<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 March 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-9319 Commission File Number 1-9320
PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC.
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Delaware 94-0358820 Delaware 94-2878485
(State or other (I.R.S. Employer (State or other (I.R.S. Employer
jurisdiction of Identification jurisdiction of Identification
incorporation or No.) incorporation or No.)
organization) organization)
1950 Stemmons Freeway, Suite 6001 1950 Stemmons Freeway, Suite 6001
Dallas, Texas 75207 Dallas, Texas 75207
(Address of principal executive (Address of principal executive
offices) (Zip Code) offices) (Zip Code)
(214) 863-1000 (214) 863-1000
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
N/A N/A
(Former name, former address and (Former name, former address and
former fiscal year, if changed since former fiscal year, if changed since
last report) last report)
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 May 13, 1999,
was as follows:
<TABLE>
<CAPTION>
Registrant Number of Shares
---------- ----------------
<S> <C>
Patriot American Hospitali-
ty, Inc. 239,838,771
Wyndham International, Inc. 239,838,771
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
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 March 31, 1999 (unaudited) and
December 31, 1998...................................................... 3
Condensed Combined Statements of Operations for the three months ended
March 31, 1999 and 1998 (unaudited).................................... 4
Condensed Combined Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 (unaudited).................................... 5
Patriot American Hospitality, Inc.:
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998.................................................. 6
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited).............................. 7
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited).............................. 8
Wyndham International, Inc.:
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998.................................................. 9
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited).............................. 10
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited).............................. 11
Notes to Condensed Financial Statements as of March 31, 1999 (unaudited).. 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 27
Item 3. Qualitative and Quantitative Disclosures about Market Risks....... 41
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................... 42
Item 6. Exhibits and Reports on Form 8-K:
Exhibits................................................................ 42
Reports on Form 8-K..................................................... 42
Signatures................................................................ 43
</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>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in real estate and related improvements
and land held for development, net of accumulated
depreciation of $302,409 in 1999 and $252,580 in
1998............................................... $5,576,797 $5,585,616
Cash and cash equivalents........................... 131,786 123,085
Restricted cash..................................... 41,014 35,869
Accounts and lease revenue receivable............... 229,204 194,583
Investment in unconsolidated subsidiaries........... 144,884 146,912
Mortgage notes and other receivables from unconsoli-
dated subsidiaries................................. 77,536 78,403
Mortgage notes and other receivables................ 41,824 41,334
Management contracts, net of accumulated amortiza-
tion of $16,561 in 1999 and $11,258 in 1998........ 193,908 194,014
Leaseholds, net of accumulated amortization of
$8,318 in 1999 and $5,989 in 1998.................. 176,714 179,922
Trade names and franchise costs, net of accumulated
amortization of $7,886 in 1999 and $6,670 in 1998.. 124,219 125,974
Goodwill and intangibles, net of accumulated amorti-
zation of $24,546 in 1999 and $20,895 in 1998...... 555,574 553,889
Deferred expenses, net of accumulated amortization
of $39,708 in 1999 and $29,136 in 1998............. 42,275 37,998
Deferred acquisition costs.......................... 18,017 16,144
Inventories......................................... 23,131 23,583
Other assets........................................ 82,166 78,344
---------- ----------
Total assets.................................... $7,459,049 $7,415,670
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under credit facility, term loans, mort-
gage notes and capital leases...................... $3,888,569 $3,857,521
Accounts payable and accrued expenses............... 350,167 313,831
Deposits............................................ 37,247 26,392
Due to unconsolidated subsidiaries.................. 8,084 7,919
Deferred income taxes............................... 112,660 123,463
Minority interest in the Operating Partnerships..... 256,465 253,970
Minority interest in consolidated subsidiaries...... 196,798 229,537
Commitment and contingencies.
Shareholders' Equity:
Preferred stock, $0.01 par value, authorized:
100,000,000 shares each; shares issued and out-
standing: 8,981,886 in 1999 and 1998.............. 90 90
Excess stock (paired shares), $0.01 par value, au-
thorized: 750,000,000 shares each; no shares is-
sued and outstanding.............................. -- --
Common stock (paired shares), $0.01 par value, au-
thorized: 650,000,000 shares each; issued and out-
standing: 234,224,527 shares in 1999 and
213,521,647 shares in 1998........................ 4,684 4,270
Additional paid in capital......................... 3,031,108 3,024,540
Receivable from shareholders and affiliates........ (16,541) (16,364)
Unearned stock compensation, net of accumulated am-
ortization of $17,777 in 1999 and $13,447 in
1998.............................................. (1,472) (5,494)
Unrealized loss on securities available for sale... (1,281) (1,245)
Unrealized foreign exchange (loss) gain............ (3,723) 2,749
Accumulated deficit and dividend distributions..... (403,806) (405,509)
---------- ----------
Total shareholders' equity...................... 2,609,059 2,603,037
---------- ----------
Total liabilities and shareholders' equity...... $7,459,049 $7,415,670
========== ==========
</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
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C> <C>
Revenue:
Hotel revenue...................................... $638,830 $290,644
Participating lease revenue........................ 333 20,565
Racecourse facility and land lease revenue......... 4,561 23,048
Management fee and service fee income.............. 22,791 13,839
Net gain on sale of assets......................... 2,775 --
Interest and other income.......................... 4,560 1,711
-------- --------
Total revenue.................................... 673,850 349,807
-------- --------
Expenses:
Hotel expenses..................................... 425,552 188,841
Racing facility operations......................... 3,867 18,184
Real estate and personal property taxes and
casualty insurance................................ 20,180 12,011
General and administrative......................... 50,396 17,306
Cost of acquiring license agreements............... 803 --
Interest expense................................... 90,215 35,959
Depreciation and amortization...................... 76,109 35,603
-------- --------
Total expenses................................... 667,122 307,904
-------- --------
Operating income..................................... 6,728 41,903
Equity in earnings of unconsolidated subsidiaries.. 2,701 3,194
-------- --------
Income before income tax provision, minority
interests and extraordinary item.................... 9,429 45,097
Income tax provision............................... (8,943) (3,558)
-------- --------
Income before minority interests and extraordinary
item................................................ 486 41,539
Minority interest in the Operating Partnerships.... 1,958 (3,055)
Minority interest in other consolidated
subsidiaries...................................... (1,872) (1,356)
-------- --------
Income before extraordinary item..................... 572 37,128
Extraordinary loss from early extinguishment of
debt, net of minority interest.................... -- (18,716)
-------- --------
Net income .......................................... $ 572 $ 18,412
======== ========
Basic (loss) income (attributable) available to
common shareholders:
Net income......................................... $ 572 $ 18,412
Adjustment for equity forwards..................... (8,395) --
Preferred stock dividends.......................... (373) --
-------- --------
Basic net (loss) income............................ $ (8,196) $ 18,412
======== ========
Basic (loss) earnings per common paired share:
(Loss) income before extraordinary item............ $ (0.05) $ 0.34
Extraordinary loss................................. -- (0.17)
-------- --------
Net (loss) income per common paired share........ $ (0.05) $ 0.17
======== ========
Diluted (loss) income (attributable) available to
common shareholders:
Net income......................................... $ 572 $ 18,412
Adjustment for equity forwards..................... (20,033) --
Preferred stock dividends.......................... (373) --
-------- --------
Diluted net (loss) income.......................... $(19,834) $ 18,412
======== ========
Diluted (loss) earnings per common paired share:
(Loss) income before extraordinary item............ $ (0.13) $ 0.32
Extraordinary loss................................. -- (0.16)
-------- --------
Net (loss) income per common paired share........ $ (0.13) $ 0.16
======== ========
</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>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 572 $ 18,412
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 59,714 28,481
Amortization of unearned stock compensation............ 4,330 1,527
Amortization of deferred loan costs.................... 10,636 3,503
Amortization of management contracts and trade names... 10,123 3,245
Amortization of goodwill and other assets.............. 6,272 3,877
Net gain on sale of assets............................. (2,775) --
Issuance of stock for bonuses and directors' fee....... -- 880
Equity in earnings of unconsolidated subsidiaries...... (2,701) (3,194)
Minority interest in Operating Partnerships............ (1,958) 3,055
Minority interest in consolidated subsidiaries......... 1,872 1,356
Deferred income taxes.................................. (10,805) (1,068)
Extraordinary loss from early extinguishment of debt... -- 18,716
Changes in assets and liabilities:
Accounts and lease revenue receivable and other
assets............................................... (32,169) (29,959)
Inventories........................................... 459 424
Accounts payable and other accrued expenses........... 37,721 10,000
--------- ---------
Net cash provided by operating activities............ 81,291 59,255
--------- ---------
Cash flows from investing activities:
Acquisition of hotel properties and related working
capital assets........................................ (32,258) (281,753)
Improvements and additions to hotel properties......... (50,938) (41,205)
Net proceeds from asset sales.......................... 19,444 --
Acquisition of management contracts.................... (1,679) --
Cash received in acquisition of hotel leases........... -- 28,976
Collections on other notes receivable.................. 2,431 4,000
Advances on other notes receivable..................... (2,498) --
(Increase) decrease in restricted cash accounts........ (5,145) 4,588
Deferred acquisition costs............................. (1,873) (27,104)
Net payments collected from unconsolidated
subsidiaries.......................................... 1,874 4,708
Investment in mortgage and other notes receivable...... -- (939)
Other.................................................. 5,770 --
--------- ---------
Net cash used in investing activities................ (64,872) (308,729)
--------- ---------
Cash flows from financing activities:
Borrowings under credit facility, term loans, mortgage
notes and capital lease obligations................... 52,252 504,762
Net repayments on credit facility and other debt....... (21,424) (311,862)
Payment of deferred loan costs......................... (12,705) --
Proceeds from issuance of common stock................. -- 123,782
Collections on notes receivable from shareholders and
affiliates............................................ -- 2,999
Distribution to minority interest holders.............. (18,759) --
Dividends and distributions paid....................... -- (27,564)
Foreign currency translation adjustment................ (6,472) --
Other.................................................. (610) 194
--------- ---------
Net cash (used in) provided by financing activities...... (7,718) 292,311
--------- ---------
Net increase in cash and cash equivalents................ 8,701 42,837
Cash and cash equivalents at beginning of period......... 123,085 42,431
--------- ---------
Cash and cash equivalents at end of period............... $ 131,786 $ 85,268
========= =========
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in real estate and related
improvements and land held for development,
net of accumulated depreciation of $259,194
in 1999 and $216,548 in 1998................. $4,951,180 $4,960,429
Cash and cash equivalents..................... 53,492 72,360
Restricted cash............................... 19,511 17,525
Accounts and lease revenue receivable......... 15,187 8,589
Investment in unconsolidated subsidiaries..... 998,553 975,591
Mortgage notes and other receivables from
unconsolidated subsidiaries.................. 77,536 78,403
Subscription notes receivable from Wyndham.... 134,378 133,669
Notes and other amounts receivable from
Wyndham...................................... 267,951 180,152
Other notes receivable........................ 21,780 20,079
Investment in leaseholds, net of accumulated
amortization of $4,825 in 1999 and $3,301 in
1998......................................... 100,564 102,088
Goodwill and other intangibles net of
accumulated amortization of $6,874 in 1999
and $5,287 in 1998........................... 136,023 139,240
Deferred expenses, net of accumulated
amortization of $36,919 in 1999 and $27,426
in 1998...................................... 42,129 36,900
Deferred acquisition costs.................... 928 1,587
Other assets.................................. 24,192 22,594
---------- ----------
Total assets.............................. $6,843,404 $6,749,206
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under credit facility, term loans,
mortgage notes and capital leases............ $3,643,401 $3,612,076
Subscription notes payable to Wyndham......... 91,278 91,020
Notes and other amounts payable to Wyndham.... 73,280 19,109
Accounts payable and accrued expenses......... 81,379 63,850
Deferred income taxes......................... 37,755 38,912
Due to unconsolidated subsidiaries............ 8,084 7,919
Minority interest in Patriot Partnership...... 225,999 217,924
Minority interest in consolidated
subsidiaries................................. 196,798 229,537
Commitments and contingencies.
Shareholders' equity:
Preferred stock, $0.01 par value;
authorized: 100,000,000 shares;shares
issued and outstanding: 5,419,532 in 1999
and 1998................................... 54 54
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: 234,224,527 shares in 1999 and
213,521,647 shares in 1998................. 2,342 2,135
Additional paid in capital.................. 2,781,901 2,775,722
Receivable from shareholders................ (15,471) (15,254)
Unearned stock compensation, net of
accumulated amortization of $17,777 in 1999
and $13,447 in 1998........................ (1,472) (5,494)
Unrealized foreign exchange gain (loss)..... (4,547) 1,142
Accumulated deficit and dividend
distributions.............................. (277,377) (289,446)
---------- ----------
Total shareholders' equity.................. 2,485,430 2,468,859
---------- ----------
Total liabilities and shareholders' equity.. $6,843,404 $6,749,206
========== ==========
</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
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Lease revenue............................................. $186,155 $109,649
Gain on sale of asset..................................... 2,985 --
Interest and other income................................. 4,758 3,516
-------- --------
Total revenue............................................ 193,898 113,165
-------- --------
Expenses:
Real estate and personal property taxes and casualty
insurance................................................ 17,737 11,923
Ground lease expense...................................... 13,622 6,558
General and administrative................................ 20,651 5,282
Cost of acquiring license agreements...................... 803 --
Interest expense.......................................... 86,104 34,251
Depreciation and amortization............................. 52,662 20,497
-------- --------
Total expenses........................................... 191,579 78,511
-------- --------
Operating income........................................... 2,319 34,654
Equity in earnings of unconsolidated subsidiaries.......... 14,612 3,591
-------- --------
Income before income tax provision, minority interests and
extraordinary item........................................ 16,931 38,245
Income tax provision....................................... (2,477) (371)
-------- --------
Income before minority interests and extraordinary item.... 14,454 37,874
Minority interest in Patriot Partnership................... (729) (3,128)
Minority interest in consolidated subsidiaries............. (1,873) (533)
-------- --------
Income before extraordinary item........................... 11,852 34,213
Extraordinary loss from early extinguishment of debt, net
of minority interest..................................... -- (18,716)
-------- --------
Net income................................................. $ 11,852 $ 15,497
======== ========
Basic income available to common shareholders:
Net income............................................... $ 11,852 $ 15,497
Adjustment for equity forwards........................... (8,395) --
Preferred stock dividends................................ (373) --
-------- --------
Basic net income......................................... $ 3,084 $ 15,497
======== ========
Basic earnings per common share:
Income before extraordinary item.......................... $ 0.02 $ 0.31
Extraordinary loss........................................ -- (0.17)
-------- --------
Net income per common share............................... $ 0.02 $ 0.14
======== ========
Diluted (loss) income (attributable) available to common
shareholders:
Net income............................................... $ 11,852 $ 15,497
Adjustment for equity forwards........................... (20,033) --
Preferred stock dividends................................ (373) --
-------- --------
Diluted net (loss) income................................ $ (8,554) $ 15,497
======== ========
Diluted (loss) earnings per common share:
(Loss) income before extraordinary item................... $ (0.06) $ 0.29
Extraordinary loss........................................ -- (0.16)
-------- --------
Net (loss) income per common share........................ $ (0.06) $ 0.13
======== ========
</TABLE>
See notes to condensed financial statements.
