<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
COMMISSION FILE NUMBER: 0-26528
PATRIOT AMERICAN HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 75-2599709
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 LBJ FREEWAY, SUITE 1500
DALLAS, TEXAS 75234
(Address of principal executive office) (Zip Code)
(214) 888-8000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all
documents and 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 of common stock, no par value, of Patriot
American Hospitality, Inc. outstanding on August 13, 1996 was 20,978,648.
Exhibit Index is located on page 40.
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<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
PATRIOT AMERICAN HOSPITALITY, INC.:
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996 (unaudited)...................... 3
Consolidated Statements of Operations for the three months ended June 30, 1996 and for the six months
ended June 30, 1996 (unaudited).................................................................... 4
Consolidated Statement of Cash Flows for the six months ended June 30, 1996 (unaudited)................. 5
Notes to Consolidated Financial Statements as of June 30, 1996 (unaudited).............................. 6
CHC LEASE PARTNERS:
Balance Sheets as of December 31, 1995 and June 30, 1996 (unaudited)................................... 12
Statements of Operations for the three months ended June 30, 1996 and for the six months ended
June 30, 1996 (unaudited).......................................................................... 13
Statement of Cash Flows for the six months ended June 30, 1996 (unaudited).............................. 14
Notes to Financial Statements as of June 30, 1996 (unaudited)........................................... 15
INITIAL HOTELS COMBINED FINANCIAL STATEMENTS:
Combined Statements of Operations for the three months ended June 30, 1995 and for the six months ended
June 30, 1995 (unaudited)........................................................................... 17
Combined Statement of Cash Flows for the six months ended June 30, 1995 (unaudited)..................... 18
Notes to Combined Financial Statements as of June 30, 1995 (unaudited).................................. 19
NORTHCOAST HOTELS, L.L.C.:
Balance Sheet as of June 30, 1996 (unaudited)........................................................... 23
Statement of Operations for the period April 2, 1996 (inception of operations) through
June 30, 1996 (unaudited).......................................................................... 24
Statement of Members' Equity for the period April 2, 1996 (inception of operations)
through June 30, 1996 (unaudited)................................................................... 25
Statement of Cash Flows for the period April 2, 1996 (inception of operations) through
June 30, 1996 (unaudited)........................................................................... 26
Notes to Financial Statements as of June 30, 1996 (unaudited)........................................... 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 32
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................ 40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits........................................................................................... 40
Reports on Form 8-K................................................................................ 40
SIGNATURE............................................................................................... 41
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotel properties, net of accumulated depreciation of $9,249
in 1996 and $2,529 in 1995 $416,563 $265,759
Cash and cash equivalents, including capital improvement reserves of $3,605
in 1996 and $1,091 in 1995 6,675 4,769
Lease revenue receivable 4,207 2,260
Receivables from selling entities 1,470 1,765
Investment in unconsolidated subsidiary 4,739 4,263
Mortgage notes and other receivables from unconsolidated subsidiary 40,854 40,855
Inventory 1,142 1,035
Deferred expenses, net of accumulated amortization of $315 in 1996 and $88
in 1995 2,470 1,852
Prepaid expenses and other assets 5,913 1,666
-------- --------
Total assets $484,033 $324,224
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit $111,161 $ 9,500
Dividends and distributions payable 9,112 8,154
Accounts payable and accrued expenses 6,873 3,179
Due to unconsolidated subsidiary 69 91
Minority interest in Operating Partnership 72,291 41,522
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, no par value, 20,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, no par value, 200,000,000 shares authorized,
shares issued and outstanding were 15,478,648 in 1996 and
14,665,935 in 1995 -- --
Paid-in capital 285,931 264,808
Unearned executive compensation, net of accumulated amortization of
$355 in 1996 and $71 in 1995 (1,067) (1,351)
Distributions in excess of earnings (337) (1,679)
-------- --------
Total shareholders' equity 284,527 261,778
-------- --------
Total liabilities and shareholders' equity $484,033 $324,224
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996
-------------- --------------
<S> <C> <C>
Revenue:
Participating lease revenue $17,913 $30,269
Interest and other income 94 201
------- -------
Total revenue 18,007 30,470
------- -------
Expenses:
Real estate and personal property taxes and casualty insurance 1,460 2,542
Ground lease expense 223 300
General and administrative 951 1,892
Interest expense 2,171 2,772
Depreciation and amortization 3,946 6,784
------- -------
Total expenses 8,751 14,290
------- -------
Income before equity in earnings of unconsolidated subsidiary and minority interest 9,256 16,180
Equity in earnings of unconsolidated subsidiary 1,243 2,605
------- -------
Income before minority interest 10,499 18,785
Minority interest in Operating Partnership (1,816) (2,974)
------- -------
Net income applicable to common shareholders $ 8,683 $15,811
======= =======
Net income per common share $0.57 $1.06
======= =======
Weighted average number of common shares and common share equivalents
outstanding 15,174 14,953
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,811
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 6,724
Amortization of unearned executive compensation 284
Amortization of deferred loan costs 122
Amortization of lease inducement costs 46
Other amortization 60
Payment of interest on notes receivable from unconsolidated subsidiary 2,129
Issue common stock to directors 37
Equity in earnings of unconsolidated subsidiary (2,605)
Minority interest in income of Operating Partnership 2,974
Changes in assets and liabilities:
Lease revenue receivable (1,947)
Prepaid expenses and other assets 152
Accounts payable and other accrued expenses 1,037
Due to unconsolidated subsidiary (21)
---------
Net cash provided by operating activities 24,803
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties and related working capital assets (139,152)
Improvements and additions to hotel properties (3,619)
Collection of receivables from selling entities 572
Prepaid acquisition costs (2,166)
Principal payment received on other note receivable 101
---------
Net cash used in investing activities (144,264)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 141,161
Repay borrowings under line of credit (39,500)
Payment of deferred loan costs (846)
Payment of prepaid offering costs (2,015)
Net proceeds of private placement 39,417
Payment of initial public offering costs (462)
Dividends and distributions paid (16,388)
---------
Net cash provided by financing activities 121,367
---------
Net increase in cash and cash equivalents 1,906
Cash and cash equivalents at beginning of period 4,769
---------
Cash and cash equivalents at end of period $ 6,675
=========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,713
=========
</TABLE>
See accompanying notes.
5
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Patriot American Hospitality, Inc. (collectively with its subsidiaries, the
"Company"), a Virginia corporation, was formed April 17, 1995 as a self-
administered real estate investment trust ("REIT") for the purpose of acquiring
equity interests in hotel properties. On October 2, 1995, the Company completed
an initial public offering (the "Initial Offering") of 14,605,000 shares of its
common stock (including 1,905,000 shares of common stock issued upon exercise of
the underwriters' over-allotment option) and commenced operations. The offering
price of all shares sold was $24.00 per share, resulting in net proceeds (less
the underwriters' discount and Initial Offering expenses) of approximately
$313,170.
Upon completion of the Initial Offering, the Company, through its wholly-owned
subsidiary, PAH LP, Inc., contributed substantially all of the net proceeds of
the Initial Offering to Patriot American Hospitality Partnership, L.P. (the
''Operating Partnership'') in exchange for an approximately 85.3% limited
partnership interest in the Operating Partnership. The Company, through its
wholly-owned subsidiary, PAH GP, Inc., is the sole general partner and the
holder of a 1.0% general partnership interest in the Operating Partnership.
The Operating Partnership used approximately $263,600 of the net proceeds of
the Initial Offering to acquire ownership interests in 20 hotels (the "Initial
Hotels") from various entities (the "Selling Entities") and to repay existing
mortgage and other indebtedness of the Initial Hotels. In addition, in
connection with the Initial Offering, the Company closed on a Line of Credit
with Paine Webber Real Estate Securities, Inc. to be utilized primarily for the
acquisition of additional hotels, renovation of certain hotels and for working
capital. The balance of the proceeds from the Initial Offering, together with
proceeds from the Line of Credit, were used to finance acquisitions of two
additional hotel investments, provide for renovations to existing hotels and for
general working capital during 1995. In consideration for the sale of the
Initial Hotels, certain owners in the Selling Entities, including affiliates of
the Company, elected to receive limited partnership units in the Operating
Partnership. The 2,324,312 limited partnership units in the Operating
Partnership ("OP Units") received by such owners represented an approximate
13.7% equity interest in the Operating Partnership at December 31, 1995.
During the first quarter of 1996, the Company acquired three additional hotel
properties, utilizing cash drawn on its Line of Credit and issuing 167,012 OP
Units in connection with the purchases. During the second quarter of 1996, the
Company acquired eight additional hotel properties, utilizing cash drawn on its
Line of Credit and issuing 331,577 OP Units in connection with the purchases. At
June 30, 1996, the Operating Partnership owned interests in 33 hotels and the
Company owned an approximate 81.6% interest in the Operating Partnership.
The Company leases each of its hotels, except the Crowne Plaza Ravinia Hotel,
which is owned through a special purpose corporation, to lessees that are
independent of the Company (the "Lessees"). The Company leases 23 of its hotel
investments to CHC Lease Partners for staggered terms of ten to twelve years
pursuant to separate participating leases providing for the payment of the
greater of base or participating rent, plus certain additional charges, as
applicable (the "Participating Leases"). Seven hotels are leased to NorthCoast
Hotels, L.L.C. ("NorthCoast") under similar Participating Lease Agreements.
Metro Hotels Leasing Corporation ("Metro Lease Partners") and DTR North Canton,
Inc. (the "Doubletree Lessee") each lease one hotel. The Crowne Plaza Ravinia
Hotel acquisition was structured without a lessee.
These unaudited consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, PAH GP, Inc. and PAH LP, Inc., and the
Operating Partnership. All significant intercompany accounts and transactions
have been eliminated. These financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month and six month periods ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1996. For further information, refer to the
consolidated financial
6
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
statements and footnotes thereto included in the Company's annual report on Form
10-K for the period ended December 31, 1995. Certain prior year amounts have
been reclassified to conform to current period presentation.
2. ACQUISITION OF HOTEL PROPERTIES:
During the first quarter of 1996, the Company acquired three hotels located in
Massachusetts, Georgia and California with an aggregate of 830 rooms. The
aggregate purchase price of the properties (including acquisition-related
expenses) was approximately $38,587 plus 167,012 OP Units (valued at
approximately $4,000 based upon the market price of the Company's common stock
on the contract settlement date). One of the hotels is subject to a 73-year
ground lease. The cash portion of the purchase was financed primarily with
funds drawn on the Line of Credit. The hotels are leased to CHC Lease Partners
for 11 to 12 years pursuant to separate Participating Leases.
In April 1996, the Company acquired the six hotel WestCost Portfolio for
approximately $75,630 and 331,577 OP Units, valued at approximately $8,800 at
the closing of the acquisition. The portfolio includes the 194-suite WestCoast
Plaza Park Suites Hotel, the 151-room WestCoast Roosevelt Hotel and the 145-room
WestCoast Gateway Hotel, all in Seattle, Washington; the 410-room Hyatt
Newporter in Newport Beach, California; the 192-room WestCoast Long Beach Hotel
and Marina in Long Beach, California; and the 147-room WestCoast Wenatchee
Center Hotel in Wenatchee, Washington. The cash portion of the purchase was
financed primarily with funds drawn on the Line of Credit. The hotels are
leased to NorthCoast for 10 to 12 years pursuant to separate Participating
Leases. A portion of the purchase price in the amount of $2,000 was withheld
and is contingent upon the achievement of a certain level of operating
performance at each respective hotel. This amount is included in accounts
payable and accrued expenses at June 30, 1996.
On May 22, 1996, the Company acquired the 365-room Hyatt Regency in Lexington,
Kentucky for approximately $14,320 in cash. The hotel is subject to a 79-year
ground lease. On June 20, 1996, the Company acquired the 180-room Doubletree
Denver/Boulder in Westminster (Denver), Colorado for approximately $12,520 in
cash. These purchases were financed primarily with funds drawn on the Line of
Credit. The Hyatt Regency is leased to NorthCoast for a period of 10 years and
the Doubletree Denver/Boulder is leased to the Doubletree Lessee for 10 years
pursuant to separate Participating Leases.
