severally, the
"Companies" and each a "Company"), and PAINEWEBBER
FINANCIAL PRODUCTS INC. ("PaineWebber").
The purpose of this Letter Agreement is to confirm the
satisfaction of certain obligations under the Purchase Price Adjustment
Mechanism Agreement among REIT, OPCO and PaineWebber dated April 6, 1998 (the
"PPAM Agreement").
NOW, THEREFORE, in consideration of the representations,
warranties and covenants herein contained, and on the terms and subject to
the conditions herein set forth, the Companies and PaineWebber hereby agree
as follows:
Section 1.01. DEFINITIONS. All capitalized terms used but
not defined herein shall have the meanings given them in the PPAM Agreement.
Section 1.02. REPRESENTATIONS. The representations,
warranties and covenants of the Companies in Section 4 of the Purchase
Agreement, dated as of April 6, 1998 (the "Purchase Agreement"), among the
Companies and PaineWebber are hereby incorporated by reference herein, and
the Companies hereby so represent, warrant and covenant to PaineWebber. The
provisions of Section 6 of the Purchase Agreement shall also be applicable to
any Paired Shares delivered to PaineWebber under this Agreement.
Section 1.03. INTERIM SETTLEMENT. The Companies agree to
deliver to PaineWebber Interim Settlement Shares for the Reset Date that
occurred on June 30, 1998, PROVIDED, HOWEVER, that such Interim Settlement
Shares need not be delivered pursuant to an effective registration statement
covering any sale of such Interim Settlement Shares by PaineWebber, PROVIDED
FURTHER that if such Interim Settlement Shares are not the subject of an
effective registration statement covering all sales of such Interim
Settlement Shares by PaineWebber by August 28, 1998, the Companies shall
deliver cash collateral to PaineWebber on such date in an amount equal to the
Interim Settlement Amount for the Reset Date that occurred on June 30, 1998.
Any cash collateral delivered by the Companies to PaineWebber pursuant to
this Section shall be subject to the provisions of Section 5.1 of the PPAM
Agreement. PaineWebber acknowledges that the Companies' obligations to
deliver Interim Settlement Shares to PaineWebber under Section 5.1 of the
PPAM Agreement with respect to the Reset Date occurring on June 30, 1998,
shall be satisfied upon the full performance by the
<PAGE>
Companies of all their respective obligations under this Letter Agreement.
For the avoidance of doubt, such satisfaction is only with respect to the
obligations of the Companies arising with respect to the Reset Date occurring
on June 30, 1998, and in no way affects the obligations of the Companies with
respect to future Reset Dates.
Section 1.04. MISCELLANEOUS PROVISIONS. The
representations, warranties and covenants of the Companies contained in
Section 6 and Section 7 of the PPAM Agreement are hereby incorporated by
reference herein, and the Companies hereby so represent, warrant and covenant
to PaineWebber.
Section 1.05. GOVERNING LAW AND JURISDICTION. This Letter
Agreement will be governed by and construed in accordance with the laws of
the State of New York without reference to choice of law doctrine. With
respect to any suit, action or proceeding relating to this Letter Agreement
("Proceedings"), each party irrevocably submits to the exclusive jurisdiction
of the courts of the State of New York and the United States District Court
located in the Borough of Manhattan in New York City and waives any objection
which it may have at any time to the laying of venue of any Proceedings
brought in any such court, waives any claim that such Proceedings have been
brought in an inconvenient forum and further waives the right to object, with
respect to such Proceedings, that such court does not have any jurisdiction
over such party.
IN WITNESS WHEREOF, PaineWebber and the Companies have
caused this Letter Agreement to be duly executed and delivered, as of the
date first written above.