7
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 11,852 $ 15,497
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 50,531 19,856
Amortization of unearned stock compensation............. 4,330 1,336
Amortization of deferred loan costs..................... 9,236 3,503
Amortization of goodwill and other assets............... 2,132 641
Abandoned transaction costs............................. 676 --
Net gain on sale of assets.............................. (2,985) --
Issuance of stock for bonuses and directors' fee........ -- 675
Deferred income taxes................................... (1,158) --
Equity in earnings of unconsolidated subsidiaries....... (14,612) (3,591)
Minority interest in Patriot Partnership................ 729 3,128
Minority interest in consolidated subsidiaries.......... 1,873 533
Extraordinary loss from early extinguishment of debt.... -- 18,716
Changes in assets and liabilities:
Accounts and lease revenue receivable and other assets.. (26,865) (25,737)
Due from Wyndham........................................ (12,272) (11,892)
Accounts payable and other accrued expenses............. 21,534 (2,811)
-------- ---------
Net cash provided by operating activities............. 45,001 19,854
-------- ---------
Cash flows from investing activities:
Acquisition of hotel properties and related working
capital assets......................................... (32,258) (281,753)
Improvements and additions to hotel properties.......... (39,493) (38,333)
Net proceeds from real estate sales and acquisitions.... 18,008 --
Collections (advances) on other notes receivable........ (1,278) 4,000
(Increase) decrease in restricted cash accounts......... (1,986) 4,746
Deferred acquisition costs.............................. (17) (2,669)
Net payments from (investment in) unconsolidated
subsidiaries........................................... (2,305) 4,699
Other................................................... 1,590 --
-------- ---------
Net cash used in investing activities................. (57,739) (309,310)
-------- ---------
Cash flows from financing activities:
Borrowings under credit facility, term loans, mortgage
notes and capital lease obligations.................... 52,252 504,762
Repay borrowings under credit facility and other debt... (20,813) (307,277)
Payment of deferred loan costs.......................... (12,513) --
Principal payments on subscription notes payable to
Wyndham................................................ -- (12,875)
Proceeds from issuance of common stock.................. -- 117,572
Collections on notes receivable from shareholders....... -- 2,999
Distributions to minority interest holders.............. (18,757) --
Dividends and distributions paid........................ -- (27,113)
Foreign currency translation adjustment................. (5,689) --
Other................................................... (610) 194
-------- ---------
Net cash (used in) provided by financing activities... (6,130) 278,262
-------- ---------
Net decrease in cash and cash equivalents................. (18,868) (11,194)
Cash and cash equivalents at beginning of period.......... 72,360 15,355
-------- ---------
Cash and cash equivalents at end of period................ $ 53,492 $ 4,161
======== =========
</TABLE>
See notes to condensed financial statements.
8
<PAGE>
WYNDHAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 78,294 $ 50,725
Restricted cash...................................... 21,503 18,344
Accounts receivable.................................. 214,017 185,994
Notes and other receivables from Patriot............. 73,280 19,109
Inventories.......................................... 23,131 23,583
Prepaid expenses and other current assets............ 30,094 28,195
---------- ----------
Total current assets............................... 440,319 325,950
Investment in real estate and related improvements,
net of accumulated depreciation of $43,215 in 1999
and $36,032 in 1998.................................. 625,744 626,103
Investments in unconsolidated subsidiaries............ 86,875 86,812
Subscription notes receivable from Patriot............ 91,278 91,020
Mortgage notes and other receivables.................. 20,044 21,255
Management contract costs, net of accumulated
amortization of $16,561 in 1999 and $11,258 in 1998.. 193,908 194,014
Leasehold costs, net of accumulated amortization of
$3,493 in 1999 and $2,688 in 1998.................... 76,150 77,834
Trade names and franchise costs, net of accumulated
amortization of $7,886 in 1999 and $6,198 in 1998.... 124,219 125,974
Deferred acquisition costs............................ 17,089 14,557
Goodwill, net of accumulated amortization of $17,672
in 1999 and $15,608 in 1998.......................... 419,551 414,649
Deferred expenses, net of accumulated amortization of
$2,789 in 1999 and $1,710 in 1998.................... 146 1,098
Other assets.......................................... 27,880 27,555
---------- ----------
Total assets....................................... $2,123,203 $2,006,821
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 268,788 $ 249,981
Participating lease payments payable to Patriot...... 68,887 40,996
Deposits............................................. 37,247 26,392
Notes and other amounts payable to Patriot........... 199,064 139,156
Current portion of mortgage notes and capital lease
obligations......................................... 145,169 145,969
---------- ----------
Total current liabilities.......................... 719,155 602,494
Subscription notes payable to Patriot................. 134,378 133,669
Mortgage notes payable and capital lease obligations.. 99,999 99,476
Deferred income taxes................................. 74,905 84,551
Minority interest in Wyndham Partnership.............. 30,466 36,046
Minority interest in consolidated subsidiaries........ 940,544 915,491
Commitments and contingencies.
Shareholders' equity:
Preferred stock, $0.01 par value; authorized:
100,000,000 shares; shares issued and outstanding:
3,562,354 in 1999 and 1998.......................... 36 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:
234,224,527 shares in 1999 and 213,521,647 shares in
1998................................................ 2,342 2,135
Additional paid in capital........................... 249,207 248,818
Receivable from shareholders and affiliates.......... (1,070) (1,110)
Unrealized loss on securities available for sale..... (1,281) (1,245)
Unrealized foreign exchange gain..................... 824 1,607
Accumulated deficit and dividend distributions....... (126,302) (115,147)
---------- ----------
Total shareholders' equity......................... 123,756 135,094
---------- ----------
Total liabilities and shareholders' equity......... $2,123,203 $2,006,821
========== ==========
</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>
Three Months
Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Hotel revenue............ $638,830 $290,644
Racecourse facility
revenue................. 4,561 23,048
Management fee and
service fee income...... 22,918 14,104
Loss on sale of asset.... (210) --
Interest and other
income.................. 5,418 2,186
-------- --------
Total revenue........... 671,517 329,982
-------- --------
Expenses:
Hotel expenses........... 414,373 182,371
Racecourse facility
operations.............. 3,867 18,184
General and
administrative.......... 29,745 12,023
Interest expense......... 9,727 5,699
Depreciation and
amortization............ 23,447 15,106
Participating lease
payments................ 185,822 89,084
-------- --------
Total expenses.......... 666,981 322,467
-------- --------
Operating income.......... 4,536 7,515
Equity in earnings of
unconsolidated
subsidiaries............. 187 1,720
-------- --------
Income before income tax
provision and minority
interests................ 4,723 9,235
Income tax provision...... (6,466) (3,187)
-------- --------
(Loss) income before
minority interests....... (1,743) 6,048
Minority interest in
Wyndham Partnership...... 2,687 73
Minority interest in
consolidated
subsidiaries............. (12,097) (2,941)
-------- --------
Net (loss) income......... $(11,153) $ 3,180
======== ========
Basic net (loss) income
per common share......... $ (0.07) $0.03
======== ========
Diluted net (loss) income
per common share......... $ (0.07) $0.03
======== ========
</TABLE>
See notes to condensed financial statements.
10
<PAGE>
WYNDHAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.......................................... $(11,153) $ 3,180
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 9,184 8,625
Amortization of deferred loan costs....................... 1,400 129
Amortization of management contracts and trade names...... 10,123 3,245
Amortization of goodwill and other........................ 4,140 3,107
Loss on sale of asset..................................... 210 --
Issuance of stock for bonuses and directors' fees......... -- 205
Net payment from unconsolidated subsidiaries.............. -- 9
Deferred income taxes..................................... (9,647) (1,068)
Equity in earnings of unconsolidated subsidiaries......... (187) (1,720)
Minority interest in Wyndham Partnership.................. (2,687) (73)
Minority interest in consolidated subsidiaries............ 12,097 2,941
Changes in assets and liabilities:
Accounts receivable and prepaid expenses and other
assets................................................... (24,596) (25,520)
Other receivables from Patriot............................ 3,727 --
Inventories............................................... 459 424
Accounts payable and other accrued expenses............... 16,185 13,002
Participating lease payments payable to Patriot........... 27,837 21,297
-------- -------
Net cash provided by operating activities............... 37,092 27,783
-------- -------
Cash flows from investing activities:
Improvements and additions to hotel properties............ (11,572) (3,137)
Net proceeds from asset sales............................. 1,437 --
Increase in restricted cash account....................... (3,152) (158)
Change in due to Patriot.................................. -- 11,892
Acquisition of management contracts....................... (1,679) --
Deferred acquisition costs................................ (2,532) (24,435)
Cash received upon acquisition of hotel leases............ -- 28,976
Investment in mortgage notes and other notes receivable... (1,220) (939)
Collections on other notes receivable..................... 2,431 --
Investment in unconsolidated subsidiaries................. 209 --
Other..................................................... 4,172 --
-------- -------
Net cash (used in) provided by investing activities..... (11,906) 12,199
-------- -------
Cash flows from financing activities:
Borrowings under credit facility and term loans........... -- (3,780)
Repayment of assumed debt................................. (391) --
Payment of capital lease obligations...................... (220) (805)
Proceeds from issuance of common stock.................... 3,970 6,210
Payment of deferred loan costs............................ (192) --
Collections on subscription notes......................... -- 12,875
Foreign currency translation adjustment................... (782) --
Distributions paid........................................ (2) (451)
-------- -------
Net cash provided by financing activities............... 2,383 14,049
-------- -------
Net increase in cash and cash equivalents................... 27,569 54,031
Cash and cash equivalents at beginning of period............ 50,725 27,076
-------- -------
Cash and cash equivalents at end of period.................. $ 78,294 $81,107
======== =======
</TABLE>
See notes to condensed financial statements.
11
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
1. Organization and Basis of Presentation:
Patriot American Hospitality, Inc. (collectively with its subsidiaries,
"Patriot"), was formed April 17, 1995 as a self-administered real estate
investment trust ("REIT") for the purpose of acquiring equity interests in
hotel properties. Wyndham International, Inc. (collectively with its
subsidiaries, "Wyndham") was formed in connection with Patriot's merger with
and into California Jockey Club and Bay Meadows Operating Company on July 1,
1997. Patriot and Wyndham are both Delaware corporations and are collectively
referred to as the Companies.
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. The single unit is comprised of one share of common stock of
Patriot paired with one share of common stock of Wyndham, and is referred to
herein as a paired share.
Patriot, through its wholly-owned subsidiary, PAH GP, Inc., is the sole
general partner and the holder of a 1% general partnership interest in Patriot
American Hospitality Partnership, L.P. (the "Patriot Partnership"). In
addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an
approximate 87.2% limited partnership interest in the Patriot Partnership.
Wyndham owns the 1% general partnership interest and an approximate 86.1%
interest in Wyndham International Operating Partnership, L.P. (the "Wyndham
Partnership") as of March 31, 1999. The Patriot Partnership and the Wyndham
Partnership are collectively referred to as the Operating Partnerships.
As of March 31, 1999, Patriot and Wyndham, through the Operating
Partnerships and other subsidiaries, owned interests in 177 hotels with an
aggregate of over 43,600 guest rooms and leased 118 hotels from third parties
with over 15,500 rooms. In addition, Wyndham manages 436 hotels with over
92,000 guest rooms and franchises 12 hotels with over 2,900 guest rooms.
Patriot leases all but one of its hotels to Wyndham. Certain of these leases
provide for the payment of the greater of base or participating rent, plus
certain additional charges, as applicable.
Patriot owns interests in eight hotels and 81 leaseholds for hotels leased
from third parties through special purpose entities which are non-controlled
subsidiaries. Patriot owns the non-voting interest and Wyndham owns the
controlling voting interest in each of the non-controlled subsidiaries. As a
result of this ownership, 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 own a controlling interest.
Partnerships--control is determined in accordance with generally accepted
accounting principles ("GAAP"). The condition for control is the ownership of
a majority voting interest and the ownership of the general partnership
interest.
12
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
Corporations and Limited Liability Companies--control is determined in
accordance with GAAP. The condition for control is the ownership of a majority
voting 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 GAAP 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 GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, as amended for the year ended December 31,
1998. Certain prior period amounts have been reclassified to conform to
current period presentation.
2. Acquisitions and Disposals:
Sale of Bay Meadows Racecourse
In February 1999, Patriot sold its interest in the Bay Meadows Racecourse
located in San Mateo, California. The Companies received cash proceeds of
approximately $3,446 after payment of legal costs and other closing costs. The
Companies recognized an estimated impairment loss on assets held for sale of
$42,278 related to the racecourse facility in 1998. In connection with the
transaction, Patriot terminated its lease to Wyndham for the racecourse
facility. The actual loss on the sale of the racecourse facility was $42,766.
Sale of Holiday Inn Crockett
In March 1999, Patriot sold the Holiday Inn Crockett, realizing net cash
proceeds of approximately $18,000 and recognized a gain of approximately
$2,985. In connection with the sale, $17,000 of the net proceeds were used to
repay a portion of Patriot's term loans.