3. INVESTMENT IN AND MORTGAGE NOTES RECEIVABLE FROM UNCONSOLIDATED SUBSIDIARY:
The Company, through the Operating Partnership, owns an approximate 99% non-
voting ownership interest in PAH Ravinia, Inc. ("PAH Ravinia"), a Virginia
corporation. PAH Ravinia owns the 495-room Crowne Plaza Ravinia Hotel in
Atlanta, Georgia.
As part of the financing for the acquisition of the Crowne Plaza Ravinia
Hotel, the Company, through the Operating Partnership, advanced $40,500 to PAH
Ravinia, which is evidenced by two mortgage notes consisting of a $36,000 first
mortgage note and a $4,500 second mortgage note. The principal amount of both
notes is due and payable on November 28, 1998. Interest at an annual rate equal
to 10.25% and 12.5% on the first and second mortgage notes, respectively, is due
and payable monthly. All amounts owing under the mortgage notes will become due
and payable upon a sale of the hotel to a third party purchaser. The mortgage
notes are collateralized by deeds of trust on the Crowne Plaza Ravinia Hotel.
7
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. LINE OF CREDIT:
In connection with the Initial Offering, the Company, through the Operating
Partnership obtained a revolving credit facility of up to $165,000 (the "Line of
Credit") to fund the acquisition of additional hotels, renovations and capital
improvements to hotels and for general working capital purposes. In May 1996,
the maximum amount available under the Line of Credit was increased to $250,000
and certain other modifications were made, thereby increasing the Company's
ability to borrow under the Line of Credit. The Line of Credit is
collateralized by a first mortgage lien on certain of the hotels. As of June
30, 1996, the Company had $111,161 outstanding on its Line of Credit. The Line
of Credit, which expires October 1, 1998, bears interest on the outstanding
balance at a rate per annum equal to 30-day LIBOR plus 1.90%. LIBOR was 5.69%
at December 31, 1995 and 5.44% at June 30, 1996. The weighted average interest
rate incurred by the Company during 1996 under this borrowing was 7.43%. No
prepayment penalties are required under the Line of Credit.
The agreement requires the Company to maintain certain financial ratios with
respect to liquidity, loan to value and net worth and imposes certain
limitations on acquisitions. The Company is in compliance with such covenants
at June 30, 1996. The unused commitment under the Line of Credit at June 30,
1996, is $138,839, subject to certain restrictions and provisions of the Line of
Credit Agreement.
5. MINORITY INTEREST
The Operating Partnership has 2,822,901 OP Units and 662,391 Preferred OP
Units (see Note 6) outstanding as of June 30, 1996 (excluding OP Units held by
the Company). Pursuant to the Operating Partnership's limited partnership
agreement, the limited partners of the Operating Partnership, including certain
affiliates of the Company, received rights (the "Redemption Rights") that enable
them to cause the Operating Partnership to redeem each OP Unit in exchange for
cash equal to the value of a share of common stock (or, at the Company's
election, the Company may purchase each OP Unit offered for redemption for one
share of common stock). The Redemption Rights generally may be exercised at any
time after one year following the issuance of the OP Units. However, certain
holders of OP Units, including directors and officers of the Company, are
restricted from exercising their Redemption Rights for 18 to 24 months from the
closing of the Initial Offering. The number of shares of common stock issuable
upon exercise of the Redemption Rights will be adjusted for share splits,
mergers, consolidations or similar pro rata transactions, which would have the
effect of diluting the ownership interests of the limited partners of the
Operating Partnership or the shareholders of the Company.
6. SHAREHOLDERS' EQUITY:
Capital Stock
The Company's Board of Directors has declared quarterly distributions of
$0.48 per common share for each of the first and second quarters. The first
quarter distribution was paid on April 30, 1996 to holders of record on March
29, 1996. The second quarter distribution was paid on July 30, 1996 to
shareholders of record on June 27, 1996. Concurrent with the dividend
declarations, the Operating Partnership has authorized and paid distributions in
the same amount.
In response to an independent consultant review of executive compensation, the
Board of Directors elected to accelerate the vesting period for the shares of
common stock held by three of the Company's executive officers, which has been
recorded as unearned executive compensation. During the first quarter of 1996,
the vesting period was reduced from five years to three years and the
amortization period of the unearned executive compensation was revised
accordingly.
8
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock Option Awards
Pursuant to the Company's Directors' Plan and the 1995 Incentive Plan, the
Board of Directors granted stock options to purchase 15, 000 shares of common
stock to the Company's directors, and 177,800 shares of common stock to the
Company's executive and other officers and certain employees. For the directors
the exercise price of the options is $28.375 (the market price of the Company's
stock on the date of the grant, May 23, 1996). For the officers and employees
employed as of the grant date (April 19, 1996) the exercise price of the options
is $26.875 (the market price of the Company's common stock on the date of
grant). For officers and employees hired subsequent to April 19, 1996, the
excercise price is equal to the market price of the Company's common stock on
the employee's hire date. The options to purchase common stock vest annually
over a period of seven years.
Private Placement
In May 1996, the Company sold an aggregate of approximately $40,000 of equity
securities to an institutional investor that purchased the securities on behalf
of two owners (the "Private Placement"). The securities consisted of 811,393
shares of common stock sold at $26.95 per share and 662,391 Preferred OP Units
(the "Preferred OP Units") sold at $27.375 per unit. The common stock is of the
same class as the Company's existing common stock and is entitled to the same
voting and dividend rights as all outstanding common stock, subject to certain
restrictions on the resale of the stock. The Preferred OP Units are entitled to
quarterly distributions equal to 103% of the quarterly dividends paid on the
common stock. Generally, three years following issuance, the Preferred OP Units
may be converted into shares of common stock on a one-for-one basis, subject to
certain limitations. After 10 years, the Company will have the right to
exchange all outstanding Preferred OP Units for shares of common stock on a one-
for-one basis.
7. NONCASH INVESTING AND FINANCING ACTIVITIES:
In connection with the acquisition of hotel properties, the following assets
and liabilities were assumed:
<TABLE>
<CAPTION>
<S> <C>
Receivables from selling entities........................... $ 277
Inventory.................................................. 107
Prepaid expenses and other assets........................... 323
Accounts payable and accrued liabilities.................... 2,657
Issuance of OP Units in connection with the acquisition of
hotel properties........................................... $12,803
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
The Company currently is not subject to any material legal proceedings or
claims nor, to management's knowledge, are any material legal proceedings or
claims currently threatened.
9
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. PRO FORMA FINANCIAL INFORMATION:
The following unaudited pro forma condensed consolidated statements of
operations of the Company are presented as if (i) the Initial Offering and the
acquisition of the 20 Initial Hotels, (ii) the subsequent acquisition of 13
additional hotel properties, and (iii) the Private Placement had occurred on
January 1, 1995, and the hotels (except the Crowne Plaza Ravinia Hotel) had been
leased to the Lessees pursuant to the Participating Leases. These unaudited pro
forma condensed consolidated statements of operations are not necessarily
indicative of what actual results of operations of the Company would have been
assuming such transactions had been completed as of January 1, 1995, nor do they
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------
1995 1996
------------------- ------------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Participating lease revenue..................................... $33,684 $35,761
Interest and other income....................................... 22 201
------- -------
Total revenue................................................ 33,706 35,962
------- -------
Expenses:
Real estate and personal property taxes and casualty insurance.. 2,858 3,066
Ground lease expense............................................ 659 680
General and administrative...................................... 1,400 1,892
Interest expense................................................ 4,618 4,329
Depreciation and amortization................................... 8,222 8,448
------- -------
Total expenses............................................... 17,757 18,415
------- -------
Income before equity in earnings of unconsolidated subsidiary
and minority interest........................................... 15,949 17,547
Equity in earnings of unconsolidated subsidiary................ 1,857 2,605
------- -------
Income before minority interest................................... 17,806 20,152
Minority interest in Operating Partnership...................... (3,276) (3,708)
------- -------
Net income applicable to common shareholders...................... $14,530 $16,444
======= =======
Net income per common share....................................... $0.97 $1.10
======= =======
Weighted average number of common shares and common share
equivalents outstanding......................................... 14,953 14,953
======= =======
</TABLE>
10. SUBSEQUENT EVENTS:
Public Offering of Common Stock
On July 29, 1996, the Company completed a public offering (the "Follow-on
Offering") of 5,500,000 shares of its common stock. The offering price of all
shares sold in the Follow-on Offering was $28.25 per share, resulting in net
proceeds (less the underwriters' discount and offering expenses) of
approximately $144,200 of which approximately $134,696 was used to reduce
amounts outstanding under the Line of Credit.
10
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Hotel Properties Acquired
On July 15, 1996, the Company acquired the 472-room Wyndham Greenspoint
Hotel located in Houston, Texas and the 191-room Wyndham Garden-Midtown located
in Atlanta, Georgia from entities owned primarily by members of the Trammell
Crow family for approximately $60,960 in cash and 17,036 OP Units valued at
approximately $500 at the time of acquisition. In addition, the Company may be
obligated to pay up to $3,000 of additional consideration upon the achievement
of certain future operating results at these hotels. In connection with this
acquisition, the Company has agreed to maintain at least $22,000 of debt on the
Wyndham Greenspoint Hotel until the end of 1999. Paine Webber Real Estate has
extended a single asset mortgage loan of approximately $22,000 on this hotel
(the "Greenspoint Loan") on economic terms substantially similar to the Line of
Credit. While the Greenspoint Loan is outstanding, the maximum amount the
Company may draw on the Line of Credit will be $228,000. The Line of Credit and
the Greenspoint Loan are cross-defaulted. No prepayment penalties are required
in connection with the prepayment of amounts outstanding under the Greenspoint
Loan.
Potential Acquisitions
The Company has entered into non-binding purchase and sale agreements to
acquire the 492-room Bonaventure Hotel & Spa in Fort Lauderdale, Florida for a
purchase price of approximately $16,200 in cash and the payment of approximately
$3,425 relating to the assumption of operating liabilities and acquisition-
related expenses, the 362-room Marriott WindWatch Hotel in Long Island, New York
for a purchase price of approximately $30,000, the 257-room Valley River Inn in
Eugene, Oregon for a purchase price of approximately $18,800, and the 250-room
Holiday Inn O'Hare in Des Plaines, Illinois for a purchase price of
approximately $8,700. In addition, the Company has entered into an agreement to
acquire the 148-room Wyndham Garden located in Novi (Detriot), Michigan; the
162-room Wyndham Garden located in Wood Dale (Chicago), Illinois; and the 168-
room Wyndham Garden-Las Colinas located in Irving (Dallas), Texas for an
aggregate purchase price of approximately $35,300. The acquisition of these or
any other properties is subject to a number of contingencies, including, among
other things, the satisfactory completion of the Company's due diligence
investigation of the hotels, the negotiation of a definitive acquisition
agreement and obtaining financing and/or Line of Credit lender approval, as
applicable. Accordingly, there can be no assurance that the acquisition of any
of these properties will be consummated.