PATRIOT AMERICAN HOSPITALITY, INC.,
by /s/
--------------------------
WYNDHAM INTERNATIONAL, INC.,
by /s/
--------------------------
PAINEWEBBER FINANCIAL PRODUCTS, INC.,
by /s/
--------------------------
<PAGE>
EXHIBIT 10.3
UBS AG
London Branch
100 Liverpool Street
London EC2M 2 RH
September 11, 1998
Patriot American Hospitality, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attn: William W. Evans III
Wyndham International, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attn: Leslie Ng
Ladies and Gentlemen:
Reference is made to that certain Forward Stock Contract, dated December 31,
1997 (the "Forward Agreement") between Patriot American Hospitality, Inc. (the
"REIT") and Patriot American Hospitality Operating Company (the "OPCO") and
Union Bank of Switzerland, London Branch ("UBS"), as such Forward Agreement may
have been amended through the date hereof (including the letter agreement dated
August 14, 1998, between the REIT and Wyndham International, Inc. (as successor
to the OPCO, each a "Company" and collectively, the "Companies") and Union Bank
AG, London Branch ("UB-LB"), as successor to UBS acting through its agent
Warburg Dillon Read, LLC.
This letter agreement between the Companies and UB-LB modifies and amends, in
part, certain of the terms and conditions in the Forward Agreement. Capitalized
terms not otherwise defined herein shall have the meanings ascribed to them
under the Forward Agreement, as amended.
As of August 26, 1998, the average closing price of the Paired Shares for two
consecutive Exchange Trading Days was equal to or below the Mandatory Unwind
Threshold and UB-LB in providing notice to the Companies that a Mandatory Unwind
Event has occurred. However, the amendments to the Forward Agreement contained
herein amend the Mandatory Unwind Threshold retroactively.
Notwithstanding the terms and conditions of the Forward Agreement, the Companies
and UB- LB agree as follows:
1. In the definition of "Mandatory Unwind Thresholds" that is contained within
Section II of the Forward Agreement, the term "$16.00" shall be replaced by the
term "$11.00". No Mandatory Unwind Event under clause (i) of the definition of
Mandatory Unwind Event shall
1
<PAGE>
be deemed to have occurred or be continuing under the Forward Agreement, as
hereby amended.
2. The cash collateral currently held by UB-LB in the amount of $45,627,725 will
be used on the date hereof to "buy down" the Forward Price. Accordingly, the
Forward Price will be reduced on the date hereof by $14.0393 ($45,627,725
divided by 3,250,000, the number of Underlying Shares), and the cash collateral
of $45,627,725 will be applied to fund the buy down on the date hereof.
3. The Companies covenant that they will give telephone notice (confirmed in
writing) at least fifteen (15) business days prior to the consummation of any
transaction (including without limitation an open market repurchase of Paired
Shares) that would result in UB-LB or any of its affiliates owning in excess of
5% of the Paired Shares (any such ownership interest an "Ownership Interest").
UB-LB agrees that such notice requirement shall be deemed to have been satisfied
by the public announcement of a transaction by the Companies, but only if a copy
of such announcement is delivered to UB-LB. UB-LB represents on the date hereof
that the Ownership Interest consists of 3,250,000 Paired Shares owned by UB-LB.
UB-LB covenants that it will notify the Companies in writing within two (2)
business days after the occurrence of any increase in the Ownership Interest,
except with respect to any increase arising from the operating of the Forward
Agreement (including without limitation, the delivery of Interim Settlement
Shares or Cash Collateral Shares). Failure to comply with this covenant shall
constitute a Mandatory Unwind Event under clause (ii) of "Mandatory Unwind
Event" in Section VI of the Forward Agreement. In making calculations under this
paragraph, the Companies shall be entitled to rely on share information provided
by UB-LB under this paragraph and will not be in breach of this covenant if any
share information so provided by UB-LB is inaccurate or incomplete.
4. The Companies covenant and agree that simultaneously with the consummation of
the sale of certain property interests as set forth on Exhibit A hereto (the
"Assets"), the Companies will effect a Physical Settlement under the Forward
Contract with respect to 100% of the Underlying Shares. The Companies represent
that they have granted no lien, pledge or security interest in the proceeds of
the sale of the Assets. Failure to comply with this covenant shall constitute a
Mandatory Unwind Event under clause (ii) of "Mandatory Unwind Event" in Section
VI of the Forward Agreement.