Acquisition
In January 1999, Patriot acquired the remaining 25% minority interests in
each of the five following hotels; Embassy Suites Schaumburg, the Hilton
Dania, the Marriott Suites at Valley Forge, the Marriott Boston Andover and
the Marriott Tysons Corner from CIGNA. The acquisition of such interests was
financed through additional mortgage indebtedness totaling $49,800 and the
sale of an additional 10% interest in the Marriott Warner Center.
3. Subscription Notes:
In order to effect the issuance of the paired shares of common stock and
units of limited partnership interest ("OP units") which were issued in
connection with certain of the Companies' mergers, other acquisition
transactions, equity transactions and stock dividend payments, Patriot and
Wyndham have issued promissory notes to fund issuance of paired shares and OP
units. These promissory notes are referred to as subscription notes.
13
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
As of March 31, 1999, Patriot's obligations to Wyndham under the
subscription notes totaled $91,278. In connection with each issuance of shares
and OP units pursuant to a specific transaction, these subscriptions for
shares and OP units are funded through the issuance of promissory notes
between the Companies. The notes bear interest ranging from LIBOR plus 1% to
8.75% per annum and mature from 1999 through 2002. As of March 31, 1999,
Wyndham's obligations to Patriot under a subscription note totaled $134,378.
The notes bear interest ranging from LIBOR plus 1% to 8.75% per annum and
mature from 2001 to 2002.
4. Pending Transactions:
Interstate's Third-Party Hotel Management Business
On May 27, 1998, the Companies and Interstate Hotels Company ("Interstate")
entered into a settlement agreement, as amended, with Marriott International,
Inc. ("Marriott"), which addressed certain claims asserted by Marriott in
connection with the Companies' then proposed merger with Interstate. The
settlement agreement provided for the dismissal of litigation brought by
Marriott, and allowed the Companies' merger with Interstate to close. In
addition to dismissal of the Marriott litigation, the settlement agreement
provides for the re-branding of ten Marriott hotels under the Wyndham name,
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 the spin-off by the Companies (subject to extension upon
payment of certain fees by the Companies) of the third-party management
business which was operated by Interstate no later than May 14, 1999.
If the Companies do not complete the spin-off by May 14, 1999, Marriott will
be entitled to receive 110% of the fees otherwise due under the submanagement
agreements with respect to the ten hotels Marriott will manage pursuant to the
submanagement arrangement described above. Additionally, the Companies will be
subject to other penalties, including Marriott's right to purchase, subject to
third-party consents, the hotels to be submanaged by Marriott and six
additional Marriott hotels owned by the Companies at their then appraised
values.
Moreover, subject to any defenses, the Companies would owe Marriott
liquidated damages with respect to the hotels converted to the Wyndham brand,
those to be submanaged by Marriott, and the six additional Marriott hotels
would have the option to purchase. The Companies also anticipate that Marriott
would require third-party owners of the Marriott-branded hotels to choose an
alternative manager for their hotels. As a result, each respective hotel would
either: (1) lose the Marriott brand, at which time the Companies would have to
compensate Marriott for any lost franchise fees or (2) terminate the
management contract with the Companies and enter into a contract with an
alternative manager. The Companies would owe liquidated damages on any third-
party Marriott-franchised hotel which chooses to convert its brand.
The Companies are currently negotiating to extend the deadline for the spin-
off, but no formal agreement has been reached as of the date hereof.
Securities Purchase Agreement
Wyndham and Patriot have entered into an agreement with investors providing
for a $1 billion equity investment and related restructuring of the two
companies. The Companies have also received a commitment letter for a
$2,450,000 credit facility to be put into place upon the completion of the $1
billion equity investment.
The new $2,450,000 credit facility will consist of: $1,000,000 of term loans
with a seven year term; a $600,000 credit facility with a five year term; and,
an $850,000 increasing rate loan facility with a five year term
14
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
which will provide financing which may be redeemed with the proceeds of the
issuance of senior unsecured notes.
As a condition of the $1 billion equity investment, the Companies are
required to restructure their existing organization. Under the contemplated
restructuring, a subsidiary of Wyndham will merge with and into Patriot and
Patriot will become a wholly-owned subsidiary of Wyndham and new shares of
Wyndham will be issued in exchange for the then outstanding shares of Patriot
common stock. In addition, the pairing agreement between Wyndham and Patriot
will terminate, Patriot's status as a REIT will terminate effective January 1,
1999, and Patriot will become a taxable corporation at that date. The
termination of Patriot's REIT status will cause Patriot to permanently lose
its special status as a grandfathered paired share REIT. As a result of that
transaction, the Company will be required to record a charge for deferred
income taxes for the difference between the income tax basis and the recorded
carrying value of assets and liabilities. The Company is continuing its
analysis of the expected effects of this non-cash charge. Currently the
estimate is $750,000, however; this amount could vary when the analysis is
completed. In addition, the Company will charge off the value of an intangible
asset associated with the paired share structure of approximately $83,600.
In the event that the equity and related debt transactions referred to above
are not completed, management has determined that additional capital would
have to be raised from other sources or the Companies would have to sell
significant amounts of assets to produce proceeds sufficient to meet its
existing current debt maturity obligations. These asset sales could include
resort properties or Wyndham-managed properties in major cities and could
negatively impact operations. Management believes these alternatives, if
necessary, represent a viable plan to address the Companies' liquidity needs.
5. Credit Facility, Term Loans, Mortgages and Other Notes:
Credit Facility and Term Loans
The Companies' credit facilities led by the Chase Manhattan Bank and Chase
Securities, Inc. and Paine Webber Real Estate Securities, Inc. include a
$900,000 revolving credit facility (the "Credit Facility") and a series of
term loans in the aggregate amount of up to $1,800,000 (the "Term Loans").
Proceeds from the Credit Facility were used to fund certain of the Companies'
mergers, as well as to refinance certain outstanding indebtedness of the
Companies. Interest rates are based on the Companies' leverage ratio and may
vary from 1.5% to 3% over LIBOR. As of March 31, 1999, the Companies had no
additional availability under the Credit Facility. The Credit Facility matures
July 2000. The Term Loans mature on June 30, 1999 ($733,000), March 31, 2000
($450,000), and March 31, 2003 ($599,250).
Under the original terms, two of the Term Loans were scheduled to mature on
January 31, 1999 ($350 million) and March 31, 1999 ($400 million),
respectively. All of the requisite lenders agreed to extend maturity of these
two term loans to June 30, 1999, subject to Patriot and Wyndham consummating
the securities purchase agreement by that date. In addition to the maturity
extensions, the lenders have waived certain debt covenants to June 30, 1999 on
which the Companies would have been in default if not waived. If the
securities purchase agreement is not consummated by June 30, 1999, or the
securities purchase agreement otherwise terminates, the maturity on these two
Term Loans will be extended to March 31, 2000, and the Companies will be
required to make a $300,000 principal amortization payment by December 31,
1999. Additionally, the Companies will be required to secure the Credit
Facility with mortgages and other security interests.
15
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
Paine Webber Mortgage Financing
Effective February 15, 1999, the financing arrangement with an affiliate of
Paine Webber Real Estate Securities, Inc. ("Paine Webber Real Estate") whereby
such affiliate loaned Patriot $103,000, was amended and extended to the
earlier of June 30, 1999 or the closing of the securities purchase agreement.
Additionally, the amendment provides for an increase in the rate of interest
to LIBOR plus 2.75% per annum.
Effective February 15, 1999, the agreements entered into in connection with
the acquisition of the Wyndham Emerald Plaza Hotel located in San Diego,
California and the Arcadian acquisition, whereby Paine Webber Real Estate
provided loans of $35,000 and $160,000, respectively were amended and extended
to the earlier of June 30, 1999 or the closing of the securities purchase
agreement. Additionally, the amendments provide for an increase in the rate of
interest to LIBOR plus 2.75% per annum for the $35,000 loan and to LIBOR plus
5% per annum for the $160,000 loan.
Interest Rate Swaps and Caps
Patriot enters into interest rate swap and cap agreements to modify the
interest characteristics of its outstanding debt. These agreements involve the
exchange of amounts based on a variable interest rate for amounts based on
fixed interest rates over the life of the agreement without an exchange of the
notional amount upon which the payments are based. The differential to be paid
or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt using a method which
approximates the effective interest method (the accrual accounting method).
The related amount payable to or receivable from counterparties is included in
accrued expenses or other assets.
Patriot also enters into interest rate cap agreements that are designed to
limit its exposure to increasing interest rates and are designated as hedges
of its outstanding debt. An interest rate cap entitles Patriot to receive a
payment from the counterparty equal to the excess, if any, of the hypothetical
interest expense (strike price) on a specified notional amount at a current
market interest rate over an amount specified in the agreement. The only
amount Patriot is obligated to pay the counterparty is an initial premium. The
cost of the agreements (the initial premium) is included in other assets and
amortized to interest expense ratably during the life of the agreement.
The fair value of interest rate swap and cap agreements and changes in the
fair value as a result of changes in market interest rates are not recognized
in the financial statements.
Patriot has entered into two additional interest rate swap arrangements
during 1999 to swap floating rate LIBOR-based interest rates for a fixed rate
interest amount as a hedge against $50,987 of the outstanding balance on
specific property related debt. The interest rate swap fixes the LIBOR portion
of the debt interest rate at 5.31% per annum through January 2000 ($19,987)
and 5.42% per annum through March 2001 ($31,000). At March 31, 1999, Patriot
has various interest rate swap arrangements as a hedge against $872,987 of the
outstanding balance on the Credit Facility, the Term Loans and specific
property related debt.
Additionally, Patriot entered into two interest rate cap arrangements as
follows; an interest rate cap that limits LIBOR to 7% on up to $1,500,000 of
indebtedness through April 2000, and an interest rate cap that limits LIBOR to
6.75% on up to $19,475 of indebtedness through March 2001.
16
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
6. Comprehensive Income (Loss):
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and displaying comprehensive income (loss) and its components. The
Companies adopted SFAS No. 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
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income................................................ $ 572 $ 18,412
Unrealized (loss) gain on securities available for sale... (36) 106
Unrealized foreign exchange loss.......................... (6,472) --
--------- ---------
Total comprehensive (loss) income......................... $ (5,936) $ 18,518
========= =========
</TABLE>
Patriot
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income................................................ $ 11,852 $ 15,497
Unrealized foreign exchange loss.......................... (5,689) --
--------- ---------
Total comprehensive income................................ $ 6,163 $ 15,497
========= =========
</TABLE>
Wyndham
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net (loss) income ......................................... $ (11,153) $ 3,180
Unrealized (loss) gain on securities available for sale.... (36) 106
Unrealized foreign exchange loss........................... (783) --
--------- --------
Total comprehensive (loss) income ......................... $(11,972) $ 3,286
========= ========
</TABLE>
17
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
7. Computation of Earnings Per Share:
Earnings per share have been computed as follows:
Combined (1)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Basic Diluted
-------------------- --------------------
<S> <C> <C> <C> <C>
Income before extraordinary item... $ 572 $ 37,128 $ 572 $ 37,128
Adjustment for equity forwards
(2)............................... (8,395) -- (20,033) --
Return on preferred stock ......... (373) -- (373) --
--------- --------- --------- ---------
(Loss) income (attributable)
available to common stockholders
before extraordinary item......... (8,196) 37,128 (19,834) 37,128
Extraordinary loss................. -- (18,716) -- (18,716)
--------- --------- --------- ---------
Net (loss) income (attributable)
available to common stockholders.. $ (8,196) $ 18,412 $ (19,834) $ 18,412
========= ========= ========= =========
Weighted average number of paired
shares outstanding................ 154,990 109,549 154,990 109,549
Dilutive securities:
Effect of unvested stock grants.. -- -- -- 872
Dilutive options to purchase
paired shares................... -- -- -- 2,024
Dilutive convertible preferred
shares.......................... -- -- -- 4,645
Dilutive impact of equity
forwards........................ -- -- -- 376
--------- --------- --------- ---------
154,990 109,549 154,990 117,466
========= ========= ========= =========
(Loss) earnings per paired share:
(Loss) income (attributable)
available to common stockholders
before extraordinary item....... $ (0.05) $ 0.34 $ (0.13) $ 0.32
Extraordinary loss............... -- (0.17) -- (0.16)
--------- --------- --------- ---------
Net (loss) income................ $ (0.05) $ 0.17 $ (0.13) $ 0.16
========= ========= ========= =========
</TABLE>
- --------
(1) For the three months ended March 31, 1999, the dilutive effect of unvested
stock grants of 796, the option to purchase common stock of 15 and 8,423
of preferred shares were not included in the computation of diluted
earnings per share because they are anti-dilutive.
(2) The adjustment relates to the mark-to-market and yield adjustment for the
forward equity contracts which can be settled in cash or stock, at the
Companies' option.
18
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
Patriot
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Basic Diluted (1)
-------------------- --------------------
<S> <C> <C> <C> <C>
Income before extraordinary item.. $ 11,852 $ 34,213 $ 11,852 $ 34,213
Adjustment for equity forwards
(2).............................. (8,395) -- (20,033) --
Preferred stock dividends......... (373) -- (373) --
--------- --------- --------- ---------
Income (loss) available
(attributable) to common
stockholders before extraordinary
item............................. 3,084 34,213 (8,554) 34,213
Extraordinary loss................ -- (18,716) -- (18,716)
--------- --------- --------- ---------
Net income (loss) available
(attributable) to common
stockholders..................... $ 3,084 $ 15,497 $ (8,554) $ 15,497
========= ========= ========= =========
Weighted average number of common
shares outstanding............... 154,990 109,549 154,990 109,549
Dilutive securities:
Effect of unvested stock
grants......................... -- -- -- 872
Dilutive options to purchase
common shares.................. -- -- -- 2,024
Dilutive convertible preferred
shares......................... -- -- -- 4,645
Dilutive impact of equity
forwards....................... -- -- -- 376
--------- --------- --------- ---------
154,990 109,549 154,990 117,466
========= ========= ========= =========
Earnings (loss) per share:
Income (loss) available
(attributable) to common
stockholders before extraordinary
item............................. $ 0.02 $ 0.31 $ (0.06) $ 0.29
Extraordinary loss.............. -- (0.17) -- (0.16)
--------- --------- --------- ---------
Net income (loss)............... $ 0.02 $ 0.14 $ (0.06) $ 0.13
========= ========= ========= =========
</TABLE>
- --------
(1) For the three months ended March 31, 1999, the dilutive effect of unvested
stock grants of 796, the option to purchase common stock of 15 and 8,423
of preferred shares were not included in the computation of diluted
earnings per share because they are anti-dilutive.