11
<PAGE>
CHC LEASE PARTNERS
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,617 $ 9,385
Accounts receivable, net of allowance for doubtful accounts
of $188 and $142 at June 30, 1996 and December 31,
1995, respectively 9,447 5,833
Inventories 1,947 2,136
Prepaid expenses 974 441
------- -------
Total current assets 20,985 17,795
Investments 5,100 5,100
Deposits 93 71
------- -------
Total assets $26,178 $22,966
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable $ 2,645 $ 2,202
Accrued rent due to Patriot American Hospitality
Partnership, L.P. 1,642 2,260
Due to affiliates, net 464 138
Accrued payroll 2,800 2,219
Taxes payable 1,701 1,556
Guest deposits 1,954 958
Accrued expenses and other liabilities 3,329 2,012
------- -------
Total current liabilities 14,535 11,345
Due to Patriot American Hospitality Partnership, L.P. 957 1,035
Lease inducement 931 977
------- -------
Total liabilities 16,423 13,357
Commitments and contingencies (Note 2) -- --
Partners' capital 9,755 9,609
------- -------
Total liabilities and partners' capital $26,178 $22,966
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
CHC LEASE PARTNERS
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996
-------------- --------------
<S> <C> <C>
Revenue:
Rooms $28,377 $52,637
Food and beverage 8,919 16,917
Conference center 551 1,196
Telephone and other 2,423 4,718
------- -------
Total revenue 40,270 75,468
------- -------
Expenses:
Departmental costs and expenses 14,306 27,071
Participating lease payments 13,949 25,867
General and administrative 3,419 6,302
Repairs and maintenance 1,746 3,290
Utilities 1,693 3,189
Marketing 3,653 6,827
Insurance 178 398
------- -------
Total expenses 38,944 72,944
------- -------
Income before lessee income (expense) 1,326 2,524
------- -------
Dividend and interest income 278 473
Management fees (992) (1,589)
Lessee general and administrative expenses (309) (472)
------- -------
Total lessee income (expense) (1,023) (1,588)
------- -------
Net income $ 303 $ 936
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
CHC LEASE PARTNERS
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
--------------
<S> <C>
Cash flows from operating activities:
Net income..................................................................... $ 936
Adjustments to reconcile net income to net cash used in operating activities:
Recognition of lease inducement............................................. (46)
Provision for losses on accounts receivable................................. 46
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable......................................................... (3,548)
Inventories................................................................. 111
Prepaid expenses and other assets........................................... (555)
Increase (decrease) in:
Accounts payable............................................................ 521
Accrued rent due to Patriot American Hospitality Partnership, L.P........... (618)
Due to affiliates........................................................... 326
Accrued payroll............................................................. 581
Taxes payable............................................................... 145
Guest deposits.............................................................. 80
Accrued expenses and other liabilities...................................... 1,317
-------
Net cash used in operating activities............................................ (704)
-------
Cash flows from investing activities:
Acquired cash from new operating leases........................................ 726
-------
Net cash provided by investing activities........................................ 726
-------
Cash flows from financing activities:
Partnership distribution....................................................... (790)
-------
Net cash used in financing activities............................................ (790)
-------
Net decrease in cash and cash equivalents........................................ (768)
Cash and cash equivalents at beginning of period................................. 9,385
-------
Cash and cash equivalents at end of period....................................... $ 8,617
=======
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Assumption of assets and liabilities upon consummation of participating lease
agreements with Patriot American Hospitality Partnership, L.P.:
Acquired cash............................................................. $ 726
Inventories............................................................... (78)
Other assets.............................................................. 112
Due to Patriot American Hospitality Partnership, L.P...................... 78
Other liabilities......................................................... (838)
-------
Net assets................................................................ $ --
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
CHC Lease Partners, was formed as the initial lessee to lease and operate
certain hotels owned by Patriot American Hospitality Partnership, L.P. (the
"Operating Partnership"). At June 30,1996, Patriot American Hospitality, Inc.
(the "Company"), through its subsidiaries, owns approximately 81.6% of the
Operating Partnership. CHC Lease Partners, a general partnership, is owned
jointly by CHC REIT Lessee Corp., a wholly owned subsidiary of CHC
International, Inc. ("CHC") and by an affiliate of a principal of the Gencom
group of companies.
CHC Lease Partners began operating twenty hotels (the "Initial Hotels") on
October 2, 1995. In January 1996 and March 1996, CHC Lease Partners and the
Operating Partnership entered into three operating leases for three hotels which
were acquired by the Operating Partnership. The leases are substantially
similar to the other participating lease agreements between CHC Lease Partners
and the Operating Partnership. At June 30, 1996, CHC Lease partners leases
twenty-three hotels.
Each hotel is leased by the Operating Partnership to CHC Lease Partners under
separate participating operating lease agreements which contain cross-default
provisions. These leases, which require CHC Lease Partners to maintain a
minimum net worth and adequate working capital, have an average term of eleven
years, require payment of the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, conference center revenue and telephone and other revenues of
each of the hotels.
The hotels leased by CHC Lease Partners consist of eighteen full service
hotels, four limited service hotels and one executive conference center.
Nineteen of the twenty-three hotels are operated under franchise licenses with
nationally recognized hotel companies. The cost of obtaining the franchise
licenses is paid by the Operating Partnership and the continuing franchise fees
are paid by CHC Lease Partners. Franchise and related fees generally range from
3.5% to 8.0% of room revenues for the hotels under franchise licenses.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month and six month periods ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. For further information, refer to the CHC Lease Partners
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
CHC Lease Partners incurred base rents of $8,740 and $16,060 for the
three months and six months ending June 30, 1996, respectively, and
participating rents of $5,187 and $9,787 for the three months and six months
ending June 30, 1996, respectively. At June 30, 1996 and December 31, 1995, CHC
Lease Partners owed the Operating Partnership $1,642 and $2,260, respectively,
for rents under the terms of the participating leases.
Under the participating lease agreements, CHC Lease Partners is
obligated to return to the Operating Partnership at the end of each lease term
the inventory at each of the Initial Hotels less a total of $1,000. Such amount
is considered a lease inducement and is recorded as a reduction to participating
lease payments over the lives of the participating lease agreements. As of June
30, 1996, the balance of the lease inducement and the inventory due to the
Operating Partnership were $931 and $957 , respectively. As of December 31,
1995, the balances were $977 and $1,035, respectively.
CHC Lease Partners entered into management agreements with hotel
management subsidiaries of CHC and GAH-II, L.P. ("GAH"), an affiliate of CHC
and the Gencom group of companies, to perform all management functions necessary
to operate 22 of the 23 hotels leased by CHC Lease Partners. The terms of these
agreements range from ten to twelve years with management fees due based upon a
percentage of gross revenue of each of the hotels ranging from 2.25% to 2.5%
escalating to 3.0% over a two to three year period. The fees under these
management agreements are subordinate to CHC Lease Partners' obligations to the
Operating Partnership under the participating lease agreements. Management fees
incurred under these management agreements were $913 during the three months
ended June 30, 1996 and were $1,429 for the six months ended June 30, 1996.
Included in due to affiliates, net were amounts for management fees under these
management agreements owed to CHC and GAH of $175 and $162, respectively, at
June 30, 1996 and due from CHC and owed to GAH of $46 and $43, respectively, at
December 31, 1995.
15
<PAGE>
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
CHC Lease Partners fully reimburses CHC for office space it occupies
within the corporate offices of CHC and for the payroll and related costs CHC
administers on behalf of CHC Lease Partners. These costs amounted to $136 for
the three months ended June 30, 1996 and $285 for the six months ended June 30,
1996. At June 30, 1996 and December 31, 1995 the amount due CHC for these costs
was $127 and $141, respectively.
During the three months and six months ended June 30, 1996, CHC Lease
Partners made distributions to its partners of $450 and $790, respectively.
3. PRO FORMA FINANCIAL INFORMATION:
The unaudited pro forma statements of operations are presented as if the
leases and the operation of the twenty-three hotels had commenced on January 1,
1995. The unaudited pro forma statements of operations are not necessarily
indicative of what the actual results of operations of CHC Lease Partners would
have been assuming such operations had commenced as of January 1, 1995, nor do
they purport to represent the results of operations for future periods. Pro
forma lessee expenses represent management fees and estimated lessee overhead
expenses and exclude pro forma dividend income on 250,001 Operating Partnership
Units and interest income associated with working capital balances.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1995 1996
------------ -----------
<S> <C> <C>
(IN THOUSANDS)
Revenue:
Rooms............................ $51,944 $55,070
Food and beverage................ 17,408 17,620
Conference center................ 1,292 1,196
Telephone and other.............. 4,868 4,963
------- -------
Total revenue................... 75,512 78,849
------- -------
Expenses:
Departmental costs and expenses.. 27,480 28,395
Participating lease payments..... 25,409 26,828
General and administrative....... 6,067 6,664
Repairs and maintenance.......... 3,472 3,445
Utilities........................ 3,153 3,339
Marketing........................ 6,917 7,178
Insurance........................ 566 481
------- -------
Total expenses.................. 73,064 76,330
------- -------
Income before lessee expenses..... 2,448 2,519
Lessee expenses................... 1,519 1,691
------- -------
Net income (loss)................ $ 929 $ 828
======= =======
</TABLE>
4. SUBSEQUENT EVENT:
CHC Lease Partners and the Operating Partnership have entered into a
non-binding letter agreement to lease the 492-room Bonaventure Hotel & Spa in
Fort Lauderdale, Florida subject to the Operating Partnership's non-binding
purchase and sale agreement for the hotel and spa. The lease would be
substantially similar to other participating lease agreements between CHC Lease
Partners and the Operating Partnership.
The leasing of the hotel and spa is subject to a number of contingencies
including, among other things, the acquisition of the hotel and spa and the
negotiation of a definitive participating lease agreement. Accordingly, there
can be no assurance the leasing of the hotel and spa will be consummated.
16
<PAGE>
INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1995
------------- --------------
<S> <C> <C>
Revenue from hotel operations:
Rooms $21,848 $44,090
Food and beverage 7,529 15,142
Conference center 593 1,292
Telephone and other 2,128 3,985
------- -------
Total revenue 32,098 64,509
------- -------
Expenses:
Departmental costs and expenses 11,889 23,695
General and administrative 2,702 5,388
Repairs and maintenance 1,451 2,870
Utilities 1,315 2,622
Marketing 2,990 5,811
Management fees paid to affiliates 1,288 2,776
Interest expense 3,512 8,416
Real estate and personal property taxes, and insurance 1,079 2,207
Depreciation and amortization 2,555 5,204
------- -------
Total expenses 28,781 58,989
------- -------
Income before extraordinary item 3,317 5,520
Extraordinary item--loss on extinguishment of debt -- (1,803)
------- -------
Net income $ 3,317 $ 3,717
======= =======
</TABLE>
See accompanying notes.
17
<PAGE>
INITIAL HOTELS
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1995
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,717
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,204
Amortization of deferred loan costs 168
Amortization of discount on note payable 172
Expenses financed with term debt 250
Loss on extinguishment of debt 1,803
Changes in assets and liabilities:
Cash held in escrow (400)
Accounts receivable, net (1,634)
Inventories (88)
Prepaid and other assets (503)
Accounts payable and other accrued expenses (104)
Payables to affiliates 40
--------
Net cash provided by operating activities 8,625
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted funds used for acquisition of property and equipment (52)
Improvements and additions to hotel properties (2,695)
--------
Net cash used in investing activities (2,747)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mortgages and other notes payable 13,217
Principal payments on mortgages and other notes payable (10,585)
Payment of financing costs (314)
Payments on capital lease obligations (1,259)
Payments on advances from affiliates (428)
Payments on loans from affiliates (318)
Capital contributions 33
Distributions paid (4,960)
--------
Net cash used in financing activities (4,614)
--------
Net change in cash and cash equivalents 1,264
Cash and cash equivalents at beginning of period 8,290
--------
Cash and cash equivalents at end of period $ 9,554
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 8,072
========
</TABLE>
See accompanying notes.
18
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION, INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION:
Organization
Patriot American Hospitality, Inc. (the ''Company'') is a Virginia corporation
which was created to own, through wholly-owned subsidiaries, an approximately
86.3% general and limited partnership interest in Patriot American Hospitality
Partnership, L.P., a Virginia limited partnership (the ''Operating
Partnership''). On October 2, 1995, the Operating Partnership acquired from
various entities (the "Selling Entities") twenty (20) operating hotel properties
(collectively, the ''Initial Hotels''). Sixteen of the 20 Initial Hotels were
acquired from Selling Entities owned jointly or individually by Patriot American
(or its principals) ("Patriot American"), CHC International, Inc. (''CHC'') and
the Gencom group of companies (''Gencom,'' and collectively with CHC and Patriot
American, the ''Primary Contributors''). The four remaining hotels were acquired
from Selling Entities not affiliated with the Primary Contributors. Following
is a listing of the Initial Hotels.