5. The Companies represent on the date hereof that no early settlement of any
Other Transaction has occurred or is being contemplated, and that no Financial
Covenant Default or other Event of Default has occurred, all within the meaning
and for the purposes of clause (ii) of "Mandatory Unwind Event" in Section VI of
the Forward Agreement.
For the avoidance of doubt, the failure of the Companies to deliver to UB-LB on
or before September 30, 1998, an effective registration statement as
contemplated by Section III.A.4. of the Forward Agreement shall constitute a
Mandatory Unwind Event (regardless of when the Companies may have filed such a
registration statement with the SEC), and nothing in this letter agreement shall
be construed to the contrary.
2
<PAGE>
Sincerely,
UBS AG, London Branch
By: /s/
-----------------------------------------
Name:
Title:
Date:
AGREED TO AND ACCEPTED
Patriot American Hospitality, Inc.
By: /s/
-----------------------------------------
Name:
Title:
Date:
Wyndham International, Inc.
By: /s/
-----------------------------------------
Name:
Title:
Date:
3
<PAGE>
EXHIBIT 10.4
PaineWebber Financial Products Inc.
1285 6th Avenue
New York NY 10019
September 15, 1998
Patriot American Hospitality, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Wyndham International, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Re: Purchase Price Adjustment Mechanism Agreement,
dated as of April 6, 1998, as amended on July 30, 1998
and August 14, 1998 (the "PaineWebber Agreement")
Gentlemen:
We understand that you wish to settle an amount not in excess of
$45,627,725 of your obligation under the Forward Stock Contract between you and
Union Bank of Switzerland, London Branch, dated December 31, 1998, as amended on
August 14, 1998 and September 11, 1998, solely by means of applying cash
collateral previously delivered under such Forward Stock Contract (together with
any interest earned thereon) (the "Partial UBS Settlement"). We hereby agree and
confirm that (i) the Partial UBS Settlement will not give rise to a Cross-
Default under Section 4.3 of the PaineWebber Agreement, and (ii) we will not
require you to settle all or part of your obligation under the PaineWebber
Agreement in connection with the Partial UBS Settlement. In all other respects,
the PaineWebber Agreement, and any right of PaineWebber arising in the past or
in the future to settle under the PaineWebber Agreement, either due to a
cross-default described in Section 4.3 of the PaineWebber Agreement or arising
or having arisen under any other provision of the PaineWebber Agreement, shall
remain in full force and effect.
Very truly yours,
PAINEWEBBER FINANCIAL PRODUCTS, INC.
By:/s/
----------------------------------
Title:
<PAGE>
EXHIBIT 10.5
September 29, 1998
Patriot American Hospitality, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attn: William W. Evans III
Wyndham International, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attn: Leslie Ng
Ladies and Gentlemen:
This letter agreement among Patriot American Hospitality, Inc. (the
"REIT"), Wyndham International, Inc. (the "OPCO") (each a "Company" and
collectively, the "Companies") and PaineWebber Financial Products Inc.
("PaineWebber") modifies and amends, in part, certain of the terms and
conditions of that certain Purchase Price Adjustment Mechanism Agreement,
dated April 6, 1998 (the "Agreement") between the Companies and PaineWebber,
as amended by the letter agreement dated August 14, 1998. Defined terms not
otherwise defined herein shall have the meanings ascribed to them under the
Agreement.
Notwithstanding the terms and conditions of the Agreement, the Companies
and PaineWebber agree as follows:
1. REPRESENTATIONS AND WARRANTIES. The representations, warranties and
covenants of the Companies in Section 4 of the Purchase Agreement, dated
as of April 6, 1998 (the "Purchase Agreement"), among the Companies and
PaineWebber are hereby incorporated by reference herein, and the
Companies hereby so represent, warrant and covenant to PaineWebber. The
provisions of Section 6 of the Purchase Agreement shall also be
applicable to any Paired Shares delivered to PaineWebber under this
Agreement.