(2) The adjustment relates to the mark-to-market and yield adjustment for the
forward equity contracts which can be settled in cash or stock, at the
Companies' option.
19
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
Wyndham
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
-------------------- --------------------
1999 (1) 1998 1999 (1) 1998
-------------------- --------------------
Basic Diluted (2)
-------------------- --------------------
<S> <C> <C> <C> <C>
Net (loss) income (attributable)
available to common stockholders... $ (11,153) $ 3,180 $ (11,153) $ 3,180
========= ========= ========= =========
Weighted average number of common
shares outstanding................. 154,990 109,549 154,990 109,549
Dilutive securities:
Effect of unvested stock grants... -- -- -- 872
Dilutive options to purchase
common shares.................... -- -- -- 2,024
Dilutive convertible preferred
shares........................... -- -- -- 4,645
Dilutive impact of equity
forwards......................... -- -- -- 376
--------- --------- --------- ---------
154,990 109,549 154,990 117,466
========= ========= ========= =========
(Loss) earnings per share:
(Loss) income (attributable)
available to common
stockholders..................... $ (0.07) $ 0.03 $ (0.07) $ 0.03
========= ========= ========= =========
</TABLE>
- --------
(1) Wyndham is in a loss position for the three months ended March 31, 1999.
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) For the three months ended March 31, 1999, the dilutive effect of unvested
stock grants of 796, the option to purchase common stock of 15 and 8,423
of preferred shares were not included in the computation of diluted
earnings per share because they are anti-dilutive.
8. Commitments and Contingencies:
Forward Equity Contracts
Patriot is party to forward equity contracts with three counterparties
involving the sale of an aggregate of 13.3 million paired shares, with related
price adjustment mechanisms. Patriot's aggregate obligation under the forward
equity transactions was approximately $321.2 million at March 31, 1999. As of
such date, Patriot had delivered an aggregate of 79 million shares to the
counterparties as collateral in addition to approximately 12.5 million paired
shares owned by the counterparties or their affiliates.
In a forward equity transaction, a company sells shares of its common stock
to an investment bank or similar financial institution. As the same time, the
parties enter into a forward contract under which they agree to "settle" the
transaction at a stated maturity date based upon the adjusted price of the
purchased shares at maturity. During the term of the forward contract, the
price of the purchased shares increases at a rate that corresponds to an
agreed-upon interest rate. At maturity, the buyer sells a number of shares
sufficient to generate proceeds equal to the total adjusted purchase price of
the purchased shares. Shares may be sold to the public through an underwritten
public offering or by other methods, or to private investors. If the buyer
does not receive sufficient proceeds from selling the number of shares that it
originally purchased, the company must issue more shares of common stock to
the buyer for resale until the obligation has been satisfied. Under the terms
of the Companies' forward equity contracts, the Companies may elect to settle
their obligation in cash instead of paired shares.
20
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
On February 28, 1999, all three counterparties agreed, subject to specified
conditions, not to require settlement under their respective forward
agreements or to sell paired shares in connection with the forward agreements
until the earlier of the closing of the $1 billion equity investment or June
30, 1999. In connection with these standstill agreements, the Companies agreed
to pay a 2% fee to the three counterparties. Each of the agreements provided
that the standstill obligation would terminate if, among other events, the
price of the paired shares fell to a specified threshold. As of the date of
this Form 10-Q, the price of the paired shares has fallen below these
thresholds. As a result, each of the forward counterparties has the right to
require an immediate settlement of its forward equity transaction. As of the
date of this Form 10-Q, none of the counterparties has made any sale of paired
shares, other than the sale of 754,525 paired shares by one counterparty in
December 1998, or required settlement of its forward transaction. However, the
Companies cannot assure you that the forward counterparties will not sell
paired shares or require settlement in the future.
In addition, the Companies have agreed to deliver a total of up to
$18,084,488 of paired shares to the counterparties in exchange for the
Interstate shares which the counterparties will receive in the spin-off. The
counterparties will hold these paired shares as additional collateral under
the forward equity agreements.
The Companies may settle the forward transactions by delivering either cash
or paired shares covered by an effective registration statement. Sources of
cash are not currently available for the Companies to make the payments that
would be required to settle one or more of the forward transactions in cash.
Moreover, the Companies cannot assure that the bank lenders would consent to
any cash settlements prior to the closing of the $1 billion equity investment.
Generally, the Companies may settle by delivering paired shares only if a
registration statement covering such paired shares is effective. There are
currently effective registration statements covering the sale by the three
forward counterparties of up to 40 million paired shares and the sale by one
counterparty of an additional 4 million paired shares of which 754,525 paired
shares were sold by that counterparty in December 1998. In addition, the
Companies filed a registration statement in April 1999 registering an
additional 68 million paired shares in connection with the forward equity
transactions. If and when the April 1999 registration statement becomes
effective, there will be 111.2 million paired shares covered by effective
registration statements, representing approximately 14 million paired shares
more than the total number of paired shares currently owned or held as
collateral by the forward counterparties. The Companies can make no assurance
that these registration statements will remain effective or that the Companies
will not be required to register more paired shares in connection with the
forward equity transactions. Given the current market price of the paired
shares, any settlement in paired shares would have severely dilutive effects
on the Companies' capital stock. Based on the $5.0625 closing price of the
paired shares on April 30, 1999 and assuming an average of 2% selling
expenses, the forward counterparties would have to sell approximately 65
million paired shares to settle all of the forward equity transactions in
full. The number of paired shares required would substantially increase if the
market price of the paired shares decreases as a result of the sales of paired
shares by the forward counterparties. If any of the counterparties sells
paired shares, the conversion price of the preferred stock to be issued to the
investors in the $1 billion equity investment will be adjusted downward to the
extent that the price recognized by the Companies on the sale is less than
$8.75 per share.
The Companies intend to settle in full all of the forward transactions with
part of the proceeds of the $1 billion equity investment. If the Companies
settle the forward transactions in cash, the counterparties must deliver to
the Companies all paired shares then owned by them or held by them as
collateral under the forward agreement.
21
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
Contingencies
On June 29, 1992 an action for trademark infringement was filed in the New
York Supreme County of New York, Index No. 17474/92 titled Wyndham Hotel
Company, John Mados, and Suzanne Mados et al v. Wyndham Hotel Company. Ltd.
The action is based upon the plaintiff's alleged use of the mark "Wyndham" in
connection with the Wyndham Hotel located in Manhattan, New York City. The
case was tried in May 1996, and an order and partial judgment was entered in
March 1998. The order enjoins the Companies' from using the name and mark
"Wyndham" in connection with the advertising, promoting, managing or operating
a hotel in Manhattan, New York City, and places restrictions on the Companies'
use of the name and mark "Wyndham" in all other areas of New York outside of
Manhattan. In November 1998, an order was issued clarifying the original order
and a final judgment was entered. The Companies filed an appellate brief on
February 22, 1999.
On January 12, 1999, a purported class action lawsuit was filed on behalf of
the stockholders of Patriot and Wyndham in the Delaware Chancery Court. The
lawsuit, captioned Charles Fraschilla v. Paul A. Nussbaum, et al., No.
16895NC, names as defendants the directors of Patriot ("Directors"), as well
as the investors in the $1 billion equity investment. The lawsuit alleges that
the Directors breached their fiduciary duties to Patriot's shareholders with
respect to the Companies' financial condition. The lawsuit also alleges that
the Directors breached their fiduciary duty to Patriot's shareholders by
"effectively selling control" of Patriot to the investors for inadequate
consideration and without having adequately considered or explored all other
alternatives to this sale or having taken steps to maximize stockholder value.
The lawsuit also alleges that the investors aided and abetted the Directors in
their purported breaches of fiduciary duty. The plaintiffs seek an unspecified
amount of monetary damages from the Directors as well as an injunction
preventing the consummation of the deal with the investors. On January 19,
1999, three nearly identical purported class action lawsuits were filed in the
same court on behalf of different purported class representatives: (1) Sybil
R. Meisel and Steven Langsam, Trustees, No. 16905NC; (2) Crandon Capital
Partners, No. 16906NC; and (3) Robert A. Staub, No. 16907NC.
In April 1999, the parties entered into a memorandum of understanding to
settle these lawsuits. In the memorandum of understanding Wyndham agreed to
make the proposed $300 million rights offering no earlier than 60 days after
the closing of the $1 billion equity investment and to hold the rights
offering open for a period of not less than 30 days. Wyndham also agreed to
use good faith efforts to commence the rights offering no later than 120 days
after the closing of the $1 billion equity investment. Wyndham will not be
required to make the rights offering if: (1) the $1 billion equity investment
is not made; (2) the SEC does not declare effective any registration statement
with regard to securities of Wyndham to be offered in the rights offering; (3)
there is a pending court order, motion, legal proceeding or other action to
enjoin, prevent or delay the rights offering; or (4) the rights offering
cannot be completed, despite Wyndham's good faith efforts, within 170 days of
the closing of the $1 billion investment.
The memorandum of understanding and the proposed settlement are conditioned
on: (1) the completion of the $1 billion investment; (2) the drafting and
execution of a stipulation of settlement and related documents; (3) the
completion by plaintiffs of reasonable and appropriate discovery; and (4)
final court approval of the settlement and dismissal of the action with
prejudice by the court.
In the stipulation, the parties will request that the court certify, for
purposes of settlement, a non-opt out, binding class of all persons, exclusive
of defendants and their affiliates, who owned shares of Patriot on or after
December 15, 1998, and their successors in interest and transferrees, through
and including the closing of the $1
22
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
billion investment; that the court approve the settlement, including the
release of all claims by class members against the defendants; and that the
court enter final judgment dismissing with prejudice all claims of the
plaintiffs and the class against the defendants. Patriot has agreed to pay an
award of attorney's fees and expenses not to exceed $1.25 million to counsel
for class plaintiffs if ordered by the court.
On February 3, 1999, McNeill Investment Company, Inc. filed a lawsuit
against Patriot in the United States District Court for the Western District
of Pennsylvania. In the lawsuit, captioned McNeill Investment Company, Inc. v.
Patriot American Hospitality, Inc., No 99-165, the plaintiff alleges that
Patriot breached its obligations under a registration rights agreement that
Patriot became obligated under through its merger transaction with Interstate
Hotels Corporation. The plaintiff claims approximately $9 million in damages.
Counsel is currently conducting a factual investigation of the claims made in
the complaint. Also, counsel is investigating the possibility of settlement
with the plaintiff, but if the matter is not settled, it will have to be
litigated. Patriot filed an answer denying all liability in response to the
complaint.
The Companies are currently involved in certain guest and customer claims
and other disputes arising in the ordinary course of business. In the opinion
of management, the pending litigation will not have a material effect on the
financial statements.
On May 7, 1999, a purported class action lawsuit was filed on behalf of
former shareholders of California Jockey Club and Bay Meadows Operating
Company in the United States District Court for the Northern District of
California. The lawsuit captioned Johnson, et al. v. Patriot American
Hospitality, Inc., et al., C-99-2153-SI, names as defendants Patriot American
Hospitality, Inc., Wyndham International, Inc., PAH GP, Inc., PAH LP, Inc.,
Patriot American Hospitality Partnership, L.P., Wyndham International
Operating Partnership, L.P. and PaineWebber Group, Inc. The lawsuit alleges
that the named defendants made false and misleading statements concerning the
proposed merger in the joint proxy statement/prospectus that was delivered to
California Jockey Club and Bay Meadows Operating Company stockholders. The
plaintiffs seek an unspecified amount of monetary damages. The Companies have
not yet been served with the complaint.
9. Related Party Transactions:
Consulting Agreements
On February 26, 1999, Patriot, Wyndham and Paul A. Nussbaum entered into a
Separation Agreement (the "Separation Agreement") whereby Mr. Nussbaum
resigned his position as Chairman of the Board of Directors and Chief
Executive Officer of Patriot. Pursuant to the Separation Agreement, Mr.
Nussbaum has been named Chairman Emeritus of the Board of Directors of Patriot
and will remain as a Director of Wyndham.
In accordance with terms of the Separation Agreement, Patriot will: (1)
guarantee the repayment of the remaining outstanding principal on Mr.
Nussbaum's NationsBank Loan of approximately $7,000 (2) make all interest
payments that become due and payable on the NationsBank Loan on or after the
date of separation; (3) shall pay severance of $3,200 reduced by any interest
payments made by Patriot on the NationsBank Loan through June 30, 1999.
Additionally, Mr. Nussbaum's outstanding unvested options to purchase paired
shares shall vest and remain fully exercisable for the period of their
respective terms and within six months Mr. Nussbaum may elect to
23
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
exchange such options on a Black Scholes neutral basis for new options with an
exercise price equal to the fair market value of a Paired Share on the
election date. Mr. Nussbaum will also receive 250,000 Paired Shares equally
over a three year period and any restrictions will be lifted from existing
paired shares held by Mr. Nussbaum.
As a condition to receiving the second and third installments of the paired
shares, Mr. Nussbaum has agreed to provide non-exclusive consulting services
to the Companies for a period of two years following the resignation date.
Additionally, Mr. Nussbaum will receive other compensation as provided for in
the Separation Agreement.
Other Related Party Transactions
In 1999, Wyndham amended its management contract for the Wyndham Anatole
Hotel to provide that the owners of the hotel may terminate the management
contract following the first annual meeting of Wyndham stockholders after the
completion of the $1 billion equity investment if Paul Nussbaum continues on
the Board of Directors of Wyndham. Additionally, the owners of the Wyndham
Anatole Hotel may terminate the management contract if James Carreker ceases
to be an executive officer of the Companies.
On April 30, 1999, the Companies' option to purchase certain interests in
Kinetic Group Limited Partnership, which provides management information
services to the Companies, expired without being exercised by the Companies.