<TABLE>
<CAPTION>
NUMBER
OF MONTH/YEAR
SELLING ENTITY PROPERTY NAME/LOCATION ROOMS ACQUIRED
- ----------------------------------- -------------------------------------------------------- ------ -------------
<S> <C> <C> <C>
FULL SERVICE HOTELS:
Bourbon Orleans Investors, LP Bourbon Orleans Hotel--New Orleans, Louisiana 211 8/92
Summit AP Partners, LP Holiday Inn Select North Dallas--Farmers Branch, Texas 374 8/93
Quarry Inn Company Hilton Inn Cleveland South--Independence, Ohio 191 N/A(2)
Crockett Hospitality, Inc. Crockett Hotel--San Antonio, Texas 206 5/90
Troy Hotel Investors, LP Marriott Troy Hotel--Troy, Michigan 350 12/94
Tri-City Associates Four Points by Sheraton--Saginaw, Michigan 156 N/A(2)
1500 Canal Street Investors, LP Radisson New Orleans Hotel--New Orleans, Louisiana 759 9/92
Chartwell Properties, Inc. Radisson Hotel & Suites--Dallas, Texas 198 2/90
Town & Country Hospitality, Co. Radisson Suites (Town & Country)--Houston, Texas 173 11/89
Main Street Hospitality, LP Holiday Inn Aristocrat--Dallas, Texas 172 11/92
290 Ventures, LP Holiday Inn Northwest Plaza--Houston, Texas 193 9/90
Travis Real Estate Group, JV Holiday Inn Northwest Plaza--Austin, Texas 193 1/92
San Angelo Hospitality, LP Holiday Inn--San Angelo, Texas 148 1/93
Sebring Hospitality, LP Holiday Inn--Sebring, Florida 148 8/93
Fairmount Hospitality, LP Fairmount Hotel--San Antonio, Texas 37 10/92
-----
3,509
-----
LIMITED SERVICE HOTELS:
Hotel Group of Jacksonville, JV Hampton Inn Jacksonville Airport - Jacksonville, Florida 113 1985(1)
North Coast Rochester Limited Hampton Inn--Rochester, New York 113 1986(1)
Partnership
Great Northern Inns Company, L.P. Hampton Inn Cleveland Airport--North Olmsted, Ohio 113 N/A(2)
North Coast Inns Co. Ltd. Hampton Inn--Canton, Ohio 108 N/A(2)
-----
447
-----
EXECUTIVE CONFERENCE CENTER:
MWL Peachtree Peachtree Executive Conference Center--Peachtree City, 250 4/93
Georgia -----
4,206
=====
- ---------------
</TABLE>
(1) Constructed by the current owner.
(2) See Basis of Presentation for a discussion of these Initial Hotels which
were not owned by the Primary Contributors or their affiliates.
19
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
The Operating Partnership purchased the Initial Hotels from the Selling
Entities for an aggregate purchase price of approximately $311,000. The owners
of the Selling Entities received cash and/or units of limited partnership
interest in the Operating Partnership as consideration for the hotels. See
Initial Public Offering below.
Upon acquisition, all of the Initial Hotels were leased to CHC Lease
Partners, a general partnership owned jointly by CHC and an affiliate of a
principal of Gencom, pursuant to separate participating leases (the
''Participating Leases''). Under the terms of the Participating Leases, CHC
Lease Partners is obligated to pay the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, conference center revenue and telephone and other revenue of
each of the Initial Hotels. The Participating Leases have an average term of
approximately eleven years.
CHC Lease Partners contracted with hotel management subsidiaries of CHC and
with GAH-II, L.P. (''GAH'') to manage 19 of the Initial Hotels and Metro Hotels
Joint Venture manages the remaining Initial Hotel (collectively, the
''Operators''). Under the terms of these management agreements the Operators
are required to perform all management functions necessary to operate the
Initial Hotels.
Initial Public Offering
The Company filed its registration statement with the Securities and Exchange
Commission which became effective September 27, 1995 pursuant to which the
Company completed an initial offering (the "Initial Offering") of 14,605,000
shares of its common stock to the public (including 1,905,000 shares of common
stock issued upon exercise of the underwriters' over-allotment option). The
Initial Offering price of all shares sold in the Initial Offering was $24.00 per
share, resulting in net proceeds (less the underwriters' discount and offering
expenses) of approximately $313,170.
Upon completion of the Initial Offering, the Company contributed, through its
wholly-owned subsidiaries, substantially all of the net proceeds of the Initial
Offering to the Operating Partnership in exchange for an approximately 86.3%
general and limited partnership interest in the Operating Partnership. The
Operating Partnership then used the proceeds from the Company to acquire the
Initial Hotels from the Selling Entities, to finance certain capital
improvements and for general working capital. Rather than receiving cash for
their entire interests in the Selling Entities upon the sale of the Initial
Hotels, the Primary Contributors and certain third-party sellers elected to
receive limited partnership interests in the Operating Partnership aggregating
an approximately 13.7% equity interest in the Operating Partnership.
Basis Of Presentation
The accompanying financial statements are presented on a combined basis
because subsequent to October 1, 1995, these properties are wholly-owned by the
Operating Partnership and because 19 of the 20 Initial Hotels included in the
combination were either owned or managed by one of the Primary Contributors or
their affiliates prior to the Operating Partnership's acquisition.
Management believes that these combined financial statements result in a more
meaningful presentation and thus appropriately reflect the historical financial
position and results of operations of the predecessor of CHC Lease Partners. All
significant inter-entity transactions have been eliminated in the combined
presentation.
Interim Unaudited Financial Information
These unaudited combined statements of operations and cash flows have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods ended
June 30, 1995 is not necessarily indicative of the
20
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
results for the year ended December 31, 1995. For further information, refer to
the combined financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
2. MORTGAGES AND OTHER NOTES PAYABLE:
Mortgage Loans
As of June 30, 1995, the combined Initial Hotels were obligated under an
aggregate of 21 mortgage loans, each of which are generally collateralized by a
first lien deed of trust and assignment of rents. The mortgage loans payable
consist of both interest only and amortizing loans which mature at various dates
through November 2011. Seven of the mortgage loans totaling $83,689 as of June
30, 1995 have fixed interest rates ranging from 6.0% to 12.0%. Variable rate
mortgage loans payable at June 30, 1995 total approximately $54,375. Interest
rates on the variable rate debt are generally based on prime or LIBOR rates
which were 9.0% and 6.13%, respectively, at June 30, 1995. Certain of the
mortgage obligations are personally guaranteed by certain partners of the
Selling Entities.
Other Notes Payable
As of June 30, 1995, the combined Initial Hotels were also obligated under
six other notes payable arrangements totaling $5,850. Two of the notes
aggregating $4,499 were issued in connection with the redemption of a minority
partner's interest in one of the Initial Hotels and termination of the hotel
operator's management contract in January 1995. The proceeds from the remaining
notes were used to finance improvements to certain hotels. The notes, which
mature at various dates through December 31, 2004, bear interest at rates
ranging from 7.5% to 14%. Certain of the notes are guaranteed by owners.
Debt Extinguishment
All of the outstanding mortgage and other notes payable described above were
repaid on October 2, 1995 from the proceeds of the Initial Offering.
The Bourbon Orleans Hotel was purchased subject to a mortgage note in the
amount of $9,345 held by the Resolution Trust Corporation (''RTC''). Due to the
non-interest bearing feature of the loan, the mortgage note payable and the
carrying amount of the property were discounted in the amount of $3,220 using an
imputed interest rate of approximately 7.5%. The loan provided for payment to
the RTC equal to 25% of the net proceeds from sale or refinancing of the
property.
In February 1995, the owner refinanced the hotel and the RTC note payable was
retired, prior to scheduled maturity, for $7,588. The excess of the
reacquisition price over the net carrying amount of the debt of $5,785, resulted
in a loss on extinguishment of $1,803, which is presented as an extraordinary
item in 1995. Additionally, interest expense in 1995 includes $1,242 paid to
the RTC for its share of the net refinancing proceeds. The new loan, in the
amount of $12,500, accrued interest at the LIBOR Index, with monthly payments of
interest only due for the first twelve months.
Additionally, the loan proceeds were used to retire other indebtedness of the
hotel of approximately $2,480 and to purchase equipment leased under capital
leases of approximately $1,290.
In March 1995, the Radisson New Orleans Hotel obtained an extension of a
$500,000 note payable due January 1995. The terms of the loan remained
unchanged except for an extension of the loan maturity date to December 2, 1995.
21
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
3. COMMITMENTS AND CONTINGENCIES:
Franchise Agreements
Under the terms of hotel franchise agreements expiring at various dates
through July 2013, annual payments for franchise royalties, reservation and
advertising services are due for 17 of the 20 Initial Hotels. Fees are computed
based upon percentages of gross room revenue. Such fees were approximately
$1,686 during 1995. Certain of these agreements require the franchisee to
establish reserves for property improvements, replacement of furniture and
equipment or payment of property taxes and insurance.
4. RELATED PARTY TRANSACTIONS:
After the Initial Offering described in Note 1, the Operators of 19 of the
Initial Hotels are hotel management subsidiaries of CHC and GAH, an entity
affiliated with CHC and Gencom. Prior to the Initial Offering, seven of the
Initial Hotels were operated by CHC and six were operated by GAH. In addition,
five of the remaining Initial Hotels were operated by affiliates of the Selling
Entities.
The hotels were operated under management agreements expiring through August
2003, and terms included management fees generally ranging from 2% to 5% of
revenue. In addition, certain of the hotels provided for the payment of
incentive management fees based on achievement of specified performance criteria
as defined in the individual management agreements. In certain cases accounting
fees ranging from $1 to $3 per month, asset management fees ranging from $2 to
$3 per month, and construction supervisory fees ranging from 5% to 10% of the
total cost incurred for capital improvements were also due.
Certain of the Selling Entities had working capital loans or advances from
owners or their affiliates. These loans bear interest at rates ranging from 5%
to 14% at June 30, 1995 and mature at various dates through March 1997. The
advances are non-interest bearing and are generally due on demand. Interest
expense related to these loans is $157 during 1995. Loans and advances from
affiliates were repaid in connection with the Initial Offering.
5. CHANGES IN OWNERSHIP:
In January 1995, the partnership owning the Radisson New Orleans Hotel
redeemed the limited partnership interest of a minority partner based upon a
negotiated purchase price of $4,249 and bought out the existing management
contract of the hotel operator in exchange for notes payable aggregating $4,499.
The notes were repaid in connection with the Initial Offering.
In June 1995, one of the Primary Contributors acquired the interests of his
partners in the Holiday Inn Northwest-Houston Hotel. In connection with this
acquisition, an affiliated entity acquired all the assets and certain
liabilities in exchange for a note payable to the seller, which wraps around the
underlying first mortgage and certain other indebtedness of the seller. The
amount of the note payable in excess of the underlying indebtedness of $3,964
has been reflected as a redemption of partner interests in the accompanying
financial statements. The notes were repaid in connection with the Initial
Offering.
6. NON CASH INVESTING AND FINANCING ACTIVITIES:
During 1995, a note payable to an affiliate of one of the Primary
Contributors was converted to an additional equity interest in the owner of the
Peachtree Executive Conference Center in the amount of $4,145.
22
<PAGE>
NORTHCOAST HOTELS, L.L.C.
BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,649
Accounts receivable, net of allowance for doubtful accounts of $16 2,392
Receivable from Patriot American Hospitality Partnership, L.P. 287
Inventories 201
Prepaid expenses and other assets 159
-------
Total current assets 6,688
Deferred assets, net of accumulated amortization of $8 375
Investments 825
Other assets 792
-------
Total assets $ 8,680
=======
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable $ 1,606
Accrued rent due to Patriot American Hospitality Partnership, L.P. 2,277
Due to affiliates 148
Accrued payroll and benefits 1,637
Guest deposits 133
Accrued expenses and other liabilities 92
-------
Total current liabilities 5,893
Due to Patriot American Hospitality Partnership, L.P. 190
-------
Total liabilities 6,083
Commitments and contingencies --
Members' Equity:
Capital contributions 3,300
Less: Notes receivable from members (1,050)
-------
2,250
Accumulated earnings 347
-------
Total members' equity 2,597
-------
Total liabilities and members' equity $ 8,680
=======
</TABLE>
See accompanying notes.
23
<PAGE>
NORTHCOAST HOTELS, L.L.C.
STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 2, 1996
(INCEPTION OF
OPERATIONS)
THROUGH
JUNE 30, 1996
---------------
<S> <C>
Revenue:
Rooms $ 7,720
Food and beverage 3,237
Telephone and other 707
-------
Total revenue 11,664
-------
Expenses:
Departmental costs and other expenses 4,639
Participating lease payments 3,307
General and administrative 998
Ground lease expense 278
Repairs and maintenance 621
Utilities 357
Marketing 789
-------
Total expenses 10,989
-------
Income before lessee income (expense) 675
-------
Dividend and interest income 59
Management fees (281)
Depreciation and amortization (8)
Lessee general and administrative expenses (98)
-------
Total lessee income (expense) (328)
-------
Net income $ 347
=======
</TABLE>
See accompanying notes.
24
<PAGE>
NORTHCOAST HOTELS, L.L.C.
STATEMENT OF MEMBERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 2, 1996
(INCEPTION OF
OPERATIONS)
THROUGH
JUNE 30, 1996
--------------
<S> <C>
Initial capitalization at inception................... $ 3,300
Notes receivable from members......................... (1,050)
Net income............................................ 347
-------
Balance, June 30, 1996................................ $ 2,597
=======
</TABLE>
See accompanying notes.
25
<PAGE>
NORTHCOAST HOTELS, L.L.C.
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 2, 1996
(INCEPTION OF
OPERATIONS)
THROUGH
JUNE 30, 1996
---------------
<S> <C>
Cash flows from operating activities:
Net income $ 347
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on accounts receivable 16
Depreciation and amortization 8
Increase in assets and liabilities:
Accounts receivable (2,408)
Inventories (11)
Prepaid expenses and other assets (159)
Accounts payable 1,186
Accrued rent due to Patriot American Hospitality Partnership, L.P. 2,277
Due to affiliates 148
Accrued payroll and benefits 1,174
Guest deposits 133
Accrued expenses and other liabilities 92
-------
Net cash provided by operating activities 2,803
-------
Cash flows from investing activities:
Purchase of equipment (7)
Payment of organization costs and capitalized lease costs (383)
Payment for deferred purchase consideration (785)
-------
Net cash used in investing activities (1,175)
-------
Cash flows from financing activities:
Cash received from assumption of operating liabilities 682
Payments for capital improvements on behalf of owner (86)
Capital contributions 1,425
-------
Net cash provided by financing activities 2,021
-------
Net increase in cash and cash equivalents 3,649
-------
Cash and cash equivalents at end of period $ 3,649
=======
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Contribution of Operating Partnership Units $ 825
=======
Inventory received in exchange for a liability to Patriot American Hospitality
Partnership, L.P. $ 190
=======
Operating liabilities assumed in exchange for receivables from Patriot American
Hospitality Partnership, L.P. $ 201
=======
</TABLE>
See accompanying notes.
26
<PAGE>
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
NorthCoast Hotels, L.L.C. ("NorthCoast"), was formed January 10, 1996 to
lease and operate certain hotels owned by Patriot American Hospitality
Partnership, L.P. (the "Operating Partnership"). At June 30, 1996, Patriot
American Hospitality, Inc. (the "Company"), through its subsidiaries, owns
approximately 81.6% of the Operating Partnership. NorthCoast, a Washington
limited liability company, is owned jointly by Dunson NorthCoast L.L.C.,
Sterling Resources, Inc., WestCoast NC, Inc. (a subsidiary of WestCoast Hotels,
Inc.), and the Thomas H. and Ann A. Childers Family Trust. NorthCoast will
continue for a term of fifty years unless terminated earlier pursuant to the
terms of the limited liability company agreement. In general, members are not
personally liable for any debts or losses of NorthCoast that exceed their
respective capital contribution, except as discussed in Note 2, and losses are
generally allocated to the members in proportion to their capital contributions.
NorthCoast began leasing five hotels on April 2, 1996. On April 5, 1996
and May 22, 1996, NorthCoast and the Operating Partnership entered into two
additional operating leases for two hotels which were acquired by the Operating
Partnership. At June 30, 1996, NorthCoast leased seven hotels, of which four
are located in Washington, two in California and one in Kentucky.
Each hotel is leased by the Operating Partnership to NorthCoast under
separate participating operating lease agreements. Six of the seven hotel
leases contain cross-default provisions. These leases, which require NorthCoast
to maintain a minimum net worth and adequate working capital, have an average
term of eleven years and require payment of the greater of (1) minimum base rent
or (2) participating rent based upon certain percentages of room revenue, food
and beverage revenue, and telephone and other revenues of each of the hotels,
plus certain additional charges, as applicable.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
period April 2, 1996 (inception of operations) through June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. Significant accounting policies are summarized below.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with an original maturity date of three
months or less when purchased are considered to be cash equivalents.
27
<PAGE>
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Inventories
Inventories, consisting of food, beverages, china, linens, silverware and
glassware, are principally stated at the lower of cost (generally first-in,
first-out) or market.
Deferred Assets
Deferred assets consist of organization costs and capitalized lease costs.
Amortization of organization costs is computed using the straight-line method
over five years. Capitalized lease costs are amortized over the average lease
term of eleven years.
Investments
Investments consist of 31,074 units of limited partnership interest in the
Operating Partnership ("OP Units"). The OP Units are subject to redemption
rights which may be exercised, subject to certain restrictions, at any time
after April 2, 1997, to cause the Operating Partnership to redeem each OP Unit
for cash equal to the value of a share of Company common stock or, at the
Company's election, the Company may purchase each OP Unit offered for redemption
for one share of Company common stock. Under the participating lease agreements
NorthCoast has collaterally assigned the OP Units to the Operating Partnership.
NorthCoast accounts for its investment in the OP Units using the cost method of
accounting. The OP Units are stated at lower of cost or market based upon the
fair market value of Company common stock.
Other Assets
Other assets consists primarily of additional purchase consideration due
from the Operating Partnership on two of the hotels. NorthCoast purchased the
additional consideration from the selling entities upon acquisition of the
hotels by the Operating Partnership. Receipt of the additional purchase
consideration is dependent upon the respective hotels achieving certain
operating performance goals in 1997. Management believes the deferred purchase
consideration will be collected.
Revenue Recognition
Revenue is recognized upon performance of hotel-related services and
delivery of food and beverages. Credit evaluations are performed and an
allowance for doubtful accounts is provided against accounts receivable which
are estimated to be uncollectible.
Income Taxes
Under the provisions of the Internal Revenue Code and applicable state
income tax law, NorthCoast is taxed as a limited liability company, an entity
which is taxed in the same manner as a partnership and, therefore, is not
subject to taxation on income. The federal and state income tax consequences of
NorthCoast's profits and losses accrue to the limited liability company members.
Concentration of Credit Risk
Financial instruments which potentially subject NorthCoast to
concentrations of credit risk consist principally of cash balances with banks in
excess of Federal Deposit Insurance Corporation ("FDIC") insured limits,
accounts receivable from hotel customers and investments in OP Units.
NorthCoast places its cash with high quality financial institutions, however, at
June 30, 1996, NorthCoast has cash balances with banks in excess of FDIC insured
limits. Management believes the credit risk related to these deposits is
minimal. Concentrations of credit risk with respect to accounts receivable from
hotel customers are limited due to the large number of customers and their
dispersion across many hotels and geographies. Concentrations of credit risk
with respect to investments in OP Units exist to the extent
28
<PAGE>
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
of potential fluctuations in the value of Company common stock. Management
believes the credit risk related to the OP Units is minimal.
2. MEMBERS' EQUITY:
Initial Capitalization
Each of the four members is required to contribute $825 to NorthCoast.
Contributions can be in the form of cash or other property. At June 30, 1996,
cash contributions of $1,425 and OP Units of $825 have been received.
In addition, notes receivable, bearing interest at 7% per annum, have been
received from Sterling Resources, Inc. in the amount of $225 and from Thomas H.
Childers in the amount of $825. The note receivable from Sterling Resources,
Inc., which is unsecured, is due in two installments with $50 due July 31, 1996
and the balance due October 1, 1996. The note receivable from Thomas H.
Childers is due October 31, 1998, and can be paid with either cash or OP Units.
This note is secured by an approximate 12.6% interest in LeParc Investment
Group, LLC (the "LeParc Entity"). These notes receivable from members have
been offset against members' equity in the accompanying financial statements.
Interest income of $18 was earned during the period ended June 30, 1996.
Guarantees
Each of the four NorthCoast members has guaranteed NorthCoast's
obligations to the Operating Partnership in the amount of $150.
Minimum Net Worth
Under the terms of the participating lease agreements, NorthCoast is
required to maintain minimum net worth, as defined, equal to the greater of (i)
$2,929, or (ii) 20% of the projected annual lease payments for all hotels
leased. The minimum net worth must be composed of certain components in
specified minimum amounts, including at least 15% in cash or certain cash
equivalents. No more than 25% of the minimum net worth can be composed of a
promissory note secured by an interest in the LeParc Entity. NorthCoast is also
required to maintain ownership of shares of common stock of the Company or OP
Units of the Operating Partnership with a value of $825.
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
Participating Lease Commitments
At June 30, 1996, NorthCoast has future lease commitments to the Operating
Partnership under the participating lease agreements through the year 2008.
Minimum future rental payments under these noncancellable operating leases are
as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
--------------------------- --------
<S> <C>
1996........................ $ 6,440
1997........................ 13,226
1998........................ 12,898
1999........................ 12,898
2000........................ 12,898
Thereafter.................. 71,071
--------
$129,431
========
</TABLE>
NorthCoast incurred rents of $3,307 during the period April 2, 1996 through
June 30, 1996. At June 30, 1996, NorthCoast owed the Operating Partnership
$2,277 for rents under the terms of the participating leases, including deferred
rent of $846 payable ratably over the remainder of 1996. The deferred rent
bears interest at 9.75%.
29
<PAGE>
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Under the participating lease agreements, NorthCoast is obligated to return
to the Operating Partnership the inventory at each of the hotels at the end of
the related lease term. As of June 30, 1996, the balance of the inventory due
to the Operating Partnership was $190.
Management and Franchise Agreements
Five of the seven hotels leased by NorthCoast are managed by WestCoast
Hotels, Inc. ("WestCoast Hotels"), and are operated under a franchise agreement
with WestCoast Marketing, Inc. WestCoast Hotels receives a hotel management fee
per hotel of $2 per month in 1996 for four of the five hotels and 1% of gross
room revenue, as defined, for the WestCoast Long Beach Hotel and Marina. All
management fees payable to WestCoast Hotels greater than 1% of hotel revenues
are subordinate to NorthCoast's obligations to the Operating Partnership under
the terms of the participating lease agreements. WestCoast Marketing, Inc.
receives a franchise fee of 2.5% of gross room revenues, as well as certain
reservation fees in connection with the use of the WestCoast brand. Two of the
seven hotels are managed by Hyatt Corporation ("Hyatt"), and include an asset
management agreement with WestCoast Hotels. WestCoast Hotels receives an asset
management fee in 1996 on the Hyatt Regency Lexington of $6 per month and on the
Hyatt Newporter of $2 per month.
Hyatt receives management fees ranging from 3.5% to 5% of gross revenues
plus incentive fees if certain operating results based on cash flow and profits
(as defined) are achieved by the hotels. In addition, the management agreement
with Hyatt provides for the allocation of certain advertising, marketing and
reservation related expenses incurred by Hyatt to all hotels in the Hyatt chain
based upon the number of total rooms available during the year.
Management Contract for Convention Center
The WestCoast Wenatchee Center Hotel has entered into an agreement with the
City of Wenatchee (the "City") to provide management services for the Wenatchee
Center, including marketing and space rental for meetings, conferences and
banquets. The agreement, which commenced in October 1980, provides for an
initial term of seven years and the option to extend the agreement for three
consecutive periods of seven years each. The WestCoast Wenatchee Center Hotel
pays the City fees based on the greater of $50 annually, adjusted for the
increase in the Consumer Price Index, or a percentage of gross revenues from
operation of the hotel.
Ground Lease
NorthCoast has commitments under two ground lease agreements. The term of
the lease for the Hyatt Newporter Hotel is through December 31, 2048 and the
lease is subject to an escalation clause for each five-year period based on the
Consumer Price Index, not to exceed 8% per year compounded annually for the five
years then ending. In addition, the lease requires the hotel to pay a percentage
of its annual sales, as defined in the related lease agreement, with minimum
annual lease payments of $722.