<PAGE>
Patriot American Hospitality, Inc.
Wyndham International, Inc.
September 30, 1998
Page 2
2. FILING OF REGISTRATION STATEMENT. The Companies agree to use all best
efforts to file and have declared effective, before October 15, 1998, a
registration statement covering the sale of any Paired Shares issued to
PaineWebber pursuant to the Purchase Agreement or the Agreement;
provided, however, that at PaineWebber's request at any time prior to
that date, the Companies will use all best efforts to file and have
declared effective such registration statement as soon as possible
thereafter. PaineWebber agrees that such filing will satisfy the
requirements of Section 7.1(a) of the Purchase Agreement with respect to
Resale Registration Statements.
3. EFFECTIVE DATE. Paragraph 7 of the letter agreement among the parties
hereto dated August 14, 1998 is amended by replacing "September 30,
1998" with "October 15, 1998."
4. EFFECT. Notwithstanding this letter agreement all other provisions as
amended remain in full force and effect.
Sincerely,
PaineWebber Financial Products Inc.
By: /s/ Terrence E. Fancher
--------------------------------
Name: Terrence E. Fancher
Title: Managing Director
AGREED TO AND ACCEPTED
Patriot American Hospitality, Inc. Wyndham International, Inc.
By: /s/ William W. Evans III By: /s/ William W. Evans III
---------------------------- ----------------------------
Name: William W. Evans III Name: William W. Evans III
Title: Title:
<PAGE>
EXHIBIT 10.6
October 22, 1998
Patriot American Hospitality, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attn.: William W. Evans III
Wyndham International, Inc.
1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207
Attn.: Leslie Ng
Ladies and Gentlemen:
This letter agreement among Patriot American Hospitality, Inc. (the
"REIT"), Wyndham International, Inc. (the "OPCO") (each a "Company" and
collectively, the "Companies") and PaineWebber Financial Products Inc.
("PaineWebber") confirms, modifies and amends, in part, certain of the terms
and conditions of that certain Purchase Price Adjustment Mechanism Agreement,
dated April 6, 1998 (the "Agreement") between the Companies and PaineWebber,
as amended by letter agreements dated August 14, 1998, and September 30,
1998. Defined terms not otherwise defined herein shall have the meanings
ascribed to them under the Agreement.
Notwithstanding the terms and conditions of the Agreement, the
Companies and PaineWebber agree as follows:
1. REPRESENTATIONS AND WARRANTIES. The representations, warranties and
covenants of the Companies in Section 4 of the Purchase Agreement,
dated as of April 6, 1998 (the "Purchase Agreement"), among the
Companies and PaineWebber are hereby incorporated by reference herein,
and the Companies hereby so represent, warrant and covenant to
PaineWebber. The provisions of Section 6 of the Purchase Agreement
shall also be applicable to any Paired Shares delivered to PaineWebber
under the Agreement.
<PAGE>
Patriot American Hospitality, Inc.
Wyndham International, Inc.
October 22, 1998
Page 2
2. CONFIRMATION OF COLLATERAL SHARES. A. The Companies hereby confirm
that there has heretofore been irrevocably and unconditionally
pledged, granted, assigned, hypothecated and transferred to
PaineWebber a first and prior pledge and security interest in the
12,574,780 Paired Shares previously delivered to PaineWebber as
collateral and all shares hereafter delivered as collateral, and all
proceeds thereof, and any increase in profits received therefrom and,
to the extent provided in Section 2C below, Distributions (as defined
in the Agreement), and all security entitlements in respect of the
foregoing (such Paired Shares are in addition to the Adjustment Shares
and are hereinafter referred to as the "Collateral Shares"). Blank
stock powers for all collateral shares held by PaineWebber, duly
endorsed with signatures guaranteed, are being delivered herewith.