Kinetic Group Limited Partnership is owned 50% by Trammell Crow Company and
50% by an entity owned by Crow family members and certain of the Companies'
senior executive officers. The option was granted to Patriot in connection
with the Wyndham merger.
10. Stock Dividends:
On January 25, 1999, Patriot paid a stock dividend of $.44 per share of
common stock for the fourth quarter of 1998 to shareholders of record on
December 30, 1998. Earnings per common share, weighted average shares
outstanding and all stock option activity have been restated to reflect the
stock dividend.
11. Segment Reporting:
The Companies' classify their business into proprietary owned brands and
non-proprietary brand hotel divisions, under which they manage the business.
Among its proprietary branded hotels, the Company is positioned in the
luxury segment under the Grand Bay Hotel & Resorts(R) brand; in the upscale
segment under Wyndham(TM); and in the mid-priced segment under the ClubHouse
brand. Additionally, the Company offers proprietary branded all-suite
accommodations through its upscale Summerfield Suites brand and its mid-priced
Sierra Suites brand. Other proprietary hotel brands owned and developed by the
Companies include Malmaison, Grand Heritage(R) and Carefree(R).
Description of Reportable Segments
The Companies have six reportable segments: Wyndham hotel properties, resort
properties, all suite properties, non-proprietary branded properties, other
proprietary branded hotel properties and other.
. Wyndham hotel properties include Wyndham Hotels, Wyndham Gardens and
Wyndham Grand Heritage. The Wyndham hotel properties are full-service
properties that generally offer a full range of meeting and
24
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
conference facilities and banquet space. Facilities generally include
restaurants and lounge areas, gift shops and recreational facilities,
including swimming pools. Full-service hotels generally provide a
significant array of guest services, including room service, valet services
and laundry.
. Resort properties include Wyndham Resorts, Grand Bay resort properties and
other resort properties. Resorts are designed to offer unique destinations
which appeal to today's sophisticated vacation traveler and to blend with
their environment, enhancing the natural surroundings with design that fits
the locale. Each resort's recreational activities are of the highest
caliber and are designated to capitalize on the natural attractions of the
location. Many offer a combination of golf, tennis, skiing, health spa,
hiking and other sports.
. All suite properties include the Summerfield and Sierra Suite properties.
The Summerfield and Sierra Suite properties generally target the business
travelers who usually anticipate a one to two week stay. The suites
generally have limited public space and offer limited food and beverage
service. However, the suites provide guests with larger rooms and work
space.
. Non-proprietary branded properties include all properties which are not
Wyndham hotel properties, resort properties, all suite properties or other
proprietary branded properties. The properties consist of non Wyndham
branded assets such as: Crowne Plaza(R), Embassy Suites(R), Marriott(R),
Courtyard by Marriott(R), Sheraton(R) and independents.
. Other proprietary branded hotel properties include Malmaison, Grand
Heritage, Clubhouse and hotels acquired in the Arcadian acquisition.
. Other includes participating lease revenues, racecourse facility revenue
and expenses, management fee and service fee income, interest and other
income, general and administrative costs, interest expense, depreciation
and amortization and other one-time charges. General and administrative
costs, interest expenses and depreciation and amortization are not
allocated to each reportable segment; therefore, they are reported in the
aggregate within this segment.
Measurement of segment profit or loss
The Companies evaluate performance based on the operating income or loss
from each business segment. The accounting policies of the reportable segments
are the same as those described in Note 1.
Factors Management Used to Identify the Reportable Segments
The Companies' reportable segments are determined by brand affiliation and
type of property. The reportable segments are each managed separately due to
the specified characteristics of each segment.
<TABLE>
<CAPTION>
Non- Other
Three Months Ended Wyndham Suite proprietary Proprietary
March 31, 1999 Hotels Resorts Properties Branded Branded Other Total
------------------ -------- -------- ---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue........... $143,296 $159,679 $33,113 $281,121 $21,623 $ 35,018 $673,850
Operating income
(loss)................. 41,985 58,143 6,479 64,534 5,555 (169,968) 6,728
<CAPTION>
Non- Other
Three Months Ended Wyndham Suite proprietary Proprietary
March 31, 1998 Hotels Resorts Properties Branded Branded Other Total
------------------ -------- -------- ---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue........... $151,806 $ 74,834 $ -- $ 58,799 $ 5,205 $ 59,163 $349,807
Operating income
(loss)................. 43,589 26,799 -- 15,242 1,857 (45,584) 41,903
</TABLE>
25
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC. AND
WYNDHAM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(dollars in thousands, except for share amounts)
(unaudited)
The following table represents revenue information by geographic area as of
and for the three month period ending March 31, 1999. Revenues are attributed
to the United States and its territories and Europe based on the location of
hotel properties. The hotel properties in Europe were acquired on April 6,
1998. Prior to this date, all of the Companies' business was attributed to
hotel properties located in the United States and its territories.
<TABLE>
<CAPTION>
United States Europe Total
------------- ------- --------
<S> <C> <C> <C>
Revenues......................................... $656,743 $17,107 $673,850
</TABLE>
12. Subsequent Events:
On April 30, 1999, Patriot sold the following hotels; Hampton Inn Rochester,
Hampton Inn Jacksonville, Hampton Inn Cleveland, and the Hampton Inn Canton,
for net proceeds of approximately $23,469.
In April 1999, Patriot acquired the remaining 10% minority interests in each
of the four following hotels; the Radisson Akron; the Courtyard Beachwood; the
Holiday Inn Westlake; the Radisson Beachwood from IAH Snavely L.L.C.
("Snavely"). In addition, the Companies sold the Holiday Inn Beachwood to
Snavely. The transaction generated net proceeds for the Companies of
approximately $8,770.
On May 7, 1999, Patriot exercised its option to purchase the interest in
ISIS 2000, formerly owned by certain related parties and Wyndham senior
executive officers, for a cash payment of $3,073. Subsequent to the exercise
of the option, Patriot will own 100% of this entity which provides
reservations and other services to the Companies.
On May 11, 1999, the Companies sold the Holiday Inn Sebring for net proceeds
of approximately $4,100.
In May 1999, Beacon Capital Partners, L.P. ("Beacon") loaned $25,000 to the
Companies. The loan, which bears interest at LIBOR plus 2.5% is due June 30,
1999. The loan is secured by a first mortgage on the Wyndham Batterymarch
hotel, a property under construction in Boston, Massachusetts. The Companies
paid Beacon a financing fee of 2.50% of the loan principal in May and will pay
Beacon an additional fee of 0.75% of the loan principal upon maturity of the
loan.
26
<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, as
amended, for the year ended December 31, 1998.
Certain statements in this Form 10-Q constitute "forward-looking statements"
as that term is defined under the Private Securities Litigation Reform Act of
1995 (the "Act"). 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. Although forward-looking statements
reflect management's good faith beliefs, forward-looking statements 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 March 31, 1999, Patriot and Wyndham, directly or through the Operating
Partnerships and other subsidiaries, owned interests in 177 hotels totaling
over 43,600 rooms and leased 118 hotels from third parties totaling over
15,500 rooms. In addition, Wyndham managed 436 hotels with over 92,000 rooms
for third party owners and franchised 12 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 205 of its owned or leased hotels to Wyndham and one of
Patriot's hotels is leased to a third party lessee who is responsible for
operating the hotel. Certain of these leases provide for the payment of the
greater of base or participating rent, plus certain additional charges, as
applicable (the "Participating Leases").
Eighty-nine of the Companies' hotels are owned or leased by special purpose
entities (the "Non-Controlled Subsidiaries"). Generally, 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.
In addition to leasing and managing hotels, Wyndham was also engaged in the
business of conducting and offering pari-mutuel wagering on thoroughbred horse
racing at the Bay Meadows Racecourse until February 1999, when it sold its
interest in this business.
Asset Sales and Acquisitions
In January 1999, Patriot acquired the remaining 25% minority interests in
each of the five following hotels; Embassy Suites Schaumburg, the Hilton
Dania, the Marriott Suites at Valley Forge, the Marriott Boston Andover
27
<PAGE>
and the Marriott Tysons Corner from CIGNA. The acquisition of such interests
was financed through additional mortgage indebtedness totaling $49.8 million
and the sale of an additional 10% interest in the Marriott Warner Center.
Revenues and operating income for the above are not significant.
In February 1999, Patriot sold its interest in the Bay Meadows Racecourse
located in San Mateo, California. The Companies received cash proceeds of
approximately $3.4 million after payment of legal costs and other closing
costs. The Companies recognized an estimated impairment loss on assets held
for sale of $42.2 million related to the racecourse facility in 1998. In
connection with the transaction, Patriot terminated its lease to Wyndham for
the racecourse facilities. The actual loss on sale of asset recognized was
$42.8 million.
In March 1999, Patriot sold the Holiday Inn Crockett, realizing net cash
proceeds of approximately $18.0 million and recognized a gain of approximately
$3.0 million. In connection with the sale, $17.0 million of the net proceeds
were used to repay a portion of Patriot's term loans.
In April 1999, Patriot acquired the remaining 10% minority interests in each
of the four following hotels; the Radisson Akron; the Courtyard Beachwood; the
Holiday Inn Westlake; the Radisson Beachwood from IAH Snavely L.L.C.
("Snavely"). In addition, the Companies sold the Holiday Inn Beachwood to
Snavely. The transaction generated net proceeds for the Companies of
approximately $8.8 million.
On May 7, 1999, Patriot exercised its option to purchase the interest in
ISIS 2000 formerly owned by certain related parties and Wyndham senior
executive officers, for a cash payment of $3.1 million. Subsequent to the
exercise of the option, Patriot will own 100% of this entity which provides
reservations and other services to the Companies.
On May 11, 1999, the Companies sold the Holiday Inn Sebring for net proceeds
of approximately $4,100.
Securities Purchase Agreement
On February 18, 1999, the Companies, and Apollo Real Estate Advisors III,
L.P., Apollo Management IV, L.P., Thomas H. Lee Company, Beacon Capital
Partners, L.P. and Rosen Consulting Group entered into a securities purchase
agreement pursuant to which the investors will purchase up to $1 billion of a
new series B convertible preferred stock of the Operating Company.
Under the terms of the securities purchase agreement, the Companies are
required to complete a restructuring of the existing paired share REIT
structure prior to the investment by the investors. The proposed restructuring
plan includes, among other provisions, the following transactions: (1) Patriot
will merge into a wholly-owned subsidiary of Wyndham, (2) the pairing
agreement between Patriot and Wyndham will terminate, and (3) Patriot will
terminate its status as a real estate investment trust effective January 1,
1999.
Interstate's Third-Party Hotel Management Business
On May 27, 1998, the Companies and Interstate Hotels Company ("Interstate")
entered into a settlement agreement with Marriott International, Inc. The
settlement agreement was subsequently amended on August 26, 1998, October 29,
1998, January 6, 1999, and March 11, 1999. This agreement addressed certain
claims asserted by Marriott in connection with the Companies' then proposed
merger with Interstate. The settlement agreement provided for the dismissal of
litigation brought by Marriott, and allowed the Companies' merger with
Interstate to close on June 2, 1998. In addition to dismissal of the Marriott
litigation, the settlement agreement provides for the re-branding of ten
Marriott hotels under the Wyndham name, 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 the spin-off by the
Companies (subject to extension upon payment of certain fees by the Companies)
of the third-party management business which was operated by Interstate no
later than May 14, 1999.
If the Companies do not complete the spin-off by May 14, 1999, Marriott will
be entitled to receive 110% of the fees otherwise due under the submanagement
agreements with respect to the ten hotels Marriott will
28
<PAGE>
manage pursuant to the submanagement arrangement described above.
Additionally, the Companies will be subject to other penalties, including
Marriott's right to purchase, subject to third-party consents, the hotels to
be submanaged by Marriott and six additional Marriott hotels owned by the
Companies at their then appraised values.
Moreover, subject to any defenses, the Companies would owe Marriott
liquidated damages with respect to the hotels converted to the Wyndham brand,
those to be submanaged by Marriott, and the six additional Marriott hotels
would have the option to purchase. The Companies also anticipate that Marriott
would require third-party owners of the Marriott-branded hotels to choose an
alternative manager for their hotels. As a result, each respective hotel would
either: (1) lose the Marriott brand, at which time the Companies would have to
compensate Marriott for any lost franchise fees or (2) terminate the
management contract with the Companies and enter into a contract with an
alternative manager. The Companies would owe liquidated damages on any third-
party Marriott-franchised hotel which chooses to convert its brand.
The Companies are currently negotiating to extend this deadline for the
spin-off, but no formal agreement has been reached as of the date hereof.
Forward Equity Contracts
Patriot is party to forward equity contracts with three counterparties
involving the sale of an aggregate of 13.3 million paired shares, with related
price adjustment mechanisms. Patriot's aggregate obligation under the forward
equity transactions was approximately $321.2 million at March 31, 1999. As of
such date, Patriot had delivered an aggregate of 79 million shares to the
counterparties as collateral in addition to approximately 12.5 million paired
shares owned by the counterparties of their affiliates.
In a forward equity transaction, a company sells shares of its common stock
to an investment bank or similar financial institution. At the same time, the
parties enter into a forward contract under which they agree to "settle" the
transaction at a stated maturity date based upon the adjusted price of the
purchased shares at maturity. During the term of the forward contract, the
price of the purchased shares increases at a rate that corresponds to an
agreed-upon interest rate. At maturity, the buyer sells a number of shares
sufficient to generate proceeds equal to the total adjusted purchase price of
the purchased shares. Shares may be sold to the public through an underwritten
public offering or by other methods, or to private investors. If the buyer
does not receive sufficient proceeds from selling the number of shares that it
originally purchased, the company must issue more shares of common stock to
the buyer for resale until the obligation has been satisfied. Under the terms
of the Companies' forward equity contracts, the Companies may elect to settle
their obligation in cash instead of paired shares.