The term of the lease for the WestCoast Long Beach Hotel and Marina is
through March 31, 2052. Annual minimum rent payments are approximately $173
through September 30, 1999, at which time the rent will be negotiated for the
next five-year period. Percentage rent is payable, if in excess of the minimum
rent, based upon certain percentages of room revenue, food and beverage revenue,
and telephone and other revenues of the hotel.
Employment and Other Agreements
NorthCoast has entered into an employment agreement with Thomas H.
Childers, pursuant to which Mr. Childers serves as President of NorthCoast for a
term of five years at an initial annual base compensation of $120.
NorthCoast fully reimburses WestCoast Hotels for office space it occupies
within the corporate offices of WestCoast Hotels and for the payroll and related
costs WestCoast Hotels administers on behalf of NorthCoast. As of June 30,
1996, the amount paid to WestCoast Hotels for these costs was $6.
30
<PAGE>
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
4. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statements of operations are presented as
if the leases and the operation of the seven hotels leased by NorthCoast had
commenced on January 1, 1995. The unaudited pro forma statements of operations
are not necessarily indicative of what the actual results of operations of
NorthCoast would have been assuming such operations had commenced as of January
1, 1995, nor do they purport to represent the results of operations for future
periods. Pro forma lessee expenses represent management fees and estimated
lessee overhead expenses and exclude pro forma dividend income on 31,074 OP
Units and interest income associated with working capital balances.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1995 1996
------------- ------------
<S> <C> <C>
(IN THOUSANDS)
Revenue:
Rooms............................ $15,313 $16,451
Food and beverage................ 7,388 7,457
Telephone and other.............. 1,442 1,553
------- -------
Total revenue................... 24,143 25,461
------- -------
Expenses:
Departmental costs and expenses.. 10,357 10,720
Participating lease payments..... 6,635 7,215
General and administrative....... 2,059 2,389
Ground lease expense............. 551 567
Repairs and maintenance.......... 1,365 1,406
Utilities........................ 889 903
Marketing........................ 1,875 1,901
Insurance........................ 112 112
------- -------
Total expenses.................. 23,843 25,213
------- -------
Income before lessee expenses..... 300 248
Lessee expenses................... 673 805
------- -------
Net loss......................... $ (373) $ (557)
======= =======
</TABLE>
31
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The accompanying discussion and analysis of financial condition and
results of operations is based on the consolidated financial statements of the
Company, the financial statements of CHC Lease Partners, Inc. ("CHC Lease
Partners"), the combined historical financial statements of the Initial Hotels,
and the financial statements of NorthCoast Hotels, L.L.C. ("NorthCoast") which
are included elsewhere in this Quarterly Report. The following discussion and
analysis should be read in conjunction with the accompanying financial
statements and related notes thereto. This discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Security Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause a difference
include, but are not limited to, the Company's dependence upon rental payments
from the Lessees for substantially all the Company's income and the dependence
upon the abilities of the Lessees and Operators to manage the hotels, risks
associated with the hotel industry and real estate markets in general, and risks
associated with debt financing.
BACKGROUND
Patriot American Hospitality, Inc. (collectively with its subsidiaries, the
"Company"), a Virginia corporation, was formed April 17, 1995 as a self-
administered real estate investment trust ("REIT") for the purpose of acquiring
equity interests in hotel properties. On October 2, 1995, the Company completed
its initial public offering (the "Initial Offering") of 14,605,000 shares of its
common stock and commenced operations. The Company, through its wholly-owned
subsidiary, PAH LP, Inc., contributed substantially all of the net proceeds of
the Initial Offering to Patriot American Hospitality Partnership, L.P. (the
"Operating Partnership") in exchange for an approximate 85.3% limited
partnership interest in the Operating Partnership. The Company, through its
wholly-owned subsidiary, PAH GP, Inc., is the sole general partner and the
holder of a 1.0% general partnership interest in the Operating Partnership.
The Operating Partnership used approximately $263,600,000 of the net
proceeds from the Company to acquire 20 hotel properties with a total of 4,206
guest rooms (the "Initial Hotels") from various entities and repay existing
mortgages and other indebtedness of the Initial Hotels. In addition, in
connection with the Initial Offering, the Company closed on a Line of Credit
with Paine Webber Real Estate Securities, Inc. ("Paine Webber Real Estate") to
be utilized primarily for the acquisition of additional hotels, renovation of
certain hotels and for working capital. Since the Initial Offering, the Company
has invested approximately $276,973,000 in the acquisition of hotel properties
(including purchase prices and acquisition-related expenses).
On November 15, 1995, the Company acquired the 223-suite Embassy
Suites Hotel in Hunt Valley, Maryland for cash of approximately $15,961,000.
The purchase was paid for with a portion of the remaining net proceeds from the
Initial Offering.
On December 1, 1995, PAH Ravinia, Inc. ("PAH Ravinia"), a Virginia
corporation of which the Company owns an approximate 99% non-voting ownership
interest, acquired the 495-room Crowne Plaza Ravinia Hotel in Atlanta, Georgia.
The Company paid approximately $4,456,000 for its 99% ownership interest in PAH
Ravinia and advanced to PAH Ravinia an aggregate of $40,500,000 in first and
second lien mortgage notes (the "Mortgage Notes") for the purchase of the hotel.
The investment in PAH Ravinia and funding of the Mortgage Notes was paid for in
part with the remaining net proceeds from the Initial Offering and in part with
borrowings from the Company's Line of Credit in the amount of $9,500,000.
During the first quarter of 1996, the Company acquired three
additional hotel properties in three states with an aggregate 830 guest rooms.
The Company acquired the 288-room Tremont House Hotel in Boston, Massachusetts
in January 1996, for approximately $16,482,000 in cash. The purchase was
financed primarily with funds drawn on the Line of Credit. In March 1996, the
Company acquired the 297-room Holiday Inn Lenox Hotel in Atlanta, Georgia and
the 245-room Del Mar Hilton in Del Mar (San Diego), California. The Holiday Inn
Lenox Hotel is subject to a 73-year ground lease and was acquired for
approximately $7,340,000 in cash and 167,012 OP Units valued at approximately
$4,739,000 based upon the market price of the Company's common stock at the
closing of the acquisition. The cash portion of the purchase was funded with a
draw on the Line of Credit. The Del Mar Hilton Hotel was acquired for
approximately $14,765,000 in cash. The purchase was also financed primarily
with funds drawn on the Line of Credit.
In April 1996, the Company acquired the six hotel WestCoast Portfolio
for approximately $75,630,000 in cash and 331,577 OP Units, valued at
approximately $8,800,000 at the closing of the acquisition. The portfolio
includes the 194-suite WestCoast Plaza Park Suites Hotel, the 151-room WestCoast
Roosevelt Hotel and the 145-room WestCoast Gateway Hotel, all in Seattle,
Washington; the 410-room Hyatt Newporter Hotel in Newport Beach, California; the
192-room West Coast Long Beach Hotel and Marina in Long Beach, California; and
the 147-room WestCoast Wenatchee Center Hotel in Wenatchee, Washington. The
cash portion of the purchase was financed primarily with funds drawn on the Line
of Credit.
32
<PAGE>
On May 22, 1996, the Company acquired the 365-room Hyatt Regency in
Lexington, Kentucky for approximately $14,320,000 in cash. On June 20, 1996,
the Company acquired the 180-room Doubletree Denver/Boulder in Westminster
(Denver), Colorado for approximately $12,520,000 in cash. These purchases were
financed primarily with funds drawn on the Line of Credit.
As of June 30, 1996, the Company, through the Operating Partnership
and PAH Ravinia, owned 33 hotel properties in 13 states with an aggregate 7,538
guest rooms (the "Hotels"). The Hotels are diversified by franchise or brand
affiliation and serve primarily major U.S. business centers, including Atlanta,
Boston, Cleveland, Dallas, Denver, Houston and Seattle. In addition to hotels
catering primarily to business travelers, the Hotels include prominent hotels in
major tourist destinations, including New Orleans, San Antonio and San Diego.
The Hotels include 27 full service hotels, 5 limited service hotels and an
executive conference center. Twenty-nine of the Hotels are operated under
franchise or brand affiliations with nationally recognized hotel companies.
In order for the Company to qualify as a REIT, neither the Company nor
the Operating Partnership can operate hotels. Therefore, the Operating
Partnership leases each of the Hotels, except the Crowne Plaza Ravinia Hotel, to
lessees that are independent of the Company (the "Lessees") pursuant to separate
Participating Leases for staggered lease terms of ten to twelve years. The
Participating Leases provide for the payment of the greater of base rent or
participating rent, plus certain additional charges which vary with the
Participating Lease. Twenty-three of the Hotels are leased to CHC Lease
Partners, the Hotels in the WestCoast Portfolio and the Hyatt Regency are leased
to NorthCoast, and Metro Hotels Leasing Corporation ("Metro Lease Partners") and
DTR North Canton, Inc. (the "Doubletree Lessee") each lease one Hotel. The
Crowne Plaza Ravinia Hotel acquisition was structured without a lessee for
reasons specific to the acquisition. As a result, the Company receives its
income from this Hotel's operations as income from an unconsolidated subsidiary
instead of lease income.
The Operating Partnership's, and therefore the Company's, primary
source of revenue is lease payments by the Lessees under the Participating
Leases. Participating Rent is based primarily upon the Hotels' room revenue,
and to a lesser extent, food and beverage, conference center and other revenue.
The Lessees' ability to make payments to the Operating Partnership under the
Participating Leases is dependent upon their ability to generate cash flow from
the operation of the Hotels.
The Lessees and PAH Ravinia in turn have entered into separate
management agreements with Operators to operate the Hotels. CHC Lease Partners
has entered into management agreements whereby 22 of the Hotels are managed by
affiliates of CHC Lease Partners and one Hotel is managed by Metro Joint Venture
("Metro Hotels"), an affilate of Metro Lease Partners. NorthCoast has entered
into management agreements whereby WestCoast Hotels, Inc. ("WestCoast Hotels"),
a hotel management company affiliated with NorthCoast, manages each of the
hotels in the WestCoast Portfolio except the Hyatt Newporter Hotel. The Hyatt
Newporter Hotel and the Hyatt Regency in Lexington are managed by Hyatt
Corporation ("Hyatt") pursuant to separate management agreements between
NorthCoast and Hyatt. Metro Lease Partners has entered into a management
agreement with Metro Hotels to manage the Embassy Suites, Hunt Valley, Maryland.
The Doubletree Lessee has entered into a management agreement with a subsidiary
of Doubletree Hotels to manage the Doubletree Denver/Boulder. The Crowne Plaza
Ravinia is being managed by Holiday Inns, Inc. pursuant to a management
agreement between PAH Ravinia and Holiday Inns, Inc.
RECENT DEVELOPMENTS
On July 15, 1996, the Company acquired the Wyndham Greenspoint Hotel
located in Houston, Texas and the Wyndham Garden-Midtown located in Atlanta,
Georgia, containing an aggregate of 663 rooms for approximately $60,960,000
(including acquisition-related expenses) and 17,306 OP Units, valued at
approximately $500,000 at the closing of the acquisition. In addition, the
Company may be obligated to pay up to $3,000,000 of additional consideration
upon the achievement of certain future operating results at these hotels. In
connection with this acquisition, the Company agreed to maintain at least
$22,000,000 of debt on the Wyndham Greenspoint Hotel until the end of 1999 and
Paine Webber Real Estate has extended the $22,000,000 Greenspoint Loan on
economic terms similar to the Line of Credit.
The Wyndham Greenspoint Hotel and the Wyndham Garden-Midtown are
leased to Crow Hotel Lessee, Inc. (the "Wyndham Lessee"), and are managed by
Wyndham Management Corporation ("Wyndham") pursuant to separate Management
Agreements between the Wyndham Lessee and Wyndham.
The Company has also entered into non-binding purchase and sale
agreements to acquire the 492-room Bonaventure Hotel & Spa in Fort Lauderdale,
Florida for a purchase price of approximately $16,200,000 in cash and the
payment of approximately $3,425,000 relating to the assumption of operating
liabilities and acquisition-related
33
<PAGE>
expenses; the 362-room Marriott WindWatch Hotel in Hauppauge (Long Island), New
York for a purchase price of approximately $30,000,000; the three Wyndham Garden
Hotels aggregating 478 rooms located in Novi (Detroit), Michigan, Wood Dale
(Chicago), Illinois, and Irving (Dallas), Texas for approximately $35,300,000;
the 257-room Valley River Inn in Eugene, Oregon for a purchase price of
approximately $18,750,000; and the 250-room Holiday Inn O'Hare in Des Plaines,
Illinois for a purchase price of approximately $8,700,000.