This Section 2 creates a security interest in the Collateral Shares to
secure the payment and performance of any and all obligations now or
hereafter existing of the Companies under the Purchase Agreement and
the Agreement, as the same has been and may be amended from time to
time (collectively "Obligations"). Upon the occurrence of a Default
(as defined below), in addition to any and all other rights and
remedies which PaineWebber may have hereunder, under applicable laws
or otherwise, PaineWebber at its option may, subject to any limitation
or restriction imposed by any applicable laws, (i) foreclose or
otherwise enforce its security interest in all or any part of the
Collateral Shares by any available judicial procedure; (ii) sell or
otherwise dispose of, at the office of PaineWebber, all or any part of
the Collateral Shares, and any such sale or other disposition shall be
in accordance with applicable laws, and may be as a unit or in
parcels, by public or private proceedings, and by way of one or more
contracts (it being agreed that the sale of any part of the Collateral
Shares shall not exhaust PaineWebber's power of sale, but sales may be
made from time to time until all of the Collateral Shares have been
sold or until the Obligations have been performed and paid in full),
and at any such sale it shall not be necessary to exhibit the
Collateral Shares; (iii) at its discretion, retain the Collateral
Shares in satisfaction of the Obligations whenever the circumstances
are such that PaineWebber is entitled to do so under applicable laws;
(iv) apply any appropriate judicial proceedings for consent to any
appointment; (v) buy the Collateral Shares at any public sale; and
(iv) buy the Collateral Shares at any private sale, subject to any
restrictions imposed by applicable laws. The Companies agree that, if
notice is required to be given by applicable laws, two days' advance
written notice shall constitute reasonable notice. PaineWebber shall
apply the proceeds of any collection, sale, disposition or other
realization upon any Collateral Shares as follows:
FIRST, to the payment of the reasonable costs and expenses of
such collection, sale, disposition or other realization, including
reasonable out-of-pocket costs and
<PAGE>
Patriot American Hospitality, Inc.
Wyndham International, Inc.
October 22, 1998
Page 3
expenses of PaineWebber and the reasonable fees and expenses of its
agents and counsel;
NEXT, to the satisfaction and payment of the Obligations; and
FINALLY, to the payment to the Companies, or their respective
successors or assigns, or as a court of competent jurisdiction may
direct, of any surplus them remaining.
If the proceeds of collection, sale, disposition , or other
realization are insufficient to cover the costs and expenses of such
realization and the payment in full of the Obligations, the Companies
shall remain liable for such deficiency.
B. The Companies recognize that if a Default occurs prior to a
registration statement covering all shares to be sold by PaineWebber
under the Agreement (a "Valid Registration") becoming effective,
PaineWebber may be unable to effect a public sale of any or all of the
Collateral Shares by reason of certain prohibitions contained in the
Securities Act of 1933, as amended (the "Securities Act") and
applicable state securities laws, and may be compelled to resort to
one or more private sales thereof. The Companies acknowledge and
agree that PaineWebber shall have the right to sell the Collateral
Shares at a private sale and any such private sale may result in
prices and other terms less favorable to the seller than if such sale
were a public sale. PaineWebber shall be under no obligation to delay
a sale of any of the Collateral Shares until a Valid Registration is
in effect. The Companies hereby agree (i) that in the event
PaineWebber shall, upon any Default, sell the Collateral Shares or any
portion thereof, at a private sale or sales, PaineWebber shall have
the right to rely upon the advice and opinion of a member of a
nationally recognized investment banking firm acceptable to
PaineWebber (which may be an affiliate of PaineWebber), as to the best
price reasonably obtainable upon such a private sale thereof, and (ii)
in the absence of fraud, willful misconduct and gross negligence, that
such reliance shall be conclusive evidence that PaineWebber handled
such matter in a commercially reasonable manner under the Uniform
Commercial Code.