On February 28, 1999, all three counterparties agreed, subject to specified
conditions, not to require settlement under their respective forward
agreements or to sell paired shares in connection with the forward agreements
until the earlier of the closing of the $1 billion equity investment or June
30, 1999. In connection with these standstill agreements, the Companies agreed
to pay a 2% fee to the three counterparties. Each of the agreements provided
that the standstill obligations would terminate if, among other events, the
price of the paired shares fell below a specified threshold. As of the date of
this Form 10-Q, the price of the paired shares has fallen below these
thresholds. As a result, each of the forward counterparties has the right to
require an immediate settlement of its forward equity transaction. As of the
date of this Form 10-Q, none of the counterparties had made any sale of paired
shares, other than the sale of 754,525 paired shares by one counterparty in
December 1998, or required settlement of its forward transaction. However, the
Companies cannot assure you that the forward counterparties will not sell
paired shares or require settlement in the future.
The Companies are currently negotiating to extend the deadline for this
spin-off, but no formal agreement has been reached as of the date hereof.
In addition, the Companies have agreed to deliver a total of up to
$18,084,488 of paired shares to the counterparties in exchange for the
Interstate shares which the counterparties will receive in the Spin-Off. The
counterparties will hold these paired shares as additional collateral under
the forward equity agreements.
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<PAGE>
The Companies may settle the forward transactions by delivering either cash
or paired shares covered by an effective registration statement. Sources of
cash are not currently available for the Companies to make the payments that
would be required to settle one or more of the forward transactions in cash.
Moreover, the Companies cannot assure that the bank lenders would consent to
any cash settlements prior to the closing of the $1 billion equity investment.
Generally, the Companies may settle by delivering paired shares only if a
registration statement covering such paired shares is effective. There are
currently effective registration statements covering the sale by the three
forward counterparties of up to 40 million paired shares and the sale of one
counterparty of an additional 4 million paired shares of which 754,525 paired
shares were sold by that counterparty in December 1998. In addition, the
Companies filed a registration statement in April 1999 registering an
additional 68 million paired shares in connection with the forward equity
transactions. If and when the April 1999 registration statement becomes
effective, there will be 111.2 million paired shares covered by effective
registration statements, representing approximately 14 million paired shares
more than the total number of paired shares currently owned or held as
collateral by the forward counterparties. The Companies can make no assurance
that these registration statements will remain effective or that the Companies
will not be required to register more paired shares in connection with the
forward equity transactions. Given the current market price of the paired
share, any settlement in paired shares would have severely dilutive effects on
the Companies' capital stock. Based on the $5.0625 closing price of the paired
shares on April 30, 1999 and assuming an average of 25% selling expenses, the
forward counterparties would have to sell approximately 65 million paired
shares to settle all of the forward equity transactions in full. The number of
paired shares required would substantially increase if the market price of the
paired shares decreases as a result of the sales of paired shares by the
forward counterparties. If any of the counterparties sells paired shares, the
conversion price of the preferred stock to be issued to the investors in the
$1 billion equity investment will be adjusted downward to the extent that the
price recognized by the Companies on the sale is less than $8.75 per share.
The Companies intend to settle in full all of the forward transactions with
part of the proceeds of the $1 billion equity investment. If the Companies
settle the forward transactions in cash, the counterparties must deliver to
the Companies all paired shares then owned by them or held by them as
collateral under the forward agreement.
PATRIOT AMERICAN HOSPITALITY, INC.
Results of Operations: Quarter Ended March 31, 1999 Compared with Quarter
Ended March 31, 1998
Patriot's participating lease revenue from the lessees (including Wyndham)
for the quarter ended March 31, 1999, increased 70% from $109,649,000 in 1998
to $186,155,000 in 1999. This increase is primarily due to the acquisition of
175 hotel properties during the past twelve months. Patriot directly owned or
leased interests in 295 hotel properties as of March 31, 1999 as compared to
120 hotel properties as of March 31, 1998.
Interest and other income increased from $3,516,000 in 1998 to $4,758,000 in
1999 which is primarily attributable to subscription notes payable associated
with the merger and acquisition of Interstate and Summerfield during 1998 and
interest and dividend income earned on cash investments.
Real estate and personal property taxes and casualty insurance was
$17,737,000 for the three months ended March 31, 1999, compared to $11,923,000
for the three months ended March 31, 1998. This increase is primarily due to
the increase in owned and leased hotel properties described above.
General and administrative expenses were $20,651,000 for the three months
ended March 31, 1999, compared to $5,282,000 for 1998. The increase is
primarily attributable to additional general and administrative expenses
incurred related to the growth of the Companies' portfolio during 1998 of
which the largest component is salaries and wages. For the quarter ended March
31, 1999, general and administrative expenses also include the amortization of
unearned stock compensation and the accrual of related costs of $10,182,000.
This is due to the acceleration of amortization and the accrual of related
costs associated with the severance of certain employees. Also included in
general and administrative expenses are the costs associated with evaluating
properties and companies which were ultimately not acquired of $1,394,000 in
1999 increasing from $313,000 in 1998.
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<PAGE>
Ground lease expense increased from $6,558,000 for the three months ended
March 31, 1998 to $13,622,000 for the three months ended March 31, 1999. This
increase is attributable to the acquisition of leasehold interests in hotel
properties during 1998.
Interest expense for the three months ended March 31, 1999 was $86,104,000
compared to $34,251,000 in 1998. Patriot's outstanding debt obligations as of
March 31, 1999 and 1998 were approximately $3.6 billion and $1.6 billion,
respectively. The primary components of interest expense for the three months
ended March 31, 1999 are $52,628,000 of interest related to the revolving
credit facility and term loans, $15,805,000 of interest on mortgage notes,
$11,088,000 of amortization of deferred financing costs and $9,412,000 of
other interest related to other unsecured notes, capital lease obligations and
commitments payable. Interest expense for the three months ended March 31,
1998 consists primarily of $22,558,000 of interest on Patriot's revolving
credit facility and term loans, $7,943,000 of interest on mortgage notes, and
$3,503,000 of amortization of deferred financing costs. Additionally, Patriot
capitalized interest totaling $2,829,000 and $2,195,000 for the three months
ended March 31, 1999 and 1998, respectively, associated with major renovations
of certain hotel properties.
In connection with the sale of Holiday Inn Crockett in 1999, Patriot
recognized a gain on sale of assets of $2,985,000 based on the excess cash
proceeds received in the sale over book value.
Depreciation and amortization expense was $52,662,000 for the three months
ended March 31, 1999, compared to $20,497,000 for the same period in 1998.
This increase is primarily due to the net increase in owned and leased hotel
properties described above.
Patriot's share of income from unconsolidated subsidiaries increased to
$14,612,000 for the three months ended March 31, 1999, compared to $3,591,000
in 1998. This increase is due to unconsolidated subsidiaries acquired through
various mergers and acquisitions during 1998.
Minority interest share of income in the Patriot Partnership was $729,000
and $3,128,000 for the three months ended March 31, 1999 and 1998,
respectively. The decrease is due to the dilution of the minority interest as
a result of the common shares issued in connection with the various mergers
occurring during 1998.
Minority interest share of income in Patriot's other consolidated
subsidiaries was $1,873,000 in 1999 and $533,000 in 1998. The increase is due
to the various mergers and acquisitions during 1998.
Extraordinary items for debt extinguishment totalled $18,716,000 in 1998 due
to the repayment of certain debt obligations of Wyndham Hotel Management
Company in 1998.
As a result of the factors discussed above, net income was $11,852,000 for
the three months ended March 31, 1999, as compared to net income of
$15,497,000 for the three months ended March 31, 1998.
WYNDHAM INTERNATIONAL, INC.
Results of Operations: Quarter Ended March 31, 1999 Compared with Quarter
Ended March 31, 1998
Concurrent with the closing of the Cal Jockey merger, the entity now known
as Wyndham began leasing four hotels from the Patriot Partnership and
commenced its hotel management operations on July 1, 1997. At March 31, 1998,
Wyndham leased 94 hotels from Patriot, managing 81 of those hotels, and
managed 13 hotels for third parties. As of March 31, 1999, Wyndham leased 205
hotels from Patriot, managing 183 of those hotels, and manages 164 hotels for
third parties.
For the three months ended March 31, 1999, hotel revenues were $638,830,000
as compared to $290,644,000 in hotel revenues during the three months ended
March 31, 1998. Of the approximate $348,186,000 increase, approximately
$340,000,000 was due to acquisitions and the remainder was due primarily to
revenue increases at the Wyndham branded hotels. Hotel expenses increased from
$182,371,000 for the quarter ended March 31, 1998, to $414,373,000 for the
quarter ended March 31, 1999. As with revenues, the vast majority of this
increase is a result of the increased number of hotels operated by Wyndham.
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<PAGE>
Management fee and service fee income was $22,918,000 and $14,104,000 for
the three months ended March 31, 1999 and 1998, respectively. The increase is
primarily the result of the acquisition of third party management contracts
during 1998 resulting from the Interstate merger and the Summerfield
acquisition.
Interest and other income increased from $2,186,000 for the three months
ended March 31, 1998 to $5,418,000 for the three months ended March 31, 1999.
The increase is primarily attributable to the mergers and acquisitions of the
hotel management and related businesses of Interstate, Summerfield and
Arcadian during 1998, the subscription notes payable from Patriot and interest
and dividend income earned on cash investments.
Total revenues from the racecourse facility operations (including interest
and other income) were $4,561,000 for the quarter ended March 31, 1999
compared to $23,048,000 for the same quarter last year. Total costs and
expenses associated with the racecourse operations (including marketing costs,
general and administrative expenses and depreciation and amortization
expenses) were $3,867,000 for the quarter ended March 31, 1999 compared to
$18,184,000 for the same quarter last year. These decreases are due to the
above mentioned sale of Bay Meadows racecourse effective February 1999.
General and administrative expenses were $29,745,000 for the period compared
to $12,023,000 for the same period last year of which salaries and wages is
the major component. This increase is due primarily to the overhead required
due to growth in the portfolio of managed and leased hotels during 1998. Also,
Wyndham recorded costs associated with evaluating properties and companies
which were ultimately not acquired of $1,254,000.
Depreciation and amortization expense was $23,447,000 for the three months
ended March 31, 1999, compared to $15,106,000 for the three months ended March
31, 1998. This increase is primarily due to amortization of goodwill,
management contracts and trade names resulting from the mergers and
acquisitions of Interstate, Summerfield, Arcadian and WHG of approximately
$8,341,000.
Participating Lease expense increased to $185,822,000 for the three months
ended March 31, 1999 from $89,084,000 for the three months ended March 31,
1998. The increase is due to leases acquired in 1998. As a percentage of hotel
revenues, Participating Lease expense remained constant after accounting for
the effect of eliminating lease expense and lease revenue with Patriot.
Interest expense for the three months ended March 31, 1999 was $9,727,000
compared to $5,699,000 for the same period last year. The increase is
primarily attributable to debt obligations related to hotels acquired during
1998. This increase was primarily due to consolidating the WHG transaction
results for the full quarter in 1999, whereas in most of the first quarter of
1998, this entity was accounted for using the equity method.
Wyndham's share of income from unconsolidated subsidiaries was $187,000 for
the three months ended March 31, 1999 compared to $1,720,000 for the three
months ended March 31, 1998. The decrease is due to accounting for the WHG
transaction using the equity method in 1998, whereas in 1999 the entire
quarter was consolidated.
The provision for income taxes increased from $3,187,000 for the three
months ended March 31, 1998 to $6,466,000 for the three months ended March 31,
1999. The increase is due to the operation of certain special purpose Wyndham
controlled subsidiaries which separately report and pay taxes on their taxable
income. For federal income tax purposes, the taxable income from these Wyndham
controlled subsidiaries can not be consolidated with Wyndham's taxable income
or loss and hence can not be offset by operating losses created at Wyndham.
Minority interest's share of loss associated with the Wyndham Partnership
was $2,688,000 for the three months ended March 31, 1999 as compared to
$73,000 for the same quarter last year due to the issuance of operating
partnership units for the acquisition of hotels during 1998.
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<PAGE>
Minority interest's share of income in Wyndham's other consolidated
subsidiaries was $12,097,000 in 1999 and $2,941,000 in 1998. This increase is
due to Patriot's 99.0% ownership in most of the decontrolled subsidiaries
consolidated by Wyndham.
As a result, the net loss was $11,153,000 for the three months ended March
31, 1999 and the net income was $3,180,000 for the three months ended March
31, 1998.
Results of Reporting Segments: For the quarter ended March 31, 1999 compared
with the quarter ended March 31, 1998
The Companies' management reviews Patriot's and Wyndham's results of
operations on a combined basis. Patriot's revenues and the majority of its
expenses are classified in the "other" reportable segment. Patriot classifies
real estate and personal property taxes and casualty insurance and ground
lease expense with their related hotel operations. Wyndham's results of
operations are classified into six reportable segments. Patriot and Wyndham
manage the business in six reportable segments. Those segments include Wyndham
hotels, resort properties, all suite properties, other proprietary branded
properties, non-proprietary branded properties and other.
Wyndham hotel properties include Wyndham Hotels, Wyndham Gardens and Wyndham
Grand Heritage and represent approximately 21.3% and 43.4% of total revenue
for the three months ended March 31, 1999 and 1998, respectively. Total
revenue was $143,296,000 compared to $151,806,000 for the quarters ended March
31, 1999 and 1998, respectively. The decrease in revenue is due to
reclassifying several hotels between segments in 1999 and due to a 1998 hotel
acquisition which causes a combined affect of approximately $14,000,000 when
comparing the two quarters. After accounting for this change, there is an
approximate 3% growth in revenue. Operating income for the Wyndham hotels was
$41,985,000 compared to $43,589,000 for the quarters ended March 31, 1999 and
1998, respectively. After accounting for the change in segments referred to
above, operating income increased approximately 6% due to improvements in
operating margins.
Resort hotel properties including Grand Bay and Wyndham represent
approximately 23.7% and 21.4% of total revenue for the quarters ended March
31, 1999 and 1998, respectively. Total revenue was $159,679,000 compared to
$74,834,000 for the quarters ended March 31, 1999 and 1998, respectively. The
increase is due to the above mentioned reclassification and due to
consolidating the results of the WHG transaction for the entire 1999 quarter,
whereas in the 1998 quarter, the WHG transaction was accounted for primarily
using the equity method of accounting. After accounting for these changes,
there is an approximate 4% growth in revenue. Operating income for the resort
properties was $58,143,000 compared to $26,799,000 for the quarters ended
March 31, 1999 and 1998, respectively. After accounting for the changes in
classification and accounting treatment referred to above, there is
approximately 11% growth in operating income due to overall improvements in
operating margins primarily at the WHG transaction properties.