The acquisition of these or any other properties is subject to a
number of contingencies, including, among other things, the satisfactory
completion of the Company's due diligence investigation of the hotels, the
negotiation of a definitive acquisition agreement and obtaining financing and/or
Line of Credit lender approval, as applicable. Accordingly, there can be no
assurance that the acquisition of any of these properties will be consummated.
On July 29, 1996, the Company completed a public offering (the
"Follow-on Offering") of 5,500,000 shares of its common stock. The offering
price of all shares sold in the Follow-on Offering was $28.25 per share,
resulting in net proceeds (less the underwriters' discount and offering
expenses) of approximately $144,200,000 of which approximately $134,696,000 was
used to reduce the amount outstanding under the Line of Credit.
RESULTS OF OPERATIONS OF THE COMPANY
Actual (for the Six Months Ended June 30, 1996)
For the six months ended June 30, 1996, the Company earned $30,269,000
in Participating Lease revenue from the Lessees, which is net of leasing cost
amortization of $46,000. Interest and other income, which was $201,000 for the
period, consisted primarily of interest income earned on invested cash balances
of the Company's capital improvement reserves. Depreciation and amortization
for the period was $6,784,000. Real estate and personal property taxes and
insurance for the period were $2,542,000 and rent payments on a ground lease
were $300,000. General and administrative expenses were $1,892,000 (including
amortization of unearned executive compensation of $284,000). The Company
reported $2,772,000 of interest expense for the period which consists of
$2,639,000 of interest incurred on the Line of Credit balance outstanding,
$11,000 of other interest expense and $122,000 of amortization of deferred
financing costs. The Company's share of income from an unconsolidated subsidiary
was $2,605,000. The minority interest's share of income of the Company was
$2,974,000 (representing the minority partners' interest in the Operating
Partnership). The resulting net income applicable to common shareholders was
$15,811,000.
Pro Forma
For the six months ended June 30, 1996, the Company's pro forma lease
revenue increased 6.2% to $35,761,000 from $33,684,000 for 1995, reflecting
improvements in average room rates at the Hotels during 1996 (see pro forma
Results of Operations of Lessees below). Total pro forma expenses increased from
$17,757,000 for the six months ended June 30, 1995 to $18,415,000 for the six
months ended June 30, 1996, an increase of $658,000, or 3.7%. This increase is
primarily attributable to pro forma general and administrative expense, which
increased by $492,000 in 1996 compared to 1995 as a result of increases in
staffing, cost of amortization of unearned executive compensation, and certain
professional fees and consultant costs. Pro forma real estate taxes and
personal property taxes and casualty insurance increased by $208,000.
Depreciation and amortization increased by $226,000. Interest expense decreased
by $289,000 as a result of decreases in the 30-day LIBOR rate (for the first six
months of 1996 as compared to the first six months of 1995) upon which Line of
Credit interest rate is based. In addition, the Company's pro forma equity in
earnings of its unconsolidated subsidiary increased from $1,857,000 for the
first six months of 1995 to $2,605,000 for the first six months of 1996 as a
result of improvement in operating results of the Crowne Plaza Ravinia Hotel.
As a result of the above, pro forma net income increased to $16,444,000 in 1996
from $14,530,000 in 1995.
Funds from Operations
Funds from Operations (as defined and computed below) was $14,949,000
for the three months ended June 30, 1996 and $26,583,000 for the six months
ended June 30, 1996. On a pro forma basis, Funds from Operations was
$29,562,000 for the six months ended June 30, 1996.
The Company considers Funds from Operations to be a key measure of
REIT performance. Funds from Operations represents net income (loss) (computed
in accordance with generally accepted accounting principles), excluding gains
(or losses) from debt restructuring or sales of property, plus depreciation of
real property, and after adjustments for unconsolidated partnerships, joint
ventures and corporations. Adjustments for the Company's unconsolidated
subsidiary are calculated to reflect Funds from Operations on the same basis.
The Company has also
34
<PAGE>
made certain adjustments to Funds from Operations for real estate related
amortization. Funds from Operations should not be considered as an alternative
to net income or other measurements under generally accepted accounting
principles as an indicator of operating performance or to cash flows from
operating, investing or financing activities as a measure of liquidity. Funds
from Operations does not reflect working capital changes, cash expenditures for
capital improvements or principal payments on indebtedness.
The following reconciliation of net income to Funds from Operations
for the quarter and the six months ended June 30, 1996 illustrates the
difference between the two measures of operating performance:
<TABLE>
<CAPTION>
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996
-------------- --------------
<S> <C> <C>
Net income $ 8,683 $15,811
Add:
Minority interest in Operating Partnership 1,816 2,974
Depreciation of buildings and improvements and
furniture, fixtures and equipment 3,916 6,724
Amortization of franchise fees 22 44
Amortization of capitalized lease costs 23 46
Adjustments for funds from operations of unconsolidated subsidiary:
Equity in earnings of unconsolidated subsidiary (1,243) (2,605)
Funds from Operations of unconsolidated subsidiary 1,732 3,589
------- -------
Funds from Operations $14,949 $26,583
======= =======
The Company's share of Funds from Operations $12,363 $22,372
======= =======
Fully diluted weighted average shares and OP Units outstanding 18,335 17,721
======= =======
Weighted average number of common shares and common share
equivalents outstanding 15,174 14,953
======= =======
</TABLE>
RESULTS OF OPERATIONS OF THE LESSEES
Actual (for the Six Months Ended June 30, 1996)
CHC Lease Partners. For the six months ended June 30, 1996, CHC Lease
Partners had room revenues of $52,637,000 from the 23 Hotels it leases. Food
and beverage, conference center and other revenues were $22,831,000 for the
period. Participating Lease payments and hotel operating expenses were
$25,867,000 and $47,077,000, respectively, and net income was $936,000.
NorthCoast. For the period April 2, 1996 (inception of operations) through
June 30, 1996, NorthCoast had room revenues of $7,720,000 from the seven Hotels
it leases. Food and beverage, and other revenues were $3,944,000 for the
period. Participating Lease payments and hotel operating expenses were
$3,307,000 and $7,682,000, respectively, and net income was $347,000.
Combined Lessees (CHC Lease Partners, NorthCoast, Metro Lease Partners and
Doubletree Lessee combined). For the six months ended June 30, 1996, the
combined Lessees had room revenues of $62,887,000. Food and beverage,
conference center and other revenues were $27,548,000 for the period.
Participating Lease payments and hotel operating expenses were $30,285,000 and
$56,902,000, respectively, and net income was $1,265,000.
Pro Forma Comparison of the Six Months Ended June 30, 1996 and 1995
CHC Lease Partners. Pro forma room revenue increased from $51,944,000 to
$55,070,000, an increase of $3,126,000 or 6.0%. Pro forma average occupancy
decreased from 73.4% in 1995 to 71.6% in 1996 as part of the business plan which
raised average daily rates by 8.0%, from $77.81 in 1995 to $84.03 in 1996. The
result was a 5.4% increase in pro forma revenue per available room from $57.09
in 1995 to $60.15 in 1996. This overall increase in revenue per available room
was net of decreases at certain hotels. The hotels continue to benefit from
improvement in
35
<PAGE>
market conditions in the U.S. lodging industry and completion of renovations at
certain of the hotels. Four of the Initial Hotels completed renovations in 1995
that were begun in 1994.
Pro forma food and beverage revenue increased from $17,408,000 to
$17,620,000, a total of $212,000, an increase of only 1.2% due to lower
occupancies. Pro forma conference center revenue decreased from $1,292,000 to
$1,196,000, a decrease of $96,000, or 7.4%, due primarily to decreased
conference facility utilization in 1996 compared to 1995. Telephone and other
revenue increased from $4,868,000 to $4,963,000, an increase of $95,000, or
2.0%, due primarily to higher forfeitures of deposits on room cancellations.
Pro forma Participating Lease payments were $26,828,000 for 1996 compared
to $25,409,000 in 1995, an increase of 5.6%. Pro forma hotel operating expenses
increased from $47,655,000 to $49,502,000, an increase of $1,847,000 or 3.9%.
Of this amount, $915,000 was attributable to a 3.3% increase in departmental
costs and expenses, primarily salaries and benefits. Pro forma general and
administrative expenses increased $597,000, or 9.8%, due to higher salaries and
benefits costs. Pro forma marketing expenses increased $261,000, or 3.8%, as a
result of increased marketing efforts at newly renovated hotels. Pro forma
hotel operating expenses as a percentage of total revenue was comparable between
periods, decreasing slightly from 63.1% in 1995 to 62.8% in 1996.
Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, increased by $172,000 which is primarily attributable to
increased management fees resulting from higher revenues. CHC Lease Partners'
pro forma net income was $929,000 in 1995 compared to $828,000 in 1996.
NorthCoast. Pro forma room revenue increased from $15,313,000 to
$16,451,000, an increase of $1,138,000 or 7.4%. Pro forma average occupancy
remained relatively stable, increasing from 66.5% in 1995 to 67.0% in 1996. Pro
forma average daily rates increased by 6.8%, from $79.24 in 1995 to $84.64 in
1996. The result was a 7.7% increase in pro forma revenue per available room
from $52.67 in 1995 to $56.70 in 1996.
Pro forma food and beverage revenue and telephone and other revenue
increased from $8,830,000 to $9,010,000, a total of $180,000, an increase of
2.0%.
Pro forma Participating Lease payments were $7,215,000 for 1996 compared to
$6,635,000 in 1995, an increase of 8.7%. Pro forma hotel operating expenses
increased from $17,208,000 to $17,998,000, an increase of $790,000 or 4.6%. Of
this amount, $363,000 was attributable to a 3.5% increase in departmental costs
and expenses, primarily salaries and benefits. General and administrative
expenses increased $330,000, or 16.0%, due to higher salaries and benefits
costs. Pro forma hotel operating expenses as a percentage of total revenue
decreased from 71.3% in 1995 to 70.7% in 1996. The operating expenses for the
NorthCoast hotels include ground lease expense of $551,000 in 1995 and $567,000
in 1996 which represents 2.3% of total revenue in 1995 and 2.2% of total revenue
in 1996.
Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, increased by $132,000 which is primarily attributable to
increased management fees resulting from higher revenues. NorthCoast's net loss
on a pro forma basis was $373,000 in 1995 compared to a net loss of $557,000 in
1996.
Combined Lessees (CHC Lease Partners, NorthCoast, Metro Lease Partners and
Doubletree Lessee combined). On a combined basis, pro forma room revenue from
the hotels was $75,640,000 for the six months ended June 30, 1996, an increase
of 6.2% from $71,232,000 in the first six months of 1995. Pro forma average
occupancy for all leased hotels decreased 1.8%, from 71.9% for the first six
months of 1995 to 70.6% in 1996. However, pro forma average daily rates
increased 7.9%, from $77.63 in 1995 to $83.78 in 1996, resulting in a 6.0%
growth in revenue per available room from $55.79 in 1995 to $59.14 in 1996.
Food and beverage, conference center and other revenues increased 1.0% to
$34,458,000 for 1996 compared to $34,105,000 for 1995. Combined pro forma
Participating Lease payments were $35,761,000 for 1996 compared to $33,684,000
in 1995, a 6.2% increase. Hotel operating expenses on a pro forma basis
increased 3.8% to $71,317,000 for the six months ended June 30, 1996 compared to
$68,739,000 for 1995. Combined pro forma net income for the six months ended
June 30, 1996 was $382,000 compared to $546,000 in 1995.
RESULTS OF OPERATIONS OF THE INITIAL HOTELS
For the Six Months Ended June 30, 1995. The Initial Hotels had room
revenues of $44,090,000 for the six months ended June 30, 1995. Average
occupancy was 74.2% for the six month period and the average daily rate was
$78.08, which represents an increase over 1994. The increases in both occupancy
and average daily rates were primarily due to improving conditions in the U.S.
lodging industry, completion of renovations at eight of the Initial Hotels
during
36
<PAGE>
1994 and increased sales and marketing efforts. Food and beverage, conference
center and other revenue for the period was $20,419,000, which represents a net
increase compared to 1994 due primarily to increased occupancy rates.