C. All Distributions in respect of the Collateral Shares shall
be deposited in the collateral account at PaineWebber or a custodian
or depositary designated by PaineWebber and treated in accordance with
the letter agreement between the parties dated August 14, 1998.
D. For purposes of the Agreement and this letter agreement, a
"Default" shall mean failure by the Company to deliver sufficient
Additional Shares (as defined in the
<PAGE>
Patriot American Hospitality, Inc.
Wyndham International, Inc.
October 22, 1998
Page 4
Agreement) pursuant to Section 3.2(b) of the Agreement.
3. EFFECT. Notwithstanding this letter agreement, all other provisions
of the Agreement as amended remain in full force and effect. Nothing
in this letter agreement diminishes any rights of either party under
the Purchase Agreement and the Agreement.
Sincerely,
PaineWebber Financial Products, Inc.
By:/s/
--------------------------------
Name:
Title:
AGREED TO AND ACCEPTED
Patriot American Hospitality, Inc. Wyndham International, Inc.
By:/s/ By:/s/
-------------------------------- ------------------------------
Name: Name:
Title: Title:
<PAGE>
EXHIBIT 99.1
DEBT SCHEDULE
11/5/98
<TABLE>
<CAPTION>
BALANCE
DEBT 05-NOV MATURITY RATE
- ---- ------ -------- ----
<S> <C> <C> <C>
NationsBank 12,875,000 11/18/98 Libor + 2.75
CHC Loans 103,000,000 12/15/98 Libor + 2.25
Emerald Plaza 35,000,000 12/31/98 Libor + 1.9
Casa Marina 30,566,000 12/31/98 Libor + 2.0
Harrisburg 19,838,875 12/31/98 Libor + 2.25
Arcadian Feb 98 Facility 850,000 12/31/98 SLibor(3) + 1.75
Arcadian Overdraft Facility 3,400,000 Reviewed Annually UK Base + 1.25
- ----------------------------------------------------------------------------------
Condado 55,000,000 1/29/99 Libor + 2.25
El Conquistador 90,000,000 1/29/99 Libor + 2.25
Tranche I 350,000,000 1/31/99 Libor + 2.25
Arcadian Feb 98 Facility 5,950,000 2/31/99 SLibor + 1.75
Tranche II 400,000,000 3/31/99 Libor + 2.25
Unsecured Recourse Loan 160,000,000 4/15/99 Libor + 2.25
Golden Door Spa 2,000,000 6/1/99 AFR
Chase Promissory Note 49,255,000 11/5/99 Libor + 2.25
Syracuse 9,774,066 12/1/99 8.0%
- ----------------------------------------------------------------------------------
Tranche III 450,000,000 3/31/00 Libor + 2.25
Golden Door Spa 2,000,000 6/1/00 AFR
Revolver(1) 887,758,199 7/18/00 Libor + 2.25
Arcadian Additional Loan 6,800,000 7/31/00 SLibor + 1.75
Santa Maria 4,000,000 8/27/00 Libor + .5
- ----------------------------------------------------------------------------------
Golden Door Spa 2,000,000 6/1/01 AFR
Reach 9,347,583 7/1/01 8.0%
Wyndham PeachTree 38,000,000 10/23/01 Libor + 3.50
Arcadian Term Loan 29,750,000 11/01/01 Libor + 1.25
Arcadian Revolving Credit
Facility 30,600,000 11/01/01 Libor + 1.25
- ----------------------------------------------------------------------------------
St. Louis 8,276,404 5/1/02 9.6%
Pittsburgh 14,462,744 6/1/02 9.0%
Meadows Del Mar 1,172,016 6/1/02 Libor + 3.56
- ----------------------------------------------------------------------------------