All suite properties including Summerfield and Sierra represent
approximately 4.9% of total revenue for the three months ended March 31, 1999.
There are no comparable results for 1998 as the portfolio was not acquired
until June of 1998. Total revenue and operating income were $33,113,000 and
$6,479,000, respectively for the three months ended March 31, 1999.
Other proprietary branded properties including Malmaison, Grand Heritage,
Clubhouse and hotels acquired in the Arcadian acquisition, represent
approximately 3.2% and 1.5% of total revenue for the quarters ended March 31,
1999 and 1998, respectively. Total revenue was $21,623,000 compared to
$5,205,000 for the quarters ended March 31, 1999 and 1998, respectively. The
increase is due entirely to the acquisition of Arcadian and Malmaison in April
of 1998. The Clubhouse portfolio total revenues decreased 13% from 1998 due to
the softness caused by overbuilding in the mid market segment. Operating
income for these properties was $5,555,000 and $1,857,000 for the quarters
ended March 31, 1999 and 1998, respectively. As with revenues, operating
income decreased from 1998 for the Clubhouse portfolio, but the acquisition of
Malmaison and Arcadian offset this decrease to produce an overall increase.
33
<PAGE>
Non proprietary branded properties including Hilton, Holiday Inn, Marriott,
Ramada, Radisson, Hampton and other major hotel franchises, represent
approximately 41.7% and 16.8% of total revenue for the quarters ended March
31, 1999 and 1998, respectively. Total revenue was $281,121,000 compared to
$58,799,000 for the quarters ended March 31, 1999 and 1998, respectively. The
increase is due primarily to the acquisition of the owned and leased
Interstate properties; the leasehold interests in CHC Lease Partners and North
Coast hotels in June and December of 1998, respectively; as well as several
other leasehold acquisitions throughout 1998. After accounting for these
changes, there was no significant change in revenue from 1998. Operating
income for these properties was $64,534,000 and $15,242,000 for the quarters
ended March 31, 1999 and 1998, respectively. After accounting for the above
acquisitions, operating income was consistent with 1998.
Other represents revenue from various operating businesses including
management and other service companies, Bay Meadows Race Track and
participating lease revenue for one hotel and a parcel of land. Expenses in
this segment are primarily interest, depreciation, amortization and corporate
general and administrative expenses. Total revenue for the other segment was
$35,018,000 compared to $59,163,000 for the quarters ended March 31, 1999 and
1998, respectively. The overall $24,000,000 decrease in this segment's revenue
was caused by a combination of increases and decreases. The sale of Bay
Meadows Race Track operations and leasehold effective February 1, 1999 reduced
revenue by approximately $18,000,000. The purchase of the remaining third
party leasehold interests, primarily CHC Lease Partners and North Coast Hotels
in June and December of 1998, respectively, reduced participating lease
revenue by $20,000,000. Finally a $9,000,000 increase in revenue is due to the
acquisition of third party management contracts as a result of the Interstate,
Summerfield, CHC and Arcadian mergers. Operating losses for the segment were
$170,000,000 and $45,584,000 for the quarters ended March 31, 1999 and 1998,
respectively. In addition to the decrease in revenues, the increase in the
segment's operating loss is a result of increased expenses resulting from the
mergers and acquisitions in 1998. Interest expense increased $54,256,000,
depreciation and amortization increased $40,506,000 and corporate general and
administrative increased $33,090,000. Approximately $10,182,000 of the
corporate general and administrative increase is due to the acceleration of
amortization and the accrual of related costs associated with the severance of
certain employees. The sale of the Bay Meadows Race Track accounted for an
approximate $14,317,000 decrease in expenses. The final difference is the
$12,000,000 increase in the elimination of internal management fee revenues
and expenses. (This fee is included as an expense in each of the five hotel
segments, so the offset is reflected in this segment.) The increase in this
elimination amount is due to the acquisitions in 1998.
Statistical Information
During the period, Patriot's and Wyndham's portfolio of owned and leased
hotels, excluding the Interstate third party leases, experienced continued
growth in both average daily rate ("ADR") and revenue per available room
("REVPAR") of approximately 4.0% and 3.0% respectively, while occupancy
remained relatively stable. Management attributes this growth to continued
marketing efforts throughout the portfolio on hotels that have been newly
renovated, and repositioned in certain cases, as well as to the current
strength of market conditions in the U.S. lodging industry. The following
table sets forth certain statistical information for the Companies' owned and
leased hotels as of March 31, 1999 and 1998 as if the hotels were owned at the
beginning of the periods presented.
<TABLE>
<CAPTION>
Three months ended March 31
-------------------------------------------
Occupancy ADR REVPAR
---------- --------------- ---------------
1999 1998 1999 1998 1999 1998
---- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Wyndham Branded Hotels............ 71.5% 71.9% $139.66 $131.58 $ 99.84 $ 94.66
Grand Bay Hotels & Resorts........ 73.4 75.7 352.70 354.22 258.95 268.09
Summerfield Suites................ 77.4 79.0 120.93 117.98 93.56 93.26
Malmaison......................... 78.8 75.0 89.36 89.26 70.41 66.94
Clubhouse......................... 55.0 64.1 69.55 68.49 38.28 43.88
Arcadian.......................... 56.2 53.6 116.72 110.65 65.61 59.31
Non Proprietary Brands............ 67.3 68.2 96.61 93.39 65.04 63.68
Other............................. 65.5 66.7 98.51 96.35 64.48 64.31
---- ---- ------- ------- ------- -------
Weighted Average................. 70.2% 70.9% $122.16 $117.40 $ 85.78 $ 83.27
</TABLE>
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<PAGE>
COMBINED LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents as of March 31, 1999 were $172.8 million,
including restricted cash of $41.0 million. Combined cash and cash equivalents
as of March 31, 1998 were $88.7 million, including capital improvement
reserves of $3.4 million. The increase is primarily the result of net cash
provided by operating and financing activities exceeding the net cash used in
investing activities.
Cash Flow Provided by Operating Activities
The Companies' principal source of cash to fund operating expenses and
distributions to shareholders is cash flow provided by operating activities.
Patriot's principal source of revenue is rent payments from the lessees,
including Wyndham, under the Participating Leases. Wyndham's principal source
of cash flow is from the operation of the hotels that it leases and manages.
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 flows from operating activities of
the Companies were $81.3 million for the three months ended March 31, 1999,
and $59.3 million for the three months ended March 31, 1998. Cash flows from
operating activities represent a combination of the collection of rents under
participating leases with third party lessees and cash flow generated by the
hotels operated by Wyndham. The increase is due primarily to the results of
operations or the lease payments for 175 hotels acquired during the last
twelve months.
Cash Flows From Investing and Financing Activities
During the first quarter of 1999, the Companies acquired the remaining 25%
interest in five hotels financed with additional mortgage indebtedness of
$49.8 million. Additionally, during the first quarter of 1999, Patriot sold
its interest in the Bay Meadows racecourse for cash proceeds of $3.4 million.
Combined cash flows used in investing activities of the Companies were $64.9
million for the three months ended March 31, 1999, resulting primarily from
the acquisition of hotel properties and management companies and renovation
expenditures at certain hotels. Combined cash flows used in financing
activities of $7.7 million for the three months ended March 31, 1999 were
primarily related to repayments on the credit facility and mortgage notes and
payments of deferred loan costs.
Combined cash flows used in investing activities were $308.7 million for the
three months ended March 31, 1998, resulting primarily from the merger and
acquisition of hotel properties and management companies and the renovation
expenditures at certain hotels. Combined cash flows from financing activities
of $292.3 million for the three months ended March 31, 1998 were primarily
related to borrowings on the revolving credit facility and mortgage notes and
net proceeds from private placement of equity securities, net of payments of
dividends and distributions.
As of March 31, 1999, the Companies had approximately $875.6 million
outstanding under its Credit Facility and $1.8 billion outstanding on the Term
Loans. Additionally, the Companies had outstanding letters of credit totaling
$24.4 million. As of March 31, 1999, Patriot also had over $984.1 million of
mortgage debt outstanding that encumbered 48 hotels and 3 hotels under
development and approximately $246.7 million in other debt, resulting in total
indebtedness of approximately $3.9 billion. As of March 31, 1999, the
Companies had no additional availability under the Credit Facility.
The Credit Facility matures July 2000. The Term Loans mature on June 30,
1999 ($733 million); March 31, 2000 ($450 million); and March 31, 2003 ($599.3
million).
Forward Equity Transactions. The Companies are parties to forward equity
transactions with three counterparties involving the sale of an aggregate of
13.3 million shares as described previously. 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
35
<PAGE>
of the paired shares or otherwise) may force the Companies to issue paired
shares at a depressed price, which may heighten the dilutive effects on the
Companies' capital stock. The dilutive effect of a stock settlement and the
adverse liquidity effect of a cash 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 common stock has dropped significantly below
the respective forward prices under the forward equity contracts. As a result,
the Companies have delivered an aggregate of 84.7 million shares to the
counterparties as collateral, including approximately 4 million shares issued
as dividends on the collateral shares, in addition to approximately 12.5
million original paired shares currently owned by the counterparties or their
affiliates.
Agreements Relating to Existing Credit Facility
Patriot and Wyndham's existing credit facility with The Chase Manhattan
Bank, Chase Securities, Inc. and PaineWebber Real Estate consists of a $900
million revolving credit facility and a series of term loans in the aggregate
amount of $1.8 billion. Interest rates on the existing Credit Facility are
based on Patriot's and Wyndham's leverage ratio and vary from 1.5% to 3% over
LIBOR. Under the original terms of the Credit Facility, two of the Term Loans
were scheduled to mature on January 31, 1999 ($350 million) and March 31, 1999
($400 million), respectively. All of the requisite lenders under the Credit
Facility have agreed to extend the maturity of these two terms loans to June
30, 1999, subject to Patriot and Wyndham consummating the $1 billion equity
investment by that date. If the Companies do not consummate the investment by
June 30, 1999, or the agreement with the investor group otherwise terminates,
the maturity on these two term loans will be extended to March 31, 2000 and
the Companies will be required to make a $300 million amortization payment by
December 31, 1999. Additionally the Companies will be required to secure the
Credit Facility with mortgages and other security interest. Fees of $11.7
million have been paid to the lenders under the Credit Facility in connection
with their agreement to extend the maturities of the term loans to June 30,
1999.
New Credit Facility
Patriot has recently signed a commitment letter with Chase Securities Inc.
and The Chase Manhattan Bank for senior credit facilities for Wyndham in the
amount of $1.8 billion, comprised of a term loan facility and a revolving loan
facility. Definitive agreements relating to the new credit facility are
expected to be finalized at the same time that the $1 billion equity
investment is consummated. The commitment letter provided that the Chase
Manhattan Bank will act as the administrative agent and Chase Securities Inc.
will act as the lead arranger for a syndicate of lenders which will provide
Wyndham with $1 billion in term loans and up to $800 million under the
revolving loan facility, of which a maximum of $560 million may be drawn at
the closing of the investment. The term loan facility and the revolving
facility carry terms of 7 years and 5 years, respectively. The commitment
letter based interest rates for the new credit facility upon LIBOR spreads
varying from 1.50% to 3.00% per annum (for the revolving loan facility) and
3.00% to 3.75% per annum (for the term facility), based both on Wyndham's
leverage ratio and on whether any increasing rate loans (described below) are
outstanding. However, at Wyndham's election or under other specified
circumstances, the term loans and revolving loans may instead bear interest at
an alternative base rate plus the applicable spread. The alternative base rate
is equal to the greater of The Chase Manhattan Bank's prime rate or federal
funds rate plus 0.5%, and the alternative spread is 1.0% below the applicable
LIBOR spread. Subject to limited agreed-upon exceptions, the New Credit
Facility will be guaranteed by the domestic subsidiaries of Wyndham, and will
be secured by pledges of equity interests held by Wyndham and its
subsidiaries. The proceeds from the term loan facility will be used to finance
the restructuring of Wyndham and Patriot. The proceeds from the revolving loan
facility will be used for working capital and general corporate purposes.
Increasing Rate Loans
Wyndham and Patriot have signed a commitment letter with The Chase Manhattan
Bank, Chase Securities Inc., Bear, Stearns & Co. Inc., and The Bear Stearns
Companies Inc. providing that The Chase Manhattan Bank,
36
<PAGE>
The Bear Stearns Companies Inc. and a possible syndicate of other lenders will
provide an increasing rate loan facility in the amount of up to $850 million.
The increasing rate loans carry a term of 5 years. Interest rates for the
increasing rate loans are based on LIBOR spreads and are initially set at
0.25% below the initial LIBOR spread on the term loan facility, but increase
by 0.50% every three months, with a cap of LIBOR plus 4.75%. However, under
other specified circumstances, interest accrues at an alternate rate equal to
the rate borne by three-month treasury securities plus 1.0%, plus the
applicable spread. The lenders under the increasing rate loans receive the
benefit of the same guarantees and pledges of security provided under the New
Credit Facility. The proceeds from the increasing rate loans will be used to
finance the restructuring of Wyndham and Patriot.
After the six month anniversary of the closing of the $1 billion equity
investment, lenders transferring increasing rate loans may exchange the
increasing rate loans for exchange notes carrying identical terms to the
increasing rate loans. To the extent any increasing rate loans or exchange
notes are outstanding 180 days after the closing of the investment, Wyndham
must by such date file and maintain a shelf registration statement with the
Securities and Exchange Commission allowing the resale of any exchange notes
outstanding thereafter. Wyndham may also offer registered substitute notes in
exchange for all outstanding increasing rate loans and exchange notes.
Wyndham's ability to borrow under its revolving facility is subject to
Wyndham's compliance with a number of customary financial and other covenants,
including total leverage and interest coverage ratios, limitations on
additional indebtedness, and limitations on investments and stockholder
dividends.
In April 1999, The Chase Manhattan Bank and Chase Securities, Inc. notified
the Companies that they were exercising their rights under the "market flex"
provisions of the commitment letters to change the terms of the senior credit
facilities and the increasing rate loan facility. The total amount of the
senior credit facilities was reduced by $200 million to $1.6 billion and the
amount of the increasing rate loans was increased by $200 million to $850
million. The revolving credit facility has been reduced from $800 million to
$600 million and the maximum that may be drawn at the closing has been reduced
from $560 million to $400 million.