Departmental and other expenses (departmental costs and expenses, general
and administrative, repairs and maintenance, utilities, marketing and management
fees) for the period were $43,162,000, an increase from 1994 expense levels.
However, as a percentage of total revenue, departmental and other expenses
decreased from 68.0% in 1994 to 66.9%. As a result, income before fixed
expenses (calculated as total revenues less departmental and other expenses) was
$21,347,000 or 33.1% of total revenue for the period, a 3.4% increase from the
1994 average of 32.0%. On a same property basis, departmental and other
expenses increased $1,427,000 or 4.0% compared to 1994. General and
administrative expenses increased $417,000, or 9.3% compared to 1994 due to
increased owner expenses. Repairs and maintenance expense decreased as a result
of the completion of renovations and repairs to certain of the Initial Hotels in
the fourth quarter of 1994 and utilities expense decreased due to rate
reductions and rebates received from utility companies. Marketing expense
increased $877,000, or 19.8% as a result of increased marketing fees charged by
the franchisor at the Radisson Hotel & Suites Dallas and fees resulting from a
change in franchise affiliation at the Radisson New Orleans Hotel in January
1995. Management fees increased $671,000, or 36.2% as a result of increased
revenues during the period and the buyout of the existing management contract
for the Radisson New Orleans Hotel in 1995.
Fixed expenses (composed of interest expense, real estate and personal
property taxes, insurance, and depreciation and amortization), totaled
$15,827,000 for the period, which represented an increase over 1994, due
primarily to a one-time participating debt payment at the Bourbon Orleans Hotel
of $1,242,000 as well as increased interest costs on new indebtedness incurred
by the Initial Hotels in 1995. Net income for the period was $3,717,000 and
reflects an extraordinary loss from debt extinguishment on the Bourbon Orleans
Hotel of $1,803,000.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the maximum amount available under the Line of Credit was
increased from $165,000,000 to $250,000,000 and certain modifications were made,
thereby increasing the Company's ability to borrow under the Line of Credit.
Subsequent to the acquisition of the two Wyndham hotel properties and closing of
the Follow-on Offering, the Company had approximately $14,315,000 outstanding on
the Line of Credit. The Line of Credit is secured by first mortgage liens on 25
of the Hotels and a second mortgage lien on the Wyndham Greenspoint Hotel.
Borrowings under the Line of Credit bear interest at a rate per annum equal to
30-day LIBOR plus 1.9%. In connection with the acquisition of the Wyndham
Greenspoint Hotel, the Company has obtained the $22,000,000 Greenspoint Loan
from Paine Webber Real Estate. Borrowings under the Greenspoint Loan bear
interest at a rate per annum equal to 30-day LIBOR plus 1.9%. In July 1996, the
Line of Credit was further modified to provide that while the Greenspoint Loan
is outstanding, the maximum amount that the Company may draw on the Line of
Credit will be $228,000,000. The Line of Credit and the Greenspoint Loan are
cross-defaulted.
In May 1996, the Company sold an aggregate of approximately $40,000,000 of
securities to an institutional investor in a private placement. The securities
consisted of 811,393 shares of common stock sold at $26.95 per share and 662,391
Preferred OP Units (the "Preferred OP Units") sold at $27.375 per unit. The
common stock is of the same class as the Company's existing common stock and is
entitled to the same voting and dividend rights as all outstanding common stock,
subject to certain restrictions on the resale of the stock. The Preferred OP
Units are entitled to quarterly distributions equal to 103% of the current
quarterly dividends paid on the common stock. Distributions on the Preferred OP
Units increase or decrease concurrently with any changes in common stock
dividends. Generally, three years following issuance, the Preferred OP Units
may be converted into shares of common stock on a one-for-one basis, subject to
certain limitations. After 10 years, the Company will have the right to
exchange all outstanding Preferred OP Units for shares of common stock on a one-
for-one basis.
In addition, as discussed in "Recent Developments" above, the Company
completed an offering of its common stock in July 1996, the net proceeds of
which have been utilized primarily to reduce amounts outstanding under the Line
of Credit. The Company continues to evaluate other permanent sources of
capital, including equity and long-term debt. It is expected that additional
common or preferred stock offerings will be used both to acquire hotel
properties and to limit the Company's overall debt to market capitalization
ratio.
The Company also acquired two hotels in July 1996 with a total of 663 guest
rooms located in Houston and Atlanta for an aggregate purchase price (including
closing costs) of approximately $60,960,000 which was funded primarily with
borrowings under the Line of Credit and the $22,000,000 Greenspoint Loan and
issuance of 17,036 OP Units. In addition, the Company has entered into
contracts to acquire a total of seven hotels in the states of New York, Texas,
Michigan, Illinois, Oregon and Florida. These acquisitions are subject to
various closing conditions and there
37
<PAGE>
can be no assurance that any or all of these proposed acquisitions will be
consummated. The Company currently intends to use Line of Credit borrowings to
acquire these assets. While no definitive agreements with respect to the
acquisition of any additional hotels have been entered into, the Company expects
additional acquisitions will be completed during the remainder of 1996, which
will be funded through the Line of Credit borrowings or permanent debt or equity
financing.
The Company's principal source of cash to meet its cash requirements,
including distributions to its shareholders, is its share of the Operating
Partnership's cash flow. The Operating Partnership's principal source of
revenue is rent payments under the Participating Leases. The Lessees' ability
to make rent payments to the Operating Partnership, and, therefore, the
Company's liquidity, including the ability to make distributions to its
shareholders, is dependent upon the Lessees' ability to generate sufficient cash
flow from operation of the Hotels. The Lessees are current in their payments to
the Company under the Participating Leases.
Cash and cash equivalents as of June 30, 1996 were $6,675,000, including
capital improvement reserves of $3,605,000. Additionally, $3,481,000 of the
June 30, 1996 lease revenue receivable was paid by the Lessees in July 1996.
Cash flows from operating activities of the Company was $24,803,000 for the six
months ended June 30, 1996, which primarily represents collection of rents under
the Participating Leases, less the Company's operating expenses for the period.
Cash flows used in investing activities in the amount of $144,264,000 resulted
primarily from the acquisition of hotel properties. Cash flows from financing
activities of $121,367,000 was primarily related to $101,661,000 in net
borrowings on the Line of Credit and $39,417,000 of net proceeds from the
private placement, net of dividends and distributions paid during the period.
RENOVATIONS AND CAPITAL IMPROVEMENTS
Pursuant to the Participating Leases, the Company is obligated to establish
a reserve for each hotel for capital improvements, including the periodic
replacement or refurbishment of furniture, fixtures and equipment ("F, F & E").
The aggregate amount of such reserves average 4.0% of total revenue, with the
amount of such reserve with respect to each hotel based upon projected capital
requirements of such hotel. Management believes such reserves will generally be
sufficient to fund recurring capital expenditures for the hotels. Capital
expenditures, exclusive of renovations, will exceed 4% of total revenues in 1996
for the reasons described below.
The Company has budgeted $7,500,000 to fund capital expenditures, excluding
renovations, at the Initial Hotels in 1996 and approximately $3,800,000 to
complete recurring capital expenditures, excluding renovations in 1996 for
hotels acquired subsequent to the Initial Offering. The $11,300,000 total
exceeds anticipated reserves in 1996, as the Company has been required to
complete certain capital improvements by franchisors (in connection with the
transfer of franchise licenses) and has decided to accelerate certain capital
improvements which were originally planned to be completed over a longer period.
The budgeted capital expenditures also include upgrades of telephone systems,
other major equipment purchases and improvements management believes will
immediately enhance the revenue producing capabilities of certain of the hotels.
In addition to the above expenditures, the Company also has plans to
commence or complete renovation projects at several hotels during 1996,
including the Crockett Hotel, the Tremont House Hotel, the Crowne Plaza Ravinia
Hotel, the Del Mar Hilton Hotel, the WestCoast Long Beach Hotel and Marina, the
Doubletree Denver/Boulder, the Wyndham Greenspoint Hotel and the Wyndham Garden
- - Midtown. Total renovation cost is expected to be approximately $17,500,000
(including approximately $8,500,000 to renovate the Tremont House Hotel). The
Company has spent approximately $1,449,000 of this amount from date of
acquisition through June 30, 1996 and expects to spend the remainder in 1996 and
early 1997.
The Company will finance these renovations with draws on its Line of
Credit, operating cash flow in excess of distributions and reserves, and/or
through permanent debt or equity financing. Funding for $1,066,000 of the
Crowne Plaza Ravinia Hotel renovation will come from a reserve provided by the
seller at the closing date. The Company attempts to schedule renovations and
improvements during traditionally lower occupancy periods in an effort to
minimize disruption to the hotel's operations. Therefore, the Company does not
believe such renovations and capital improvements will have a material effect on
the results of operations of the hotels.
38
<PAGE>
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the Lessees' ability to raise
room rates in the face of inflation.
SEASONALITY
The hotel industry is seasonal in nature. Revenues at certain of the
hotels are greater in the first and second quarters of a calendar year and at
other hotels in the second and third quarters of the calendar year. Seasonal
variations in revenue at the hotels may cause quarterly fluctuations in the
Company's lease revenue.
39
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 23, 1996. The
stockholders voted to elect each of Paul A. Nussbaum, Leonard Boxer, John H.
Daniels, John C. Deterding, Gregory R, Dillon, Thomas S. Foley and Arch K.
Jacobson to serve as directors until the 1997 annual meeting of stockholders and
until their successors are duly elected and qualified. The following chart
details the number of votes cast for, against or withheld, as well as the number
of abstentions and broker non-votes with respect to each nominee:
<TABLE>
<CAPTION>
Against
or Abstentions and
Nominee For Withheld Broker Non-Votes
- -------------------------------- --------- ---------- ----------------
<S> <C> <C> <C>
Paul A. Nussbaum................ 9,279,074 31,884 --
Leonard Boxer................... 9,279,074 31,884 --
John H. Daniels................. 9,279,074 31,884 --
John C. Deterding............... 9,279,074 31,884 --
Gregory R. Dillon............... 9,279,074 31,884 --
Thomas S. Foley................. 9,279,074 31,884 --
Arch K. Jacobson................ 9,279,074 31,884 --
</TABLE>
The stockholders also voted to ratify the Board of Director's selection of
Ernst & Young LLP as the Company's independent auditors for the fiscal year
ending December 31, 1996. There were 9,289,763 votes cast for and 5,400 votes
cast against this proposal, with 15,795 abstentions and broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
ITEM NUMBER DESCRIPTION
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K:
Current Report on Form 8-K dated April 2, 1996, as amended, related to the
acquisition of assets as filed with the Securities and Exchange Commission on
April 16, 1996, file number 0-26528.
40
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1996
PATRIOT AMERICAN HOSPITALITY, INC.
By: /s/ Rex E. Stewart
------------------------------------------
Rex E. Stewart
Executive Vice President and
Chief Financial Officer
(Authorized Officer and Principal Accounting
and Financial Officer)
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AS OF JUNE 30, 1996 AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE MONTHS ENDED JUNE 30, 1996 AND SIX MONTHS ENDED JUNE 30, 1996 OF
PATRIOT AMERICAN HOSPITALITY INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 APR-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 6,675 6,675
<SECURITIES> 0 0
<RECEIVABLES> 5,677 5,677
<ALLOWANCES> 0 0
<INVENTORY> 1,142 1,142
<CURRENT-ASSETS> 0 0
<PP&E> 425,812 425,812
<DEPRECIATION> 9,249 9,249
<TOTAL-ASSETS> 484,033 484,033
<CURRENT-LIABILITIES> 16,054 16,054
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 284,527 284,527
<TOTAL-LIABILITY-AND-EQUITY> 484,033 484,033
<SALES> 30,269 17,913
<TOTAL-REVENUES> 30,470 18,007
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 11,518 6,580
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,772 2,171
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 15,811 8,683
<EPS-PRIMARY> 1.06 .57
<EPS-DILUTED> 1.06 .57
</TABLE>