Tranche B 599,500,000 3/31/03 Libor + 2.5
El San Juan 42,100,000 8/31/03 Libor + 2.0
Malmaison Senior Debt 25,956,300 12/1/03 Libor + 2.5
Leeds Site Debt 2,260,710 12/1/03 Libor + 2.5
Bourbon Orleans 13,500,000 1/1/04 Libor + 2.0
Ventana Canyon 28,488,769 3/1/05 6.50%
Radisson Beachwood 5,064,553 5/31/05 9.75%
Clubhouse 22,826,894 10/1/05 8.7%
Reach 14,990,400 10/1/05 9.1%
El Conquistador 25,000,000 2/7/06 Libor + .9
Wyndham Senior Sub(2) 1,510,000 5/15/06 10.5%
Gressy Term Loan 2,448,000 4/1/07 TBB + 2.5
Met Life Portfolio 84,058,200 10/1/07 8.08%
Embassy Suites Chicago 41,671,000 10/16/08 8.25%
Greenspoint 41,372,000 10/16/08 8.25%
Great Eastern Tranche A 25,500,000 10/15/10 9.00%
Great Eastern Tranche B 13,600,000 10/15/10 Libor + 1.75
Saletta Term Loan 8,639,000 7/1/14 Ribor + 1.75
Buena Vista 47,223,119 12/1/15 9.11%
Vinings 9,675,000 2/1/23 6.15%
Summerfield 338,200 On Demand Prime
Capital Leases 31,450,256
-------------
TOTAL 3,898,848,288
</TABLE>
(1) LOCs of Approximately $24M exist which count against credit availability
(2) Unable to locate payee in order to tender notes
(3) SLibor - Sterling Libor
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997 OF PATRIOT AMERICAN HOSPITALITY, INC.
</LEGEND>
<CIK>0000016343
<NAME>PATRIOT AMERICAN HOSPITALITY
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 39,030 20,360
<SECURITIES> 0 0
<RECEIVABLES> 15,636 14,458
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 5,225,483 2,083,768
<DEPRECIATION> 173,105 67,501
<TOTAL-ASSETS> 6,756,426 2,321,105
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
49 0
<COMMON> 1,555 733
<OTHER-SE> 2,494,721 908,294
<TOTAL-LIABILITY-AND-EQUITY> 6,756,426 2,321,105
<SALES> 0 0
<TOTAL-REVENUES> 438,119 123,308
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 269,167 95,270
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 162,294 31,977
<INCOME-PRETAX> 30,669 549
<INCOME-TAX> 533 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 30,559 2,534
<CHANGES> 0 0
<NET-INCOME> (9,879) (4,547)
<EPS-PRIMARY> (0.88) (0.09)
<EPS-DILUTED> (0.88) (0.09)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 OF WYNDHAM INTERNATIONAL, INC.
</LEGEND>
<CIK>0000715273
<NAME>WYNDHAM INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 108,367 27,076
<SECURITIES> 0 0
<RECEIVABLES> 195,130 46,340
<ALLOWANCES> 0 0
<INVENTORY> 24,553 9,144
<CURRENT-ASSETS> 379,391 100,662
<PP&E> 636,082 29,686
<DEPRECIATION> 25,705 1,304
<TOTAL-ASSETS> 2,023,362 252,088
<CURRENT-LIABILITIES> 444,342 115,656
<BONDS> 0 0
0 0
36 0
<COMMON> 1,555 733
<OTHER-SE> 172,233 80,132
<TOTAL-LIABILITY-AND-EQUITY> 2,023,362 252,088
<SALES> 1,266,985 30,271
<TOTAL-REVENUES> 1,376,245 44,184
<CGS> 0 0
<TOTAL-COSTS> 869,820 27,333
<OTHER-EXPENSES> 529,674 15,909
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 24,015 11
<INCOME-PRETAX> (44,703) 931
<INCOME-TAX> 10,740 94
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 1,257 0
<CHANGES> 0 0
<NET-INCOME> (67,686) 709
<EPS-PRIMARY> (0.56) 0.01
<EPS-DILUTED> (0.56) 0.01
</TABLE>