Wyndham and Patriot have agreed to pay to the agents and the lenders
customary fees for a facility of this nature.
Renovations and Capital Improvements
During the first three months of 1999, the Companies invested approximately
$50.9 million in capital improvements. 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"). Management
reserves an average of 4.0% of total hotel revenues, and believes such amounts
are sufficient to fund recurring capital expenditures for the hotels. Capital
expenditures, exclusive of renovations, may exceed 4.0% of total hotel
revenues 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 or with working capital.
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
37
<PAGE>
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 grand fathering rule would not be
available to Patriot and Patriot would not qualify as a REIT for any taxable
year.
Patriot's exemption from the anti-pairing rules could be lost, or its
ability to utilize the paired structure could be revoked or limited, as a
result of future legislation. In this regard, legislation to freeze the
grandfathered status of paired share REITS such as Patriot was included in 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.
Under the IRS Reform Act of 1998, the anti-pairing rules generally apply to
real 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 generally permits Patriot to continue its current
method of operations with respect to its existing assets. However, the
legislation would require Patriot to modify its method of operations with
respect to newly acquired assets.
As described elsewhere in this document, the Companies have entered into an
agreement which, if completed, requires the Companies to restructure, and
terminate the pairing agreement between Wyndham and Patriot, and Patriot's
status as a REIT would terminate effective January 1, 1999. Such a change
would mean the Companies would be subject to tax as a C corporation in 1999
and subsequent years. Distributions to shareholders will no longer be
deductible or required, and the amount of such distributions is likely to be
reduced. The termination of the Companies REIT status will also cause the
Companies to permanently lose its special status as a grandfathered paired
share REIT.
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
38
<PAGE>
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;
. other electronic assets such as, but not limited to, automated time
clocks, point-of-sale systems, non-information technology systems,
including embedded technologies that operate fire-life safety systems,
phone systems, energy management systems and other similar systems; and
. 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; and
. 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 Companies have completed
inventory and assessment phases with respect to their corporate information
technology infrastructure and reservation systems. The Companies have also
completed the inventory and assessment phases with respect to the information
technology and other electronic assets that are located in the Companies'
hotels, other than some of the 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"). Based on those assessments, the
Companies, working with their consultants, determined which systems were not
Year 2000 compliant and developed appropriate remediation plans.
The Companies have begun the necessary work to remediate those systems at
their owned and leased hotels, and at March 31, 1999 had completed 10 percent
of that work. The Companies previously 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.
Of the 93 Third Party Compliance Hotels that were not acquired in the merger
with Interstate Hotels (the "Interstate Merger"), at March 31, 1999, 66 Third
Party Compliance Hotels had been assessed as part of the Companies' compliance
program and the Companies had begun to implement remediation plans at 21 of
those hotels. At March 31, 1999, the owners of the other 45 Third Party
Compliance Hotels that were assessed have neither taken any action to effect
the necessary remediation identified in the assessment nor authorized the
Companies to effect the remediation on behalf of the owners. While none of the
remaining 27 Third Party Compliance Hotels have been assessed by the
Companies, the Companies have been informed by four of the owners that they
have completed their own assessments. The Companies are continuing to monitor
the status of the Third Party Compliance Hotels and have reminded the owners
of the importance of making the Third Party Compliance Hotels Year 2000
compliant in sufficient time to permit adequate testing. The Companies have
begun surveying the Year 2000 compliance of the owners of the hotels that are
franchised under the Wyndham brand but not managed by Wyndham, and have
informed those owners of the appropriate standards to make the equipment
operating Wyndham's systems Year 2000 compliant. However, as the systems at
the Third Party Compliance Hotels and franchised hotels 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 effected by third parties at the Third Party
Compliance Hotels or the franchised hotels.
The Companies presently expect to expend approximately $34 million in
connection with Year 2000 issues. At March 31, 1999, the Companies had
incurred $1.75 million in connection with the inventory and assessment phases
of their compliance program and $4.6 million to remediate their systems.
However, the Companies' anticipated expenditures may increase as the Companies
effect the remediation plans.
39
<PAGE>
As part of the settlement of litigation arising out of the Interstate
Merger, the Companies agreed to contribute to a new company management of the
Third Party Compliance Hotels acquired in that merger, and then dispose of
substantially all of that new company's stock by means of a spin-off to the
Companies' stockholders or otherwise. As the hotels acquired in the Interstate
Merger 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 hotels.
The Companies identified 5,100 vendors and service providers that provide
critical goods and services to the Companies and have requested those parties
to provide information concerning their Year 2000 compliance and remediation
efforts. At March 31, 1999, 48% of those parties had provided written
responses to the Companies. Of those responding parties, the Companies sought
clarifying information from less than one percent. None of the respondents
indicated that Year 2000 was an issue that would materially disrupt their
operations, and most indicated that they are or will become Year 2000
compliant. The Companies were not provided, and did not seek, detailed
assessment or remediation plans from their vendors and service providers.
Consequently, the Companies cannot evaluate the status or scope of those
parties' Year 2000 compliance programs and will not be able to test those
parties' compliance. The Companies are continuing to seek information from the
parties that have not responded, but cannot guarantee that they will comply
with the Companies' requests. As the Companies must rely on information
provided by its vendors and service providers, of which more than 50% have not
responded, the Companies may not be able to accurately determine the Year 2000
compliance of their vendors and service providers. However, based on responses
from those parties that have responded, the Companies believe that their most
critical vendors and service providers will not cause the Companies'
operations to be materially disrupted as a result of Year 2000 issues. In
addition, based on existing responses the Companies have not identified any of
their critical vendors as non-compliant. If the Companies determine that a
vendor or service provider of critical goods or services is expected to be
non-compliant, the Companies will evaluate whether the vendor or service
provider could be replaced. Due to the lack of alternative sources, the
Companies may be required to remain with non-compliant vendors or service
providers. If the Companies identify 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 the end of the third quarter of 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. 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.
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.
During the second quarter of 1999, the Companies intend to develop
contingency plans to address potential Year 2000 induced failures. Because the
Companies have no control over third party assessment and remediation efforts,
the Companies expect to focus most of their contingency planning on externally
caused disruptions. In addition, the Companies will develop their plans on
their belief that the consequences of Year 2000 induced
40
<PAGE>
failures will be local in nature. These plans will be based on existing
contingency plans for operations during storms and other natural disasters.
While each hotel will develop a contingency plan, any disruption in utilities
or other key local services could disrupt operations of several hotels located
in the same geographic area. As part of the Companies' contingency planning,
they also expect to evaluate their continued management of the Third Party
Compliance Hotels that do not become Year 2000 compliant.
FUNDS FROM OPERATIONS
Combined Funds from Operations of the Companies (as defined and computed
below) was $82.5 million for the three months ended March 31, 1999 and $75.5
million for the three months ended March 31, 1998.
The following reconciliation of net income to Funds from Operations
illustrates the difference between the two measures of operating performance
for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Net income............................................... $ 572 $ 18,412
Add:
Extraordinary loss from extinguishment of debt......... -- 18,716
Minority interest in the Operating Partnerships........ (1,958) 3,055
Minority interest in consolidated subsidiaries......... (2,000) (479)
Depreciation of buildings and improvements and
furniture, fixtures and equipment..................... 56,784 27,667
Amortization of goodwill and other assets.............. 8,092 3,869
Amortization of management contracts and trade names... 10,395 3,245
Transaction related severance costs.................... 10,182 --
Cost of acquiring license agreements................... 803 --
Gain on sale of asset.................................. (2,775) --
Other.................................................. 27 --
Adjustment for Funds from Operations of unconsolidated
subsidiaries:
Equity in earnings of unconsolidated subsidiaries...... (2,701) (3,194)
Funds from Operations of unconsolidated subsidiaries... 5,102 4,225
--------- ---------
Funds from Operations.................................. $ 82,523 $ 75,516
========= =========
Weighted average shares and OP Units outstanding:
Basic.................................................. 171,420 122,352
========= =========
Diluted................................................ 180,644 130,269
========= =========
</TABLE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material changes in the first quarter of 1999. Refer to
the Company's discussion in its Annual Report on Form 10-K, as amended, for
the year ended December 31, 1998.
41
<PAGE>
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities--None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Item No. Description
-------- -----------
<C> <S>
27.1 Financial Data Schedule--Patriot (filed herewith).
27.2 Financial Data Schedule--Wyndham (filed herewith).
99.1 Letter dated May 4, 1999 by and among Patriot American Hospitality,
Inc., Wyndham International, Inc., PaineWebber Financial Products
Inc. and PaineWebber Incorporated (incorporated by reference to
Exhibit 99.25 to Patriot American Hospitality, Inc.'s and Wyndham
International, Inc.'s Registration Statement on Form S-3 (Nos. 333-
77271 and 333-77271-01)).
99.2 Letter dated May 4, 1999 by and among Patriot American Hospitality,
Inc., Wyndham International, Inc. and NationsBanc Mortgage Capital
Corporation (incorporated by reference to Exhibit 99.26 to Patriot
American Hospitality, Inc.'s and Wyndham International, Inc.'s
Registration Statement on Form S-3 (Nos. 333-77271 and 333-77271-
01)).
99.3 Letter dated May 4, 1999 by and among Patriot American Hospitality,
Inc., Wyndham International, Inc. and UBS AG, London Branch
(incorporated by reference to Exhibit 99.27 to Patriot American
Hospitality, Inc.'s and Wyndham International, Inc.'s Registration
Statement on Form S-3 (Nos. 333-77271 and 333-77271-01)).
</TABLE>
(b) Reports on Form 8-K:
(1) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and
Wyndham International, Inc. filed February 4, 1999 (Nos. 001-09319 and
001-09320), reporting under Item 5 that Patriot and Wyndham received
consents from Patriot's bank group to amend the terms of Patriot's $2.7
billion bank credit facility.
(2) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and
Wyndham International, Inc. filed February 16, 1999 (Nos. 001-09319 and
001-09320), reporting under Item 5 a press release announcing that Patriot
had extended a letter of intent with an investor group, comprised of
Thomas H. Lee Company, Apollo Real Estate Advisors, L.P., Apollo
Management, L.P., Beacon Capital Partners, Inc., and Rosen Consulting
Group, under which the investor group would purchase up to $1 billion of
convertible preferred stock.
(3) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and
Wyndham International, Inc. filed March 2, 1999 (Nos. 001-09319 and 001-
09320), reporting under Item 5 that Patriot had entered into a definitive
securities purchase agreement with a group of investors, including
affiliates of Thomas H. Lee Company, Apollo Real Estate Advisors, L.P.,
Apollo Management, L.P., Beacon Capital Partners, Inc., and Rosen
Consulting Group, providing for a $1 billion equity investment in the
Companies.
(4) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and
Wyndham International, Inc. filed March 3, 1999 (Nos. 001-09319 and 001-
09320), reporting under Item 5 that Paul A. Nussbaum had resigned his
position as Chairman of the Board of Directors and Chief Executive Officer
of Patriot.
(5) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and
Wyndham International, Inc. filed March 26, 1999 (Nos. 001-09319 and 001-
09320), reporting under Item 5 current developments regarding the spin-off
of Interstate Hotels Management, Inc.
(6) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and
Wyndham International, Inc. filed March 29, 1999 (Nos. 001-09319 and 001-
09320), as amended May 10, 1999, filing under Item 5 the pro forma
financial information for the year ended December 31, 1998.
42
<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: May 14, 1999
Patriot American Hospitality, Inc.
By /s/ Lawrence S. Jones
---------------------------------------
Lawrence S. Jones
Executive Vice President and Treasurer
(Authorized Officer and Principal
Accounting and Financial Officer)
Wyndham International, Inc.
By /s/ Lawrence S. Jones
---------------------------------------
Lawrence S. Jones
Executive Vice President and Treasurer
(Authorized Officer and Principal
Accounting and Financial Officer)
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000016343
<NAME> PATRIOT AMERICAN HOSPITALITY, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 73,003 89,885
<SECURITIES> 0 0
<RECEIVABLES> 15,187 8,589
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 5,210,374 5,176,977
<DEPRECIATION> 259,194 216,548
<TOTAL-ASSETS> 6,843,404 6,749,206
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
54 54
<COMMON> 2,342 2,135
<OTHER-SE> 2,483,034 2,466,670
<TOTAL-LIABILITY-AND-EQUITY> 6,843,404 6,749,206
<SALES> 0 0
<TOTAL-REVENUES> 193,898 113,165
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 105,475 44,260
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 86,104 34,251
<INCOME-PRETAX> 16,931 38,245
<INCOME-TAX> (2,477) (371)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (18,716)
<CHANGES> 0 0
<NET-INCOME> 11,852 15,497
<EPS-PRIMARY> 0.02 0.14
<EPS-DILUTED> (0.06) 0.13
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000715273
<NAME> WYNDHAM INTERNATIONA, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 99,797 69,069
<SECURITIES> 0 0
<RECEIVABLES> 214,017 185,994
<ALLOWANCES> 0 0
<INVENTORY> 23,131 23,583
<CURRENT-ASSETS> 440,319 325,950
<PP&E> 668,959 662,135
<DEPRECIATION> 43,215 36,032
<TOTAL-ASSETS> 2,123,203 2,006,821
<CURRENT-LIABILITIES> 719,155 602,494
<BONDS> 0 0
0 0
36 36
<COMMON> 2,342 2,135
<OTHER-SE> 121,378 132,923
<TOTAL-LIABILITY-AND-EQUITY> 2,123,203 2,006,821
<SALES> 638,830 290,644
<TOTAL-REVENUES> 671,517 329,982
<CGS> 0 0
<TOTAL-COSTS> 418,240 200,555
<OTHER-EXPENSES> 239,014 116,213
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9,727 5,699
<INCOME-PRETAX> 4,723 9,235
<INCOME-TAX> (6,466) (3,187)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,153) 3,180
<EPS-PRIMARY> (0.07) 0.03
<EPS-DILUTED> (0.07) 0.03
</TABLE>
